`
<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------

                                    FORM 10-K

                                 United States
                       Securities and Exchange Commission
                             Washington, D.C. 20549
(Mark One)

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

         For the fiscal year ended DECEMBER 31, 2003

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

         For the transition period from              to 
                                        ------------    ------------

         Commission File No. 1-3548

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

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

              30 WEST SUPERIOR STREET, DULUTH, MINNESOTA 55802-2093
           (Address of principal executive offices including zip code)

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

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                                Name of Each Stock Exchange
              Title of Each Class                   on Which Registered
              -------------------                   -------------------
        Common Stock, without par value           New York Stock Exchange

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                                      None
  
   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.

   Yes  /X/    No  / /

   Indicate by check mark if disclosure of  delinquent filers  pursuant to  Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /

   Indicate by check mark whether  the registrant is  an  accelerated  filer (as
defined in Rule 12b-2 of the Act).

   Yes /X/   No / /

   The aggregate market value of voting stock held by  nonaffiliates on June 30,
   2003 was $2,281,896,734.
   
   As of March 8, 2004  there were  87,880,279  shares of ALLETE  Common  Stock,
without par value, outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

   Portions of the Proxy Statement for the 2004 Annual  Meeting  of Shareholders
are incorporated by reference in Part III.


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                                     PAGE 7


<PAGE>
                              ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                               TABLE OF CONTENTS


DEFINITIONS....................................................................9

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995.......................................................................10


PART I

Item 1.  Business.............................................................11
         Energy Services......................................................12
          Regulated Utility Electric Sales....................................12
          Regulated Utility Purchased Power...................................15
          Fuel................................................................15
          Nonregulated Generation and Power Marketing.........................16
          Regulatory Issues...................................................16
          Competition.........................................................18
          Franchises..........................................................18
          Employees...........................................................18
          Environmental Matters...............................................18
         Automotive Services..................................................20
          Wholesale Vehicle Auctions..........................................20
          Dealer Financing....................................................23
          Competition.........................................................25
          Employees...........................................................25
          Vehicle Regulation..................................................25
          Environmental Matters...............................................26
         Investments and Corporate Charges....................................27
          Real Estate Operations..............................................27
          Emerging Technology Investments.....................................27
          Environmental Matters...............................................27
         Executive Officers of the Registrant.................................28

Item 2.  Properties...........................................................29

Item 3.  Legal Proceedings....................................................29

Item 4.  Submission of Matters to a Vote of Security Holders..................29


PART II

Item 5.  Market for Registrant's Common Equity, Related Stockholder
         Matters and Issuer Purchases of Equity Securities....................29

Item 6.  Selected Financial Data..............................................30

Item 7.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations..................................32
          Consolidated Overview...............................................32
          Net Income..........................................................33
          2003 Compared to 2002...............................................35
          2002 Compared to 2001...............................................36
          Critical Accounting Policies........................................36
          Outlook.............................................................37
          Liquidity and Capital Resources.....................................41
          Capital Requirements................................................43
          Environmental and Other Matters.....................................44
          Market Risk.........................................................45
          New Accounting Standards............................................46
          Factors that May Affect Future Results..............................46

Item 7A. Quantitative and Qualitative Disclosures about Market Risk...........53

Item 8.  Financial Statements and Supplementary Data..........................53

Item 9.  Changes in and Disagreements with Accountants on
         Accounting and Financial Disclosure..................................53

Item 9A. Controls and Procedures..............................................53


PART III

Item 10. Directors and Executive Officers of the Registrant...................54

Item 11. Executive Compensation...............................................54

Item 12. Security Ownership of Certain Beneficial Owners and
         Management and Related Stockholder Matters...........................54

Item 13. Certain Relationships and Related Transactions.......................54

Item 14. Principal Accountant Fees and Services...............................54


PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K......55

SIGNATURES....................................................................59

CONSOLIDATED FINANCIAL STATEMENTS.............................................60

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                                     PAGE 8


<PAGE>
                              ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                                  DEFINITIONS

ABBREVIATION
OR ACRONYM                            TERM
--------------------------------------------------------------------------------
ACE                                   ACE Limited
ADESA Impact                          Automotive Recovery Services, Inc. and
                                        Impact Auto, collectively
AFC                                   Automotive Finance Corporation
ALLETE                                ALLETE, Inc. and its subsidiaries
APB                                   Accounting Principles Board
BNI Coal                              BNI Coal, Ltd.
Boswell                               Boswell Energy Center
Capital Re                            Capital Re Corporation
CIP                                   Conservation Improvement Program(s)
Company                               ALLETE, Inc. and its subsidiaries
EBITDA                                Earnings Before Interest, Taxes,
                                        Depreciation and Amortization Expense
EITF                                  Emerging Issues Task Force
Enventis Telecom                      Enventis Telecom, Inc.
EPA                                   Environmental Protection Agency
ESOP                                  Employee Stock Ownership Plan
FASB                                  Financial Accounting Standards Board
FERC                                  Federal Energy Regulatory Commission
Florida Water                         Florida Water Services Corporation
Form 8-K                              ALLETE Current Report on Form 8-K
Form 10-K                             ALLETE Annual Report on Form 10-K
Form 10-Q                             ALLETE Quarterly Report on Form 10-Q
FPSC                                  Florida Public Service Commission
GAAP                                  Generally Accepted Accounting Principles
                                        in the United States
GeoInsight                            GeoInsight, Inc.
Hibbard                               M.L. Hibbard Station
Impact Auto                           Impact Auto Auctions Ltd. and
                                        Suburban Auto Parts Inc., collectively
Invest Direct                         ALLETE's Direct Stock Purchase and
                                        Dividend Reinvestment Plan
kWh                                   Kilowatthour(s)
kV                                    Kilovolt(s)
Laskin                                Laskin Energy Center
Lehigh                                Lehigh Acquisition Corporation
LIBOR                                 London Interbank Offer Rate
LTV                                   LTV Steel Mining Co.
MAPP                                  Mid-Continent Area Power Pool
MBtu                                  Million British thermal units
Minnesota Power                       An operating division of ALLETE, Inc.
Minnkota Power                        Minnkota Power Cooperative, Inc.
MISO                                  Midwest Independent Transmission System
                                        Operator, Inc.
MPCA                                  Minnesota Pollution Control Agency
MPUC                                  Minnesota Public Utilities Commission
MTBE                                  Methyl Tertiary-Butyl Ether
MW                                    Megawatt(s)
MWh                                   Megawatthour(s)
NCUC                                  North Carolina Utilities Commission
Note ___                              Note ___ to the consolidated financial
                                        statements indexed in Item 15(a) of this
                                        Form 10-K
NPDES                                 National Pollutant Discharge Elimination
                                        System
NRG Energy                            NRG Energy, Inc.
PSCW                                  Public Service Commission of Wisconsin
QUIPS                                 Quarterly Income Preferred Securities
Rainy River Energy                    Rainy River Energy Corporation
SEC                                   Securities and Exchange Commission
SFAS                                  Statement of Financial Accounting
                                        Standards No.
Split Rock Energy                     Split Rock Energy LLC
Square Butte                          Square Butte Electric Cooperative
SWL&P                                 Superior Water, Light and Power Company
Taconite Harbor                       Taconite Harbor Energy Center
WDNR                                  Wisconsin Department of Natural Resources
WPPI                                  Wisconsin Public Power, Inc.


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                                     PAGE 9


<PAGE>
                              ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                        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  Annual  Report on Form  10-K,  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"  or  similar
expressions) are not statements of historical facts and may be forward-looking.
   Forward-looking   statements  involve  estimates,   assumptions,   risks  and
uncertainties  and are  qualified  in their  entirety by  reference  to, and are
accompanied by, the following important factors, which are difficult to predict,
contain  uncertainties,  are beyond our control and may cause actual  results or
outcomes  to  differ   materially  from  those   contained  in   forward-looking
statements:
   - our ability to successfully implement  our strategic  objectives, including
     the  completion  and  impact of the  proposed  spin-off  of our  Automotive
     Services business and the sale of our Water Services businesses;
   - war and acts of terrorism;
   - prevailing governmental policies and regulatory actions, including those of
     the  United  States  Congress,  Canadian   federal  government,  state  and
     provincial legislatures, the FERC, the MPUC, the FPSC, the  NCUC, the PSCW,
     and various county regulators and city administrators, about allowed  rates
     of  return,  financings,  industry  and  rate  structure,  acquisition  and
     disposal of assets and  facilities, operation  and  construction  of  plant
     facilities,  recovery  of  purchased  power  and  capital  investments, and
     present or prospective wholesale and retail competition (including but  not
     limited to transmission  costs)  as well as vehicle-related laws, including
     vehicle brokerage and auction laws;
   - unanticipated  effects  of   restructuring   initiatives  in  the  electric
     and automotive industries;
   - economic and geographic factors, including political and economic risks;
   - changes in and compliance with environmental and safety laws and policies;
   - weather conditions;
   - natural disasters;
   - market factors affecting supply and demand for used vehicles;
   - wholesale power market conditions;
   - population growth rates and demographic patterns;
   - the effects of competition, including competition for retail and  wholesale
     customers, as well as sellers and buyers of vehicles;
   - pricing and transportation of commodities;
   - changes in tax rates or policies or in rates of inflation;
   - unanticipated project delays or changes in project costs;
   - unanticipated changes in operating expenses and capital expenditures;
   - capital market conditions;
   - competition for economic expansion or development opportunities;
   - our ability to manage expansion and integrate acquisitions; 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 7. under the heading  "Factors that May Affect Future Results"
located on page 46 of this 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-K and in our  other  reports  filed  with the SEC that  attempt  to
advise interested parties of the factors that may affect our business.

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                                     PAGE 10


<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------

                                     PART I


ITEM 1.  BUSINESS

   ALLETE  has  been  incorporated  under  the  laws of  Minnesota  since  1906.
References  in this  report  to  "we,"  "us" and  "our"  are to  ALLETE  and its
subsidiaries, collectively.
   ALLETE files annual,  quarterly and other  reports and  information  with the
SEC. You can read and copy any  information  filed by ALLETE with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, N.W.,  Washington,  D.C. 20549.
You can obtain additional information about the Public Reference Room by calling
the SEC at  1-800-SEC-0330.  In addition,  the SEC  maintains  an Internet  site
(www.sec.gov) that contains reports, proxy and information statements, and other
information  regarding issuers that file  electronically with the SEC, including
ALLETE.  ALLETE also maintains an Internet site  (www.allete.com)  that contains
documents   as  soon  as   reasonably   practicable   after  such   material  is
electronically filed with or furnished to the SEC.
   As of December 31, 2003 we had approximately 13,000 employees, 4,000 of which
were part time. Our core  operations in 42 states,  nine Canadian  provinces and
Mexico focus on two segments:  ENERGY  SERVICES which includes  electric and gas
services,  coal mining and  telecommunications;  and  AUTOMOTIVE  SERVICES which
includes wholesale vehicle auctions and related vehicle redistribution  services
and dealer financing.
   INVESTMENTS  AND  CORPORATE  CHARGES  include  our  real  estate  operations,
investments in emerging  technologies  related to the electric  utility industry
and corporate charges.  Corporate charges represent general corporate  expenses,
including interest, not specifically related to any one business segment.
   For a detailed  discussion of results of operations  and trends,  see Item 7.

Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations. For business segment information, see Notes 1 and 2.
   SPIN-OFF OF  AUTOMOTIVE  SERVICES.  After a lengthy  review of our  strategic
alternatives,  in  October  2003  we  announced  plans  to  spin  off to  ALLETE
shareholders  our  Automotive  Services  business  which would become a publicly
traded company doing business as ADESA.  The decision  reflects our intention to
maximize the long-term  value of each  business by creating two  separate,  more
focused  companies,  and create  long-term  shareholder  value.  The spin-off is
expected to take the form of a tax-free stock dividend to ALLETE's shareholders,
who would receive one ADESA share for each share of ALLETE stock they own.
   Our Energy Services and Automotive  Services businesses are two very distinct
businesses  and we  believe  that  this  spin-off  will  better  facilitate  the
strategic objectives of both businesses. We believe that our Automotive Services
business  will be  better  able to  pursue  a  business  growth  strategy  as an
independent  company.  For  ALLETE,  we  believe  the  spin-off  will  create  a
simplified  regulatory and risk profile and a more stable credit  rating,  which
will enhance our ability to pursue strategic growth initiatives.


<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                            2003     2002     2001
==========================================================================
<S>                                              <C>      <C>      <C> 
Consolidated Operating
     Revenue - Millions                          $1,619   $1,494   $1,526

Percentage of Consolidated
     Operating Revenue

Energy Services
     Regulated Utility
         Industrial
              Taconite Producers                      9%      10%      10%
              Paper and Wood Products                 4        4        4
              Pipelines and Other Industries          2        3        3
--------------------------------------------------------------------------
                  Total Industrial                   15       17       17
         Residential                                  5        5        4
         Commercial                                   5        5        5
         Wholesale                                    5        5        6
         Other Revenue                                2        2        3
--------------------------------------------------------------------------
                  Total Regulated Utility            32       34       35
     Nonregulated                                     9        8        5
--------------------------------------------------------------------------
         Total Energy Services                       41       42       40
Automotive Services                                  57       56       55
Investments                                           2        2        5
--------------------------------------------------------------------------
                                                    100%     100%     100%
==========================================================================
</TABLE>

   Our Automotive  Services business,  which will do business as ADESA after the
spin-off,  operates two main  businesses  that are integral parts of the vehicle
redistribution industry in North America.  Wholesale vehicle auctions include 53
used vehicle auctions,  27 salvage vehicle auctions and related services,  while
dealer financing  consists of AFC's 80 loan production  offices.  Our Automotive
Services business will remain based in Indiana.
   After the spin-off, ALLETE will be comprised of our Energy Services business,
which includes  Minnesota  Power,  SWL&P,  BNI Coal,  Enventis Telecom and Rainy
River Energy,  ALLETE  Properties,  Inc., our real estate operations in Florida,
and our emerging technology  investments.  ALLETE's  headquarters will remain in
Duluth, Minnesota.
   Our Board of Directors has retained financial and legal advisors to work with
management on the  refinancing of ALLETE's and  Automotive  Services' debt which
will precede the spin-off.  The spin-off is subject to the approval of the final
plan by ALLETE's Board of Directors, favorable market conditions, receipt of tax
opinions,  satisfaction of SEC requirements and other customary conditions,  and
is expected to occur in the third quarter of 2004.
   SALE OF WATER PLANT ASSETS.  During 2003 we substantially  completed the sale
of our Water  Services  businesses.  Approximately  90% of our  water  assets in
Florida were sold, under condemnation or imminent threat of condemnation, during
2003 for a total sales price of approximately  $445 million.  Proceeds were used
to pay down debt which  strengthened our balance sheet. In addition,  we reached
an agreement to sell our North Carolina water assets for

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                                    PAGE 11


<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
 
                                    PART I

$48  million  and the  assumption  of  approximately  $28 million in debt by the
purchaser.  The North  Carolina  sale is  awaiting  approval  of the NCUC and is
expected to close in mid-2004.  We expect to enter into  agreements  to sell our
remaining water assets in Florida and Georgia in 2004.
   In October  2003 the FPSC voted to initiate a proceeding  to examine  whether
the sale of Florida  Water's  assets  involves a gain that should be shared with
Florida Water's  customers.  The question raised is whether the entire gain from
the asset sales should go to Florida Water and its shareholders, or should it be
shared with customers.  In November 2003 the FPSC issued a final order regarding
a similar gain on sale issue for Utilities,  Inc. of Florida.  In that order the
FPSC made several findings that could be helpful to Florida Water's case, namely
that courts have found that rates paid by customers do not vest  ratepayers with
ownership rights to the property used to render service,  and shareholders  bear
the risk of gain or loss associated with  investments  made to provide  service.
Florida Water intends to vigorously  contest any decision to seek sharing of the
gain with  customers.  Florida  Water is unable to predict  the  outcome of this
proceeding.

ENERGY SERVICES

   We categorize our Energy Services  businesses as regulated utility operations
or nonregulated operations.  Regulated utility operations include rate regulated
activities   associated  with  generation,   transmission  and  distribution  of
electricity under the jurisdiction of state and federal regulatory  authorities.
Nonregulated   operations  consist  of  coal  mining,   nonregulated  generation
(non-rate base generation sold at  market-based  rates to the wholesale  market)
and telecommunications.  The discussion below summarizes the major businesses we
include in Energy Services.  Statistical information is presented as of December
31, 2003 unless  otherwise  indicated.  All subsidiaries are wholly owned unless
otherwise specifically indicated.
   MINNESOTA POWER, an operating  division of ALLETE,  Inc.,  provides regulated
utility  electric  service  in  a  26,000  square  mile  service   territory  in
northeastern  Minnesota.  Minnesota Power supplies  regulated  utility  electric
service  to  135,000  retail  customers  and  wholesale  electric  service to 16
municipalities.   In  addition,  Minnesota  Power  has  nonregulated  generation
operations at the Taconite Harbor facility in northern Minnesota. SWL&P provides
regulated  utility  electric,  natural  gas and water  service  in  northwestern
Wisconsin. SWL&P has 14,000 electric customers, 12,000 natural gas customers and
10,000 water customers.
   Minnesota  Power had an annual net peak load of 1,463 MW on January 13, 2003.
Our power supply sources are listed on the following page.
   We have electric transmission and distribution lines of 500 kV (8 miles), 230
kV (606 miles),  161 kV (43 miles),  138 kV (66 miles), 115 kV (1,259 miles) and
less than 115 kV (6,935 miles).  We own and operate 179 substations with a total
capacity of 8,562  megavoltamperes.  Some of our  transmission  and distribution
lines interconnect with other utilities.
   We own offices and service  buildings,  an energy  control  center and repair
shops, and lease offices and storerooms in various localities. Substantially all
of  our  electric  plant  is  subject  to  mortgages  which   collateralize  the
outstanding first mortgage bonds of Minnesota Power and of SWL&P.  Generally, we
hold  fee  interest  in our  real  properties  subject  only to the  lien of the
mortgages.  Most of our electric lines are located on land not owned in fee, but
are  covered  by  appropriate  easement  rights  or by  necessary  permits  from
governmental authorities. WPPI owns 20% of Boswell Unit 4. WPPI has the right to
use  our  transmission  line  facilities  to  transport  its  share  of  Boswell
generation. (See Note 14.)
   As of February 2004  Minnesota  Power withdrew from active  participation  in
Split Rock Energy,  a joint venture with Great River Energy,  and will terminate
its ownership  interest  upon receipt of FERC approval  which is expected in the
first half of 2004. (See Nonregulated Generation and Power Marketing.)
   BNI COAL owns and  operates a lignite mine in North  Dakota.  BNI Coal is the
lowest-cost  supplier of lignite in North Dakota  producing about 4 million tons
annually. Two electric generating cooperatives, Minnkota Power and Square Butte,
presently  consume  virtually  all of BNI Coal's  production  of  lignite  under
cost-plus fixed fee coal supply agreements  expiring in 2027. (See Fuel and Note
15.)
   ENVENTIS  TELECOM is an integrated  data  services  provider  offering  fiber
optic-based   communication   and  advanced  data  services  to  businesses  and
communities in the Upper Midwest.  Enventis  Telecom  provides  converged IP (or
Internet  protocol)  services that allow all  communications  (voice,  video and
data) to use the same optic-based delivery technology.  Enventis Telecom owns or
has rights to approximately  1,600 route miles of fiber optic cable. These route
miles  contain  multiple  fibers that total  approximately  47,000  fiber miles.
Enventis Telecom also owns optronic and data switching equipment that is used to
"light up" the fiber optic  cable.  Enventis  Telecom  services  customers  from
facilities that are primarily leased from third parties.
   RAINY  RIVER  ENERGY  is  engaged  in  the  acquisition  and  development  of
nonregulated  generation and wholesale power  marketing.  Rainy River Energy has
entered into a 15-year power purchase agreement with NRG Energy at a facility in
Kendall County,  Illinois.  (See  Nonregulated  Generation and Power Marketing -
Kendall County.)

REGULATED UTILITY ELECTRIC SALES
   Our regulated  utility  operations  include  retail and wholesale  activities
under  the  jurisdiction  of state  and  federal  regulatory  authorities.  (See
Regulatory Issues.)

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                                    PAGE 12


<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                                     PART I


<TABLE>
<CAPTION>
POWER SUPPLY
=======================================================================================================================
                                                                                               FOR THE YEAR ENDED
                                                    UNIT         YEAR      NET WINTER           DECEMBER 31, 2003
REGULATED UTILITY                                   NO.       INSTALLED    CAPABILITY         ELECTRIC REQUIREMENTS
-----------------------------------------------------------------------------------------------------------------------
                                                                              MW                 MWh         %

<S>                                                <C>        <C>          <C>                <C>          <C>
Steam
    Coal-Fired
       Boswell Energy Center                         1           1958          69
       near Grand Rapids, MN                         2           1960          69
                                                     3           1973         349
                                                     4           1980         427
-----------------------------------------------------------------------------------------------------------------------
                                                                              914              6,445,652    55.0%
-----------------------------------------------------------------------------------------------------------------------
       Laskin Energy Center                          1           1953          55
       in Hoyt Lakes, MN                             2           1953          55
-----------------------------------------------------------------------------------------------------------------------
                                                                              110                643,340     5.5
-----------------------------------------------------------------------------------------------------------------------
    Purchased Steam
       M.L. Hibbard Station in Duluth, MN          3 & 4      1949, 1951       48                      -       -
-----------------------------------------------------------------------------------------------------------------------
           Total Steam                                                      1,072              7,088,992    60.5
-----------------------------------------------------------------------------------------------------------------------
Hydro
    Group consisting of ten stations in MN                      Various       115                409,521     3.5
-----------------------------------------------------------------------------------------------------------------------
Purchased Power
    Square Butte burns lignite coal near Center, ND                           322              2,288,921    19.5
    All Other - Net                                                             -              1,938,958    16.5
-----------------------------------------------------------------------------------------------------------------------
           Total Purchased Power                                              322              4,227,879    36.0
-----------------------------------------------------------------------------------------------------------------------
           Total                                                            1,509             11,726,392   100.0%
-----------------------------------------------------------------------------------------------------------------------
<CAPTION>

                                                    UNIT           YEAR            YEAR           NET
NONREGULATED                                        NO.          INSTALLED       ACQUIRED     CAPABILITY
-----------------------------------------------------------------------------------------------------------------------
                                                                                                  MW
<S>                                               <C>         <C>                <C>          <C>
Steam
    Coal-Fired
       Taconite Harbor Energy Center              1, 2 & 3    1957, 1957, 1967     2001          200
       in Taconite Harbor, MN

       Cloquet Energy Center                         5              2001           2001           23
       in Cloquet, MN

       Rapids Energy Center <F1>                   6 & 7            1980           2000           29
       in Grand Rapids, MN
-----------------------------------------------------------------------------------------------------------------------
Hydro
    Conventional Run-of-River
       Rapids Energy Center <F1>                   4 & 5            1917           2000            1
       in Grand Rapids, MN
-----------------------------------------------------------------------------------------------------------------------
Power Purchase Agreement
    Kendall County (Rainy River Energy)              3              2002           2002          275
    located southwest of Chicago, IL
=======================================================================================================================
<FN>
<F1>  The net generation is primarily dedicated to the needs of one customer.
</FN>
</TABLE>


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                                    PAGE 13


<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                                     PART I


<TABLE>
REGULATED UTILITY ELECTRIC SALES
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31      2003      2002      2001
===============================================================
MILLIONS OF KILLOWATTHOURS
<S>                                <C>       <C>       <C>
Retail
      Residential                   1,066     1,044       998
      Commercial                    1,286     1,257     1,234
      Industrial                    6,558     6,946     6,549
      Other                            79        78        75
Wholesale
      Municipals and Others         2,155     1,807     2,086
---------------------------------------------------------------
                                   11,144    11,132    10,942
===============================================================
</TABLE>


   Minnesota  Power has wholesale  contracts with 16 municipal  customers.  (See
Regulatory Issues - Federal Energy Regulatory Commission.)
   Approximately  60% of the ore consumed by integrated  steel facilities in the
United  States  originates  from six  taconite  customers  of  Minnesota  Power.
Taconite, an iron-bearing rock of relatively low iron content that is abundantly
available in Minnesota,  is an important domestic source of raw material for the
steel  industry.  Taconite  processing  plants use large  quantities of electric
power to grind the  ore-bearing  rock,  and  agglomerate  and pelletize the iron
particles into taconite pellets.  Annual taconite production in Minnesota was 34
million  tons in 2003 (39 million tons in 2002;  33 million  tons in 2001).  The
decrease in 2003  taconite  production  was due to the May 2003  shutdown of the
Eveleth  Mines LLC  operations  that then  reopened in  December  2003 as United
Taconite LLC under new ownership that includes  Cleveland-Cliffs  Inc. and Laiwu
Steel Group, a Chinese-based steel producer.  A rise in Chinese steel demand and
production  has  created a new market for the  producers  of  taconite  in North
America.  United Taconite has the ability to produce 5 million to 6 million tons
of  taconite  annually  with a portion  of that  production  replacing  taconite
pellets  that will be shipped to China from other  Cleveland-Cliffs  Inc.  owned
taconite  operations.  The decrease in 2001 taconite  production  was due to the
closing of LTV and the reduced demand for iron ore from the operating mines as a
result of high steel import levels and a softer  economy.  LTV,  which was not a
Large Power Customer  (defined below),  formerly produced 7 million to 8 million
tons of  taconite  annually.  Based on our  research of the  taconite  industry,
Minnesota  taconite  production  for 2004 is  anticipated to be about 39 million
tons. As a result of continuing  consolidation  in the integrated steel business
and its resulting  impact on taconite  producers,  Minnesota  Power is unable to
predict taconite production levels for the next two to five years. We expect any
excess energy not used by our retail customers will be marketed primarily to the
regional wholesale market.
   LARGE POWER  CUSTOMER  CONTRACTS.  Minnesota  Power has large power  customer
contracts with 12 customers (Large Power  Customers),  each of which requires 10
MW or more of  generating  capacity.  Large  Power  Customer  contracts  require
Minnesota Power to have a certain amount of generating capacity available.  (See
Minimum  Revenue and Demand  Under  Contract  Table.) In turn,  each Large Power
Customer  is  required to pay a minimum  monthly  demand  charge that covers the
fixed  costs  associated  with  having  this  capacity  available  to serve  the
customer, including a return on common equity. Most contracts allow customers to
establish the level of megawatts subject to a demand charge on a biannual (power
pool  season)  basis and  require  that a  portion  of their  megawatt  needs be
committed on a  take-or-pay  basis for at least a portion of the  agreement.  In
addition to the demand  charge,  each Large  Power  Customer is billed an energy
charge for each  kilowatthour  used that recovers the variable costs incurred in
generating  electricity.  Six of the Large Power  Customers  have  interruptible
service for a portion of their needs which provides a discounted demand rate and
energy priced at Minnesota Power's incremental cost after serving all firm power
obligations.  Minnesota Power also provides  incremental  production service for
customer demand levels above the contract take-or-pay levels. There is no demand
charge for this  service and energy is priced at an  increment  above  Minnesota
Power's cost. Incremental production service is interruptible.  Contracts with 8
of the 12 Large  Power  Customers  provide  for  deferral  without  interest  of
one-half of demand charge obligations  incurred during the first three months of
a strike or illegal walkout at a customer's facilities,  with repayment required
over the 12-month period following resolution of the work stoppage.
   All contracts continue past the contract termination date unless the required
advance  notice  of  cancellation   has  been  given.   The  advance  notice  of
cancellation  varies from one to four years. Such contracts  minimize the impact
on  earnings  that  otherwise  would  result  from  significant   reductions  in
kilowatthour  sales to such  customers.  Large Power  Customers  are required to
purchase all electric service requirements from Minnesota Power for the duration
of their contracts. The rates and corresponding revenue associated with capacity
and energy provided under these contracts are subject to change through the same
regulatory process governing all retail electric rates. (See Regulatory Issues -
Electric Rates.)


<TABLE>
MINIMUM REVENUE AND DEMAND UNDER CONTRACT
AS OF MARCH 1, 2004
<CAPTION>

                      MINIMUM                    MONTHLY
                   ANNUAL REVENUE <F1>          MEGAWATTS
===========================================================
<S>                <C>                          <C>
2004               $99.5 million                   635
2005               $50.5 million                   294
2006               $36.1 million                   202
2007               $30.6 million                   181
2008               $16.2 million                    93
===========================================================
<FN>
<F1> Based on past experience, we believe revenue from Large
     Power Customers will be substantially in excess  of the
     minimum contract amounts.
</FN>
</TABLE>


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                                     PART I


<TABLE>
CONTRACT STATUS FOR MINNESOTA POWER LARGE POWER CUSTOMERS
AS OF MARCH 1, 2004
<CAPTION>
                                                                                                                EARLIEST
CUSTOMER                              INDUSTRY         LOCATION                 OWNERSHIP                       TERMINATION DATE
====================================================================================================================================

<S>                                   <C>              <C>                      <C>                             <C> 
Hibbing Taconite Co.                  Taconite         Hibbing, MN              62.3% International Steel       December 31, 2008
                                                                                 Group, Inc.
                                                                                23% Cleveland-Cliffs Inc.
                                                                                14.7% Stelco Inc.
Ispat Inland Mining Company <F1>      Taconite         Virginia, MN             Ispat Inland Steel Company      March 31, 2008
U.S. Steel Corp. (USS) Minntac <F1>   Taconite         Mt. Iron, MN             U.S. Steel Corp.                March 31, 2008
USS Keewatin Taconite <F1><F2>        Taconite         Keewatin, MN             U.S. Steel Corp.                March 31, 2008
United Taconite LLC <F3>              Taconite         Eveleth, MN              70% Cleveland-Cliffs Inc.       October 31, 2008
                                                                                30% Laiwu Steel Group
Blandin Paper Company                 Paper            Grand Rapids, MN         UPM-Kymmene Corporation         April 30, 2007
Boise Paper Solutions                 Paper            International Falls, MN  Boise Cascade Corporation       December 31, 2008
Sappi Cloquet LLC                     Paper            Cloquet, MN              Sappi Limited                   December 31, 2008
Stora Enso North America,             Paper and Pulp   Duluth, MN               Stora Enso Oyj                  April 30, 2009
   Duluth Paper Mill and
   Duluth Recycled Pulp Mill

USG Interiors, Inc.                   Manufacturer     Cloquet, MN              USG Corporation                 December 31, 2005

Enbridge Energy Company,              Pipeline         Deer River, MN           Enbridge Energy Company,        March 31, 2005
   Limited Partnership <F4>                            Floodwood, MN             Limited Partnership

Minnesota Pipeline Company <F4>       Pipeline         Staples, MN              60% Koch Pipeline Co. L.P.      March 31, 2005
                                                       Little Falls, MN         40% Marathon Ashland
                                                       Park Rapids, MN           Petroleum LLC
====================================================================================================================================
<FN>
<F1> The contract will terminate four years from the date of  written notice from either  Minnesota Power or the customer. No notice
     of contract cancellation has been given by either party. Thus, the earliest date of cancellation is March 31, 2008.
<F2> Formerly National Steel Pellet Co., now  renamed USS  Keewatin Taconite. USS assumed  the National Steel Pellet Co. Large Power
     Customer contract.
<F3> In late 2003 United Taconite LLC was the successful bidder in  a  bankruptcy auction sale of  the assets of  Eveleth Mines LLC,
     previously a Large Power Customer of Minnesota Power. United Taconite assumed the Eveleth  Mines Large Power Customer contract.
<F4> The contract will terminate one year from the date of written notice from either Minnesota Power or  the customer. No notice of
     contract cancellation has been given by either party. Thus, the earliest date of cancellation is March 31, 2005.
</FN>
</TABLE>


REGULATED UTILITY PURCHASED POWER
   Minnesota  Power has  contracts to purchase  capacity and energy from various
entities.  The largest  contract is with Square Butte.  Under an agreement  with
Square Butte expiring at the end of 2026,  Minnesota Power is currently entitled
to  approximately  71%  (66%  beginning  in  2006)  of the  output  of a  455-MW
coal-fired generating unit located near Center, North Dakota. (See Note 15.)

FUEL
   Minnesota Power  purchases  low-sulfur,  sub-bituminous  coal from the Powder
River Basin coal field located in Montana. Coal consumption in 2003 for electric
generation at Minnesota Power's  Minnesota  coal-fired  generating  stations was
about 5.6 million  tons.  As of December  31,  2003  Minnesota  Power had a coal
inventory  of  about  632,000  tons.  Minnesota  Power  has  three  coal  supply
agreements with various  expiration  dates extending  through 2009.  Under these
agreements Minnesota Power has the tonnage flexibility to procure 70% to 100% of
its total coal  requirements.  In 2004  Minnesota  Power will  obtain coal under
these coal supply  agreements  and in the spot  market.  This  diversity in coal
supply options allows Minnesota Power to manage market price and supply risk and
to take advantage of favorable spot market prices.  Minnesota Power is exploring
future coal supply  options.  It believes that adequate  supplies of low-sulfur,
sub-bituminous coal will continue to be available.
   In 2001 Minnesota Power and Burlington  Northern and Santa Fe Railway Company
(Burlington  Northern) entered into a long-term agreement under which Burlington
Northern  transports all of Minnesota Power's coal by unit train from the Powder
River  Basin  directly  to  Minnesota  Power's  generating  facilities  or  to a
designated  interconnection  point.  Minnesota  Power also has  agreements  with
Duluth  Missabe and Iron Range Railway and Midwest Energy  Resources  Company to
transport coal from the  Burlington  Northern  interconnection  point to certain
Minnesota Power facilities.


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                                     PART I


<TABLE>
COAL DELIVERED TO MINNESOTA POWER
<CAPTION>
YEAR ENDED DECEMBER 31              2003     2002    2001
============================================================
<S>                                <C>      <C>     <C>   
Average Price Per Ton              $20.02   $21.48  $20.52
Average Price Per MBtu              $1.12    $1.19   $1.18
============================================================
</TABLE>


   The Square  Butte  generating  unit  operated by  Minnkota  Power burns North
Dakota  lignite coal  supplied by BNI Coal,  in  accordance  with the terms of a
contract  expiring in 2027.  Square  Butte's cost of lignite  burned in 2003 was
approximately  66 cents per MBtu. The lignite acreage that has been dedicated to
Square Butte by BNI Coal is located on lands  essentially all of which are under
private  control  and  presently  leased by BNI  Coal.  This  lignite  supply is
sufficient to provide the fuel for the anticipated useful life of the generating
unit.

NONREGULATED GENERATION AND POWER MARKETING
   Nonregulated  generation is non-rate  base  generation  sold at  market-based
rates to the wholesale market.
   TACONITE HARBOR. In 2002 we started the Taconite Harbor generating facilities
which we purchased in 2001. The generation output is primarily being sold in the
wholesale market and is allocated in limited  circumstances to Minnesota Power's
utility customers.
   KENDALL COUNTY.  In September 1999 Rainy River Energy entered into an amended
15-year  power  purchase  agreement  (Kendall  County)  with a company  that was
subsequently purchased by NRG Energy, an independent power producer. The Kendall
County  agreement  includes  the  purchase  of the  output  of one  entire  unit
(approximately 275 MW) of a four unit (approximately 1,100 MW) natural gas-fired
combined cycle generation facility located near Chicago, Illinois.  Construction
of  the  generation  facility  was  completed  in  2002.  Rainy  River  Energy's
obligation to pay fixed capacity  related charges began May 1, 2002 and will end
on September  16, 2017.  We currently  have 130 MW (100 MW in 2003) of long-term
capacity sales contracts for the Kendall County generation,  with 50 MW expiring
in April 2012 and 80 MW in September 2017.
   SPLIT ROCK  ENERGY is a joint  venture  of  Minnesota  Power and Great  River
Energy  from which  Minnesota  Power is  withdrawing.  Great  River  Energy is a
consumer-owned generation and transmission cooperative and is Minnesota's second
largest utility in terms of generating capacity.  The joint venture combined the
two  companies'  power supply  capabilities  and  customer  loads for power pool
operations and generation outage protection.  As of February 2004 in response to
the changing  strategies of both parties,  Minnesota  Power withdrew from active
participation  in Split Rock Energy,  and will terminate its ownership  interest
upon receipt of FERC approval which is expected in the first half of 2004.  Some
of the benefits of this partnership  have been retained,  such as joint load and
capability  reporting  with Great  River  Energy.  Minnesota  Power has  resumed
functions  that provide least cost supply to our retail  customers and marketing
power in our region based on supplies available from our generating assets.
   OTHER.  Rainy River  Energy  Corporation  - Wisconsin  continues to study the
feasibility  of the  construction  of a natural  gas-fired  electric  generating
facility in  Superior,  Wisconsin.  In  accordance  with the PSCW's  final order
approving the project, Rainy River Energy undertook preliminary site preparation
work in  November  and  December  of 2003.
   In 2003 we sold 1.5 million MWh of  nonregulated  generation  (1.2 million in
2002 and 0.2 million in 2001).

REGULATORY ISSUES
   We are exempt from regulation under the Public Utility Holding Company Act of
1935  (PUHCA),  except as to Section  9(a)(2) which  relates to  acquisition  of
securities  of public  utility  companies.  If passed in its current  form,  the
pending  federal energy bill will repeal PUHCA.  However,  we cannot predict the
future of this legislative effort.
   We are subject to the  jurisdiction of various  regulatory  authorities.  The
MPUC has regulatory  authority over Minnesota Power's service area in Minnesota,
retail rates,  retail  services,  issuance of securities and other matters.  The
FERC  has  jurisdiction  over  the  licensing  of  hydroelectric  projects,  the
establishment  of rates and charges for the sale of  electricity  for resale and
transmission of electricity in interstate  commerce,  and certain accounting and
record  keeping  practices.  The PSCW has  regulatory  authority over the retail
sales of  electricity,  water  and gas by  SWL&P.  The  MPUC,  FERC and PSCW had
regulatory authority over 23%, 3% and 3%, respectively, of our 2003 consolidated
operating revenue.
   ELECTRIC  RATES.  Minnesota  Power has  historically  designed  its  electric
service rates based on cost of service studies under which  allocations are made
to the various  classes of customers.  Nearly all retail sales  include  billing
adjustment  clauses which adjust electric  service rates for changes in the cost
of fuel  and  purchased  energy,  and  recovery  of  current  and  deferred  CIP
expenditures.
   In addition  to Large  Power  Customer  contracts,  Minnesota  Power also has
contracts with large industrial and commercial customers with monthly demands of
more than 2 MW but less  than 10 MW of  capacity.  The terms of these  contracts
vary depending  upon the  customer's  demand for power and the cost of extending
Minnesota Power's facilities to provide electric service.
   Minnesota Power requires that all large  industrial and commercial  customers
under contract  specify the date when power is first required.  Thereafter,  the
customer is generally  billed  monthly for at least the minimum  power for which
they contracted. These conditions are part of all contracts covering power to be
supplied  to new  large  industrial  and  commercial  customers  and to  current
customers as their contracts expire or are amended. All rates and other contract
terms are subject to approval by  appropriate  regulatory  authorities.
   FEDERAL ENERGY  REGULATORY  COMMISSION.  The FERC has  jurisdiction  over our
wholesale  electric  service and  operations.  Minnesota  Power's  hydroelectric
facilities,  which are located in  Minnesota,  are  licensed  by the FERC.  (See
Environmental Matters - Water.)


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                                     PART I


   Minnesota  Power has  contracts  with 16 Minnesota  municipalities  receiving
wholesale  electric  service.  Two contracts are for service through 2005, while
the other 14 are for service through at least 2007. In 2003 municipal  customers
purchased 735,000 MWh from Minnesota Power.
   Minnesota Power and SWL&P are members of the MISO.  Minnesota Power and SWL&P
retain  ownership  of their  respective  transmission  assets and  control  area
functions,  but their  transmission  network is under the  regional  operational
control of the MISO. They take and provide  transmission  service under the MISO
open access transmission  tariff. In December 2001 FERC approved the MISO as the
nation's first regional  transmission  organization (RTO) under FERC's Order No.
2000 criteria, noting that it believes the MISO will benefit the public interest
by enhancing the reliability of the Midwest  electric grid and  facilitating and
enhancing  wholesale  competition.  The MISO plans to accomplish  this primarily
through  standardization of rates, terms and conditions of transmission  service
over a broad  region  encompassing  all or parts of 20 states  and one  Canadian
province,  and over 120,000 MW of  generating  capacity.  MISO  operations  were
phased  in  during  the  first  half of 2002.  In late 2003 the MISO and the PJM
Interconnection  LLC, an RTO serving all or parts of  Pennsylvania,  New Jersey,
the District of Columbia,  Maryland, Ohio, Virginia, West Virginia and Delaware,
executed a joint operating agreement. The joint operating agreement,  filed with
the FERC, will provide detailed  information  about each others'  operations and
establishes procedures to strengthen and coordinate reliability.
   The FERC is currently  developing rules for a standard market design intended
to further  define the functions and  transmission  tariff of the MISO and other
regional transmission providers.  The MISO is focusing on reliability procedures
and  on  implementation  of  the  FERC's  standard  market  design  elements  by
development of an energy market tariff or tariffs if MISO membership  determines
to form subregional  markets within MISO. The MISO expects that an energy market
tariff  will be filed with the FERC in the first half of 2004.  Minnesota  Power
will review the effects of the proposed definitive energy tariff at that time.
   Minnesota Power also participates in MAPP, a power pool operating in parts of
eight  states  in the Upper  Midwest  and in three  provinces  in  Canada.  MAPP
functions  include a regional  reliability  council  that  maintains  generation
reserve sharing  requirements.  Minnesota Power is a member of the Mid-Continent
Area Energy Marketers Association (MEMA),  recently formed to provide a regional
tariff for wholesale  power and energy  marketing under which its members trade.
On December 2, 2003 MEMA's wholesale  capacity and energy tariff was approved by
the FERC and became effective.
   MINNESOTA PUBLIC  UTILITIES  COMMISSION.  Minnesota  Power's retail rates are
based on a 1994 MPUC retail rate order that allows for an 11.6% return on common
equity  dedicated to utility  plant and resulted in an average rate  increase of
approximately 6%. Minnesota Power is in the early stages of preparing a  request
to increase rates for its utility operations sometime in the first half of 2005.
The request may be necessary  to cover  changes in the  increased  cost of doing
business.
   At the end of 2003 our equity  ratio was 64.44%,  which was greater  than the
55.03%  plus or minus 15%  (46.78% to 63.29%)  approved  by the MPUC in its 2003
order  authorizing our capital  structure.  Our equity ratio was higher than the
approved MPUC ratio due to the  recognition  of gains from the sale of our Water
Services businesses and the redemption of long-term debt. On January 23, 2004 we
filed an amendment with the MPUC  requesting  that effective no later than March
1, 2004 a new  equity  ratio of 61.53%  plus or minus 15%  (52.30% to 70.76%) be
established  until  such time as our 2004  capital  structure  is  approved.  On
February 18, 2004 the MPUC approved at Minnesota Power's request.
   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 will focus
on whether the fuel clause  continues to be an appropriate  regulatory tool. The
initial  steps will be to review the clause's  original  purpose,  structure and
rationale of the fuel  adjustment  clause  (including its current  operation and
relevance  in today's  regulatory  environment),  and then  address  its ongoing
appropriateness  and  other  issues  if the need for  continued  use of the fuel
adjustment clause is shown.  Because this  investigation is in its early stages,
we are unable to predict the outcome or impact, if any, at this time.
   Minnesota  requires  investor owned electric  utilities to spend a minimum of
1.5% of gross annual retail electric revenue on CIP each year. These investments
are recovered  from retail  customers  through a billing  adjustment and amounts
included in retail base rates.  The MPUC allows  utilities to  accumulate,  in a
deferred account for future recovery, all CIP expenditures as well as a carrying
charge on the deferred  account balance.  Minnesota  Power's CIP investment goal
was $2.9  million for 2003 ($2.9  million for 2002;  $2.7 million for 2001) with
actual  spending of $5.2 million in 2003 ($4.0 million in 2002;  $2.6 million in
2001).  These amounts  satisfied  current  spending  requirements  and all prior
years' spending shortfalls.
   PUBLIC SERVICE COMMISSION OF WISCONSIN. SWL&P's current electric retail rates
are based on a  September  2001 PSCW  retail rate order that allows for a 12.25%
return on common equity and resulted in an average rate decrease of 3.4%.  SWL&P
is  preparing  to file with the PSCW in  mid-2004 a request to  increase  retail
rates for its utility  operations  to be effective  sometime in early 2005.  The
request would cover changes in the cost of doing business.
   The ownership, control and operation of any affiliated wholesale nonregulated
generating plants in Wisconsin is subject to PSCW approval.


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                                     PART I


   In December 2003 the PSCW unanimously  approved the revised $420 million cost
estimate for the  Wausau-to-Duluth  electric  transmission  line that  Minnesota
Power,  the American  Transmission  Company (ATC) and Wisconsin  Public  Service
Corporation  have  proposed.  The line had been  projected  to cost  about  $215
million.  The increased costs for the 220-mile,  345-kV line are attributable to
higher prices for construction materials, increased payments to landowners, more
aggressive  environmental  safeguards and a different accounting calculation for
interest on funds used during  construction  for ATC. Despite the cost increase,
Minnesota  Power and  transmission  planners  throughout  the region believe the
transmission  line is  necessary.  Minnesota  Power is actively  involved in the
permitting and  construction  activities which began at the end of January 2004;
however,  it does not intend to finance or own the proposed line. An application
to cross the  Namekagon  River in  Wisconsin  was filed with the  National  Park
Service (NPS) in November 2001, and a draft  Environmental  Impact  Statement is
expected  to be  issued  by the NPS in early  2004.  Construction  is  currently
anticipated to be complete in 2008.

COMPETITION
   INDUSTRY  RESTRUCTURING.  State efforts across the country to restructure the
electric  utility  industry have slowed.  Legislation  or regulation  that would
allow retail customer choice of their electric  service  provider has not gained
momentum in either Minnesota or Wisconsin.
   At the national  level the FERC  continues  in its efforts to have  companies
join RTOs.  FERC's  sweeping  Standard  Market  Design  rulemaking,  renamed the
Wholesale  Market  Platform,  appears to have  stalled,  although  FERC  remains
committed  to  implementing  most  of  the  rule  in a more  piecemeal  fashion.
Minnesota Power supports the creation of a robust wholesale electric market.
   The  electricity  title of the pending  federal energy  legislation  seeks to
maintain  reliability,  increase  investments in new  transmission  capacity and
energy  supply,   and  address  wholesale  price  volatility  while  encouraging
wholesale  competition.  This  legislation  remains the  subject of  significant
controversy. We cannot predict the timing or substance of any future legislation
or regulation.

FRANCHISES
   Minnesota  Power  holds  franchises  to  construct  and  maintain an electric
distribution and  transmission  system in 90 cities and towns located within its
electric service territory. SWL&P holds similar franchises for electric, natural
gas and/or water  systems in 15 cities and towns  within its service  territory.
The  remaining  cities and towns  served do not require a  franchise  to operate
within their boundaries.  Our exclusive  service  territories are established by
state regulatory agencies.

EMPLOYEES
   At December 31, 2003 Energy Services had 1,400 full-time employees.
   Minnesota  Power,  SWL&P and  Enventis  Telecom  have 596  employees  who are
members of the International Brotherhood of Electrical Workers (IBEW), Local 31.
A labor agreement  between Minnesota Power and Local 31, which includes Enventis
Telecom, was in effect through January 31, 2004. On February 25, 2004 IBEW Local
31 approved a new two-year  labor  agreement  with  Minnesota  Power,  SWL&P and
Enventis  Telecom that will be in effect through January 31, 2006. The agreement
provides wage  increases of 3.25% in each of the two contract  years.  The union
voted to discontinue  their  participation  in the Results Sharing program as of
the end of 2003.
   BNI Coal had 96 employees  who were members of the IBEW Local 1593.  BNI Coal
and Local  1593 have a labor  agreement  which  expires  on March 31,  2004.  In
accordance with terms of that agreement, a 3% increase took effect July 1, 2003.
Negotiations  are underway  for a new contract  that would begin after the March
31, 2004 expiration date.

ENVIRONMENTAL MATTERS
   Certain  businesses  included in our Energy  Services  segment are subject to
regulation by various federal, state and local authorities of air quality, water
quality,  solid  wastes  and other  environmental  matters.  We  consider  these
businesses to be in substantial compliance with those environmental  regulations
currently  applicable to their  operations and believe all necessary  permits to
conduct such operations have been obtained. 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  become  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
cleanups are charged to expense.
   AIR.  Minnesota Power's regulated  generating  facilities in Minnesota mainly
burn low-sulfur western  sub-bituminous coal and Square Butte,  located in North
Dakota,  burns lignite coal. All of these facilities are equipped with pollution
control equipment such as scrubbers,  baghouses or electrostatic  precipitators.
The federal Clean Air Act  Amendments  of 1990 (Clean Air Act) created  emission
allowances for sulfur dioxide.  Each allowance is an  authorization  to emit one
ton of sulfur dioxide, and each utility must have sufficient allowances to cover
its annual emissions.  Sulfur dioxide emission  requirements are currently being
met by all of Minnesota  Power's  generating  facilities.  Most Minnesota  Power
facilities have surplus  allowances.  Taconite Harbor expects to meet its sulfur
dioxide  requirements by annually  purchasing  allowances,  since it receives no
allowance  allocation.  Square  Butte  anticipates  meeting  its sulfur  dioxide
requirements  

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through  increased  use  of  existing  scrubbers  and  by  annually   purchasing
additional allowances as necessary.
   In accordance with the Clean Air Act, the EPA has established  nitrogen oxide
limitations for electric  generating units. To meet nitrogen oxide  limitations,
Minnesota Power installed advanced low-emission burner technology and associated
control  equipment to operate the Boswell and Laskin  facilities at or below the
compliance emission limits. Nitrogen oxide limitations at Square Butte are being
met by combustion tuning.
   Minnesota Power has obtained all necessary Title V air operating permits from
the MPCA for its applicable facilities to conduct electric operations.
   In December 2000 the EPA announced its decision to regulate mercury emissions
from coal and  oil-fired  power plants  under  Section 112 of the Clean Air Act.
Section 112 will require all such power plants in the United States to adhere to
the EPA maximum achievable control technology (MACT) standards for mercury.  The
EPA issued a proposed rule in December 2003. Final regulations  defining control
requirements  are  planned  for  December  2004.  The  proposed  rule offers two
different types of regulation:  imposition of an annual average mercury emission
limitation  applied  at each unit or  facility  average  under  Section  112 and
imposition of a cap and trade program under Section 111,  where an allocation of
mercury  credits  would be assigned  and  utilities  would need to provide for a
combination  of  emission   reductions  and  credit   purchases  to  demonstrate
compliance.  The EPA is soliciting  comments about these  approaches.  In either
approach,  continuous monitoring of mercury stack emissions is required to be in
service around 2008. Minnesota Power's preliminary estimates suggest that all of
our  affected  facilities  can be outfitted  with  continuous  mercury  emission
monitors for under $2 million.  Our unit mercury emissions tests indicate all of
our units should  comply with the proposed unit  specific  target  emission rate
without significant  additional cost. Cost estimates about mercury cap and trade
program  impacts  would be premature at this time.  The EPA is still  soliciting
comments about this proposed  alternative  program and associated  final mercury
credit allocations to units have not yet been defined.
   During 2002  Minnesota  Power  received and responded to a third request from
the EPA, under Section 114 of the Clean Air Act, seeking additional  information
regarding  capital  expenditures at all of its coal-fired  generating  stations.
This action is part of an industry-wide  investigation assessing compliance with
the New  Source  Review  and the New  Source  Performance  Standards  (emissions
standards  that apply to new and changed units) of the Clean Air Act at electric
generating  stations.  We have  received no  feedback  from the EPA based on the
information we submitted.  There is, however,  ongoing litigation  involving the
EPA and other electric  utilities for alleged  violations of these rules.  It is
expected  that the  outcome  of some of the  cases  could  provide  the  utility
industry direction on this topic. We are unable to predict what actions, if any,
may be required as a result of the EPA's request for  information.  As a result,
we have not accrued any liability  for this  environmental  matter.  
   In December 2002 the EPA issued changes to the  existing  New  Source  Review
rules.  These rules  changed the  procedures  for MPCA review of projects at our
electric  generating  facilities.  In  October  2003 the EPA  announced  changes
clarifying the  application of certain  sections of the New Source Review rules.
These changes are not expected to have a material impact on Minnesota  Power. On
December 24, 2003 the U.S. Court of Appeals for the District of Columbia Circuit
stayed the  implementation of the October 2003 rule pending their further review
which is expected sometime in 2004.
   In June 2002 Minnkota Power, the operator of Square Butte,  received a Notice
of Violation from the EPA regarding  alleged New Source Review violations at the
M.R.  Young Station which  includes the Square Butte  generating  unit.  The EPA
claims  certain  capital  projects  completed by Minnkota Power should have been
reviewed pursuant to the New Source Review regulations  potentially resulting in
new air permit  operating  conditions.  Minnkota Power has held several meetings
with  the EPA to  discuss  the  alleged  violations.  Based  on an EPA  request,
Minnkota  Power  performed a study related to the  technological  feasibility of
installing  various  controls for the  reduction  of nitrogen  oxides and sulfur
dioxide emissions.  Discussions with the EPA are ongoing and we are still unable
to predict  the  outcome or cost  impacts.  If Square  Butte is required to make
significant capital expenditures to comply with EPA requirements, we expect such
capital  expenditures  to be debt financed.  Our future cost of purchased  power
would include our pro rata share of this additional debt service. (See Note 15.)
   WATER. The Federal Water Pollution Control Act of 1972 (FWPCA), as amended by
the Clean Water Act of 1977 and the Water Quality Act of 1987,  established  the
National  Pollutant  Discharge  Elimination  System (NPDES) permit program.  The
FWPCA  requires  NPDES permits to be obtained from the EPA (or, when  delegated,
from individual state pollution control agencies) for any wastewater  discharged
into navigable waters. Minnesota Power has obtained all necessary NPDES permits,
including  NPDES storm water permits for applicable  facilities,  to conduct its
electric operations.
   Minnesota  Power holds FERC licenses  authorizing the ownership and operation
of seven  hydroelectric  generating projects with a total generating capacity of
about 115 MW. In June 1996  Minnesota  Power filed in the U.S.  Court of Appeals
for the  District  of Columbia  Circuit a petition  for review of the license as
issued by the FERC for Minnesota Power's St. Louis River Hydro Project. Separate
petitions for review were also filed by the U.S.  Department of the Interior and
the  Fond  du Lac  Band  of Lake  Superior  Chippewa  (Fond  du Lac  Band),  two
intervenors  in the  licensing  proceedings.  The court  consolidated  the three
petitions for 

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review and suspended the briefing schedule while Minnesota Power and the Fond du
Lac Band  negotiate a reasonable  fee for the use of tribal lands as mandated by
the new license.  Both parties  informed the court that these  negotiations  may
resolve other disputed issues, and they are obligated to report  periodically to
the court the status of these discussions.  Beginning in 1996, and most recently
in February 2004, Minnesota Power filed requests with the FERC for extensions of
time to comply with certain plans and studies required by the license that might
conflict  with  the  settlement  discussions.  The  Fond du Lac  Band,  the U.S.
Department  of the  Interior  and  Minnesota  Power  have  reached a  settlement
agreement  for the St.  Louis  River  Hydro  Project.  This  settlement  must be
approved  by the FERC who would then amend the  project  license to reflect  the
conditions of the  settlement  agreement.  Minnesota  Power is in the process of
preparing the filing for submission to the FERC in mid 2004.
   SOLID AND HAZARDOUS WASTE. The Resource Conservation and Recovery Act of 1976
regulates the management and disposal of solid wastes and hazardous wastes. As a
result of this  legislation,  the EPA has  promulgated  various  hazardous waste
rules. Minnesota Power is required to notify the EPA of hazardous waste activity
and routinely  submits the necessary annual reports to the EPA. The MPCA and the
Wisconsin   Department  of  Natural   Resources   (WDNR)  are   responsible  for
administering  solid and hazardous waste rules on the state level with oversight
by the EPA.
   In response to EPA Region V's request for  utilities  to  participate  in the
Great  Lakes  Initiative  by  voluntarily  removing  remaining   polychlorinated
biphenyl (PCB)  inventories,  Minnesota  Power has scheduled  replacement of PCB
capacitor banks and  PCB-contaminated  oil by the end of 2004. The total cost is
expected  to be about  $2.0  million  of which $1.5  million  was spent  through
December 31, 2003.
   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's  predecessors  from 1889 to 1904.  The
WDNR requested SWL&P to initiate an environmental  investigation.  The WDNR also
issued SWL&P a  Responsible  Party letter in February  2002.  The  environmental
investigation  is  underway.  In  February  2003  SWL&P  submitted  a  Phase  II
environmental site investigation report to the WDNR. This report identified some
MGP-like  chemicals  that were  found in the soil.  During  March and April 2003
sediment  samples were taken from nearby Superior Bay. The report on the results
of this  sampling is expected  to be  completed  and sent to the WDNR during the
first  quarter of 2004. A work plan for  additional  investigation  by SWL&P was
filed on December 17, 2003 with the WDNR.  This part of the  investigation  will
determine any impact to soil or ground water between the former MGP site and the
Superior  Bay.  Although it is not possible to quantify the  potential  clean-up
cost until the  investigation is completed and a work plan is developed,  a $0.5
million  liability  was  recorded as of  December  31, 2003 to address the known
areas of  contamination.  We have  recorded a  corresponding  dollar amount as a
regulatory  asset to  offset  this  liability.  The PSCW  has  approved  SWL&P's
deferral of these MGP environmental  investigation and potential  clean-up costs
for future recovery in rates, subject to regulatory prudency review.

AUTOMOTIVE SERVICES

   Automotive  Services,  headquartered  in Carmel,  Indiana,  operates two main
businesses that are integral parts of the vehicle redistribution industry in the
United States and Canada:  auctions and related services,  and dealer financing.
Automotive Services includes several wholly owned subsidiaries, including ADESA,
ADESA Impact and AFC.  The  proposed  spin-off is expected to take the form of a
tax-free stock dividend to ALLETE's  shareholders,  who would receive one ADESA,
Inc. share for each share of ALLETE common stock. ADESA, Inc. will be the parent
company  of the  subsidiaries  we  include in  Automotive  Services.  Automotive
Services plans to grow by growing auction sales volume,  optimizing  revenue per
vehicle sold,  continuing to improve  operating  efficiency,  expanding into new
markets, and growing on-line auctions and related services. The discussion below
summarizes  the  businesses  we  include  in  Automotive  Services.  Statistical
information is presented as of December 31, 2003 unless otherwise indicated.

WHOLESALE  VEHICLE AUCTIONS 
   We  are  the  leading, national  provider of wholesale  vehicle  auctions and
related  vehicle  redistribution  services for the automotive  industry in North
America.  Most of our locations are stand-alone  facilities  dedicated to either
used vehicle auctions or salvage  auctions,  but in several  locations,  we have
been able to capitalize on the  synergies of utilizing our  facilities  for both
types of  auctions.  In addition to vehicle  auction  services,  we also provide
auctions and related services for specialty vehicles and equipment unique to the
recreational vehicle, commercial trucking, construction and utility industries.
   We provide  Internet-based  solutions  to  institutional  sellers who wish to
redistribute  their vehicles to either  franchised and/or  independent  dealers,
including   on-line  and   bulletin   board   on-line  live   auctions   running
simultaneously with our physical auctions. We feel that the physical auctions we
operate  offer a superior  method of vehicle  redistribution  when  compared  to
on-line auctions. As the use of on-line auctions has become an accepted practice
in the  vehicle  redistribution  industry,  we have  developed  on-line  auction
technologies to complement our physical auction business. We believe we are well
positioned  to offer the  appropriate  mix of physical and on-line  auctions and
services  to  our   customers  to  ensure  the  most   effective  and  efficient
redistribution of their vehicles.


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   USED  VEHICLE  AUCTIONS  AND  RELATED  SERVICES.  We are the  second  largest
wholesale used vehicle  auction  network in the United States and the largest in
Canada.  We operate 53 used vehicle  auction  facilities  in close  proximity to
large concentrations of used vehicle dealers throughout North America,  which we
own or lease. Each auction is a multi-lane, drive-through facility, and may have
additional buildings for reconditioning,  registration,  maintenance,  bodywork,
and other ancillary and  administrative  services.  Each auction also has secure
parking areas to store vehicles for auction.  (See Used Vehicle Auctions Table.)
Our customers sold 1,810,000 used vehicles at our auctions in 2003 (1,741,000 in
2002; 1,761,000 in 2001).
   Auctions are the hub of a massive  redistribution  system for used  vehicles.
Our auctions  enable  institutional  customers and selling  dealers to sell used
vehicles to licensed franchised, independent and wholesale used vehicle dealers.
Our  mission is to  maximize  the  auction  sales  price for the sellers of used
vehicles by effectively and  efficiently  transferring  the vehicles,  paperwork
(including certificates of title and other evidence of ownership),  and funds as
quickly as possible from the sellers to a large population of dealers seeking to
fill their inventory for resale to retail consumers.  Auctions are held at least
weekly at every location and provide  real-time  wholesale market prices for the
vehicle redistribution  industry.  During the sales process, we do not generally
take title to or  ownership of the  vehicles  consigned  for auction but instead
facilitate the transfer of vehicle ownership directly from seller to buyer.
   A central  measure to the results of the used vehicle  auction process is the
conversion percentage, which represents the number of vehicles sold as a percent
of the vehicles offered for sale. The number of vehicles offered for sale is the
key driver of the costs  incurred in, and the number of vehicles sold is the key
driver of the related fees generated by, the redistribution process.  Generally,
as the conversion percentage  increases,  so do the profitability and efficiency
of our auctions.
   We provide a full range of services to both buyers and sellers, including:
   -  Auction services, such  as  marketing and advertising the vehicles  to  be
      auctioned,  dealer  registration,   storage  of  consigned  and  purchased
      inventory, clearing of funds, arbitration  of  disputes,  auction  vehicle
      registration,   condition  report  processing,  security  for    consigned
      inventory, sales results reports, pre-sale  lineups, and actual auctioning
      of vehicles by licensed auctioneers.
   -  Internet-based solutions,  including  on-line  bulletin board auctions and
      on-line  live  auctions running simultaneously with our physical auctions.
   -  Inbound  and  outbound  logistics administration with services provided by
      both third party carriers and our auctions.
   -  Reconditioning services, including detailing, washing,  body  work,  light
      mechanical work, glass repair, dent repair, tire and key replacement,  and
      upholstery repair.
   -  Inspection and certification  services  whereby  the  auction  performs  a
      physical  inspection  and  produces  a  condition  report,  in addition to
      varying levels of diagnostic testing for purposes of certification.
   -  Title processing and other paperwork administration.
   -  Outsourcing of remarketing functions and end of lease term management.
Each of  these  services  may also be  purchased  separately  from  the  auction
process.
   SALVAGE AUCTIONS  AND  RELATED  SERVICES.  We are currently the third largest
salvage  auction  operator  in North  America,  where  the top  three  operators
constitute an estimated 72% of the vehicles sold through auctions. We operate 27
salvage auction facilities in the United States and Canada. Salvage auctions are
generally  smaller than used  vehicle  auctions in terms of acreage and building
size and some locations share  facilities with our used vehicle  auctions.  Most
salvage vehicles cannot be driven through lanes, and salvage auction  facilities
are  therefore  less complex than  wholesale  used vehicle  auction  facilities,
consisting  primarily of large lots for  depositing  salvage  vehicles.  Salvage
auction facilities typically have a small office building and a garage for truck
and loader  repairs.  (See  Salvage  Vehicle  Auctions  Table.)  Our  customers,
primarily insurance companies, sold an estimated 191,000 salvage vehicles at our
auctions in 2003 (175,000 in 2002; 148,000 in 2001).
   Salvage  vehicles are damaged  vehicles  that are branded as total losses for
insurance or business purposes as well as recovered stolen vehicles for which an
insurance  settlement  with the vehicle  owner has already been made. We offer a
comprehensive  selection of salvage recovery  services.  In addition to the core
auction process including inbound and outbound  logistics,  remarketing  vehicle
claims services such as vehicle inspection,  evaluation,  titling and settlement
administration, remarketing and theft-recovered vehicle services. Used together
or independently,  these services provide efficiency and speed of service to our
customers, helping them to mitigate their losses and manage the costs related to
processing  the claims and  related  vehicles.  We also  provide  the  insurance
industry  with  professional  claims  outsourcing  and recycled  parts  locating
services via an extensive network of third party suppliers of
used vehicle parts. 
   We  provide  solutions  for  all  aspects  of the  salvage  auction  process,
including:
   -  Auction  services,  such  as  registering  vehicles,  clearing  of  funds,
      reporting sales results and pre-sale lineups to  customers,  paying  third
      party  storage  centers  for  the  release  of  vehicles  and the physical
      auctioning of the vehicles by licensed auctioneers.
   -  Inbound  and  outbound  logistics  administration  with   actual  services
      provided by both third party carriers and our auctions.
   -  Other  services  including  vehicle  inspections,   evaluations,  titling,
      settlement administration, drive through damage


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<TABLE>
<CAPTION>
                                                                                  NUMBER OF
                                                            STATE/                 AUCTION
USED VEHICLE AUCTIONS              CITY                     PROVINCE                LANES
=============================================================================================
<S>                                <C>                      <C>                   <C>
UNITED STATES                                            
    ADESA Birmingham               Moody                    Alabama                  10
    ADESA Phoenix                  Chandler                 Arizona                  12
    ADESA Little Rock <F1>         North Little Rock        Arkansas                 10
    ADESA Golden Gate              Tracy                    California               12
    ADESA Los Angeles <F2>         Mira Loma                California                6
    ADESA Sacramento               Sacramento               California                5
    ADESA San Diego <F1>           San Diego                California                6
    ADESA Colorado Springs         Colorado Springs         Colorado                  5
    ADESA Jacksonville <F3>        Jacksonville             Florida                   6
    ADESA Ocala                    Ocala                    Florida                   5
    ADESA Orlando-Sanford          Sanford                  Florida                   8
    ADESA Tampa                    Tampa                    Florida                   8
    ADESA Atlanta <F1>             Fairburn                 Georgia                   8
    ADESA Indianapolis             Plainfield               Indiana                  10
    ADESA Southern Indiana         Edinburgh                Indiana                   3
    ADESA Des Moines               Grimes                   Iowa                      5
    ADESA Lexington                Lexington                Kentucky                  6
    ADESA Shreveport               Shreveport               Louisiana                 5
    ADESA Boston                   Framingham               Massachusetts            11
    ADESA Concord <F3>             Acton                    Massachusetts             5
    ADESA Lansing                  Dimondale                Michigan                  5
    ADESA Kansas City              Lee's Summit             Missouri                  7
    ADESA St. Louis                Barnhart                 Missouri                  3
    ADESA New Jersey               Manville                 New Jersey                8
    ADESA Buffalo <F3>             Akron                    New York                 10
    ADESA Long Island              Yaphank                  New York                  6
    ADESA Charlotte                Charlotte                North Carolina           10
    ADESA Cincinnati/Dayton        Franklin                 Ohio                      8
    ADESA Cleveland                Northfield               Ohio                      8
    ADESA Tulsa                    Tulsa                    Oklahoma                  6
    ADESA Pittsburgh               Mercer                   Pennsylvania              8
    ADESA Knoxville                Lenoir City              Tennessee                 6
    ADESA Memphis                  Memphis                  Tennessee                 6
    ADESA Austin <F1>              Austin                   Texas                     6
    ADESA Dallas                   Mesquite                 Texas                     8
    ADESA Houston                  Houston                  Texas                     8
    ADESA San Antonio              San Antonio              Texas                     8
    ADESA Seattle                  Auburn                   Washington                4
    ADESA Wisconsin                Portage                  Wisconsin                 5

CANADA                                                                             
    ADESA Calgary                  Airdrie                  Alberta                   4
    ADESA Edmonton  <F3>           Nisku                    Alberta                   5
    ADESA Vancouver <F1><F3>       Richmond                 British Columbia          7
    CAG Vancouver <F1>             Surrey                   British Columbia          2
    ADESA Winnipeg                 Winnipeg                 Manitoba                  4
    ADESA Moncton                  Moncton                  New Brunswick             2
    ADESA St. John's <F1>          St. John's               Newfoundland              1
    ADESA Halifax <F3>             Enfield                  Nova Scotia               5
    ADESA Kitchener                Ayr                      Ontario                   4
    ADESA Ottawa <F3>              Vars                     Ontario                   5
    ADESA Toronto                  Brampton                 Ontario                   8
    ADESA Montreal                 St. Eustache             Quebec                   12
    ADESA Saskatoon <F1>           Saskatoon                Saskatchewan              2

MEXICO                                                                                           
    ADESA Mexico <F4>              Mexico City
=============================================================================================
<FN>
<F1> Leased auction facilities. (See Note 15.)
<F2> We currently lease part of the property on which this auction is located.
<F3> Shares facilities with salvage auction at the same location.
<F4> Holds auctions at one of our customer's facilities in Mexico City, Mexico.
</FN>
</TABLE>


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<TABLE>
<CAPTION>
                                                                                             
                                                                   STATE/                   TOTAL
SALVAGE VEHICLE AUCTIONS                   CITY                    PROVINCE                ACREAGE
============================================================================================================
<S>                                        <C>                     <C>                     <C>  
UNITED STATES
   ADESA Impact - Fremont                  Fremont                 California                 63
   ADESA Impact - Jacksonville <F1>        Jacksonville            Florida                     6
   ADESA Impact - Miami <F2>               Opa-Locka               Florida                    29
   ADESA Impact - Orlando <F2>             Orlando                 Florida                     8
   ADESA Impact - Clinton                  Clinton                 Maine                       7
   ADESA Impact - Saco                     Saco                    Maine                       9
   ADESA Impact - Concord <F1>             Acton                   Massachusetts              10
   ADESA Impact - Taunton                  East Taunton            Massachusetts              29
   ADESA Impact - Salem <F3>               Salem                   New Hampshire              13
   ADESA Impact - Albany                   Colonie                 New York                   25
   ADESA Impact - Buffalo <F1>             Akron                   New York                   15
   ADESA Impact - Long Island <F2>         Medford                 New York                    4
   ADESA Impact - Montgomery <F1>          Rock Tavern             New York                   64
   ADESA Impact - Clayton                  Clayton                 North Carolina             21
   ADESA Impact - Rhode Island             East Providence         Rhode Island               15
   ADESA Impact - Vermont                  Essex                   Vermont                    28
                                                                                             
CANADA                                                                                       
   Impact Calgary <F2>                     Calgary                 Alberta                    10
   Impact Edmonton <F1><F2>                Nisku                   Alberta                    10
   Impact Vancouver <F1><F2>               Richmond                British Columbia            3
   Impact Moncton <F2>                     Moncton                 New Brunswick               8
   Impact Halifax <F1><F2>                 Enfield                 Nova Scotia                 6
   Impact Hamilton <F2>                    Hamilton                Ontario                    12
   Impact London <F2>                      London                  Ontario                    17
   Impact Toronto <F2>                     Stouffville             Ontario                    28
   Impact Sudbury <F4>                     Sudbury                 Ontario                    10
   Impact Ottawa <F1><F2>                  Vars                    Ontario                     9
   Impact Montreal <F2><F5>                Les Cedres              Quebec                     50
============================================================================================================
<FN>
<F1> Shares facilities with ADESA used vehicle auction at the same location.
<F2> Leased auction facilities. (See Note 15.)
<F3> We currently lease part of the property on which this auction is located.
<F4> Impact Auto owns 50% of this auction facility.
<F5> Holds a monthly auction at an independent auction facility in Quebec City, Quebec.
</FN>
</TABLE>


      assessment  centers,  claims  auditing,  recycled  parts locating,  and  a
      national call center.
   -  Internet-based solutions, including on-line bulletin  board  auctions  and
      on-line live auctions running simultaneously with our physical auctions.
Each of  these  services  may also be  purchased  separately  from  the  auction
process.

DEALER FINANCING
   AFC  primarily  provides  short-term  inventory-secured  financing,  known as
floorplan  financing,  for used  vehicle  dealers in North  America who purchase
vehicles from our auctions, independent auctions, auctions affiliated with other
auction networks and outside sources.  In 2003 approximately 85% of the vehicles
floorplanned  by AFC were vehicles  purchased by dealers at auction.  AFC has 80
loan  production  offices at or near vehicle  auctions  across North America and
arranged 950,000 loan  transactions in 2003 (946,000 in 2002;  904,000 in 2001).
Our ability to provide  floorplan  financing  facilitates  the growth of vehicle
sales at  auction,  and also  allows  us to have  a  larger  role in the  entire
vehicle redistribution industry. 
   AFC's  procedures and proprietary  computer-based  system enable us to manage
our  credit  risk by  following  each loan from  origination  to  payoff,  while
expediting  services through its branch network.  Our approximately 8,200 active
accounts (those  accounts with financing for at least one vehicle  outstanding),
had an average  line of credit of  $112,000.  An average of nine  vehicles  were
floorplanned  per active dealer with an approximate  average value of $6,500 per
vehicle.  Up to 12,000  dealers  utilize their lines of credit during any twelve
month period.
   AFC offices are  conveniently  located at or within  close  proximity  of our
auctions and other auctions,  which allows dealers to reduce transaction time by
providing immediate payment for vehicles purchased at auction. On-site financing
also enables AFC to share its information with auction representatives regarding
the financing capacity of customers, thereby increasing the purchasing potential
at auctions.  Of AFC's 80 offices in North America, 58 are physically located at
auction  facilities.  Each of the  remaining  22 AFC  offices  is
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strategically located in close proximity to at least one of the auctions that it
services.  In  addition,  AFC has the  ability to send  finance  representatives
on-site  to  most  approved   independent  auctions  during  auction  sale-days.
Geographic  proximity to our  customers  also gives our employees the ability to
stay in close contact with our  outstanding  accounts,  thereby better  enabling
them to manage credit risk.
   Every floorplan financed vehicle is treated as an individual loan. Typically,
AFC  assesses a floorplan  fee at the  inception  of a loan and collects the fee
along with interest (accrued daily) when the loan is paid in full. AFC generally
only  allows one loan per  vehicle  and  permits  payoffs to occur with only one
check per vehicle.  In addition,  AFC holds title or other evidence of ownership
to all vehicles  which are  floorplanned,  except for vehicles  floorplanned  in
Michigan. Typical loan terms are 30 or 45 days, each with a possible curtailment
extension. For an additional fee, the curtailment extension allows the dealer to
extend the  duration of the loan beyond the  original  term for another 30 to 45
days if the dealer  makes an upfront  payment  towards  principal,  interest and
fees.
   The  extension  of a credit  line to a dealer  starts  with the  underwriting
process.  Credit lines up to $150,000 are extended  using a proprietary  scoring
model developed internally by AFC with no requirement for financial  statements.
Credit lines in excess of $150,000 may be extended using underwriting guidelines
which require dealership and personal financial  statements and tax returns. The
underwriting  of  each  line  of  credit  requires  an  analysis,  write-up  and
recommendation by the credit department and final review by a credit committee.
   AFC takes a  security  interest  in each  financed  vehicle,  and  collateral
management is an integral  part of day-to-day  operations at each AFC branch and
its Corporate headquarters.  AFC's proprietary computer-based system facilitates
collateral  management by providing real time access to dealer  information  and
enables our branch  personnel to manage potential  collection  issues as soon as
they arise.  Restrictions are  automatically  placed on customer accounts in the
event of a  delinquency,  insufficient  funds  received  or poor audit  results.
Branch  personnel are proactive in managing  collateral by monitoring  loans and
notifying dealers that payments are coming due. In addition,  routine audits, or
lot checks, are performed by an affiliated company. Poor results from lot checks
typically  require  branch  personnel to take actions to determine the status of
missing  collateral,  including visiting the dealer personally,  verifying units
held off-site and collecting payments for units sold. In some instances an audit
may identify a troubled account which could cause our collections  department to
become involved.
   AFC operates four  divisions  which are  organized  into ten regions in North
America.  Each  division and region is  monitored by managers who oversee  daily
operations. At the corporate level, AFC employs full-time collection specialists
and  collection  attorneys  who are  assigned  to  specific  regions and monitor
collection  activity for these areas.  Collection  specialists work closely with
the branches to track trends before an account becomes a troubled account and to
determine,  together with collection attorneys,  the best strategy to secure the
collateral  once a  troubled  account  is  identified.  
   Once a new  customer is extended  credit,  we emphasize  service,  growth and
management. All AFC employees at the management level participate in a two-stage
interactive  training  program at Automotive  Services'  corporate  headquarters
that allows  us to provide  consistent  services to our customers and consistent
monitoring of our accounts at local, regional and central levels.
   The  Eligible  Active  Dealers  table  depicts a range of the lines of credit
available to eligible dealers.
   As of December 31, 2003 no single line of credit  accounted for more than 10%
of the total credit extended by AFC. AFC's top five active dealers represented a
total committed credit of $93 million with a total outstanding  principal amount
of $31 million.  The single  largest  committed line of credit granted by AFC is
for $45 million,  for which the obligor had $3.5 million outstanding on December
31,  2003.  This  obligor  operates   outside  of  AFC's  normal   floorplanning
arrangements with specific  covenants that must be maintained,  and borrows on a
revolving based line of credit with advances based on eligible inventory.
   AFC's  five  largest  write-offs  for the past five  years  amounted  to $3.8
million in  aggregate,  of which $1.4  million  was  recovered  through  ongoing
collection activity as well as insurance claims.


<TABLE>
ELIGIBLE ACTIVE DEALERS - 2003
<CAPTION>
============================================================================================================
                                                            NUMBER OF DEALERS    AGGREGATE MANAGED PRINCIPAL
                                 NUMBER OF ELIGIBLE          WITH OUTSTANDING       AMOUNT OUTSTANDING AS
AVAILABLE LINE OF CREDIT           ACTIVE DEALERS                BALANCES           OF DECEMBER 31, 2003
------------------------------------------------------------------------------------------------------------
<S>                              <C>                        <C>                     <C>   
Less than $150,000                    11,337                      7,648                 $320,787,232
$150,001 to $500,000                     512                        495                  102,780,909
$500,001 to $2,500,000                    93                         92                   61,455,681
$2,500,001 to $5,000,000                   6                          6                   11,998,355
$5,000,001 to $10,000,000                  1                          1                    5,104,360
$10,000,001 and Greater                    2                          2                   16,036,280      
------------------------------------------------------------------------------------------------------------
Total                                 11,951                      8,244                 $518,162,817
============================================================================================================
</TABLE>


--------------------------------------------------------------------------------
                                     PAGE 24


<PAGE>
                              ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                                     PART I

COMPETITION
   We  are the  only  company to offer both used  vehicle and salvage  auctions,
floorplan financing for used vehicle dealers and a wide array of related vehicle
redistribution services. In the used vehicle auction  industry,  we compete with
Manheim Auctions, Inc. (Manheim), a subsidiary of Cox Enterprises, Inc., as well
as several smaller chains of auctions,  and independent auctions,  some of which
are  affiliated  through  their  membership  in an industry  organization  named
ServNet(registered). Due to our national presence, competition is strongest with
Manheim  for the  supply  of used  vehicles  from  national  level  accounts  of
institutional  customers.  Although  the supply of these  vehicles is  dispersed
among all of the  auctions in the used vehicle  market,  we compete most heavily
with the independent  auctions (as well as Manheim and all others in the market)
for the supply of vehicles from dealers.
   Due  to  the  increased  visibility  of  the  Internet  as  a  marketing  and
distribution  channel,  new competition has arisen recently from  Internet-based
companies  and our own customers who have  historically  redistributed  vehicles
through  various  channels  including  auctions.  Direct  sales of  vehicles  by
institutional  customers and large dealer groups through internally developed or
third  party  on-line  auctions  have  largely  replaced  telephonic  and  other
non-auction  methods,  becoming an  increasing  portion of overall  used vehicle
redistribution.  The extent of use of direct, on-line systems varies by customer
and, based upon our estimates,  currently  comprises  approximately  3% to 5% of
overall used vehicle auction sales.  Typically,  these on-line auctions serve to
redistribute  vehicles  that  have  come off  lease.  In  addition,  some of our
competitors have begun to offer on-line auctions as all or part of their auction
business and other on-line auction companies now include used vehicles among the
products  offered  at their  auctions.  On-line  auctions  or other  methods  of
redistribution  may diminish  both the quality and quantity and reduce the value
of vehicles sold through traditional auction facilities.
   In the salvage  auction  services  industry,  we compete with  Copart,  Inc.,
Insurance  Auto  Auctions,   Inc.,  independent  auctions,  some  of  which  are
affiliated   through  their  membership  in  an  industry   organization   named
Sadisco(registered),  and  a  limited  number  of  used  vehicle  auctions  that
regularly  redistribute  salvage  vehicles.  Additionally,  some  dismantlers of
salvage  vehicles and  Internet-based  companies  have entered the market,  thus
providing  alternate avenues for sellers to redistribute  salvage  vehicles.  We
believe further consolidation of the salvage auction service industry will occur
and are  evaluating  various  means by which we can  continue  our growth  plan.
Through strategic acquisitions, shared facilities with our used vehicle auctions
and greenfield  expansion,  we believe our salvage auction service  business can
become a prominent  salvage services auction provider to the insurance  industry
in the United States.
   In Canada we are the largest  provider of used and  salvage  vehicle  auction
services. Our competitors include vehicle recyclers and dismantlers, independent
vehicle auctions,  brokers, Manheim and on-line auction companies. We believe we
are  strategically  positioned  in this  market  by  providing  a full  array of
value-added  services to our customers  including auctions and related services,
on-line programs, data analyses, and consultation.
   The used vehicle  inventory  floorplan  financing  sector is characterized by
diverse and fragmented  competition.  AFC primarily  provides  short-term dealer
floorplan  financing of wholesale  vehicles to  independent  vehicle  dealers in
North America. AFC's competition includes Manheim Automotive Financial Services,
other specialty lenders,  banks and other financial  institutions.  AFC competes
primarily on the basis of quality of services,  convenience of payment, scope of
services offered, and historical and consistent commitment to the sector.

EMPLOYEES
   At December 31, 2003 Automotive Services had approximately  11,200 employees,
with 9,000  located in the United States and Mexico and 2,200 located in Canada.
About 64% of Automotive  Services' work force  consists of full-time  employees.
Currently  none of  Automotive  Services'  employees  participate  in collective
bargaining  agreements.  In addition to our work force of employees,  Automotive
Services  also  utilizes  temporary  labor  services to assist in  handling  the
vehicles consigned during periods of peak volume and staff shortages. Nearly all
of  Automotive  Services'  auctioneers  are contract  laborers  providing  their
services for a daily or weekly rate.  Many of the services  Automotive  Services
provides  are  outsourced  to third party  providers  that  perform the services
either on-site or off-site.  The use of third party  providers  depends upon the
resources  available at each auction  facility as well as peaks in the volume of
vehicles offered at auction.

VEHICLE REGULATION 
   Automotive  Services'  operations are subject to regulation,  supervision and
licensing under various U.S. or Canadian  federal,  state,  provincial and local
statutes,  ordinances  and  regulations.  Each auction is subject to laws in the
state or province in which it operates which regulate auctioneers and/or vehicle
dealers.  Some of the  transport  vehicles used at our auctions are regulated by
the U.S. Department of Transportation or the Canadian Transportation Agency. The
acquisition  and sale of salvage and theft  recovered  vehicles is  regulated by
governmental  agencies in each of the  locations  in which we  operate.  In many
states and  provinces,  regulations  require  that a salvage  vehicle be forever
"branded" with a salvage notice in order to notify prospective purchasers of the
vehicle's previous salvage status. Some state,  provincial and local regulations
also limit who can purchase  salvage  vehicles,  as well as determine  whether a
salvage  vehicle can be sold as rebuildable or must be sold for parts only. Such
regulations  can reduce the number of  potential  buyers of  vehicles at salvage
auctions.  In  addition  to the  regulation  of the  sales  and  acquisition  of
vehicles,  we are also subject to various local zoning  requirements with regard
to the location and operation of our auction and storage facilities.


--------------------------------------------------------------------------------
                                     PAGE 25


<PAGE>
                              ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                                     PART I

ENVIRONMENTAL MATTERS 
   Certain  businesses  in  our  Automotive  Services  segment  are  subject  to
regulation by various U.S. and Canadian  federal,  state,  provincial  and local
authorities  concerning  air  quality,  water  quality,  solid  wastes and other
environmental matters. In the vehicle redistribution  industry, large numbers of
vehicles,  including damaged vehicles at salvage auctions, are stored at auction
facilities and, during that time,  releases of fuel,  motor oil and other fluids
may occur,  resulting in soil, air, surface water or groundwater  contamination.
In addition,  our facilities  generate and/or store petroleum products and other
hazardous materials,  including wastewater waste solvents and used oil, and body
shops at our  facilities  may release  harmful  air  emissions  associated  with
painting.   We  could   incur   substantial   expenditures   for   preventative,
investigative or remedial action and could be exposed to liability  arising from
our operations,  contamination by previous users of our acquired facilities,  or
the disposal of our waste at off-site locations. We consider these businesses to
be in substantial  compliance  with those  environmental  regulations  currently
applicable to their operations and believe all necessary permits to conduct such
operations have been obtained.  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.
   ADESA IMPACT TAUNTON FACILITY. In December 2003 the Massachusetts  Department
of  Environmental  Protection  (MDEP)  identified  ADESA Impact as a potentially
responsible  party regarding  contamination  of several  private  drinking water
wells in a residential development that abuts the Taunton, Massachusetts salvage
vehicle auction facility. The wells had elevated levels of methyl tertiary-butyl
ether  (MTBE).  MTBE is an  oxygenating  additive in gasoline to reduce  harmful
emissions.  The EPA has identified MTBE as a possible  carcinogen.  ADESA Impact
engaged GeoInsight, an environmental services firm, to conduct tests of its soil
and  groundwater  at the salvage  vehicle  auction  site,  and we are  providing
bottled water to some affected residents.
   GeoInsight  prepared  an  immediate  response  action  (IRA)  plan,  which is
required by the MDEP to  determine  the extent of the  environmental  impact and
define activities to prevent further environmental contamination.  The IRA plan,
which was filed on January 24,  2004,  describes  the initial  activities  ADESA
Impact performed,  and proposes  additional measures that it will use to further
assess the  existence of any imminent  hazard to human health.  In addition,  as
required  by the MDEP,  ADESA  Impact is  conducting  an  analysis  to  identify
sensitive  receptors  that may have been  affected,  including  area schools and
municipal  wells.  GeoInsight does not believe that an imminent hazard condition
exists at the Taunton site;  however,  the  investigation and assessment of site
conditions are ongoing.
   In December 2003  GeoInsight  collected soil samples,  conducted  groundwater
tests and provided oversight for the installation of monitoring wells in various
locations on and adjacent to the property  adjoining the residential  community.
The results of the soil and water tests indicated  levels of MTBE exceeding MDEP
standards.  In January 2004 we collected air samples from two residences that we
identified as having  elevated  drinking water  concentrations  of MTBE. We have
determined  that  inhalation of, or contact  exposure to, this air poses minimal
risk to human health. In response to our empirical findings, we have proposed to
the MDEP that we install  granular  activated carbon  filtration  systems in the
approximately 30 affected residences.
   ADESA Impact is preparing an IRA status  report that must be submitted to the
MDEP by March 30,  2004,  and will  continue  to prepare  additional  reports as
necessary.  As of December  31, 2003 ADESA  Impact has accrued  $0.7  million to
cover the costs associated with ongoing testing,  remediation and cleanup of the
site. We have filed a claim under our pollution  liability  insurance  plan with
respect  to  this  matter. We  and  our  insurer  are  currently  discussing the
availability of insurance coverage for this claim.


--------------------------------------------------------------------------------
                                     PAGE 26


<PAGE>
                              ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                                     PART I

INVESTMENTS AND CORPORATE CHARGES

   Our  Investments  and  Corporate  Charges  segment  consists  of real  estate
operations, investments in emerging technologies related to the electric utility
industry and corporate  charges.  Corporate  Charges represent general corporate
expenses,  including  interest,  not  specifically  related to any one  business
segment. The discussion below summarizes the major components of the Investments
and  Corporate  Charges  segment.  Statistical  information  is  presented as of
December 31, 2003 unless  otherwise  noted.  All  subsidiaries  are wholly owned
unless otherwise specifically indicated.

REAL ESTATE OPERATIONS 
   Our real estate  operations  include CAPE CORAL  HOLDINGS,  INC.;  PALM COAST
LAND,  LLC;  PALM COAST  FOREST,  LLC;  TOMOKA  HOLDINGS, LLC; WINTER HAVEN CITI
CENTRE,  LLC;  and an 80%  ownership  in LEHIGH.  Through  subsidiaries,  we own
Florida real estate operations in five different locations:
   -  Lehigh Acres with 890 acres  of  residential  and  commercial  land,  east
      of Fort Myers, Florida; 
   -  Cape Coral, located west  of Fort Myers, Florida, with 160 acres of mostly
      commercially zoned land; 
   -  Palm Coast, a planned community  between St. Augustine and Daytona  Beach,
      Florida, with 12,000 acres of residential, commercial and industrial land;
   -  Tomoka, located near Ormand Beach, Florida with 6,200 acres  of  property;
      and 
   -  Winter Haven, located in central Florida, with a retail shopping center.
   Our real  estate  operations  may,  from time to time,  acquire  packages  of
diversified  properties  at low cost,  then add value through  entitlements  and
infrastructure enhancements, and sell the properties at current market prices.

EMERGING TECHNOLOGY INVESTMENTS 
   From 1985  through  2003 we have  invested  more than $50 million in start-up
companies which are developing technologies that may be utilized by the electric
utility  industry.  We are  committed  to invest an  additional  $4.8 million at
various times through 2007.  The  investments  were first made through  emerging
technology funds (Funds)  initiated by other electric  utilities and us. We have
also made investments directly in privately held companies.
   The  Funds  have  made   investments  in  companies  that  develop   advanced
technologies to be used by the utility industry, including  electrotechnologies,
renewable  energy  technologies,  and software and  communications  technologies
related to utility customer support systems.
   Companies in the Funds'  portfolios  may complete  initial  public  offerings
(IPOs),  and the Funds,  may in some  instances,  distribute  publicly  tradable
shares to us. Some restrictions on sales may apply,  including,  but not limited
to, underwriter  lock-up periods that typically extend for 180 days following an
IPO. As companies included in our emerging  technology  investments are sold, we
will recognize a gain or loss.
   Since going public,  the market value of the publicly traded  investments has
experienced  significant  volatility.  During  2003 we sold  at a net  loss  the
remainder of our direct  investment in the companies  that have gone public.  
   We also have several  minority  investments  in the Funds and  privately-held
start-up  companies.  These  investments are accounted for under the cost method
and included with  Investments  on our  consolidated  balance  sheet.  The total
carrying  value of these  investments  was $37.5  million at  December  31, 2003
($38.7 million at December 31, 2002).
   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.

ENVIRONMENTAL MATTERS 
   Certain businesses  included in our Investments and Corporate Charges segment
are  subject to  regulation  by  various  federal,  state and local  authorities
concerning  air quality,  water  quality,  solid wastes and other  environmental
matters. We consider these businesses to be in substantial compliance with those
environmental  regulations  currently applicable to their operations and believe
all necessary  permits to conduct such operations have been obtained.  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.


--------------------------------------------------------------------------------
                                     PAGE 27


<PAGE>
                              ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                      EXECUTIVE OFFICERS OF THE REGISTRANT


<TABLE>
<CAPTION>

EXECUTIVE OFFICERS                                                                                            INITIAL EFFECTIVE DATE
====================================================================================================================================
<S>                                                                                                           <C>
DAVID G. GARTZKE, Age 60
   Chairman - ALLETE;
     Chairman, President and Chief Executive Officer - ALLETE Automotive Services, Inc.;
     Chairman, President and Chief Executive Officer - ADESA, Inc.; and
     Chairman and Chief Executive Officer - ADESA Corporation                                                 January 23, 2004
   Chairman - ALLETE;
     Chairman, President and Chief Executive Officer - ALLETE Automotive Services, Inc.; and
     Chairman and Chief Executive Officer - ADESA Corporation                                                 January 21, 2004
   Chairman, President and Chief Executive Officer - ALLETE;
     Chairman, President and Chief Executive Officer - ALLETE Automotive Services, Inc.; and
     Chairman and Chief Executive Officer - ADESA Corporation                                                 July 7, 2003
   Chairman, President and Chief Executive Officer - ALLETE                                                   January 23, 2002
   President - ALLETE                                                                                         August 28, 2001
   Senior Vice President - Finance and Chief Financial Officer - ALLETE                                       December 1, 1994

DONALD J. SHIPPAR, Age 55
   President and Chief Executive Officer - ALLETE                                                             January 21, 2004
   Executive Vice President - ALLETE and
     President - Minnesota Power                                                                              May 13, 2003
   President and Chief Operating Officer - Minnesota Power                                                    January 1, 2001

DEBORAH A. AMBERG, Age 38
   Vice President, General Counsel and Secretary                                                              March 8, 2004

BRENDA J. FLAYTON, Age 48
   Vice President - Human Resources - ALLETE and
     Vice President - Human Resources - ALLETE Automotive Services, Inc.                                      October 22, 2003
   Vice President - Human Resources - ALLETE                                                                  July 22, 1998

JAMES P. HALLETT, Age 50
   Executive Vice President - ALLETE;
     Vice President - ADESA, Inc.; and
     President and Chief Operating Officer - ADESA Corporation, LLC                                           March 4, 2004
   Executive Vice President - ALLETE;
     Vice President - ADESA, Inc.; and
     President and Chief Operating Officer - ADESA Corporation                                                March 1, 2004
   Executive Vice President - ALLETE and
     President and Chief Operating Officer - ADESA Corporation                                                January 30, 2004
   Executive Vice President - ALLETE and
     President - ADESA Corporation                                                                            July 7, 2003
   Executive Vice President - ALLETE and
     President and Chief Executive Officer - ALLETE Automotive Services, Inc.                                 November 5, 2001
   Executive Vice President - ALLETE and Chief Executive Officer - ADESA Corporation                          October 1, 2001
   Executive Vice President - ALLETE and
     President and Chief Executive Officer - ADESA Corporation                                                April 23, 1997

PHILIP R. HALVERSON, Age 55
   Retired                                                                                                    March 5, 2004
   Vice President, General Counsel and Secretary                                                              January 1, 1996

MARK A. SCHOBER, Age 48
   Senior Vice President and Controller                                                                       February 1, 2004
   Vice President and Controller                                                                              April 18, 2001
   Controller                                                                                                 March 1, 1993

TIMOTHY J. THORP, Age 49
   Vice President - Investor Relations and Corporate Communications                                           November 16, 2001

JAMES K. VIZANKO, Age 50
   Senior Vice President, Chief Financial Officer and Treasurer                                               January 21, 2004
   Vice President, Chief Financial Officer and Treasurer                                                      August 28, 2001
   Vice President and Treasurer                                                                               April 18, 2001
   Treasurer                                                                                                  March 1, 1993
</TABLE>


--------------------------------------------------------------------------------
                                     PAGE 28


<PAGE>
                              ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                                     PART I

   All of the  executive  officers  have been  employed by us for more than five
years in executive or management positions.  In the five years prior to election
to the positions shown on the previous page, Ms. Amberg was senior attorney, Ms.
Flayton was director of human resources, Mr. Shippar was Minnesota Power's chief
operating officer,  senior vice president of customer service and delivery,  and
vice president of transmission and  distribution,  and Mr. Thorp was director of
investor relations.
   There are no family relationships between any of the executive officers.  All
officers and directors are elected or appointed annually. 
   The present term of office of the executive  officers  listed on the previous
page  extends  to the first  meeting  of our Board of  Directors  after the next
annual  meeting of  shareholders.  Both meetings are scheduled for May 11, 2004.


ITEM 2.  PROPERTIES

   Properties  are included in the discussion of our business in Item 1. and are
incorporated by reference herein.


ITEM 3.  LEGAL PROCEEDINGS

   Material legal and regulatory  proceedings  are included in the discussion of
our  business  in Item 1.  and are  incorporated  by  reference  herein.
   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 change materially our present
liquidity  position,  nor  have a  material  adverse  effect  on  our  financial
condition.
   The staff  of  the SEC is  conducting  an  informal  inquiry  relating to our
internal  audit  function,  internal  financial  reporting  and  the  loan  loss
methodology at AFC. We are fully and voluntarily  cooperating  with the informal
inquiry,  and the SEC staff has not asserted  that we have acted  improperly  or
illegally.  Although  we cannot  predict  the  length,  scope or  results of the
informal  inquiry,  based upon  extensive  review by the Audit  Committee of our
Board  of  Directors  with  the  assistance  of  independent   counsel  and  our
independent  auditors, we believe that we have acted appropriately and that this
inquiry  will not result in action that has a material  adverse  impact on us or
our reported results of operations.


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

   No matters  were  submitted to a vote of security  holders  during the fourth
quarter of 2003.


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

                                     PART II


ITEM 5.  MARKET  FOR  REGISTRANT'S  COMMON EQUITY,  RELATED  STOCKHOLDER MATTERS
         AND ISSUER PURCHASES OF EQUITY SECURITIES

   We have paid dividends without interruption on our common stock since 1948. A
quarterly  dividend  of $0.2825  per share on our  common  stock will be paid on
March 1, 2004 to the holders of record on February 16, 2004. Our common stock is
listed on the New York Stock  Exchange under the symbol ALE and our CUSIP number
is  018522102.  Dividends  paid per  share,  and the high and low prices for our
common  stock  for the  periods  indicated  as  reported  by the New York  Stock
Exchange on its NYSEnet website,  are in the accompanying  chart.
   The amount and timing of dividends payable on our common stock are within the
sole  discretion of our Board of  Directors.  In 2003 we paid out 40% of our per
share earnings in dividends.
   Our  Articles  of  Incorporation,  and  Mortgage  and Deed of  Trust  contain
provisions  which under  certain  circumstances  would  restrict  the payment of
common  stock  dividends.  As of December  31, 2003 no  retained  earnings  were
restricted  as  a  result  of  these  provisions.  At  March 1,  2004 there were
approximately 37,000 common stock shareholders of record.

<TABLE>
<CAPTION>
                                  PRICE RANGE
                             ---------------------        DIVIDENDS
QUARTER                       HIGH           LOW            PAID
======================================================================
<S>                          <C>           <C>            <C>
2003 -   First               $24.05        $18.75          $0.2825
         Second               26.70         20.50           0.2825
         Third                27.86         25.45           0.2825
         Fourth               31.00         27.05           0.2825
----------------------------------------------------------------------
         Annual Total                                      $1.13
----------------------------------------------------------------------
2002 -   First               $29.43        $24.25          $0.275
         Second               31.10         27.09           0.275
         Third                27.62         18.50           0.275
         Fourth               23.80         18.65           0.275
----------------------------------------------------------------------
         Annual Total                                      $1.10
======================================================================
</TABLE>

                                                     
--------------------------------------------------------------------------------
                                     PAGE 29


<PAGE>
                              ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                                     PART II


ITEM 6.  SELECTED FINANCIAL DATA

   Operating  results  of our  Water  Services businesses, our vehicle transport
and  import  businesses, and our  retail  stores are  included  in  discontinued
operations  and,  accordingly,  amounts  have  been  adjusted  for  all  periods
presented.  Common share and per share  amounts have also been  adjusted for all
periods to reflect our March 2, 1999 two-for-one common stock split.

<TABLE>
<CAPTION>
                                                      2003          2002           2001         2000          1999          1998
====================================================================================================================================
MILLIONS
<S>                                                 <C>           <C>           <C>           <C>           <C>           <C>
BALANCE SHEET

Assets
   Current Assets                                   $  680.5      $  629.6      $  853.3      $  677.2      $  506.0      $  444.6
   Discontinued Operations - Current                    14.9          28.8          42.2          41.5          43.7          29.1
   Property, Plant and Equipment                     1,499.0       1,364.7       1,323.3       1,201.1       1,003.4         955.5
   Investments                                         204.6         170.9         155.4         128.7         212.0         277.3
   Goodwill                                            511.0         502.0         491.9         472.8         181.0         169.8
   Other Assets                                        103.4         105.1         106.1          87.3          82.4          91.2
   Discontinued Operations - Other                      87.9         346.1         310.3         305.4         284.1         241.4
------------------------------------------------------------------------------------------------------------------------------------
                                                    $3,101.3      $3,147.2      $3,282.5      $2,914.0      $2,312.6      $2,208.9
------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity                           
   Current Liabilities                              $  476.7      $  708.5      $  658.6      $  661.9      $  366.1      $  326.3
   Discontinued Operations - Current                    49.5          29.7          45.9          45.1          32.2          19.7
   Long-Term Debt                                      747.7         696.4         968.9         852.3         613.0         575.7
   Mandatorily Redeemable Preferred Securities             -          75.0          75.0          75.0          75.0          75.0
   Other Liabilities                                   322.2         277.4         270.5         257.5         265.3         286.1
   Discontinued Operations - Other                      45.0         127.8         119.8         121.4         123.7         109.0
   Redeemable Preferred Stock                              -             -             -             -          20.0          20.0
   Shareholders' Equity                              1,460.2       1,232.4       1,143.8         900.8         817.3         797.1
------------------------------------------------------------------------------------------------------------------------------------
                                                    $3,101.3      $3,147.2      $3,282.5      $2,914.0      $2,312.6      $2,208.9
------------------------------------------------------------------------------------------------------------------------------------

INCOME STATEMENT                                               

Operating Revenue                                              
   Energy Services                                  $  659.6      $  626.0      $  618.7      $  586.4      $  553.1      $  558.9
   Automotive Services                                 922.3         835.8         832.1         522.6         383.2         305.5
   Investments                                          36.9          32.5          74.8          77.4          57.8          55.5
------------------------------------------------------------------------------------------------------------------------------------
                                                     1,618.8       1,494.3       1,525.6       1,186.4         994.1         919.9
------------------------------------------------------------------------------------------------------------------------------------
Expenses                                                       
   Fuel and Purchased Power                            252.5         234.8         233.1         229.0         200.2         205.7
   Operations                                        1,064.7         997.9       1,007.3         725.3         595.8         538.7
   Interest Expense                                     66.6          70.5          83.0          67.1          57.8          62.9
------------------------------------------------------------------------------------------------------------------------------------
                                                     1,383.8       1,303.2       1,323.4       1,021.4         853.8         807.3
------------------------------------------------------------------------------------------------------------------------------------
Operating Income Before Capital Re and ACE             235.0         191.1         202.2         165.0         140.3         112.6
Income (Loss) from Investment in Capital Re                    
   and Related Disposition of ACE                          -             -             -          48.0         (34.5)         15.2
------------------------------------------------------------------------------------------------------------------------------------
Operating Income from Continuing Operations            235.0         191.1         202.2         213.0         105.8         127.8
Income Tax Expense                                      91.9          72.2          73.3          76.1          50.0          48.2
------------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations                      143.1         118.9         128.9         136.9          55.8          79.6
Income from Discontinued Operations                     93.3          18.3           9.8          11.7          12.2           8.9
------------------------------------------------------------------------------------------------------------------------------------
Net Income                                             236.4         137.2         138.7         148.6          68.0          88.5
Preferred Dividends                                        -             -             -           0.9           2.0           2.0
------------------------------------------------------------------------------------------------------------------------------------
Earnings Available for Common Stock                    236.4         137.2         138.7         147.7          66.0          86.5
Common Stock Dividends                                  93.2          89.2          81.8          74.5          73.0          65.0
------------------------------------------------------------------------------------------------------------------------------------
Retained (Deficit) in the Business                  $  143.2      $   48.0      $   56.9      $   73.2      $   (7.0)     $   21.5
====================================================================================================================================
</TABLE>

                                                             
--------------------------------------------------------------------------------
                                     PAGE 30


<PAGE>
                              ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                                     PART II

<TABLE>
<CAPTION>
                                                      2003          2002          2001          2000          1999          1998
====================================================================================================================================
<S>                                                 <C>           <C>           <C>           <C>           <C>           <C>

Shares Outstanding - Millions
   Year-End                                           87.3          85.6          83.9          74.7          73.5          72.3
   Average <F1>
     Basic                                            82.8          81.1          75.8          69.8          68.4          64.0
     Diluted                                          83.3          81.7          76.5          70.1          68.6          64.2
Diluted Earnings Per Share
   Continuing Operations                             $1.72         $1.46 <F3>    $1.68         $1.95 <F6>    $0.79 <F6>    $1.21
   Discontinued Operations                            1.12 <F2>     0.22 <F4>     0.13 <F5>     0.16          0.18          0.14
------------------------------------------------------------------------------------------------------------------------------------
                                                     $2.84         $1.68         $1.81         $2.11         $0.97         $1.35
------------------------------------------------------------------------------------------------------------------------------------
Return on Common Equity                              17.7%         11.4%         13.3%         17.1%          8.3%         12.4%
Common Equity Ratio                                  64.4%         51.7%         49.9%         46.3%         49.3%         49.9%
Dividends Paid Per Share                             $1.13         $1.10         $1.07         $1.07         $1.07         $1.02
Dividend Payout                                        40%           66%           59%           51%          110%           76%
Book Value Per Share at Year-End                    $16.73        $14.39        $13.63        $12.06        $10.97        $10.86
Market Price Per Share
   High                                             $31.00        $31.10        $26.89        $25.50        $22.09        $23.13
   Low                                              $18.75        $18.50        $20.19        $14.75        $16.00        $19.03
   Close                                            $30.60        $22.68        $25.20        $24.81        $16.94        $22.00
Market/Book at Year-End                               1.83          1.58          1.85          2.06          1.54          2.03
Price Earnings Ratio at Year-End                      10.8          13.5          13.9          11.8          17.5          16.3
Dividend Yield at Year-End                            3.7%          4.9%          4.2%          4.3%          6.3%          4.6%
Employees                                           13,115        14,181        13,763        12,633         8,246         7,003
Net Income
   Energy Services                                  $ 42.4        $ 41.8 <F3>   $ 51.7        $ 44.5         $46.0         $48.3
   Automotive Services                               114.8          94.2          74.8          49.9          40.3          24.6
   Investments and Corporate Charges                 (14.1)        (17.1)          2.4          42.5 <F6>    (30.5) <F6>     6.7
------------------------------------------------------------------------------------------------------------------------------------
   Continuing Operations                             143.1         118.9         128.9         136.9          55.8          79.6
   Discontinued Operations                            93.3 <F2>     18.3 <F4>      9.8 <F5>     11.7          12.2           8.9
------------------------------------------------------------------------------------------------------------------------------------
                                                    $236.4        $137.2        $138.7        $148.6         $68.0         $88.5
------------------------------------------------------------------------------------------------------------------------------------
Electric Customers - Thousands                       149.0         147.0         145.0         144.0         139.7         138.1
Electric Sales - Millions of MWh
   Regulated Utility                                  11.1          11.1          10.9          11.7          11.3          12.0
   Nonregulated                                        1.5           1.2           0.2           0.2             -             -
   Company Use and Losses                             (0.9)         (0.5)          0.5           0.5           0.5           0.2
------------------------------------------------------------------------------------------------------------------------------------
                                                      11.7          11.8          11.6          12.4          11.8          12.2
------------------------------------------------------------------------------------------------------------------------------------
Regulated Utility Power Supply - Millions of MWh
   Steam Generation                                    7.1           7.2           6.9           6.4           6.2           6.3
   Hydro Generation                                    0.4           0.5           0.5           0.5           0.7           0.6
   Long-Term Purchase - Square Butte                   2.3           2.3           1.9           2.4           2.3           2.1
   Purchased Power                                     1.9           1.8           2.3           3.1           2.6           3.2
------------------------------------------------------------------------------------------------------------------------------------
                                                      11.7          11.8          11.6          12.4          11.8          12.2
------------------------------------------------------------------------------------------------------------------------------------
Coal Sold - Millions of Tons                           4.3           4.6           4.1           4.4           4.5           4.2
Vehicles Sold - Thousands
   Used                                              1,810         1,741         1,761         1,286         1,037           897
   Salvage                                             191           175           148            33             -             -
Loan Transactions - Thousands                          950           946           904           795           695           531
Capital Expenditures - Millions                     $136.3        $201.2        $149.2        $168.7         $99.7         $80.8
====================================================================================================================================
<FN>
<F1> Excludes unallocated ESOP shares.
<F2> Included a $71.6 million, or $0.86 per share, after-tax gain on the sale of substantially all our Water Services businesses.
<F3> Included a $5.5  million,  or $0.07 per share,  charge  related to the  indefinite  delay of a generation  project in Superior,
     Wisconsin.
<F4> Included  $3.9 million,  or $0.05 per share, in charges to complete the exit from the vehicle transport business and the retail
     stores.
<F5> Included a $4.4 million, or $0.06 per share, estimated charge to exit the vehicle transport business.
<F6> In 2000 we recorded a $30.4 million, or $0.44 per share, gain on the sale of 4.7 million shares of ACE that we received in 1999
     when Capital Re merged with ACE. As a result of the merger, in 1999 we recorded a $36.2 million, or $0.52 per share, charge.
</FN>
</TABLE>


--------------------------------------------------------------------------------
                                     PAGE 31


<PAGE>
                              ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                                     PART II


ITEM 7.  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND
         RESULTS OF OPERATIONS

CONSOLIDATED OVERVIEW

   During 2003 our efforts focused on our two core  businesses,  Energy Services
and Automotive Services.  After a lengthy review of our strategic  alternatives,
in October 2003 we announced plans to spin off our Automotive Services business.
We expect the  spin-off  to occur in the third  quarter of 2004.  This  decision
reflects  our  intention  to maximize the  long-term  value of each  business by
creating two separate, more focused companies,  and create long-term shareholder
value.  (See  Outlook.) We also  substantially  completed  the sale of our Water
Services businesses. Proceeds from the sale of our water assets were used to pay
down debt which strengthened our balance sheet.
   Net income and diluted earnings per share for 2003 increased 72% and 69% from
2002,  respectively.  Gains recognized in 2003 on the sale of substantially  all
our water and wastewater systems in Florida  contributed to increased  earnings.
Net income and diluted  earnings per share from  continuing  operations for 2003
increased  20% and 18% from  2002,  respectively.  A strong  performance  by our
Automotive  Services  businesses  in 2003  increased  earnings  from  continuing
operations.


<TABLE>
<CAPTION>
                                         2003           2002           2001
================================================================================
MILLIONS EXCEPT
   PER SHARE AMOUNTS
<S>                                    <C>            <C>            <C>
Operating Revenue
     Energy Services                   $  659.6       $  626.0       $  618.7
     Automotive Services                  922.3          835.8          832.1
     Investments                           36.9           32.5           74.8
--------------------------------------------------------------------------------
                                       $1,618.8       $1,494.3       $1,525.6
--------------------------------------------------------------------------------
Operating Expenses
     Energy Services                   $  590.6       $  560.5       $  534.6
     Automotive Services                  732.7          681.7          713.1
     Investments and
        Corporate Charges                  60.5           61.0           75.7
--------------------------------------------------------------------------------
                                       $1,383.8       $1,303.2       $1,323.4
--------------------------------------------------------------------------------
Net Income
     Energy Services                     $ 42.4         $ 41.8         $ 51.7
     Automotive Services                  114.8           94.2           74.8
     Investments and  
        Corporate Charges                 (14.1)         (17.1)           2.4
--------------------------------------------------------------------------------
     Continuing Operations                143.1          118.9          128.9
     Discontinued Operations               93.3           18.3            9.8
--------------------------------------------------------------------------------
                                         $236.4         $137.2         $138.7
--------------------------------------------------------------------------------
Diluted Average Shares
   of Common Stock                         83.3           81.7           76.5
--------------------------------------------------------------------------------
Diluted Earnings Per Share
   of Common Stock
   Continuing Operations                  $1.72          $1.46          $1.68
   Discontinued Operations                 1.12           0.22           0.13
--------------------------------------------------------------------------------
                                          $2.84          $1.68          $1.81
--------------------------------------------------------------------------------
Return on Common Equity                   17.7%          11.4%          13.3%
================================================================================
</TABLE>


   We measure  performance  of our  operations  through  careful  budgeting  and
monitoring of contributions to consolidated net income by each business segment.
   Our  financial  results  for the  past  three  years  include  the  following
significant factors which impact the comparisons between years:

   - SALE OF WATER PLANT ASSETS. Earnings from Discontinued  Operations for 2003
     included a $71.6 million, or $0.86 per share, after-tax gain on the sale of
     substantially all our Water Services businesses.
   - CHARGES. Earnings from Energy Services for 2002 included a $5.5 million, or
     $0.07 per share, after-tax charge related  to  the  indefinite delay  of  a
     generation  project  in  Superior,  Wisconsin.  Earnings from  Discontinued
     Operations for 2002 included $3.9 million, or $0.05 per share, of after-tax
     charges to exit the vehicle transport business and the  retail stores ($4.4
     million, or $0.06 per share in 2001).
   - GOODWILL. Earnings from Automotive Services for 2001 included $9.9 million,
     or $0.13 per share, of goodwill amortization expense after tax. As required
     by SFAS 142, goodwill amortization was discontinued in 2002.
   - REAL ESTATE TRANSACTION. Earnings  from  Investments for  2001 included  an
     $11.1  million, or $0.15  per  share, after-tax gain  associated  with  our
     largest ever single real estate transaction.


<TABLE>
<CAPTION>

STATISTICAL INFORMATION               2003         2002         2001
========================================================================
ENERGY SERVICES
Millions of Kilowatthours Sold

<S>                                  <C>          <C>          <C>
   Regulated Utility
      Retail
         Residential                  1,066        1,044          998
         Commercial                   1,286        1,257        1,234
         Industrial                   6,558        6,946        6,549
         Other                           79           78           75
      Resale                          2,155        1,807        2,086
------------------------------------------------------------------------
                                     11,144       11,132       10,942
   Nonregulated                       1,462        1,149          140
------------------------------------------------------------------------
                                     12,606       12,281       11,082
------------------------------------------------------------------------

AUTOMOTIVE SERVICES
Thousands
   Vehicles Sold
      Used                            1,810        1,741        1,761
      Salvage                           191          175          148
------------------------------------------------------------------------
                                      2,001        1,916        1,909
------------------------------------------------------------------------
   Conversion Rate <F1> -
      Used Vehicles                   61.0%        59.0%        58.1%

   Loan Transactions                    950          946          904
========================================================================
<FN>
<F1> Conversion rate is the percentage of vehicles sold from those that
     were offered at auction.
</FN>
</TABLE>


--------------------------------------------------------------------------------
                                     PAGE 32


<PAGE>
                              ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                                     PART II

   NON-GAAP MEASURE OF LIQUIDITY.  We believe  earnings before interest,  taxes,
depreciation and amortization  expense (EBITDA) provides  meaningful  additional
information  that helps us monitor and evaluate our ongoing  results and trends.
EBITDA should not be considered in isolation nor as a substitute for measures of
liquidity prepared in accordance with GAAP which include:


<TABLE>
CONSOLIDATED CASH FLOW
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31               2003            2002             2001
======================================================================================
MILLIONS                                                                  
<S>                                        <C>             <C>              <C>   
Cash from Operating Activities              $245.8          $453.0           $103.6
Cash from (for) Investing Activities        $212.3         $(244.4)         $(297.4)
Cash from (for) Financing Activities       $(470.7)        $(242.6)          $220.0
======================================================================================
</TABLE>


   We believe  EBITDA is a widely  accepted  measure of liquidity  considered by
investors,  financial analysts and rating agencies. EBITDA is not an alternative
to cash flow as a measure of liquidity and may not be comparable  with EBITDA as
defined by other companies.


<TABLE>

EBITDA 
<CAPTION>
                                                                                                    INVESTMENTS
                                                                          ENERGY     AUTOMOTIVE    AND CORPORATE
FOR THE YEAR ENDED                                       CONSOLIDATED    SERVICES     SERVICES        CHARGES
==================================================================================================================
MILLIONS
<S>                                                      <C>             <C>         <C>           <C>
2003
Net Income                                                  $236.4
Less: Income from Discontinued Operations                     93.3
------------------------------------------------------------------
Income (Loss) from Continuing Operations                     143.1        $ 42.4       $114.8          $(14.1)
Add Back:  Income Tax Expense (Benefit)                       91.9          26.6         74.8            (9.5)
           Interest Expense                                   66.6          22.4         16.0            28.2
           Depreciation and Amortization Expense              86.5          51.1         35.3             0.1
------------------------------------------------------------------------------------------------------------------
EBITDA                                                      $388.1        $142.5       $240.9          $  4.7
------------------------------------------------------------------------------------------------------------------

2002
Net Income                                                  $137.2
Less: Income from Discontinued Operations                     18.3
------------------------------------------------------------------
Income (Loss) from Continuing Operations                     118.9        $ 41.8       $ 94.2          $(17.1)
Add Back:  Income Tax Expense (Benefit)                       72.2          23.7         59.9           (11.4)
           Interest Expense                                   70.5          21.2         21.2            28.1
           Depreciation and Amortization Expense              81.7          48.8         32.8             0.1
------------------------------------------------------------------------------------------------------------------
EBITDA                                                      $343.3        $135.5       $208.1          $ (0.3)
------------------------------------------------------------------------------------------------------------------

2001
Net Income                                                  $138.7
Less: Income from Discontinued Operations                      9.8
------------------------------------------------------------------
Income from Continuing Operations                            128.9        $ 51.7       $ 74.8          $  2.4
Add Back:  Income Tax Expense (Benefit)                       73.3          32.4         44.2            (3.3)
           Interest Expense                                   83.0          22.5         35.3            25.2
           Depreciation and Amortization Expense              88.9          45.9         42.7             0.3
------------------------------------------------------------------------------------------------------------------
EBITDA                                                      $374.1        $152.5       $197.0           $24.6
==================================================================================================================
</TABLE>


NET INCOME

   ENERGY  SERVICES.  Income  from  continuing  operations  in 2003  was up $0.6
million, or 1%, from 2002 reflecting increased sales of nonregulated  generation
at our Taconite Harbor facility and improved wholesale power prices.
   Increased  sales of nonregulated  generation and higher  expenses  related to
that  generation  resulted  from Taconite  Harbor being  available for a full 12
months in 2003.  Taconite Harbor  generation  first came online at various times
during the first half of 2002.  Generation  secured  through the Kendall  County
power  purchase  agreement  began in May 2002.  In  total,  the  Kendall  County
facility  operated  at a  loss  in  2003  due to  negative  spark  spreads  (the
differential  between  electric and natural gas prices) in the  wholesale  power
market  and our  resulting  inability  to cover  the  fixed  capacity  charge on
approximately  175 MW. We expect the  facility to  continue  to generate  losses
until such time as spark spreads improve or we are able to enter into additional
long-term capacity sales contracts.

--------------------------------------------------------------------------------
                                     PAGE 33


<PAGE>
                              ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                                     PART II

   Wholesale  power  prices  were  higher  in 2003  compared  to 2002  when weak
wholesale  power  prices  more than  offset  the  positive  impact of  increased
nonregulated   megawatthour   sales.  In  2001  our  wholesale  power  marketing
activities  were more  profitable  compared to 2002 due to warmer summer weather
and overall market conditions.
   In 2003 higher employee  pension and benefit  expenses,  and a charge to exit
our Split Rock Energy joint venture reduced income, while in 2002 a $5.5 million
charge  related to the  indefinite  delay of a  generation  project in Superior,
Wisconsin,  reduced income. Income in 2002 also included a $2.3 million one-time
deferral of costs  recoverable  through the  regulated  utility fuel clause that
increased income.  Income in 2001 included the recovery of $2.6 million for 1998
CIP lost margins.
   AUTOMOTIVE SERVICES.  Income from continuing  operations in 2003 was up $20.6
million,  or 22%,  from  2002.  Higher  income  in 2003 was  attributable  to an
increased number of vehicles sold, fee increases, the introduction and expansion
of our service  offerings,  lower  interest  expense due to lower debt balances,
gains on sale of property and strong receivable portfolio management at AFC, our
floorplan financing business.
   At ADESA used vehicle  auction  facilities,  vehicles sold  increased 4% over
2002. Total vehicles sold at our auctions decreased in 2002 as the price spreads
between new and used  vehicles  were  disrupted  by the  increased  manufacturer
incentives  on new vehicles that were first  introduced  following the events of
September 11, 2001. The aggressive  incentives offered by vehicle  manufacturers
lowered the cost of owning a new  vehicle,  which in turn  depressed  prices for
late-model used vehicles.  Sellers at used vehicle auctions tended to hold their
vehicles  rather  than  immediately  accept  lower  prices.  In  addition to the
incentives,  the supply of program  vehicles  from  rental  repurchase  programs
maintained by our institutional customers were lower in 2002 due to the decrease
in the sizes of rental  car fleets in  response  to the  decrease  in the travel
industry after September 11, 2001. The size of the rental car fleets remained at
a lower level  throughout  2002 as compared to the levels  prior to September 11
leading to fewer turns of the fleets.  Costs of assimilating the 28 used vehicle
auction facilities acquired or opened in 2000 also impacted 2001 results.
   At our  salvage  vehicle  auction  facilities,  vehicle  sales  continued  to
increase  reflecting  expansion into new markets,  which included adding salvage
auctions  at some of our used  vehicle  auction  facilities.  During  2003 ADESA
Impact opened two auction facilities (two in 2002; 13 in 2001). In 2003, 9% more
vehicles  were sold at our  salvage  vehicle  auction  facilities  than in 2002.
Despite  unseasonably dry weather  conditions in 2002, which usually means fewer
salvage  vehicles,  the number of vehicles sold at our salvage  vehicle  auction
facilities was 18% higher in 2002 compared to 2001.
   AFC contributed  32% of the income from  Automotive  Services in 2003 (37% in
2002; 40% in 2001). Income from AFC was higher in 2003 because of lower interest
and bad debt expense.  Interest expense decreased due to lower debt balances and
rates.  Bad debt  expense was down  reflecting  improved  credit  quality of the
receivable   portfolio  and  strong  receivable   portfolio   management.   Loan
transactions   increased   slightly  to  950,000  in  2003.  AFC  managed  total
receivables  of $539 million at December 31, 2003 ($501  million at December 31,
2002; $505 million at December 31, 2001).
   As required by SFAS 142, goodwill amortization was discontinued in 2002. This
mandated  accounting change is a significant factor when comparing 2002 and 2001
earnings from  Automotive  Services.  Earnings for 2001 included $9.9 million of
goodwill amortization expense after tax.
   INVESTMENTS AND CORPORATE  CHARGES.  Net loss in 2003 decreased $3.0 million,
or 18%, from 2002. In 2003 more real estate sales were  partially  offset by net
losses  on the sale of  shares  we held  directly  in  publicly-traded  emerging
technology  investments.  Financial  results for 2002  included net gains on the
sale of  certain  emerging  technology  investments  and  losses  related to our
trading  securities  portfolio  which was  liquidated  during the second half of
2002.  In 2001 our real estate  operations  reported  strong sales  including an
$11.1 million gain on its largest single sale ever,  and our trading  securities
portfolio  earned  a  negative  1.5%  after-tax   annualized   return  prior  to
liquidation in 2002 compared to a positive 5.6% in 2001.
   Corporate  charges in 2003 reflected less interest  expense due to lower debt
balances and lower interest rates. In 2002 and 2001 interest  expense was higher
as a  result  of debt  issued  to fund  strategic  initiatives  in  early  2001.
Corporate  charges  in 2003  also  reflected  costs  incurred  for  professional
services related to the business  separation  study, as well as higher incentive
compensation  expenses.  Incentive  compensation  expenses were lower in 2002 in
part due to lower 2002 earnings.  In 2001 additional  compensation expenses were
incurred for severance packages.
   DISCONTINUED  OPERATIONS included the financial results of our Water Services
businesses,  our vehicle transport and import businesses, and our retail stores.
   Net income from  Discontinued  Operations  in 2003 was up $75.0  million from
2002 primarily due to the sale of water and wastewater  systems  serving various
counties  and  communities  in  Florida.  A $71.6  million  after-tax  gain  was
recognized on the sale of these  systems,  net of all selling,  transaction  and
employee  termination benefit expenses,  as well as impairment losses on certain
remaining assets.
   Our Water Services  businesses in North  Carolina  reported a 14% decrease in
water consumption because above normal  precipitation  decreased  consumption in
2003.
   Net income from Discontinued  Operations was also higher in 2003 and 2002 due
to the adoption of SFAS 144 which  required  suspension of  depreciation  on our
Water Services assets. Income from Discontinued Operations included $7.5 million
of depreciation expense after tax in 2001.
   Net income from other discontinued operations in 2003 included a $1.3 million
recovery from the settlement of a

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lawsuit associated with our vehicle transport business, while net income in 2002
included $3.9 million of exit charges related to the vehicle transport  business
and the  retail  stores,  and 2001  included a $4.4  million  charge to exit the
vehicle transport business.

2003 COMPARED TO 2002

ENERGY SERVICES
   Regulated  utility  operations  include  retail and wholesale  rate regulated
activities under the jurisdiction of state and federal  regulatory  authorities.
Nonregulated  operations consist of nonregulated  electric generation  (non-rate
base generation sold at market-based rates to the wholesale market), coal mining
and telecommunications  activities.  Nonregulated  generation operations consist
primarily  of  Taconite  Harbor in northern  Minnesota  and  generation  secured
through the Kendall County power purchase  agreement,  a 15-year  agreement with
NRG Energy at a facility near Chicago, Illinois, ending in 2017.
   OPERATING  REVENUE in total was up $33.6 million,  or 5%, in 2003  reflecting
increases from both regulated  utility and  nonregulated  operations.  Regulated
utility operating revenue was up $7.2 million,  or 1%, mainly due to higher fuel
clause recoveries and natural gas prices.  Regulated utility  kilowatthour sales
were  similar to last  year.  Fuel  clause  recoveries  increased  due to higher
purchased  power  costs.  Our 2003  equity in net income  from Split Rock Energy
reflected a $2.3 million  charge  accrued at the time we reached an agreement to
withdraw from this joint venture.  Nonregulated revenue increased $26.4 million,
or 22%, in 2003 primarily due to increased sales of  nonregulated  generation at
our Taconite  Harbor  facility,  improved  wholesale power prices and more sales
activity at our  telecommunications  business.  Increased  sales of nonregulated
generation resulted from Taconite Harbor being available for a full 12 months in
2003.  Taconite Harbor  generation first came online at various times during the
first half of 2002.
   OPERATING EXPENSES in total were up $30.1 million, or 5%, in 2003.  Regulated
utility operating  expenses were up $26.3 million,  or 6%, in 2003 primarily due
to  increased  purchased  power and gas expense,  as well as increased  employee
pension and benefit  expenses.  Higher  purchased power costs resulted from both
increased wholesale prices and quantities purchased. Planned maintenance outages
at our  generating  stations  and lower  output from our hydro  facilities  as a
result of drier weather  necessitated  higher quantities of purchased power this
year.  Gas  expense was higher in 2003 due to  increased  prices.  Expenses  for
pension  and  post-retirement  health  benefits  increased  mainly  due to lower
discount rates and expected rates of return on plan assets.  Operating  expenses
in 2002 included a $4 million one-time deferral of costs recoverable through the
utility fuel clause.  Nonregulated operating expenses increased $3.8 million, or
3%,  over the prior year mainly due to fuel and  purchased  power  expenses  for
nonregulated  generation  that  came  online  during  the  first  half of  2002.
Purchased  power  expense in 2003  included  a full 12 months of demand  charges
related to the Kendall County power purchase agreement, while 2002 included only
eight months. Operating expenses were also higher in 2003 due to increased sales
activity at our telecommunications business. Operating expenses in 2002 included
a $9.5 million charge related to the indefinite delay of the generation  project
in Superior, Wisconsin.

AUTOMOTIVE SERVICES
   OPERATING  REVENUE was up $86.5  million,  or 10%, in 2003.  Revenue from our
auction and related  services was higher in 2003  primarily  due to an increased
number of vehicles sold through our  auctions,  a shift towards the sale of more
institutional  vehicles,  selective fee  increases  and the  increased  Canadian
dollar currency exchange rate. At our used vehicle auction  facilities,  4% more
vehicles  were sold in 2003.  Most of the auction  volume  growth  consisted  of
internal same store growth.  Volumes  increased in 2003 due to the stabilization
of wholesale used vehicle prices in mid-2003, increased demand for used vehicles
as retail  demand  increased  during the year and an increase in volume from our
institutional  customers.  At our  salvage  auction  facilities,  vehicles  sold
increased 9% as we expanded into new markets,  including sites where we combined
salvage auctions with our existing used vehicle auction  facilities.  Same store
vehicles sold at our salvage auctions increased slightly less than 1%.
   While the number of loan  transactions by AFC was up slightly from last year,
revenue from AFC was up in 2003 primarily  because strong  receivable  portfolio
management  lowered bad debt  expense.  As customary for a finance  company,  we
report revenue net of interest expense and bad debt expense.
   OPERATING  EXPENSES were up $51.0  million,  or 7%, in 2003  primarily due to
additional  expenses  incurred for  reconditioning  and logistics  services as a
result  of a  shift  towards  the  sale of more  institutional  vehicles  at our
auctions,  increased  Canadian dollar currency exchange rate, and costs incurred
due to inclement weather and general inflationary increases. 

INVESTMENTS AND CORPORATE CHARGES
   OPERATING  REVENUE was up $4.4  million,  or 14%, in 2003 as more real estate
sales offset less revenue from our emerging technology investments.  In 2003, 11
large real estate sales  contributed  $18.5 million to revenue  compared to 2002
when five large real estate sales  contributed $8.5 million to revenue.  In 2003
we recognized a $3.5 million loss related to the sale of shares the Company held
directly in publicly-traded  emerging technology  investments,  while in 2002 we
recognized  a $3.3  million  gain on the  sale of  certain  emerging  technology
investments.  Revenue in 2002 also  included  losses on our  trading  securities
portfolio  which  was  liquidated  during  the  second  half of 2002.  
   OPERATING  EXPENSES  were  down $0.5  million,  or 1%, in 2003 in part due to
lower  expenses  related  to our  real  estate  operations  because  the cost of
property sold in 2003 was lower than in 2002.

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   Corporate Charges included operating and other expense totaling $17.6 million
in 2003 ($16.5 million in 2002) for general corporate  expenses such as employee
salaries and benefits,  and legal and other outside  contract  service fees, and
interest expense of $28.0 million in 2003 ($28.1 million in 2002).

2002 COMPARED TO 2001 

ENERGY SERVICES
   OPERATING  REVENUE in total was up $7.3 million,  or 1%, in 2002 as increased
revenue  from  nonregulated  operations  was  partially  offset by a decrease in
regulated  utility  revenue.  Despite a slight  increase  in  regulated  utility
megawatthour  sales,  regulated utility revenue decreased $33.1 million,  or 6%,
due to lower wholesale prices and fuel clause recoveries. Fuel clause recoveries
in 2002 were lower due to lower purchased  power costs in 2002.  Total regulated
utility  megawatthour sales were up 2% over the prior year reflecting  increased
retail sales to taconite  customers.  In addition,  regulated utility revenue in
2001  included  the  recovery  of  $4.5  million  for  1998  CIP  lost  margins.
Nonregulated  revenue  increased  $40.4 million,  or 51%, in 2002 primarily as a
result  of about 500 MW of  nonregulated  generation  that came  online in 2002.
There were 1.2 million megawatthours of nonregulated generation sold in 2002.
   OPERATING  EXPENSES in total  increased  $25.9  million,  or 5%, in 2002. The
increase was  attributable to additional  expenses for  nonregulated  generation
that came online in 2002 which were partially offset by lower regulated  utility
operating  expenses.  Regulated  utility  operating  expenses  were  down  $33.3
million,  or 7%, in 2002  primarily due to lower  purchased  power costs.  Lower
purchased power costs resulted from both lower wholesale  prices and a reduction
in the quantity of power purchased. Extended planned maintenance outages in 2001
necessitated  higher  quantities  of  purchased  power.  Nonregulated  operating
expenses  increased  $59.2  million,  or 77%,  over the prior year mainly due to
expenses for  nonregulated  generation that came online in 2002. The increase in
nonregulated operating expenses also included the $9.5 million charge related to
the indefinite delay of the generation project in Superior, Wisconsin.

AUTOMOTIVE SERVICES 
   OPERATING  REVENUE was up $3.7  million,  or less than 1%, in 2002.  At ADESA
used vehicle auction facilities, the number of vehicles sold in 2002 was similar
to 2001  because  the rental car  market  had yet to restore  vehicle  fleets to
levels prior to the events of September 11, 2001, and manufacturer incentives on
new  vehicles  temporarily  disrupted  the price  spreads  between  new and used
vehicles.
   Despite unseasonably dry weather conditions in 2002 which usually means fewer
salvage vehicles,  vehicles sold at our salvage vehicle auction  facilities were
up 18%  reflecting  expansion into new markets,  which  included  adding salvage
auctions at some of our used vehicle auction facilities.  Operating revenue from
AFC was up in 2002 due to a 5% increase in loan  transactions  arranged  through
our loan  production  offices  and lower bad debt  expense as a result of strong
portfolio management.
   OPERATING  EXPENSES  were down $31.4  million,  or 4%, in 2002 due to reduced
interest expense ($14.1 million) as a result of lower interest rates and a lower
debt balance,  the discontinuance of goodwill  amortization  ($12.5 million) and
improved  operating  efficiencies.  These decreases were partially  offset by an
increase in operating expenses incurred to standardize  operations at all of our
salvage vehicle auction  facilities and expenditures for information  technology
initiatives.

INVESTMENTS AND CORPORATE CHARGES 
   OPERATING REVENUE was down $42.3 million,  or 57%, in 2002 primarily due to a
large real estate transaction  recorded in 2001. Five large real estate sales in
2002  contributed  $8.5 million to revenue,  while in 2001 six large real estate
sales  contributed  $37.5  million to revenue,  one of which was our real estate
operations'  largest single  transaction  ever.  Operating  revenue in 2002 also
reflected  less  income  from  our  trading   securities   portfolio  which  was
substantially   liquidated   during  the  second   half  of  the  year  and  had
significantly lower returns during the year.
   OPERATING  EXPENSES  were down  $14.7  million,  or 19%,  in 2002  because of
expenses  associated  with  larger  real  estate  sales in 2001.  Also,  in 2001
additional compensation expenses were incurred for severance packages.
   Corporate Charges included operating and other expense totaling $16.5 million
in 2002 ($22.8 million in 2001) for general corporate  expenses such as employee
salaries and benefits,  and legal and other outside  contract  service fees, and
interest expense of $28.1 million in 2002 ($25.2 million in 2001).

CRITICAL ACCOUNTING POLICIES

   Certain   accounting   measurements   under  applicable   generally  accepted
accounting principles involve management's judgment about subjective factors and
estimates,  the effects of which are  inherently  uncertain.  These policies are
reviewed with the audit  committee of our Board of Directors on a regular basis.
The  following  summarizes  those  accounting  measurements  we believe are most
critical to our reported results of operations and financial condition.
   UNCOLLECTIBLE  RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS. The allowance
for doubtful accounts and related bad debt expense is primarily  attributable to
the financing activities of AFC. In establishing a proper allowance for doubtful
accounts,   our  quarterly  evaluation  includes   consideration  of  historical
charge-off  experience,  current  economic  conditions  and specific  collection
issues.  Changes  to  historical  charge-off  experience  or  existing  economic
conditions  would  necessitate  a  corresponding  increase  or  decrease  in the
allowance for doubtful accounts. The credit quality of AFC's finance

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receivable  portfolio has remained  strong and the total amount of the allowance
for doubtful  accounts has not changed  materially  over the last three years. A
10% increase in AFC's current allowance for doubtful accounts would increase bad
debt expense by approximately $1 million after tax; likewise,  a 10% decrease in
the current  allowance for doubtful  accounts would decrease bad debt expense by
approximately $1 million after tax.
   IMPAIRMENT OF GOODWILL AND LONG-LIVED  ASSETS.  We annually review our assets
for impairment.  SFAS 142,  "Goodwill and Other Intangible Assets" and SFAS 144,
"Accounting for the Impairment and Disposal of Long-Lived  Assets" are the basis
for these  analyses.  Judgments and  uncertainties  affecting the application of
accounting for asset impairment include:  economic  conditions  affecting market
valuations;  changes in our  business  strategy;  and changes in our forecast of
future operating cash flows and earnings.
   We conduct our annual  goodwill  impairment  testing in the second quarter of
each year and the 2003 test  resulted in no  impairment.  No event or change has
occurred that would  indicate the carrying  amount has been  impaired  since our
annual  test.  All  goodwill  relates to the  Automotive  Services  segment  and
represents  the excess of cost over  identifiable  tangible and  intangible  net
assets of businesses acquired.
   We account  for our  long-lived  assets at  depreciated  historical  cost.  A
long-lived  asset is tested  for  recoverability  whenever  events or changes in
circumstances indicate that its carrying amount may not be recoverable. We would
recognize an impairment loss only if the carrying  amount of a long-lived  asset
is not recoverable  from its  undiscounted  cash flows.  Management  judgment is
involved in both  deciding if testing for  recoverability  is  necessary  and in
estimating  undiscounted  cash flows.  Excluding  impairment  losses recorded on
certain  remaining  water  assets  held for sale,  as of  December  31,  2003 no
write-downs were required.
   PENSION AND POSTRETIREMENT HEALTH AND LIFE ACTUARIAL ASSUMPTIONS.  We account
for our pension and  postretirement  benefit  obligations in accordance with the
provisions  of SFAS  87,  "Employers'  Accounting  for  Pensions"  and  SFAS 106
"Employers'  Accounting for Postretirement  Benefits Other Than Pensions." These
standards  require the use of  assumptions in determining  the  obligations  and
annual  cost.  An  important   actuarial   assumption   for  pension  and  other
postretirement  benefit plans is the expected  long-term  rate of return on plan
assets. In establishing  this assumption,  we consider the  diversification  and
allocation of plan assets, the actual long-term  historical  performance for the
type of securities invested in, the actual long-term  historical  performance of
plan assets and the impact of current economic conditions,  if any, on long-term
historical returns. Our pension asset allocation is approximately 70% equity and
30%  fixed-rate  securities.  Equity  securities  consist  of a  mix  of  market
capitalization  sizes and also  include  investments  in real estate and venture
capital.  In  response  to  changing  market  conditions,  we have  lowered  our
actuarial  assumption  for the expected  long-term rate of return and used 9% in
the September 30, 2003 pension  actuarial study (9.5% at September 30, 2002; 10%
at September 30, 2001). We annually review our expected long-term rate of return
assumption,  and will  continue to adjust it to respond to any  changing  market
conditions.  A 1/2%  decrease in the  expected  long-term  rate of return  would
increase  the annual  expense for pension and other  postretirement  benefits by
approximately  $1 million after tax;  likewise,  a 1/2% increase in the expected
long-term rate of return would decrease the annual expense by  approximately  $1
million after tax.
   VALUATION OF INVESTMENTS.  As part of our emerging technology  portfolio,  we
have several  minority  investments in venture capital funds and  privately-held
start-up  companies.  These  investments are accounted for using the cost method
and included with Investments on our  consolidated  balance sheet. Our policy is
to quarterly  review these  investments 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 and be recognized
as a loss. We did not record any  impairment  loss on these  investments in 2003
($1.5 million pretax in 2002; $0.2 million pretax in 2001).
   PROVISION  FOR  ENVIRONMENTAL  REMEDIATION.  Our  businesses  are  subject to
regulation  by various U.S. and Canadian  federal,  state and local  authorities
concerning environmental matters. 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  become  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.  We do not currently  anticipate  that  potential  expenditures  for
environmental  matters will be material;  however,  if we become subject to more
stringent  remediation at known sites, if we discover additional  contamination,
or discover  previously  unknown sites, or become subject to related personal or
property  damage,   we  could  incur  material  costs  in  connection  with  our
environmental remediation.

OUTLOOK
   Our  operations  in 42 states,  nine  Canadian  provinces  and Mexico  employ
approximately 13,000 employees.  Since 1980 our average annual total shareholder
return is 17%.  Approximately 44% of this average was attributed to dividends. A
$100  investment in ALLETE stock at the end of 1980 would have been worth $3,800
at the end of 2003, assuming  reinvestment of dividends on the ex-dividend date.
By comparison, the Standard & Poor's 500 Index averaged

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13%  for  the  same  period,  of  which  approximately  24% of the  average  was
attributed to dividends. A $100 investment in the Standard & Poor's 500 Index at
the end of 1980  would  have  been  worth  $1,600  at the end of 2003,  assuming
reinvestment of dividends on the ex-dividend date.
   We remain focused on  continuously  improving the performance of our two core
businesses, Energy and Automotive Services.
   As part of a  strategic  initiative  to exit our Water  Services  businesses,
during 2003 we sold,  under  condemnation  or imminent  threat of  condemnation,
substantially  all of our water  assets in Florida  for a total  sales  price of
approximately  $445  million.  In addition,  we reached an agreement to sell our
North Carolina water assets for $48 million and the assumption of  approximately
$28  million  in debt by the  purchaser.  The North  Carolina  sale is  awaiting
approval of the NCUC and is expected to close in mid-2004. We expect to sell our
remaining water assets in 2004.
   Our two core  businesses  remain  strong  and are  poised for growth in their
respective markets.
   SPIN-OFF  OF  AUTOMOTIVE  SERVICES.  In October  2003 our Board of  Directors
approved  a plan to spin off to  ALLETE  shareholders  our  Automotive  Services
business  which will become a publicly  traded  company doing business as ADESA.
The spin-off,  anticipated to occur in the third quarter of 2004, is expected to
take the form of a tax-free stock dividend to ALLETE's  shareholders,  who would
receive one ADESA share for each share of ALLETE stock they own. The spin-off is
subject  to the  approval  of the final  plan by  ALLETE's  Board of  Directors,
favorable  market  conditions,  receipt  of tax  opinions,  satisfaction  of SEC
requirements and other customary conditions.
   In March 2004 our Board of  Directors  approved  an initial  public  offering
(IPO) of approximately $150 million in common shares of ADESA, representing less
than 20% of all ADESA common stock  outstanding.  A  registration  statement was
filed with the SEC in March 2004,  with the sale of ADESA stock expected to take
place as soon as practical after the registration  statement becomes  effective.
Subsequent to the IPO, ALLETE will continue to own and consolidate the remaining
portion of ADESA until consummation of the spin-off.
   Our Energy Services and Automotive  Services businesses are two very distinct
businesses  and we  believe  that  this  spin-off  will  better  facilitate  the
strategic objectives of both businesses. We believe that our Automotive Services
business  will be  better  able to  pursue  a  business  growth  strategy  as an
independent  company.  For  ALLETE,  we  believe  the  spin-off  will  create  a
simplified  regulatory and risk profile and a more stable credit  rating,  which
will enhance its ability to pursue strategic growth initiatives.
   Our  Automotive  Services  business  operates  two main  businesses  that are
integral parts of the vehicle redistribution industry in North America. Auctions
and  related  services  include 53 used  vehicle  auctions,  27 salvage  vehicle
auctions and other related services, while dealer financing consists of AFC's 80
loan production  offices.  Our Automotive Services business will remain based in
Indiana.
   After the spin-off, ALLETE will be comprised of our Energy Services business,
which includes  Minnesota  Power,  SWL&P,  BNI Coal,  Enventis Telecom and Rainy
River Energy,  ALLETE  Properties,  Inc., our real estate operations in Florida,
and our emerging technology  investments.  ALLETE's  headquarters will remain in
Duluth, Minnesota.
   ALLETE has a history of growing  our  nonregulated  asset and  earnings  base
through careful  analysis by our experienced  management team. Near term we will
focus on growth opportunities in our existing business segments and on improving
both  operational  and  financial  performance.  Longer term our  strategy is to
expand into businesses or investments that meet our free cash flow and return on
investment  criteria.   We  will  continue  to  capitalize  on  our  experienced
management team in finding  businesses that ultimately  enable ALLETE to provide
superior total shareholder returns.
   Prior to the spin-off,  ALLETE and ADESA will enter into recapitalization and
debt reallocation transactions. As part of this recapitalization, ADESA will use
a portion of the proceeds from the IPO and  additional  debt  issuances to pay a
$100  million  dividend  to  ALLETE,  as well as repay  intercompany  debt ($136
million at December 31,  2003).  ALLETE  expects to use the funds  received from
ADESA to reduce debt by  approximately  $150  million to $200  million,  provide
capital for strategic  initiatives  and for general  corporate  purposes.  ADESA
expects to use the remaining proceeds from the IPO and additional debt issuances
to repay  existing debt and  repurchase  ADESA common stock from certain  ALLETE
employee benefit plans upon consummation of the spin-off.  Immediately following
the spin-off, we expect ALLETE's debt to capital ratio to be approximately 40%.
   The amount and timing of future  dividends  on ALLETE  common stock and ADESA
common stock  following  the spin-off is subject to the sole  discretion of each
company's Board of Directors in light of all relevant facts, including earnings,
general business conditions and working capital requirements.  ALLETE's Board of
Directors  expects to continue  quarterly  dividend payments at the current rate
until  the time of the  spin-off.  At that  time,  ALLETE's  Board of  Directors
anticipates  it will adjust the dividend rate to equal a payout ratio similar to
that of comparable companies.
   Subsequent  to the  spin-off  of  ADESA,  our  Retirement  Savings  and Stock
Ownership  Plan, or RSOP,  (see Note 19) will have a significant  amount of cash
generated  from the sale of  ADESA  stock  received  in the  spin-off.  The RSOP
intends to use this cash to purchase ALLETE common stock, and federal income tax
laws generally  provide up to 90 days to complete this  purchase.  To facilitate
the RSOP's  purchase of ALLETE stock,  we have sought  Internal  Revenue Service
(IRS)  approval to extend the  purchase  period to  approximately  600 days.  We
expect the IRS to rule on our request later this year.
   In connection with the IPO of ADESA common stock and the subsequent  spin-off
of ADESA to ALLETE  shareholders,  ALLETE and ADESA have  entered  into  various
separation  agreements and  indemnifications  customary to a transaction of this
nature.


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   ENERGY  SERVICES.  In 2004 net income from Energy Services will be negatively
impacted by higher pension and  postretirement  health expenses,  and additional
expenses  associated  with  planned  maintenance  at Square  Butte.  Pension and
postretirement  health  expenses  are  expected to be  approximately  $7 million
pretax  higher than 2003,  primarily  due to a lower  discount rate and expected
long-term  return  on plan  assets.  (See Note 18.) In 2004  Square  Butte  will
perform a planned  multi-week  maintenance  outage,  and we expect  our pro rata
share of the cost to be approximately $6 million pretax.
   In February  2004 we  experienced a generator  failure at our 534-MW  Boswell
Energy  Center  Unit 4. As a result of the  failure we expect to have to replace
significant  components  of the  generator  at an  estimated  capital cost of $5
million.  The majority of the replacement cost is covered by insurance,  subject
to a deductible of $1 million. We have entered into power purchase agreements to
replace the power lost  during the Unit 4 outage,  which is expected to continue
through May 2004. The cost of this  additional  power will be recovered  through
the  regulated  utility  fuel  clause.  We do not expect  this  outage to have a
material  impact on our  results of  operations.  
   Over the next five years, we believe electric utilities will face three major
issues:  the ongoing changes in regional  transmission  structure,  the probable
enactment of stricter environmental regulations and possible federal legislation
impacting the structure and organization of the electric utility  industry.  The
FERC  plans to  consolidate  transmission  regions,  which  may  impact  states'
transmission  regulation  rights and  create a more  standard  market  design to
oversee how transmission  prices are determined.  Specifics are being debated by
legislative  and regulatory  bodies.  Stricter  environmental  requirements  may
require  significant  capital  investments  in the 2008 to 2012  timeframe.  The
expenditures will relate to new emission controls on existing  generating units.
Proposed rules defining  requirements are expected to be finalized over the next
one to four years.  Though stalled in 2003, a revised  federal energy bill could
pass in 2004. More electric industry  consolidation  could occur and new players
could enter the industry  if  the Public Utility  Holding Company Act of 1935 is
repealed as part of this legislation.  This act imposes geographic  restrictions
on large  electric and gas utility  operations and limits  diversification  into
nonutility businesses.
   We believe our Energy  Services  business is well  positioned to successfully
deal with these issues and to successfully  compete. Our access to and ownership
of low-cost  power are Energy  Services'  greatest  strengths.  We have adequate
generation  to serve our  native  load.  Power  over and  above  our  customers'
requirements will be marketed. We also have adequate  transmission  capacity. We
believe electric industry  deregulation is unlikely in Minnesota or Wisconsin in
the next five years.  We anticipate  any load losses will be manageable and that
we will have ready access to sufficient capital for general business purposes.
   Approximately  50% of our  regulated  utility  electric  sales  are  made  to
taconite  mines,  paper  producers and oil pipeline  operators.  Global economic
conditions  continue to affect our largest  industrial  retail customers and are
likely to continue over the next few years,  as  consolidation  in the steel and
taconite  industries  continues,  and while paper and pulp companies  search for
even more efficiency and cost-cutting measures to compete in the marketplace.  A
rise in Chinese  steel  demand and  production  has created a new market for the
producers  of taconite in North  America.  Based on our research of the taconite
industry,  Minnesota taconite  production for 2004 is anticipated to be about 39
million tons. The annual taconite production in Minnesota was 34 million tons in
2003 (39 million tons in 2002; 33 million tons in 2001).
   Though  changes may occur with some of our large  industrial  customers,  the
taconite  industry  is  stable  at this  time.  Our  strong  relationships  with
industrial  customers are unique in the electric  industry and enable us to work
closely with them to help ensure their success. We continue  strengthening these
relationships  to retain a strong  industrial base in our region.  On average we
expect  approximately 1% growth in retail electric  kilowatthour  sales annually
over the next five  years.  We  continue to make  investments  to  maintain  and
improve the integrity of our generating,  transmission and distribution  assets,
and maintain environmental compliance. Minnesota Power is in the early stages of
preparing a request to the MPUC to  increase  rates for its  Minnesota  electric
utility  operations  sometime  in the first  half of 2005.  The  request  may be
necessary to cover the increased cost of doing business.  Minnesota Power's last
rate  increase  for its  electric  utility  operations  was in  1994.  SWL&P  is
preparing  to file with the PSCW in mid-2004 a request to increase  retail rates
for its Wisconsin  electric utility operations to be effective sometime in early
2005. The request would cover increases in the cost of doing  business.  SWL&P's
last rate order for its electric utility operations was in 2001.
   In June  2003  the  MPUC  initiated  an  investigation  into  the  continuing
usefulness of the fuel clause as a regulatory tool for electric  utilities.  The
investigation  will  focus  on  whether  the  fuel  clause  continues  to  be an
appropriate  regulatory  tool.  The initial steps will be to review the clause's
original purpose,  structure and rationale  (including its current operation and
relevance  in today's  regulatory  environment),  and then  address  its ongoing
appropriateness  and  other  issues  if the need for  continued  use of the fuel
adjustment clause is shown.  Because this  investigation is in its early stages,
we are unable to predict the outcome or impact, if any, at this time.
   In response to the changing  strategies of both parties,  as of February 2004
we withdrew from active  participation  in Split Rock Energy and will  terminate
our ownership  interest  upon receipt of FERC approval  which is expected in the
first half of 2004. We have  reestablished  our least-cost  supply and marketing
functions within the Company.
   Alternatives are being explored to reduce the negative earnings impact of the
Kendall County power contract.
   Our  strategy is to solidify our existing  customer  base and seek  regulated
utility growth opportunities by: (1) being an advocate


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                                     PART II

in our region for additional industrial customers to build or expand thus adding
new customer load growth;  (2) using our existing  assets and enhancing  them to
develop  new  opportunities  to  primarily  serve  retail  customers;   and  (3)
evaluating and developing  Large Power Customer  projects.  We will also seek to
increase  our  presence  as a supplier  to  regional  utilities  by looking  for
nonregulated  generation  opportunities,  joint  ownership of newly  constructed
generation,  and promoting our  capabilities  as a regional  capacity and energy
supplier to meet increasing regional load requirements.
   AUTOMOTIVE  SERVICES is pursuing  strategic  initiatives that are designed to
capitalize on its underlying business  strengths,  grow its business and improve
its profitability.
   We seek  continuing  growth through  various  channels,  including  alternate
auction venues, combination used and salvage vehicle auction sites, acquisitions
of independent  auctions,  and greenfield  development of new auctions. In areas
where  we  have  existing   operations,   we  seek  to  leverage  upon  existing
infrastructure and capital investments in used vehicle operations by opening new
salvage  auction sites.  Our auction sites in  Jacksonville,  Concord,  Buffalo,
Edmonton,  Vancouver,  Halifax  and  Ottawa  are  shared  facilities  that  have
successfully  executed this  strategy.  We will continue to examine our existing
sites for opportunities to combine used vehicle and salvage auction operations.
   We have been a consolidator in used vehicle  auctions,  which has fueled much
of our historical  growth.  We continue to consider  acquiring  independent used
vehicle auctions in markets where we do not have a presence. We also expect that
consolidation  opportunities will be available for salvage auctions.  In regions
where we do not have a presence or where we are not able to identify acquisition
sites or we do have a  presence  but our  auction  sites  are  inadequate  or at
capacity,  we will  consider  greenfield  development  or  relocation of auction
sites. We have  successfully  demonstrated  this strategy in recent years in the
following  markets:  Los Angeles,  Boston,  Des Moines,  Colorado  Springs,  San
Francisco,  Vancouver,  Long Island,  Atlanta and  Edmonton.  We also opened new
salvage  auction sites in Orlando and Long Island separate from our used vehicle
operations in those markets. We may not, however,  adequately  anticipate all of
the  demands  that  our  growth  will  impose  on our  systems,  procedures  and
structures,   including  our  financial  and  reporting  control  systems,  data
processing systems and management structure.
   We strive to capitalize on the growing pool of redistributed  vehicles and to
increase  the volume of used and  salvage  vehicles  redistributed  through  our
auctions.  Our initiatives include expanding marketing of our services,  such as
selling additional  reconditioning  services and offering post-sale  inspections
and  certifications.  We intend to increase  the volume of vehicles  sold by our
existing  institutional  customers and add to new accounts by enabling customers
to maximize the value of their vehicles through the redistribution  process.  We
believe we can  continue  to expand our market  share by  realizing  the highest
prices for our customers' vehicles and providing the best service.
   We plan to increase  revenue by selling more  services  per vehicle,  such as
reconditioning, inspection, certification, titling and settlement administration
services.  We believe we can  significantly  increase service  penetration among
both  sellers  and  buyers  due to the  economic  benefits  that  our  pre-  and
post-auction services provide.
   We are  improving our operating  efficiency by further  centralizing  certain
administrative  functions,   optimizing  and  standardizing  our  redistribution
processes,  improving  our use of technology  and better  utilizing our existing
infrastructure.   Current   initiatives  aim  at  providing  better  information
throughout the auction process and moving vehicles  faster,  more accurately and
more efficiently through the auction process.
   We plan to continue  to expand our  existing  on-line  service  offerings  in
addition to introducing new on-line  services to our customers.  Direct sales of
used  vehicles  by  institutional  customers  and large  dealer  groups  through
internally  developed or third party  on-line  auctions  have  largely  replaced
telephonic  and other  non-auction  methods,  becoming an increasing  portion of
overall used vehicle  redistribution over the past several years. In addition, a
portion of the vehicles that were sold through a physical  auction are now being
sold on-line.  Although we have embraced the Internet and offer on-line auctions
and services as part of our standard service  offerings,  we cannot predict what
portion of overall  sales will be conducted  through  on-line  auctions or other
redistribution  methods  in the  future  and  what  impact  this may have on our
auction facilities.
   We are committed to investing  additional  capital and resources for emerging
technologies and service offerings in the vehicle  redistribution  industry.  We
will continue to tailor on-line  services to each of our customers to include an
appropriate mix of physical auctions and on-line services.
   INVESTMENTS  AND  CORPORATE  CHARGES.  In   2004,  excluding   the  financial
implications of the spin-off of Automotive  Services,  we expect net income from
Investments and Corporate  Charges to be approximately $5 million to $10 million
higher  primarily  as a result of debt paid off in 2003 with  proceeds  from the
sale of our  Water  Services  businesses  and  internally  generated  cash.  The
financial  implications of the spin-off of Automotive  Services include one-time
expenses of the transaction  for advisor fees, debt retirement  premiums and the
impact of cash received from ADESA after the IPO. 
   Revenue from property sales by real  estate  operations continues to be three
to four times more than the  acquisition  cost,  creating strong cash generation
and  profitability.  Our real estate operations may, from time to time,  acquire
packages of diversified  properties at low cost, add value through  entitlements
and  infrastructure  enhancements,  and sell the  properties  at current  market
prices.
   We have the potential to recognize gains or losses on the sale of investments
in our  emerging  technology  portfolio.  We  plan to  sell  investments  in our
emerging technology portfolio as shares are distributed to us. Some restrictions
on sales may apply,  including,  but not limited to, underwriter lock-up


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                                     PART II

periods that typically extend for 180 days following an initial public offering.
We have committed to make additional  investments in certain emerging technology
holdings.  The total future commitment was $4.8 million at December 31, 2003 and
is expected to be invested at various times through 2007.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOW ACTIVITIES
   A primary goal of our strategic plan is to improve cash flow from operations.
Our strategy includes growing the businesses
both  internally by expanding  facilities,  services and operations (see Capital
Requirements), and externally through acquisitions.
   During 2003 cash flow from operating  activities  reflected  strong operating
results  and  continued  focus on  working  capital  management.  Cash flow from
operating  activities  was higher in 2002 due to the  liquidation of the trading
securities  portfolio  and the  timing  of the  collection  of  certain  finance
receivables outstanding at December 31, 2001. Cash flow from operations was also
affected by a number of factors representative of normal operations.
   Using  both the  proceeds  from the sale of  Water  Services  and  internally
generated  cash,  we repaid $360 million in debt and $75 million in  manditorily
redeemable  preferred  securities  during  2003.  By year end, we  significantly
strengthened our balance sheet and reduced our debt to total capital  percentage
to 36% (46% at December 31, 2002),  while at the same time improving our current
ratio to 1.3 (0.9 at December 31, 2002).
   WORKING CAPITAL. Additional working capital, if and when needed, generally is
provided by the sale of commercial paper.  During 2002 we liquidated our trading
securities  portfolio  and used the  proceeds  to reduce  our  short-term  debt.
Approximately  3.8  million  original  issue  shares  of our  common  stock  are
available for issuance  through  Invest  Direct,  our direct stock  purchase and
dividend  reinvestment  plan.  We have bank lines of credit  aggregating  $196.5
million,  the majority of which expire in December 2004 and are negotiated on an
annual  basis.  These  bank  lines of  credit  provide  credit  support  for our
commercial  paper  program.  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.
   A substantial amount of ADESA's working capital is generated  internally from
payments for services provided. ADESA, however, has arrangements to use proceeds
from the sale of commercial  paper issued by ALLETE to meet  short-term  working
capital  requirements  arising from the timing of payment obligations to vehicle
sellers and the availability of funds from vehicle purchasers.  During the sales
process,  ADESA does not  generally  take title to or  ownership of the vehicles
consigned for auction but instead  facilitate the transfer of vehicle  ownership
directly from sellers to buyers.
   AFC offers  floorplan  financing for dealers to purchase  vehicles  mostly at
auctions and takes a security interest in each financed  vehicle.  The financing
is provided  through  the earlier of the date the dealer  sells the vehicle or a
general  borrowing term of 30 to 45 days. AFC has  arrangements  to use proceeds
from the sale of  commercial  paper  issued  by  ALLETE  to meet its  short-term
working capital requirements not funded through securitization.
   SALE OF WATER  PLANT  ASSETS.  During  2003 we sold,  under  condemnation  or
imminent  threat  of  condemnation,  substantially  all of our  water  assets in
Florida for a total sales price of approximately $445 million.  In addition,  we
reached an agreement to sell our North Carolina water assets for $48 million and
the assumption of approximately $28 million in debt by the purchaser.  The North
Carolina  sale is  awaiting  approval  of the NCUC and is  expected  to close in
mid-2004. We expect to sell our remaining water assets in 2004.
   Earnings  from  Discontinued  Operations  for 2003  included a $71.6  million
after-tax gain on the sale of substantially  all our Water Services  businesses.
The gain was net of all selling,  transaction and employee  termination  benefit
expenses, as well as impairment losses on certain remaining assets.
   The net cash proceeds from the sale of all water  assets,  after  transaction
costs,  retirement of most Florida  Water debt and payment of income taxes,  are
expected to be  approximately  $300 million.  These net proceeds have been,  and
will be, used to retire debt at ALLETE.

OFF-BALANCE SHEET ARRANGEMENTS
   AFC sells the majority of U.S. dollar  denominated  finance  receivables on a
revolving basis to a wholly owned, bankruptcy remote, special purpose subsidiary
that is consolidated for accounting purposes. The special purpose subsidiary has
entered into a securitization agreement,  which expires in 2005, that allows for
the revolving sale to a bank conduit facility of up to a maximum of $500 million
in undivided interests in eligible finance receivables. Receivables sold are not
reported on our consolidated financial statements.
   At December 31, 2003 AFC managed  total finance  receivables  of $539 million
($501 million at December 31, 2002),  of which $464 million had been sold to the
special  purpose  subsidiary  ($423 million at December 31,  2002).  The special
purpose  subsidiary  then in turn sold,  with  recourse to the  special  purpose
subsidiary, $334 million to the bank conduit facility at December 31, 2003 ($304
million at  December  31,  2002)  leaving  $205  million of finance  receivables
recorded on our consolidated balance sheet at December 31, 2003 ($197 million at
December 31, 2002).
   AFC's  proceeds from the revolving  sale of  receivables  to the bank conduit
facility  were  used to repay  borrowings  from  ALLETE  and  fund new  loans to
customers.  AFC  and  the  special  purpose  subsidiary  must  maintain  certain
financial  covenants such as minimum tangible net worth to comply with the terms
of the securitization  agreement. AFC has historically performed better than the
covenant  thresholds set


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                                     PART II

forth in the  securitization  agreement,  and we are not  aware of any  changing
circumstances that would put AFC in noncompliance with the covenants.

SECURITIES
   In March 2001 ALLETE, ALLETE Capital II and ALLETE Capital III, jointly filed
a registration  statement with the SEC pursuant to Rule 415 under the Securities
Act of 1933. The registration  statement,  which has been declared  effective by
the SEC,  relates to the possible  issuance of a remaining  aggregate  amount of
$387 million of securities which may include ALLETE common stock, first mortgage
bonds and other debt  securities,  and ALLETE  Capital II and ALLETE Capital III
preferred  trust  securities.   ALLETE  also  previously  filed  a  registration
statement,  which  has  been  declared  effective  by the SEC,  relating  to the
possible  issuance  of $25  million  of first  mortgage  bonds  and  other  debt
securities.  We may sell all or a portion of the remaining registered securities
if warranted by market  conditions and our capital  requirements.  Any offer and
sale  of the  above  mentioned  securities  will  be made  only  by  means  of a
prospectus  meeting the requirements of the Securities Act of 1933 and the rules
and regulations thereunder.
   In June 2003 ADESA  restructured its financial  arrangements  with respect to
its used  vehicle  auction  facilities  located  in Tracy,  California;  Boston,
Massachusetts;  Charlotte, North Carolina; and Knoxville,  Tennessee. These used
vehicle auction  facilities were previously  accounted for as operating  leases.
The  transactions  included the assumption of $28 million of long-term debt, the
issuance of $45 million of long-term debt and the  recognition of $73 million of
property, plant and equipment. The $28 million of assumed long-term debt matures
April 1,  2020 and has a  variable  interest  rate  equal  to the  seven-day  AA
Financial  Commercial Paper Rate plus approximately  1.2%, while the $45 million
of long-term debt issued to finance the used vehicle auction  facility in Tracy,
California,  matures July 30, 2006 and has a variable  interest rate of prime or
LIBOR plus 1%.
   In July 2003 ALLETE used internally  generated funds to retire $25 million in
principal  amount of the Company's First Mortgage Bonds,  Series 6 1/4% due July
1, 2003.
   In July 2003 ALLETE  entered  into a credit  agreement to borrow $250 million
from a consortium of financial institutions,  the proceeds of which were used to
redeem $250 million in principal  amount of the  Company's  Floating  Rate First
Mortgage Bonds due October 20, 2003. The credit agreement  expires in July 2004,
has an  interest  rate of LIBOR  plus  0.875%  and is secured by the lien of the
Company's  Mortgage  and Deed of Trust.  The credit  agreement  also has certain
mandatory  prepayment  provisions,  including a  requirement  to repay an amount
equal to 75% of the net proceeds  from the sale of water  assets.  In accordance
with these  provisions,  $197.0 million was repaid in 2003 and $53.0 million was
outstanding at December 31, 2003.
   In November  2003 ALLETE  redeemed  $50  million in  principal  amount of the
Company's  First  Mortgage  Bonds,  7 3/4%  Series due June 1, 2007.  Internally
generated  funds and proceeds from the sale of Florida Water assets were used to
repay the principal,  premium and accrued interest, totaling approximately $52.1
million, to the bondholders.
   In December 2003 ALLETE  redeemed  through  ALLETE  Capital I, a wholly owned
statutory trust of ALLETE,  all $75 million aggregate  liquidation amount of its
8.05% Cumulative  Quarterly Income Preferred  Securities (QUIPS). The redemption
price  was $25 per  QUIPS  plus  accumulated  and  unpaid  distributions  to the
redemption  date.  Proceeds  from the sale of Florida  Water assets were used to
fund this redemption.
   In January 2004 we used internally  generated  funds to retire  approximately
$3.5 million in principal amount of Industrial  Development Revenue Bonds Series
1994-A,  due  January 1, 2004.  
   ALLETE's long-term debt arrangements  contain financial  covenants.  The most
restrictive  covenant  requires  ALLETE not to exceed a maximum  ratio of funded
debt to total capital of .65 to 1.0.  Failure to meet this  covenant  could give
rise to an event of default,  if not corrected  after notice from the trustee or
security holder; in which event ALLETE may need to pursue alternative sources of
funding.  As of December 31, 2003 ALLETE's ratio of funded debt to total capital
was .36 to 1.0 and ALLETE was in compliance with its financial covenants.
   Some  of  ALLETE's  long-term  debt  arrangements   contain   "cross-default"
provisions  that would result in an event of default if there is a failure under
other financing arrangements to meet payment terms or to observe other covenants
that would result in an acceleration of payments due.
   Our lines of credit contain  financial  covenants.  These  covenants  require
ALLETE (1) not to exceed a maximum  ratio of funded debt to total capital of .60
to 1.0 and (2) to maintain an interest  coverage  ratio of not less than 3.00 to
1.00. Failure to meet these covenants could give rise to an event of default, if
not  corrected  after notice from the lender;  in which event ALLETE may need to
pursue alternative sources of funding. As of December 31, 2003 ALLETE's ratio of
funded debt to total  capital was .36 to 1.0,  the interest  coverage  ratio was
5.83 to 1.00 and ALLETE was in compliance with these financial covenants.
   ALLETE's lines of credit  contain  cross-default  provisions,  under which an
event of  default  would  arise if other  ALLETE  obligations  in excess of $5.0
million were in default.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
   Our long-term debt obligations, including long-term debt due within one year,
represent the principal  amount of bonds,  notes and loans which are recorded on
our consolidated balance sheet plus interest.
   Unconditional  purchase  obligations  represent  our Square Butte and Kendall
County power purchase  agreements,  and minimum purchase  commitments under coal
and rail contracts.
   Under our power  purchase  agreement  with Square Butte that extends  through
2026, we are  obligated to pay our pro rata share of Square  Butte's costs based
on our entitlement to the output of Square Butte's 455 MW coal-fired  generating
unit near Center, North Dakota. Our payment obligation is


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                              ALLETE FORM 10-K 2003
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                                     PART II


<TABLE>
<CAPTION>

                                                                 PAYMENTS DUE BY PERIOD
                                     -------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS               TOTAL      LESS THAN 1 YEAR    1 TO 3 YEARS    4 TO 5 YEARS    AFTER 5 YEARS
====================================================================================================================
MILLIONS

<S>                                  <C>         <C>                 <C>             <C>             <C>   
Long-Term Debt                       $1,142.3        $ 84.6             $414.2          $211.1          $432.4
Operating Lease Obligations             104.4          14.8               25.0            10.7            53.9
Unconditional Purchase Obligations      550.7          22.9               68.8            45.9           413.1
--------------------------------------------------------------------------------------------------------------------
                                     $1,797.4        $122.3             $508.0          $267.7          $899.4
====================================================================================================================
</TABLE>


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.  The table above  reflects our share of future debt
service  based on our current  output  entitlement  of 71% through  2005 and 66%
thereafter.  In December 2003 we received  notice from Minnkota  Power that they
will  reduce  our  output  entitlement,  effective  January  1,  2006,  by 5% to
approximately 66%. Minnkota Power has the option to reduce our entitlement by 5%
annually, to a minimum of 50%. (See Note 15.)
   Under the Kendall County  agreement,  we pay a fixed capacity  charge for the
right,  but not the  obligation,  to  utilize  one 275 MW  generating  unit near
Chicago,  Illinois. We are responsible for arranging the natural gas fuel supply
and are entitled to the electricity produced. (See Note 15.)
   EMERGING TECHNOLOGY INVESTMENTS. We have investments in emerging technologies
through the minority  investments  in venture  capital funds and  privately-held
start-up companies.  We have committed to make additional investments in certain
emerging  technology  holdings.  The total future commitment was $4.8 million at
December  31,  2003 ($7.7  million at December  31,  2002) and is expected to be
invested at various times through 2007.

CREDIT RATINGS 
   Our  securities  have been rated by  Standard & Poor's  Ratings  Services,  a
division of The McGraw-Hill  Companies,  Inc. (Standard & Poor's) and by Moody's
Investors Service,  Inc. (Moody's).  In October 2003, following our announcement
that we will implement a major  corporate  restructuring  that will separate our
two core businesses, Standard & Poor's reaffirmed that our BBB+ corporate credit
rating remains on CreditWatch with developing  implications.  Our BBB+ corporate
credit  rating has been on  CREDITWATCH  DEVELOPING  since  January 2003 when we
first announced that we were considering a major corporate restructuring.  In an
October 2003 press release Standard & Poor's stated that the CREDITWATCH listing
will be resolved in the very near future and is likely to result in no change to
ALLETE's ratings.
   Rating agencies use both quantitative and qualitative measures in determining
a company's credit rating. These measures 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>

                               STANDARD &
CREDIT RATINGS                   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
Senior Unsecured
   Senior Notes                   BBB             Baa2
   Unsecured Debt                 BBB             Baa2
===========================================================
</TABLE>


PAYOUT RATIO
   In 2003 we paid out 40% (66% in 2002;  59% in 2001) of our per share earnings
in dividends.

CAPITAL REQUIREMENTS

   Consolidated  capital  expenditures  totaled  $136.3  million in 2003 ($201.2
million in 2002;  $149.2 million in 2001).  Expenditures for 2003 included $73.6
million  for  Energy  Services  and  $26.9  million  for  Automotive   Services.
Expenditures for 2003 also included $35.8 million to maintain our Water Services
businesses  while they are in the process of being sold.  An existing  long-term
line of credit  and  internally  generated  funds  were the  primary  sources of
funding for these  expenditures.  The 2003  capital  expenditure  amounts do not
include  $73  million  of  property,  plant and  equipment  recognized  upon the
restructuring of financial arrangements with respect to four of our used vehicle
auction facilities previously accounted for as operating leases.
   Capital  expenditures  are expected to be $98 million in 2004 and total about
$500 million for 2005  through  2008.  The 2004 amount  includes $63 million for
Energy  Services  and $35  million for  Automotive  Services.  Energy  Services'
expenditures    are   for   system    component    replacement   and   upgrades,
telecommunication  fiber  and  coal  handling  equipment.  Automotive  Services'
expenditures  are for expansions and on-going  improvements at existing  vehicle
auction  facilities  and  associated  computer  systems.  We  expect  to draw an
additional $8 million from an existing  long-term


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                                     PART II

line of credit to complete an investment in new coal handling  equipment and use
internally generated funds to fund all other capital expenditures.

ENVIRONMENTAL AND OTHER MATTERS

   As previously  mentioned in our Critical  Accounting  Policies  section,  our
businesses  are subject to  regulation  by various U.S.  and  Canadian  federal,
state, provincial and local authorities concerning  environmental matters. We do
not currently anticipate that potential  expenditures for environmental  matters
will be  material;  however,  we are unable to predict the outcome of the issues
discussed below.
   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's
predecessors  from  1889 to  1904.  The WDNR  requested  SWL&P  to  initiate  an
environmental  investigation.  The WDNR also issued  SWL&P a  Responsible  Party
letter in  February  2002.  The  environmental  investigation  is  underway.  In
February 2003 SWL&P submitted a Phase II environmental site investigation report
to the WDNR. This report  identified some MGP-like  chemicals that were found in
the soil.  During March and April 2003  sediment  samples were taken from nearby
Superior  Bay.  The report on the  results of this  sampling  is  expected to be
completed and sent to the WDNR during the first quarter of 2004. A work plan for
additional  investigation by SWL&P was filed on December 17, 2003 with the WDNR.
This part of the investigation will determine any impact to soil or ground water
between the former MGP site and the Superior Bay. Although it is not possible to
quantify the potential  clean-up cost until the investigation is completed and a
work plan is developed, a $0.5 million liability was recorded as of December 31,
2003  to  address  the  known  areas  of  contamination.   We  have  recorded  a
corresponding dollar amount as a regulatory asset to offset this liability.  The
PSCW has approved SWL&P's deferral of these MGP environmental  investigation and
potential  clean-up  costs for future  recovery in rates,  subject to regulatory
prudency review.
   MINNESOTA POWER COAL-FIRED GENERATING FACILITIES. During 2002 Minnesota Power
received and responded to a third request from the EPA, under Section 114 of the
Clean Air Act, seeking additional  information regarding capital expenditures at
all  of  its  coal-fired  generating  stations.   This  action  is  part  of  an
industry-wide  investigation assessing compliance with the New Source Review and
the New Source Performance  Standards (emissions standards that apply to new and
changed  units) of the Clean Air Act at electric  generating  stations.  We have
received no feedback from the EPA based on the  information we submitted.  There
is, however,  ongoing litigation  involving the EPA and other electric utilities
for alleged  violations of these rules.  It is expected that the outcome of some
of the cases could provide the utility industry  direction on this topic. We are
unable to predict what actions, if any, may be required as a result of the EPA's
request for information. As a result, we have not accrued any liability for this
environmental matter.
   SQUARE BUTTE GENERATING  FACILITY.  In June 2002 Minnkota Power, the operator
of Square Butte,  received a Notice of Violation from the EPA regarding  alleged
New Source Review violations at the M.R. Young Station which includes the Square
Butte  generating  unit. The EPA claims certain  capital  projects  completed by
Minnkota  Power  should have been  reviewed  pursuant  to the New Source  Review
regulations  potentially  resulting  in new  air  permit  operating  conditions.
Minnkota  Power has held  several  meetings  with the EPA to discuss the alleged
violations. Based on an EPA request, Minnkota Power performed a study related to
the technological  feasibility of installing  various controls for the reduction
of nitrogen oxides and sulfur dioxide  emissions.  Discussions  with the EPA are
ongoing  and we are still  unable to predict  the  outcome or cost  impacts.  If
Square Butte is required to make significant capital expenditures to comply with
EPA requirements,  we expect such capital expenditures to be debt financed.  Our
future  cost of  purchased  power  would  include  our pro  rata  share  of this
additional debt service.
   ADESA IMPACT TAUNTON FACILITY. In December 2003 the Massachusetts  Department
of  Environmental  Protection  (MDEP)  identified  ADESA Impact as a potentially
responsible  party regarding  contamination  of several  private  drinking water
wells in a residential development that abuts the Taunton, Massachusetts salvage
vehicle  auction  facility.  The wells had elevated  levels of MTBE.  MTBE is an
oxygenating  additive in gasoline which reduces harmful  emissions.  The EPA has
identified MTBE as a possible  carcinogen.  ADESA Impact engaged GeoInsight,  an
environmental services firm, to conduct tests of its soil and groundwater at the
salvage vehicle auction site and we are providing bottled water to some affected
residents.
   GeoInsight  prepared  an  immediate  response  action  (IRA)  plan,  which is
required by the MDEP,  to determine the extent of the  environmental  impact and
define activities to prevent further environmental contamination.  The IRA plan,
which was filed on January 24,  2004,  describes  the initial  activities  ADESA
Impact performed,  and proposes  additional measures that it will use to further
assess the  existence of any imminent  hazard to human health.  In addition,  as
required  by the MDEP,  ADESA  Impact is  conducting  an  analysis  to  identify
sensitive  receptors  that may have been  affected,  including  area schools and
municipal  wells.  GeoInsight does not believe that an imminent hazard condition
exists at the Taunton site;  however,  the  investigation and assessment of site
conditions are ongoing.
   In December 2003  GeoInsight  collected soil samples,  conducted  groundwater
tests and provided oversight for the installation of monitoring wells in various
locations on and adjacent to the property  adjoining the residential  community.
The results of the soil and water tests indicated  levels of MTBE exceeding MDEP
standards.  In January 2004 we collected air samples from two residences that we
identified as


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--------------------------------------------------------------------------------
                                     PART II

having elevated  drinking water  concentrations of MTBE. We have determined that
inhalation  of, or contact  exposure  to, this air poses  minimal  risk to human
health. In response to our empirical findings, we have proposed to the MDEP that
we install granular  activated carbon filtration systems in the approximately 30
affected residences.
   ADESA Impact is preparing an IRA status  report that must be submitted to the
MDEP by March 30,  2004,  and will  continue  to prepare  additional  reports as
necessary.  As of December  31, 2003 ADESA  Impact has accrued  $0.7  million to
cover the costs associated with ongoing testing,  remediation and cleanup of the
site.
   ALLETE maintains pollution liability insurance coverage and has filed a claim
with respect to this matter. We and our insurer are determining the availability
of insurance coverage at this time.

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,  nor  have a  material  adverse  effect  on  our  financial
condition.

MARKET RISK

SECURITIES INVESTMENTS
   Our securities  investments include certain securities held for an indefinite
period  of  time  which  are  accounted  for as  available-for-sale  securities.
Available-for-sale  securities are recorded at fair value with unrealized  gains
and losses  included in  accumulated  other  comprehensive  income,  net of tax.
Unrealized  losses that are other than temporary are recognized in earnings.  At
December  31, 2003 our  available-for-sale  securities  portfolio  consisted  of
securities in a grantor trust established to fund certain employee benefits. Our
available-for-sale  securities  portfolio  had a fair value of $20.2  million at
December 31, 2003 ($20.9  million at December  31, 2002) and a total  unrealized
after-tax  gain of $0.8  million at  December  31,  2003 ($2.8  million  loss at
December 31, 2002).  During 2003 we sold the investments we held directly in our
publicly-traded  emerging  technology  portfolio  and  recognized a $2.3 million
after-tax loss.  These  publicly-traded  emerging  technology  investments  were
accounted for as available-for-sale securities prior to sale.
   As part of our emerging technology  portfolio,  we also have several minority
investments  in venture  capital funds and  privately-held  start-up  companies.
These  investments  are  accounted  for using the cost method and included  with
Investments on our consolidated balance sheet. The total carrying value of these
investments  was $37.5  million at December 31, 2003 ($38.7  million at December
31, 2002).  Our policy is to review these  investments on a quarterly  basis 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. We did not record any impairment loss on these investments in
2003 ($1.5 million pretax in 2002; $0.2 million pretax in 2001).


<TABLE>
<CAPTION>

INTEREST RATE SENSITIVE                                         PRINCIPAL CASH FLOW BY EXPECTED MATURITY DATE                  
FINANCIAL INSTRUMENTS                     ---------------------------------------------------------------------------------------
                                                                                                                         FAIR
DECEMBER 31, 2003                          2004       2005       2006     2007        2008      THEREAFTER    TOTAL      VALUE
=================================================================================================================================
DOLLARS IN MILLIONS

<S>                                       <C>        <C>         <C>     <C>         <C>        <C>           <C>        <C>
Long-Term Debt
      Fixed Rate                           $4.3       $0.8       $91.3   $115.7      $181.4       $224.7      $618.2     $666.4
      Average Interest Rate - %             6.4        7.6         7.7      7.1         7.6          6.3         7.0
      Variable Rate                       $33.2      $29.4       $45.8     $3.3        $0.9        $54.4      $167.0     $169.4
      Average Interest Rate - % <F1>        3.2        2.6         2.1      1.7         3.0          1.6         2.2
=================================================================================================================================
<FN>
<F1> Assumes rate in effect at December 31, 2003 remains constant through remaining term.
</FN>
</TABLE>


FOREIGN CURRENCY
   Our foreign  currency  exposure  is limited to the  conversion  of  operating
results of our Canadian and, to a lesser extent,  Mexican subsidiaries.  We have
not entered into any foreign  exchange  contracts to hedge the conversion of our
Canadian or Mexican  operating  results  into  United  States  dollars.  Mexican
operations are not material.

POWER MARKETING
   Minnesota  Power  purchases  power for retail sales in our regulated  utility
service  territory and sells excess  generation in the wholesale market. We have
about 500 MW of  nonregulated  generation  available  for sale to the  wholesale
market. Our nonregulated  generation  includes about 200 MW from Taconite Harbor
in northern Minnesota that was acquired in October 2001. It also includes 275 MW
of generation obtained through a 15-year agreement, which commenced in May 2002,
with NRG Energy at the Kendall County facility near Chicago, Illinois.
   Under the Kendall County  agreement,  we pay a fixed capacity  charge for the
right,  but not the obligation,  to capacity and energy from a 275 MW generating
unit.  We are  responsible  for  arranging  the  natural gas fuel supply and are
entitled to the  electricity  produced.  Our  strategy is to sell a


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                                     PART II

significant  portion of our nonregulated  generation through long-term contracts
of  various  durations.  The  balance  will be sold in the spot  market  through
short-term  contracts and in the daily spot market.  We currently have long-term
capacity  sales  contracts  for  130 MW  (100  MW in  2003)  of  Kendall  County
generation, with 50 MW expiring in April 2012 and the balance in September 2017.
In total, the Kendall County facility operated at a loss in 2003 due to negative
spark spreads (the differential  between electric and natural gas prices) in the
wholesale  power market and our resulting  inability to cover the fixed capacity
charge on  approximately  175 MW. We expect the facility to continue to generate
losses  until  such time as spark  spreads  improve or we are able to enter into
additional long-term capacity sales contracts.
   Split Rock Energy is a joint venture between  Minnesota Power and Great River
Energy  from which we are  withdrawing.  Split Rock Energy was formed to combine
power supply  capabilities  and  customer  loads for power pool  operations  and
generation  outage  protection.  In response to the changing  strategies of both
parties, as of February 2004 we withdrew from active participation in Split Rock
Energy and will  terminate our ownership  interest upon receipt of FERC approval
which is  expected  in the  first  half of 2004.  We have  retained  some of the
benefits of this partnership,  such as joint load and capability  reporting.  We
have resumed  performing  the  functions  that provide  least cost supply to our
retail customers and sell our excess generation.

NEW ACCOUNTING STANDARDS

   In January 2004 the FASB issued FASB Staff  Position SFAS 106-1,  "Accounting
and  Disclosure   Requirements  Related  to  the  Medicare   Prescription  Drug,
Improvement  and  Modernization  Act of 2003" (Act).  This Staff Position allows
employers who sponsor a  postretirement  health plan that provides  prescription
drug benefits to defer  recognizing the effects of the Act in accounting for its
plan under SFAS 106,  "Employers'  Accounting for Postretirement  Benefits Other
Than Pensions" until  authoritative  accounting  guidance is issued.  We provide
postretirement  health benefits that include prescription drug benefits,  and in
accordance with this Staff  Position,  have elected not to reflect the impact of
the Act in our 2003  financial  statements.  We expect  the Act will  eventually
reduce our costs for postretirement health benefits and are reviewing the impact
on our accumulated plan benefit obligation and expense going forward.
   In May 2003 the FASB  issued  SFAS 150,  "Accounting  for  Certain  Financial
Instruments  with  Characteristics  of both Liabilities and Equity." In general,
SFAS 150  established  standards for  classification  and measurement of certain
financial  instruments with the  characteristics of both liabilities and equity.
Mandatorily  redeemable financial  instruments must be classified as a liability
and the related  payments  must be reported as interest  expense.  The new rules
became effective in the third quarter of 2003 for previously  existing financial
instruments.  Beginning  with the third  quarter of 2003,  we  reclassified  our
Mandatorily  Redeemable  Preferred  Securities  as  a  long-term  liability  and
reclassified  the  quarterly  distributions  as  interest  expense.  This  was a
reclassification  only  and  did not  impact  our  results  of  operations.  The
Mandatorily  Redeemable  Preferred Securities were redeemed in December 2003. 
   In January  2003 the FASB issued  Interpretation  No. 46,  "Consolidation  of
Variable Interest  Entities." In general, a variable interest entity is one with
equity  investors  that do not have voting  rights or do not provide  sufficient
financial  resources  for the entity to support  its  activities.  Under the new
rules,  variable interest entities are consolidated by the party that is subject
to the  majority of the risk of loss or entitled to the majority of the residual
returns. In December 2003 the FASB issued  Interpretation No. 46R to replace and
clarify some of the provisions of  Interpretation  No. 46. Under  Interpretation
46R,  the rules  became  effective  on December 15, 2003 for interest in certain
structures,  and March 15, 2004 for interest in all other structures. We are not
a party to any  variable  interest  entity  required  to be  consolidated  under
Interpretation No. 46R.

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

FACTORS THAT MAY AFFECT FUTURE RESULTS

   READERS  ARE  CAUTIONED  THAT  FORWARD-LOOKING  STATEMENTS,  INCLUDING  THOSE
CONTAINED IN THIS FORM 10-K,  SHOULD BE READ IN CONJUNCTION WITH OUR DISCLOSURES
UNDER  THE  HEADING:   "SAFE  HARBOR  STATEMENT  UNDER  THE  PRIVATE  SECURITIES
LITIGATION  REFORM  ACT OF 1995"  LOCATED  ON PAGE 10 OF THIS  FORM 10-K AND THE
FACTORS DESCRIBED BELOW. THE RISKS AND UNCERTAINTIES DESCRIBED IN THIS FORM 10-K
ARE NOT THE ONLY ONES 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 BELOW ARE REALIZED.

THERE ARE RISKS ASSOCIATED WITH OUR RESTRUCTURING OF THE COMPANY.

   In October 2003 we announced  plans to restructure  ALLETE by spinning off to
ALLETE  shareholders  our  Automotive  Services  business  which  will  become a
publicly traded company doing business as ADESA.  Although we expect to complete
the  restructuring in the third quarter of 2004, there are risks associated with
proceeding that could have adverse consequences, including:
   - Cost synergies  may  be  eliminated  as  some fixed operating costs will no
     longer be shared,  thereby  potentially  adversely affecting the results of
     operations of the separate entities.  For example,  costs may increase as a
     result of having two boards of directors and management  teams,  as well as
     separate   computer   systems,   financial   audits   and  SEC   compliance
     requirements.
   - The spin-off requires a  favorable  tax  opinion. If  not  obtained and the
     spin-off is not consummated for that or any other reason, ALLETE could face
     challenges in


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                                     PART II

     refocusing the company,  suffer a credibility crisis from the standpoint of
     the financial  markets and our  shareholders  and,  consequently,  ALLETE's
     share price could be negatively  impacted.  If the spin-off is delayed, the
     cost of the separation could increase.
   - Shareholders could  experience  significant stock price volatility when the
     businesses begin trading as separate  companies.  The value of the separate
     shares  could  differ  significantly  from the  value of the  shares of the
     combined  company as the  marketplace  determines the price of the separate
     shares. We are unable to predict how or at what level the shares will trade
     publicly.
   - There is no assurance as to the extent that dividends, if any, will be paid
     on the shares of ADESA and the amount of dividends to be paid on the shares
     of  ALLETE  after  the  spin-off  may vary  significantly  from the  amount
     currently paid on the shares of the combined company.
   - The ability of the separate companies to  raise  capital  may  be adversely
     impacted.  The cost of  borrowing  may  increase  and new  separate  credit
     ratings will be assigned.
   - ALLETE as a combined company  has  benefited  from  the  diversification of
     business  operations.   The  lack  of  diversification  faced  by  separate
     companies may result in more stock price volatility.  For example, if there
     is a downturn  in the auto  business  the share  price of ADESA may decline
     more  sharply  than if it was  part of a more  diversified  entity. 
 
WE ARE DEPENDENT ON OUR ABILITY TO SUCCESSFULLY ACCESS CAPITAL MARKETS.

   Inability to access capital may limit our ability to execute  business plans,
pursue  improvements  or make  acquisitions  that we may  otherwise  rely on for
future growth.  We rely on access to both short-term  borrowings,  including the
issuance of commercial  paper,  and long-term  capital  markets as a significant
source of liquidity for capital requirements not satisfied by the cash flow from
our operations.  If we are not able to access capital at competitive  rates, the
ability to  implement  our  business  plans may be  adversely  affected.  Market
disruptions  or a  downgrade  of our credit  ratings  may  increase  the cost of
borrowing  or  adversely  affect our  ability  to access  one or more  financial
markets.

OUR CREDIT RATINGS COULD BE REVISED DOWNWARD.

   The current credit ratings for ALLETE's  long-term debt are investment grade.
A  rating  reflects  only  the  view  of a  rating  agency,  and  it  is  not  a
recommendation to buy, sell or hold securities. Any rating can be revised upward
or downward at any time by a rating  agency if such rating  agency  decides that
circumstances  warrant  such a change.  If Standard & Poor's or Moody's  were to
downgrade  ALLETE's  long-term  ratings,  particularly  below investment  grade,
borrowing  costs would  increase and the potential pool of investors and funding
sources would likely decrease.

WE ARE SUBJECT TO EXTENSIVE  GOVERNMENTAL  REGULATIONS  THAT MAY HAVE A NEGATIVE
IMPACT ON OUR BUSINESS AND RESULTS OF OPERATIONS.

   We are subject to prevailing  governmental  policies and regulatory  actions,
including  those of the United States  Congress,  Canadian  federal  government,
state and provincial  legislatures,  the FERC, the MPUC, the FPSC, the NCUC, the
PSCW, and various county regulators and city administrators, about allowed rates
of return, financings, industry and rate structure,  acquisition and disposal of
assets and facilities,  operation and construction of plant facilities, recovery
of purchased power and capital investments, and present or prospective wholesale
and retail competition (including but not limited to transmission costs) as well
as general  vehicle-related  laws, including vehicle brokerage and auction laws.
These governmental regulations significantly influence our operating environment
and may affect our ability to recover costs from our customers.  We are required
to have  numerous  permits,  approvals and  certificates  from the agencies that
regulate  our  business.  We  believe  the  necessary  permits,   approvals  and
certificates have been obtained for existing operations and that our business is
conducted in accordance with applicable laws;  however, we are unable to predict
the impact on operating results from the future regulatory  activities of any of
these  agencies.   Changes  in  regulations  or  the  imposition  of  additional
regulations could have an adverse impact on our results of operations.
   Recent  events  in the  energy  markets  that are  beyond  our  control  have
increased the level of public and regulatory scrutiny in our industry and in the
capital  markets and have resulted in increased  regulation  and new  accounting
standards.  The  reaction  to these  events  may have  negative  impacts  on our
business, financial condition and access to capital.

OUR OPERATIONS POSE CERTAIN ENVIRONMENTAL RISKS WHICH COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

   We are subject to extensive environmental laws and regulations affecting many
aspects of our  present  and future  operations  including  air  quality,  water
quality, waste management and other environmental considerations. These laws and
regulations can result in increased  capital,  operating,  and other costs, as a
result of  compliance,  remediation,  containment  and  monitoring  obligations,
particularly  with regard to laws relating to power plant emissions.  These laws
and regulations generally require us to obtain and comply with a wide variety of
environmental licenses,  permits,  inspections and other approvals.  Both public
officials and private  individuals may seek to enforce applicable  environmental
laws and regulations.  We cannot predict the financial or operational outcome of
any related litigation that may arise.
   There are no assurances that existing  environmental  regulations will not be
revised or that new regulations  seeking to protect the environment  will not be
adopted or become  applicable to us.  Revised or additional  regulations,  which
result in  increased  compliance  costs or  additional  operating  restrictions,
particularly if those costs are not fully recoverable

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                                     PART II

from customers,  could have a material effect on our results of operations.
   We  cannot  predict  with  certainty  the  amount  or  timing  of all  future
expenditures  related to  environmental  matters  because of the  difficulty  of
estimating clean up costs. There is also uncertainty in quantifying  liabilities
under  environmental  laws  that  impose  joint  and  several  liability  on all
potentially responsible parties. (See Environmental and Other Matters.)
   In the vehicle redistribution industry, large numbers of vehicles,  including
damaged vehicles at salvage vehicle auctions,  are stored at auction  facilities
and, during that time,  releases of fuel,  motor oil and other fluids may occur,
resulting in soil, surface water, air or groundwater contamination. In addition,
we generate  and/or  store  petroleum  products and other  hazardous  materials,
including  wastewater,  waste  solvents  and used oil  run-off  from our vehicle
reconditioning  and detailing  facilities,  and body shops at our facilities may
release  harmful  air  emissions  associated  with  painting.   We  could  incur
substantial expenditures for preventative,  investigative or remedial action and
could be exposed to liability  arising  from our  operations,  contamination  by
previous  users of our  acquired  facilities,  or the  disposal  of our waste at
off-site  locations.  Any such expenditures or liabilities could have a material
adverse effect on our results of operations and financial condition.

THE OPERATION AND MAINTENANCE OF OUR GENERATING  FACILITIES  INVOLVES RISKS THAT
COULD SIGNIFICANTLY INCREASE THE COST OF DOING BUSINESS.

   The operation of generating  facilities involves many risks,  including start
up risks,  breakdown or failure of  facilities,  lack of  sufficient  capital to
maintain the facilities,  the dependence on a specific fuel source or the impact
of unusual or adverse weather conditions or other natural events, as well as the
risk  of  performance  below  expected  levels  of  output  or  efficiency,  the
occurrence  of any of  which  could  result  in lost  revenue  and/or  increased
expenses.  A significant portion of Minnesota Power's facilities was constructed
many years ago. In particular, older generating equipment, even if maintained in
accordance with good  engineering  practices,  may require  significant  capital
expenditures  to keep it operating at peak  efficiency.  This  equipment is also
likely to require periodic  upgrading and improvement.  Minnesota Power could be
subject to costs  associated  with any  unexpected  failure  to  produce  power,
including  failure  caused by breakdown or forced  outage,  as well as repairing
damage to facilities due to storms, natural disasters,  wars, terrorist acts and
other  catastrophic  events.  Further,  our ability to  successfully  and timely
complete capital  improvements to existing  facilities or other capital projects
is contingent upon many variables and subject to substantial  risks.  Should any
such efforts be unsuccessful, we could be subject to additional costs and/or the
write-off of our investment in the project or improvement.

ENERGY SERVICES MUST HAVE ADEQUATE AND RELIABLE  TRANSMISSION  AND  DISTRIBUTION
FACILITIES TO DELIVER OUR ELECTRICITY TO OUR CUSTOMERS.

   Minnesota Power depends on transmission and distribution facilities owned and
operated by other utilities, as well as its own such facilities,  to deliver the
electricity it produces and sells to its  customers,  as well as to other energy
suppliers.  If  transmission  capacity  is  inadequate,  our ability to sell and
deliver  electricity may be hindered,  we may have to forgo sales or we may have
to  buy  more  expensive   wholesale   electricity  that  is  available  in  the
capacity-constrained  area. The cost to provide  service to these  customers may
exceed the cost to service other customers, resulting in lower gross margins. In
addition,  any  infrastructure  failure that  interrupts or impairs  delivery of
electricity to our customers  could  negatively  impact the  satisfaction of our
customers with our service.

THE PRICE OF ONE OF  OUR MAJOR  PRODUCTS,  ELECTRICITY, AND/OR  ONE OF OUR MAJOR
EXPENSES, FUEL, MAY BE VOLATILE.

   Volatility in market prices for fuel and electricity may result from:
   - severe or unexpected weather conditions;
   - seasonality;
   - changes in electricity usage;
   - the current diminished liquidity in the wholesale power markets as  well as
     any future illiquidity in these or other markets;
   - transmission    or    transportation    constraints,    inoperability    or
     inefficiencies;
   - availability of competitively priced alternative energy sources;
   - changes in supply and demand for energy commodities;
   - changes in power production capacity;
   - outages  at  Minnesota  Power's  generating  facilities  or  those  of  our
     competitors;
   - changes in production and  storage levels of natural gas, lignite, coal and
     crude oil and refined products;
   - natural  disasters, wars,  sabotage,  terrorist acts, embargoes  and  other
     catastrophic events; and
   - federal,  state,  local  and   foreign  energy,  environmental  and   other
     regulation and legislation.
   Since   fluctuations  in  fuel  expense  related  to  our  regulated  utility
operations  are  passed  on to  customers  through  our  fuel  clause,  risk  of
volatility  in  market  prices  for  fuel and  electricity  mainly  impacts  our
nonregulated  operations at this time. 

THE VOLATILE NATURE OF VEHICLE SALES MAY ADVERSELY AFFECT OUR PROFITABILITY.

   The vehicle industry is cyclical and  historically  has experienced  periodic
downturns  characterized by oversupply and weak demand.  Many factors affect the
industry,  including general economic conditions and consumer  confidence,  fuel
prices, the level of discretionary personal income, unemployment rates, interest
rates, credit availability and insurance premiums.
   New and used vehicle sales  substantially  slowed  immediately  following the
terrorist attacks of September 11, 2001. In response,  manufacturers  introduced
new incentives (including


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                              ALLETE FORM 10-K 2003
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                                     PART II

0% financing) and rental car companies began to downsize their inventories. This
led to decreases in the prices of both used and salvage vehicles and a temporary
decline in conversion  percentages  in the auction  industry  because the prices
that  buyers  were  willing to pay for  vehicles  did not match the prices  that
sellers were willing to accept. In 2002 the manufacturers extended and increased
the  incentives  leading to additional  declines in both used vehicle prices and
conversion percentages.  We are not able to determine the long-term consequences
the terrorist attacks and/or  subsequent  outbreaks of hostilities might have on
general economic conditions,  our industry, or ADESA, nor are we able to predict
how used vehicle  prices and conversion  percentages  may be affected by new and
additional incentives or other changes by the manufacturers aimed at the new car
market.
   Used  vehicle  sales are  driven  by  consumer  demand.  As  consumer  demand
fluctuates,  the volume  and prices of used  vehicles  may be  affected  and the
demand for used  vehicles at auction by dealers may  likewise be  affected.  The
demand for used vehicles at auction by dealers may  therefore  have an effect on
the wholesale  price of used vehicles and the conversion  percentage of vehicles
sold at auction.
   The number of new and used vehicles that are leased by consumers  affects the
supply of vehicles coming to auction.  As  manufacturers  and other lenders have
decreased  the  number of leases  in the last few years and  extended  the lease
terms of some of the leases that were written,  the number of off-lease vehicles
available  at auction  declined in 2003 and that decline is expected to continue
in 2004 and  2005.  We are not able to  predict  the  manufacturers'  and  other
lenders'  approaches to leasing,  and thus future volumes of off-lease  vehicles
may be affected based upon leasing trends.
   Program  vehicles  are  vehicles  used by  rental  car  companies  and  other
companies  with  individual  corporate  fleets of vehicles  that are returned to
manufacturers through repurchasing  programs. The volume of program vehicles and
the  terms  of the  programs  have an  effect  on the  volume  of used  vehicles
available  for  sale at  auction  since  the  majority  of  these  vehicles  are
redistributed via the used vehicle auction process.
   Repossessed vehicles are a source of volume for used vehicle auctions and are
dependent upon both economic  conditions  and the policies of lenders  regarding
their credit practices.  As these economic  conditions and policies change,  the
volume of vehicles available for sale at auction may also be affected.
   Insurance  companies  are the main source of salvage  vehicles  available for
sale at auction.  The number of vehicles  branded as salvage is  dependent  upon
several factors including  government  regulations,  the extent of damage to the
vehicle,  the number of accidents,  and the policies of the insurance  companies
with respect to claims settlement and redistribution of the salvage vehicles.
   If the  volume  of used or  salvage  vehicles  sold at our  auctions  were to
decline due to any of the factors  described above or for any other reason,  the
revenue we earn from  successful  auction  transactions  and ancillary  services
would  decline.  In  addition,  the  fixed  costs  associated  with our  auction
facilities would remain relatively constant.  As a result of these consequences,
our profitability could be adversely affected.

ALLETE'S ENERGY SERVICES BUSINESS IS SUBJECT TO INCREASED COMPETITION.

   The  independent   power  industry   includes  numerous  strong  and  capable
competitors,   many  of  which  have  extensive  experience  in  the  operation,
acquisition and development of power  generation  facilities.  Energy  Services'
competition is based  primarily on price and reputation for quality,  safety and
reliability.   The  electric   utility  and  natural  gas  industries  are  also
experiencing  increased  competitive  pressures as a result of consumer demands,
technological advances, deregulation,  greater availability of natural gas-fired
generation and other factors.

THE VEHICLE REDISTRIBUTION INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY NOT BE ABLE
TO COMPETE SUCCESSFULLY.

   We face  significant  competition for the supply of used and salvage vehicles
and for the buyers of those  vehicles.  We  believe  our  principal  competitors
include  other used  and/or  salvage  vehicle  auction  companies,  wholesalers,
dealers,  manufacturers  and dismantlers,  a number of whom may have established
relationships with sellers and buyers of vehicles and may have greater financial
resources  than we have.  Due to  the  limited  number  of  sellers  of used and
salvage vehicles,  the absence of long-term  contractual  commitments between us
and our customers and the increasingly competitive market environment, there can
be no assurance that our competitors will not gain market share at our expense.
   We may encounter  significant  competition  for local,  regional and national
supply  agreements  with sellers of used and salvage  vehicles.  There can be no
assurance  that the  existence  of other local,  regional or national  contracts
entered into by our competitors  will not have a material  adverse effect on our
business or our expansion plans. Furthermore,  we are likely to face competition
from major  competitors in the  acquisition of auction  facilities,  which could
significantly  increase  the cost of such  acquisitions  and thereby  materially
impede our expansion objectives or have a material adverse effect on our results
of operations.  These potential  competitors may include  consolidators  of used
vehicle  auctions,  vehicle  dismantling  businesses,  organized salvage vehicle
buying groups,  vehicle manufacturers and on-line auction companies.  While most
of our  institutional  customers  have  abandoned  or  reduced  efforts  to sell
vehicles  directly without the use of service providers such as us, there can be
no assurance that this trend will  continue,  which could  adversely  affect our
market share, results of operations and financial condition.
   We may also encounter  competition in our floorplan financing  business.  The
floorplan   financing   sector  is

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characterized by diverse and fragmented competition.  AFC's competition includes
the financing arms of other auction providers,  other speciality lenders,  banks
and other financial  institutions.  There can be no assurance that the existence
of other floorplan financing  providers nor the entrance of new providers to the
sector will not have a material  adverse  effect on AFC,  its ability to compete
successfully  in the  floorplan  financing  sector,  or our  overall  ability to
compete in the vehicle redistribution industry.
   Additionally,  existing or new  competitors may be  significantly  larger and
have greater financial and marketing  resources than we have;  therefore,  there
can be no assurance that we will be able to compete successfully in the future.

INCREASED USE OF ON-LINE WHOLESALE AUCTIONS MAY DIMINISH OUR SUPPLY OF VEHICLES.

   Direct sales of used  vehicles by  institutional  customers  and large dealer
groups through internally developed or third party on-line auctions have largely
replaced  telephonic  and other  non-auction  methods,  becoming  an  increasing
portion of overall used vehicle  redistribution  over the past several years. In
addition,  a portion of the vehicles  that were sold through a physical  auction
are now being sold on-line.  Typically,  on-line  auctions serve to redistribute
vehicles that have come off lease. The extent of use of direct,  on-line systems
varies among institutional customers and currently comprises approximately 3% to
5% of overall used vehicle auction sales.  In addition,  some of our competitors
have begun to offer on-line  auctions as all or part of their  auction  business
and other on-line  auctions now include used vehicles among the products offered
at their  auctions.  On-line  auctions or other  methods of  redistribution  may
diminish  both the quality and  quantity  and reduce the value of vehicles  sold
through traditional  auction facilities.  Although we have embraced the Internet
and  offer  on-line  auctions  and  services  as  part of our  standard  service
offerings,  we cannot  predict what  portion of overall  sales will be conducted
through on-line auctions or other redistribution  methods in the future and what
impact this may have on our auction facilities.

OUR OPERATIONS ARE WEATHER SENSITIVE.

   Our results of operations can be affected by changes in the weather.  Weather
conditions directly influence the demand for electricity and natural gas, affect
the price of energy  commodities  and affect the  ability to perform  energy and
automotive services. Auction volumes tend to decline during prolonged periods of
winter weather conditions. In addition, mild weather conditions and decreases in
traffic volume can lead to a decline in the available supply of salvage vehicles
because  fewer traffic  accidents  occur,  resulting in fewer  damaged  vehicles
overall.  We cannot predict future weather  conditions and as a result,  adverse
weather   conditions  could  negatively  affect  our  operations  and  financial
condition.

SEASONALITY OF THE AUCTION BUSINESS AFFECTS OUR QUARTERLY REVENUE AND EARNINGS.

   Generally, the volume of vehicles sold at auction is highest in the first and
second  calendar  quarters of each year and slightly lower in the third quarter.
Fourth  quarter  sales  are  generally  lower  than  all  other  quarters.  This
seasonality is affected by several factors including weather, the timing of used
vehicles available for sale from the institutional customers,  holidays, and the
seasonality of the retail market for used vehicles which affects the demand side
of the auction industry. As a result, the revenue and operating expenses related
to volume will fluctuate accordingly on a quarterly basis.

IF OUR SIGNIFICANT  ENERGY SERVICES  CUSTOMERS ARE NEGATIVELY  IMPACTED BY WORLD
ECONOMICS, OUR REVENUE MAY BE NEGATIVELY IMPACTED.

   Our Large Power  Customers are impacted by world  economics that affect their
competitive  position and  profitability.  Taconite producers and paper and wood
products  customers served by Minnesota Power compete in this world marketplace.
Their inability to compete in their global markets could have a material adverse
effect on their  operations  and  continuation  as a business.  Any such failure
could have a material  adverse effect on Energy  Services  results of operations
and the  surrounding  communities  we  serve.  

WE ARE DEPENDENT ON GOOD LABOR RELATIONS.

   We believe our relations to be good with our approximately  13,000 employees.
   Energy  Services  has  approximately  1,400  full-time  employees,  of  which
approximately  700 are  either  a member  of the  International  Brotherhood  of
Electrical Workers Local 31 or Local 1593.  Failure to successfully  renegotiate
labor  agreements could adversely affect the services we provide and our results
of operations.  The labor  agreements  with Local 31 expire on January 31, 2006.
Negotiations  are  underway  for a new  contract  with Local 1593.  The existing
agreement with Local 1593 ends on March 31, 2004.
   In addition to its regular employees,  Automotive Services utilizes temporary
labor services to assist in handling the vehicles consigned to it during periods
of peak volume and staff shortages. Many of Automotive Services' employees, both
full-time  and  part-time,  are  unskilled,  and in periods  of strong  economic
growth, we may find it difficult to compete for sufficient unskilled labor. Many
of the services we provide are outsourced to third party  providers that perform
the  services  either  on-site or  off-site.  The use of third  party  providers
depends upon the resources  available at each auction  facility as well as peaks
in the volume of vehicles  offered at auction.  If we are unable to maintain our
full-time,  part-time or contract workforce or the necessary  relationships with
third party providers, our operations may be adversely affected.
   In addition,  auctioneers at our auctions are highly skilled  individuals who
are essential to the successful operation of our auction business. Nearly all of
our  auctioneers  are  independent  contractors who provide their services for a
daily or  weekly  rate.  If we are  unable  to  retain a  sufficient  number  of
experienced auctioneers, our operations may be adversely affected.


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OUR  AUTOMOTIVE  SERVICES  OPERATIONS  SUBJECT  US TO  THE  RISK  OF  COLLUSION,
MISCONDUCT AND OTHER  IMPROPER  BUSINESS  PRACTICES BY OUR  AUTOMOTIVE  SERVICES
EMPLOYEES AND THIRD PARTIES.

   In the  past,  some  of our  Automotive  Services  employees  have  acted  in
collusion with one another,  with individual  contractors or third party service
providers,   and/or  with  customers,  in  order  to  manipulate  our  policies,
procedures  and  systems.  Some of our auction  employees  also have  engaged in
misconduct or wrongdoing, including isolated acts of dishonesty and malfeasance,
exercised poor judgment or otherwise  conducted  business in an improper manner.
In addition,  customers acting in collusion have redistributed  vehicles through
our  auctions  on  terms  that  were  not  arms  length.  As a  result  of these
activities,  our services have been sold at a discount or for no fee, credit has
been extended outside of the normal course of operations,  unnecessary  services
have been  provided and  operating  costs have  increased.  We have enhanced our
internal control systems and conduct random on-site audits of auction facilities
to identify and minimize these activities. While collusion, misconduct and other
improper  business  practices  have not had a  material  adverse  effect  on our
operating  results in the past, we cannot assure you that activities  similar to
those  described above will not occur in the future or will be detected by us in
a timely manner or before a material loss is incurred.  If our internal controls
fail to prevent future acts of collusion, misconduct and other improper business
practices,  resulting losses could have a material adverse effect on our results
of operations and financial condition.

IF WE ARE NOT ABLE TO RETAIN OUR EXECUTIVE  OFFICERS AND KEY  EMPLOYEES,  WE MAY
NOT BE ABLE TO IMPLEMENT OUR BUSINESS STRATEGY AND OUR BUSINESS COULD SUFFER.

   If we fail to retain our executive  officers or key employees,  our  business
could suffer.  We may have  difficulty in retaining  and  attracting  customers,
developing new services,  negotiating  favorable  agreements  with customers and
providing  acceptable levels of customer service.  Although  leadership  changes
will  occur  in  connection  with  the  spin-off,   we  cannot  predict  whether
significant resignations will occur. The success of our business heavily depends
on the leadership of our executive officers,  all of whom are  employees-at-will
and none of whom are subject to any  agreements  not to compete.  If we lose the
service of one or more of our executive officers or key employees,  or if one or
more of them  decides to join a  competitor  or  otherwise  compete  directly or
indirectly  with us, we may not be able to  successfully  manage our business or
achieve our business objectives.

WE ASSUME THE SETTLEMENT RISK FOR ALL VEHICLES SOLD THROUGH OUR AUCTIONS.

   As part of the fees earned for the  services we provide  relative to the sale
of each vehicle at auction,  we assume the risk  associated  with collecting the
gross  sales  proceeds  from  buyers  and  likewise  assume  responsibility  for
distributing  to sellers the net sales  proceeds of vehicles.  The fees for each
vehicle  are  collected  by adding  the  buyer-related  fees to the gross  sales
proceeds due from the buyer and deducting the seller-related fees from the gross
sales proceeds prior to distributing  the net sales proceeds to the seller.  The
amount we report as revenue for each vehicle only represents the fees associated
with our  services  and does not include the gross sales price of the  consigned
vehicle.  As a result, the accounts  receivable from buyers are much larger on a
per vehicle basis than the combined  seller- and  buyer-related  fees associated
with each  transaction.  We do not have recourse against sellers for any buyer's
failure to satisfy its debt. Since our revenue for each vehicle does not include
the gross  sales  proceeds,  failure to collect  the  receivables  in full would
result in a net loss up to the gross sales  proceeds  on a per vehicle  basis in
addition to any expenses  incurred to collect the receivables and to provide the
services  associated  with the vehicle.  Although we take steps to mitigate this
risk,  if we are unable to collect  payments on a large  number of vehicles  our
resulting  payment  obligations  and  decreased  fee revenue may have a material
adverse effect on our results of operations and financial condition.
   In addition,  in the ordinary course of business, it is our responsibility to
fully  disclose  any  defects or other  information  relevant  to the value of a
vehicle sold through our auctions  that we have  discovered  or of which we have
been  informed  by the  seller.  In  cases  where we fail to  properly  disclose
information about a particular  vehicle,  we typically refund the fees collected
and  void the  sale of the  vehicle.  If we are  unable  to  reach a  settlement
satisfactory to the seller, we generally purchase the vehicle, which subjects us
to the costs and risks of resale.

WE RELY  HEAVILY  ON  TECHNOLOGY  TO  PROTECT  OUR  RIGHTS  WITH  RESPECT TO OUR
BUSINESSES AND MUST ADAPT TO EVOLVING APPLICATIONS. CHANGES  IN TECHNOLOGY COULD
CAUSE OUR SERVICES TO BECOME OBSOLETE AND, AS A RESULT, WE MAY LOSE CUSTOMERS.

   In both our Energy Services and Automotive Services businesses, technology is
an  integral  part  of  our  operations  and is  subject  to  evolving  industry
standards.  The  information  systems and  processes  necessary  to support risk
management,  sales, customer service and procurement and supply are new, complex
and  extensive.  To be  successful,  we must  adapt to this  evolving  market by
continually  improving  the  responsiveness,  functionality  and features of our
services  and  systems  to meet our  customers'  changing  needs.  We may not be
successful  in  developing  or acquiring  technology  which is  competitive  and
responsive to the needs of our customers and might lack sufficient  resources to
continue to make the  necessary  investments  in  technology to compete with our
competitors.  Without the timely  introduction of new services and  enhancements
that take advantage of the latest technology,  some of our services could become
obsolete over time and we could lose a number of our customers.
   We develop software internally and through outsourcing relationships,  and we
have also licensed and may license in the future,  copyrighted  computer systems
software and trade secrets from third  parties.  While we attempt to ensure that
our intellectual  property and similar proprietary rights are protected and that
the third party rights we need are licensed


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                                     PART II

to  us  when  entering  into  business  relationships,  our  business  partners,
consultants  or other third parties may take actions that could  materially  and
adversely affect our rights or the value of our intellectual  property,  similar
proprietary  rights  or  reputation.  In  addition,  if we  are  subject  to any
infringement  claims,  such  claims may have an adverse  effect on our  business
operations.

OUR  OPERATIONS MAY BE RESTRICTED BY  VEHICLE-RELATED  OR LENDING LAWS AND OTHER
REGULATIONS, INCLUDING VEHICLE BROKERAGE AND AUCTION LAWS.

   Our  operations are subject to regulation,  supervision  and licensing  under
various  U.S.  or  Canadian  federal,  state,  provincial  and  local  statutes,
ordinances  and  regulations.  Each  auction  is subject to laws in the state or
province in which it operates which regulate auctioneers and/or vehicle dealers.
Some of the  transport  vehicles  used at our auctions are regulated by the U.S.
Department  of  Transportation  or  the  Canadian   Transportation  Agency.  The
acquisition  and sale of salvage and theft  recovered  vehicles is  regulated by
governmental  agencies in each of the  locations  in which we  operate.  In many
states and provinces, regulations require that the title of a salvage vehicle be
forever  "branded"  with  a  salvage  notice  in  order  to  notify  prospective
purchasers of the vehicle's previous salvage status. Some state,  provincial and
local  regulations  also limit who can  purchase  salvage  vehicles,  as well as
determine  whether a salvage  vehicle can be sold as rebuildable or must be sold
for parts only. Such  regulations  can reduce the number of potential  buyers of
vehicles at salvage  auctions.  In addition to the  regulation  of the sales and
acquisition   of  vehicles,   we  are  also  subject  to  various  local  zoning
requirements  with  regard to the  location  and  operation  of our  auction and
storage facilities.
   If we fail to comply with applicable  regulations and requirements,  we could
be subject to civil or criminal  liability and the imposition of liens or fines.
In addition, existing regulations may be revised or reinterpreted,  new laws and
regulations  may be adopted or become  applicable to us or our  facilities,  and
future  changes  in laws and  regulation  may have a  detrimental  effect on our
businesses.

A PORTION OF OUR REVENUE MAY BE DERIVED FROM NON-UNITED  STATES  SOURCES,  WHICH
EXPOSES US TO FOREIGN EXCHANGE AND OTHER RISKS.

   Approximately  10% of our  consolidated  revenue is derived from our Canadian
facilities.  We also conduct  operations  in Mexico.  As a result,  fluctuations
between United States and non-United States currency values may adversely affect
our results of operations  and financial  position.  In addition,  there are tax
inefficiencies in repatriating cash flow from non-United States subsidiaries. To
the extent such  repatriation  is  necessary  for us to meet our debt service or
other  obligations,  these tax  inefficiencies may adversely affect us. 

ADEQUATE INSURANCE PROTECTION MAY NOT BE COST EFFECTIVE OR AVAILABLE TO MINIMIZE
RISK.

   Insurance,  warranties or performance  guarantees may not cover any or all of
the lost revenue or increased expenses,  including the cost of replacement power
and cancellation of sale days at auction sites.  Likewise, our ability to obtain
insurance,  and the cost of and coverage  provided by such  insurance,  could be
affected by events outside our control.

RISKS  ASSOCIATED WITH  ACQUISITIONS  MAY HINDER OUR ABILITY TO INCREASE REVENUE
AND EARNINGS.

   Both the energy and vehicle  redistribution  industries are considered mature
industries  in which low single digit growth is expected in industry unit sales.
Accordingly,  our future growth depends in large part on our ability to increase
our volumes relative to our competition,  acquire additional businesses,  manage
expansion,  control  costs  in  our  operations,  introduce  new  services,  and
consolidate future acquisitions into existing operations. In pursuing a strategy
of acquiring other  businesses,  we face risks commonly  encountered with growth
through acquisitions. These risks include, but are not limited to:
   - incurring significantly higher capital expenditures and operating expenses;
   - failing  to  assimilate  the  operations  and  personnel  of  the  acquired
     businesses;
   - entering new markets with which we are unfamiliar;
   - potential undiscovered liabilities at acquired businesses;
   - disrupting our ongoing business;
   - diverting our limited management resources;
   - failing to maintain uniform standards, controls and policies;
   - impairing relationships with employees and customers as a result of changes
     in management; and
   - increasing  expenses  for  accounting  and  computer  systems,  as well  as
     integration difficulties. 
   We may not  adequately  anticipate  all of the  demands  that our growth will
impose on our systems,  procedures and  structures,  including our financial and
reporting control systems, data processing systems and management structure.  If
we cannot adequately anticipate and respond to these demands, our business could
be materially harmed.
   Although we conduct  what we believe to be a prudent  level of  investigation
regarding the operating condition of the businesses we purchase, in light of the
circumstances  of  each  transaction,  an  unavoidable  level  of  risk  remains
regarding the actual operating condition of these businesses.  Until we actually
assume  operating  control  of  such  business  assets,  we may  not be  able to
ascertain the actual value of the acquired entity.

WE  CANNOT  GUARANTEE THAT GREENFIELD DEVELOPMENT OR RELOCATION OF AUCTION SITES
WILL BE PROFITABLE.

   The costs of greenfield development or relocation of our auction sites may be
substantial.  In addition,  we may  encounter  delays and scope changes while an
auction site is under development that cause our capital  investment to increase
and our returns to be lower than  expected.  Although  our strategy is to secure
support from institutional customers and insurance companies prior to developing
new or  relocated  facilities,  there  is no  guarantee  that  new or  relocated
facilities will be able to attract these customers or deliver  sustained revenue
or profit.


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WE CAN OFFER YOU NO  ASSURANCES  THAT WE WILL BE ABLE TO CONTINUE  EXECUTING  AN
ACQUISITION STRATEGY WITHOUT THE COSTS OF FUTURE ACQUISITIONS ESCALATING.

   Although there are potential acquisition  candidates that fit our acquisition
criteria,  we are not  certain  that we will  be  able to  consummate  any  such
transactions in the future or identify those candidates that would result in the
most successful  combinations,  or that future  acquisitions  will be able to be
consummated at acceptable prices and terms. In addition,  increased  competition
for acquisition  candidates could result in fewer acquisition  opportunities for
us and higher acquisition prices. The magnitude,  timing,  pricing and nature of
future acquisitions will depend upon various factors, including:
   - the availability of suitable acquisition candidates;
   - competition with other industry groups or new  industry  consolidators  for
     suitable acquisitions; 
   - the negotiation of acceptable terms;
   - our financial capabilities;
   - the availability of skilled employees to manage the acquired companies; and
   - general economic and business conditions.
   We  may  be  required  to  file  applications  and  obtain  clearances  under
applicable  federal  antitrust  laws before  completing  an  acquisition.  These
regulatory requirements may restrict or delay our acquisitions, and may increase
the cost of completing acquisitions.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   See Item 7. Management's Discussion and Analysis of Results of Operations and
Financial  Condition - Market Risk for information  related to quantitative  and
qualitative  disclosure  about market risk.  


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   See our  consolidated  financial  statements as of December 31, 2003 and 2002
and for each of the three  years in the period  ended  December  31,  2003,  and
supplementary data, also included, which are indexed in Item 15(a).


ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE

   Not applicable.


ITEM 9A. 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-K.  Based  upon  that  evaluation,  our  chief  executive  officer  and chief
financial  officer  concluded  that our  disclosure  controls and procedures are
effective  in  timely  alerting  them to  material  information  required  to be
included in our periodic  SEC filings.  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.

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                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

   Unless  otherwise  stated,   the  information   required  for  this  Item  is
incorporated  by reference  herein from our Proxy  Statement for the 2004 Annual
Meeting of Shareholders (2004 Proxy Statement). Our 2004 Proxy Statement will be
filed with the SEC within 120 days after the end of our 2003 fiscal year.

   - DIRECTORS. The information regarding  directors  will be  included  in  the
     "Election of Directors" section;
   - AUDIT COMMITTEE FINANCIAL  EXPERT.  The  information  regarding  the  audit
     committee financial expert will be included in  the "Report  of  the  Audit
     Committee" section;
   - EXECUTIVE  OFFICERS. The   information   regarding  executive  officers  is
     included in Part I of this Form 10-K;
   - SECTION  16(a)  COMPLIANCE.  The  information   regarding   Section   16(a)
     compliance  will  be included  in  the "Section 16(a) Beneficial  Ownership
     Reporting Compliance" section; and
   - CODE OF ETHICS. We  have  adopted a  written Code of Ethics that applies to
     all  of  our  employees,  including  our  chief  executive  officer,  chief
     financial officer and controller. A copy of our Code of Ethics is available
     on our website at  www.allete.com  and print  copies are  available  to any
     shareholder  that  requests a copy.  Any amendment to the Code of Ethics or
     any  waiver of the Code of  Ethics  will be  disclosed  on our  website  at
     www.allete.com promptly following the date of such amendment or waiver.


ITEM 11. EXECUTIVE COMPENSATION

   The information  required for this Item is  incorporated by reference  herein
from  the  "Compensation  of  Executive  Officers"  section  in our  2004  Proxy
Statement.


ITEM 12. SECURITY  OWNERSHIP  OF CERTAIN  BENEFICIAL OWNERS  AND  MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

   The information  required for this Item is  incorporated by reference  herein
from the "Security  Ownership of  Beneficial  Owners  and  Management"  and  the
"Equity Compensation Plan Information" sections in our 2004 Proxy Statement.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   None.


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

   The information  required by this Item is  incorporated  by reference  herein
from the "Report of the Audit Committee" section in our 2004 Proxy Statement.

--------------------------------------------------------------------------------
                                     PAGE 54


<PAGE>
                              ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------

                                     PART IV


ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)   Certain Documents Filed as Part of this Form 10-K.

(1)   Financial Statements                                                  PAGE
        ALLETE
        Report of Independent Auditors .......................................60
        Consolidated Balance Sheet at
         December 31, 2003 and 2002 ..........................................61
        For the Three Years Ended December 31, 2003
         Consolidated Statement of Income ....................................62
         Consolidated Statement of Cash Flows ................................63
         Consolidated Statement of Shareholders' Equity ......................64
        Notes to Consolidated Financial Statements ........................65-83

(2)   Financial Statement Schedules

        Report of Independent Auditors on
         Financial Statement Schedule ........................................84
        Schedule II - ALLETE Valuation and
         Qualifying Accounts and Reserves ....................................84

      All other schedules have been omitted  either because  the information  is
      not required to be  reported  by  ALLETE or  because  the  information  is
      included  in the consolidated financial statements or the notes.

(3)   Exhibits including those incorporated by reference.

EXHIBIT NUMBER
--------------------------------------------------------------------------------
      *2(a) - First  Amended  and  Restated  Utility  System  Asset  Acquisition
              Agreement (without  Appendices),  entered into on August 25, 2003,
              by and among Hernando County,  the City of Marco Island,  the City
              of  Palm  Coast,  Osceola  County,  Florida  Governmental  Utility
              Authority,   the  City  of  Deltona  and  Florida  Water  Services
              Corporation  (filed as Exhibit 2 to the August 27,  2003 Form 8-K,
              File No. 1-3548).

       2(b) - Stock  Purchase Agreement (without  Exhibits and Schedules), dated
              November  20,   2003,   by  and  between   Philadelphia   Suburban
              Corporation (now Aqua America, Inc.),  as  Purchaser,  and  ALLETE
              Water  Services,  Inc., as Shareholder.

     *3(a)1 - Articles of Incorporation, amended and  restated as of May 8, 2001
              (filed as Exhibit 3(b) to the March 31, 2001 Form 10-Q,  File  No.
              1-3548).

     *3(a)2 - Amendment to Certificate of Assumed Name, filed with the Minnesota
              Secretary  of State on May 8, 2001  (filed as Exhibit  3(a) to the
              March 31, 2001 Form 10-Q, File No. 1-3548).

      *3(b) - Bylaws, as amended effective May 8, 2001 (filed as Exhibit 3(c) to
              the March 31, 2001 Form 10-Q, File No. 1-3548).

     *4(a)1 - Mortgage and Deed of Trust, dated as of September 1, 1945, between
              Minnesota  Power & Light  Company (now ALLETE) and The Bank of New
              York  (formerly  Irving  Trust  Company)  and Douglas J.  MacInnes
              (successor to Richard H. West),  Trustees  (filed as Exhibit 7(c),
              File No. 2-5865).

     *4(a)2 - Supplemental Indentures to ALLETE's Mortgage and Deed of Trust:

NUMBER             DATED AS OF            REFERENCE FILE             EXHIBIT
--------------------------------------------------------------------------------
First              March 1, 1949          2-7826                     7(b)
Second             July 1, 1951           2-9036                     7(c)
Third              March 1, 1957          2-13075                    2(c)
Fourth             January 1, 1968        2-27794                    2(c)
Fifth              April 1, 1971          2-39537                    2(c)
Sixth              August 1, 1975         2-54116                    2(c)
Seventh            September 1, 1976      2-57014                    2(c)
Eighth             September 1, 1977      2-59690                    2(c)
Ninth              April 1, 1978          2-60866                    2(c)
Tenth              August 1, 1978         2-62852                    2(d)2
Eleventh           December 1, 1982       2-56649                    4(a)3
Twelfth            April 1, 1987          33-30224                   4(a)3
Thirteenth         March 1, 1992          33-47438                   4(b)
Fourteenth         June 1, 1992           33-55240                   4(b) 
Fifteenth          July 1, 1992           33-55240                   4(c)
Sixteenth          July 1, 1992           33-55240                   4(d) 
Seventeenth        February 1, 1993       33-50143                   4(b)
Eighteenth         July 1, 1993           33-50143                   4(c) 
Nineteenth         February 1, 1997       1-3548
                                          (1996 Form 10-K)           4(a)3
Twentieth          November 1, 1997       1-3548
                                          (1997 Form 10-K)           4(a)3
Twenty-first       October 1, 2000        333-54330                  4(c)3
Twenty-second      July 1, 2003           1-3548
                                          (June 30, 2003 Form 10-Q)  4


     *4(b)1 - Indenture (for Unsecured Debt Securities), dated as of February 1,
              2001,  between  ALLETE and LaSalle Bank National  Association,  as
              Trustee (filed as Exhibit 4(d)1, File Nos. 333-57104, 333-57104-01
              and 333-57104-02).

     *4(b)2 - Officer's Certificate, dated  February 21, 2001, establishing  the
              terms of the 7.80% Senior Notes,  due February 15, 2008, of ALLETE
              (filed as Exhibit 4(d)2,  File Nos.  333-57104,  333-57104-01  and
              333-57104-02).

     *4(c)1 - Mortgage and Deed  of Trust,  dated  as of March 1, 1943,  between
              Superior Water,  Light and Power Company and Chemical Bank & Trust
              Company and Howard B. Smith,  as Trustees,  both succeeded by U.S.
              Bank Trust  N.A.,  as Trustee  (filed as  Exhibit  7(c),  File No.
              2-8668).

--------------------------------------------------------------------------------
                                     PAGE 55


<PAGE>
                              ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                                     PART IV

EXHIBIT NUMBER
--------------------------------------------------------------------------------
     *4(c)2 - Supplemental  Indentures  to  Superior  Water,  Light  and   Power
              Company's Mortgage and Deed of Trust:

NUMBER             DATED AS OF            REFERENCE FILE             EXHIBIT
--------------------------------------------------------------------------------
First              March 1, 1951          2-59690                    2(d)(1)
Second             March 1, 1962          2-27794                    2(d)1
Third              July 1, 1976           2-57478                    2(e)1
Fourth             March 1, 1985          2-78641                    4(b)
Fifth              December 1, 1992       1-3548
                                          (1992 Form 10-K)           4(b)1
Sixth              March 24, 1994         1-3548
                                          (1996 Form 10-K)           4(b)1
Seventh            November 1, 1994       1-3548
                                          (1996 Form 10-K)           4(b)2
Eighth             January 1, 1997        1-3548
                                          (1996 Form 10-K)           4(b)3

      *4(d) - Rights  Agreement, dated  as of  July 24, 1996, between  Minnesota
              Power & Light Company (now ALLETE) and the Corporate  Secretary of
              the Company,  as Rights Agent (filed as Exhibit 4 to the August 2,
              1996 Form 8-K, File No. 1-3548).

      *4(e) - Indenture (for Unsecured  Debt  Securities), dated  as  of May 15,
              1996,  between  ADESA  Corporation  and The Bank of New  York,  as
              Trustee,  relating to the ADESA  Corporation's 7.70% Senior Notes,
              Series A, Due 2006, and its 8.10% Senior Notes, Series B, Due 2010
              (filed as Exhibit 4(k) to the 1996 Form 10-K, File No. 1-3548).

      *4(f) - Guarantee of  the  Company, dated as of May 30, 1996, relating  to
              the ADESA  Corporation's  7.70% Senior  Notes,  Series A, Due 2006
              (filed as Exhibit 4(l) to the 1996 Form 10-K, File No. 1-3548).

      *4(g) - ADESA Corporation Officer's Certificate 1-D-1, dated May 30, 1996,
              relating to the ADESA  Corporation's 7.70% Senior Notes, Series A,
              Due 2006  (filed as Exhibit  4(m) to the 1996 Form 10-K,  File No.
              1-3548).

      *4(h) - Guarantee of Minnesota Power, Inc. (now ALLETE), dated as of March
              30, 2000,  relating to ADESA  Corporation's  8.10%  Senior  Notes,
              Series B, Due 2010  (filed as Exhibit  4(a) to the March 31,  2000
              Form 10-Q, File No. 1-3548).

      *4(i) - ADESA Corporation  Officer's Certificate 2-D-2, dated  as of March
              30, 2000,  relating to ADESA  Corporation's  8.10%  Senior  Notes,
              Series B, Due 2010  (filed as Exhibit  4(b) to the March 31,  2000
              Form 10-Q, File No. 1-3548).

     *10(a) - Participation Agreement, dated  as of  March 31, 2000, among Asset
              Holdings  III,  L.P.,  as Lessor,  ADESA  Corporation,  as Lessee,
              SunTrust Bank, as Credit Bank, and Cornerstone Funding Corporation
              I, as Issuer  (filed as Exhibit  10(a) to the March 31,  2000 Form
              10-Q, File No. 1-3548).

     *10(b) - Lease Agreement, dated as  of   March 31,  2000,   between   Asset
              Holdings III, L.P., as Lessor,  and ADESA  Corporation,  as Lessee
              (filed as Exhibit 10(b) to the March 31, 2000 Form 10-Q,  File No.
              1-3548).

     *10(c) - Reimbursement   Agreement, dated  as  of  March 31, 2000,  between
              SunTrust  Bank, as Credit Bank,  and Asset  Holdings III, L.P., as
              Lessor  (filed as Exhibit  10(c) to the March 31,  2000 Form 10-Q,
              File No. 1-3548).

     *10(d) - Appendix  I  to   Participation  Agreement,  Lease  Agreement  and
              Reimbursement Agreement, all which are dated as of March 31, 2000,
              relating to the Lease Financing for ADESA Corporation Auto Auction
              Facilities  (filed as  Exhibit  10(d) to the  March 31,  2000 Form
              10-Q, File No. 1-3548).

     *10(e) - Assignment of Lease and Rents (without Exhibit A) entered  into as
              of March 31, 2000,  by and between Asset  Holdings  III,  L.P., as
              Lessor,  and SunTrust Bank, as Credit Bank (filed as Exhibit 10(e)
              to the March 31, 2000 Form 10-Q, File No. 1-3548).

     *10(f) - Limited Guaranty of Minnesota Power, Inc.(now ALLETE), dated as of
              March  31,  2000,  relating  to  the  Lease  Financing  for  ADESA
              Corporation Auto Auction Facilities (filed as Exhibit 10(f) to the
              March 31, 2000 Form 10-Q, File No. 1-3548).

     *10(g) - Borrower  Promissory  Note,  dated  April 3, 2000,  between  Asset
              Holdings  III,   L.P.  as  Borrower,   and   Cornerstone   Funding
              Corporation  I, as Issuer  (filed as Exhibit 10(d) to the June 30,
              2003 Form 10-Q, File No. 1-3548).

     *10(h) - Trust Indenture (without Exhibits) between  Development  Authority
              of Fulton  County  and  SunTrust  Bank,  as  Trustee,  dated as of
              December  1, 2002  (filed as Exhibit  10(k) to the 2002 Form 10-K,
              File No. 1-3548).

     *10(i) - Bond  Purchase  Agreement (without  Exhibits),  dated  December 1,
              2002,  for the  Development  Authority  of Fulton  County  Taxable
              Economic  Development  Revenue Bonds (ADESA Atlanta,  LLC Project)
              Series  2002 (filed as Exhibit  10(l) to the 2002 Form 10-K,  File
              No. 1-3548).

--------------------------------------------------------------------------------
                                     PAGE 56


<PAGE>
                              ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                                     PART IV


EXHIBIT NUMBER
--------------------------------------------------------------------------------

     *10(j) - Lease Agreement (without Exhibits)  between Development  Authority
              of Fulton County and ADESA  Atlanta,  LLC, dated as of December 1,
              2002  (filed  as  Exhibit  10(m) to the 2002 Form  10-K,  File No.
              1-3548).

     *10(k) - Term Loan Agreement (without Exhibits), dated as of June 30, 2003,
              among ADESA  California,  Inc.,  as  Borrower,  the Lenders  Party
              Thereto,  and SunTrust  Bank,  as  Administrative  Agent (filed as
              Exhibit 10(b) to the June 30, 2003 Form 10-Q, File No. 1-3548).

     *10(l) - Guaranty  Agreement, dated  as of  June 30, 2003, among  ADESA and
              ALLETE, as Guarantors of ADESA California, Inc., the Borrower, and
              SunTrust Bank, the Administrative Agent (filed as Exhibit 10(c) to
              the June 30, 2003 Form 10-Q, File No. 1-3548).

     *10(m) - Receivables Purchase Agreement dated as of May 31, 2002, among AFC
              Funding Corporation, as Seller, Automotive Finance Corporation, as
              Servicer,  Fairway Finance Corporation,  as initial Purchaser, BMO
              Nesbitt Burns Corp.,  as initial Agent and as Purchaser  Agent for
              Fairway  Finance  Corporation  and XL Capital  Assurance  Inc., as
              Insurer  (filed as Exhibit  10(a) to the June 30,  2002 Form 10-Q,
              File No. 1-3548).

     *10(n) - Amended and Restated Purchase and Sale Agreement  dated as of  May
              31, 2002,  between AFC Funding  Corporation and Automotive Finance
              Corporation  (filed  as  Exhibit  10(b) to the June 30,  2002 Form
              10-Q, File No. 1-3548).

    *10(o)1 - Wholesale  Power Coordination and  Dispatch  Operating  Agreement,
              dated April 14, 2000,  between  Minnesota Power, Inc. (now ALLETE)
              and Split Rock Energy LLC (filed as Exhibit  10(a) to the June 30,
              2000 Form 10-Q, File No. 1-3548).

    *10(o)2 - Letter addressed to  the  Federal  Energy  Regulatory  Commission,
              dated April 21, 2000,  amending the Wholesale  Power  Coordination
              and Dispatch  Operating  Agreement,  dated April 14, 2000, between
              Minnesota  Power,  Inc.  (now  ALLETE)  and Split Rock  Energy LLC
              (filed as Exhibit  10(b) to the June 30, 2000 Form 10-Q,  File No.
              1-3548).

     10(o)3 - Amended   Wholesale  Power  Coordination  and  Dispatch  Operating
              Agreement,  dated January 30, 2004,  between Minnesota Power, Inc.
              (now ALLETE) and Split Rock Energy LLC.

      10(p) - Amended and  Restated Withdrawal  Agreement  (without Exhibits and
              Schedules),  dated  January 30, 2004,  by and between  Great River
              Energy and Minnesota Power (now ALLETE). [Portions of this exhibit
              have been omitted pursuant to a request for confidential treatment
              and filed separately with the SEC.]

     *10(q) - Power Purchase and  Sale Agreement,  dated  as  of  May 29,  1998,
              between  Minnesota  Power,  Inc.  (now  ALLETE)  and Square  Butte
              Electric  Cooperative  (filed as Exhibit  10 to the June 30,  1998
              Form 10-Q, File No. 1-3548).

     *10(r) - Credit  Agreement,  dated  as of  July 18, 2003, among  ALLETE, as
              Borrower,  Wells Fargo Bank,  National  Association,  as Sole Lead
              Arranger and Administrative  Agent, Bank One, N.A., as Syndication
              Agent, and the Other Financial  Institutions  Party Thereto (filed
              as Exhibit 10(a) to the June 30, 2003 Form 10-Q, File No. 1-3548).

      10(s) - Third  Amended  and  Restated  Committed  Facility Letter (without
              Exhibits),  dated  December 23, 2003,  to ALLETE from LaSalle Bank
              National Association, as Agent.

   +*10(t)1 - Minnesota Power (now ALLETE) Executive  Annual Incentive  Plan, as
              amended, effective January 1, 1999 with amendments through January
              2003  (filed as Exhibit 10 to the  September  30,  2003 Form 10-Q,
              File No. 1-3548).

    +10(t)2 - November  2003  Amendment  to  the  Minnesota   Power (now ALLETE)
              Executive Annual Incentive Plan.

     +10(u) - ALLETE and Affiliated Companies Supplemental Executive  Retirement
              Plan,  as  amended  and restated, effective January 1, 2004.

   +*10(v)1 - Executive Investment Plan-I, as  amended and  restated,  effective
              November  1, 1988  (filed as Exhibit  10(c) to the 1988 Form 10-K,
              File No. 1-3548).

    +10(v)2 - Amendments through   December  2003  to  the  Minnesota  Power and
              Affiliated Companies Executive Investment Plan-I.

   +*10(w)1 - Executive Investment Plan-II, as  amended and  restated, effective
              November  1, 1988  (filed as Exhibit  10(d) to the 1988 Form 10-K,
              File No. 1-3548).

--------------------------------------------------------------------------------
                                     PAGE 57


<PAGE>
                              ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                                     PART IV

EXHIBIT NUMBER
--------------------------------------------------------------------------------

    +10(w)2 - Amendments through  December  2003  to  the  Minnesota  Power  and
              Affiliated Companies Executive Investment Plan-II.

    +*10(x) - Deferred Compensation Trust  Agreement, as  amended and  restated,
              effective January 1, 1989 (filed as Exhibit 10(f) to the 1988 Form
              10-K, File No. 1-3548).

   +*10(y)1 - Minnesota   Power  (now  ALLETE)  Executive  Long-Term   Incentive
              Compensation  Plan,  effective  January 1, 1996  (filed as Exhibit
              10(a) to the June 30, 1996 Form 10-Q, File No. 1-3548).

   +*10(y)2 - Amendments through  January  2003  to  the  Minnesota  Power  (now
              ALLETE) Executive Long-Term Incentive  Compensation Plan (filed as
              Exhibit 10(z)2 to the 2002 Form 10-K, File No. 1-3548).

   +*10(z)1 - Minnesota  Power  (now  ALLETE)  Director  Stock  Plan,  effective
              January 1, 1995  (filed as  Exhibit 10 to the March 31,  1995 Form
              10-Q, File No.  1-3548).

    +10(z)2 - Amendments  through  December  2003 to  the  Minnesota  Power (now
              ALLETE) Director Stock Plan.

  +*10(aa)1 - Minnesota Power (now ALLETE) Director Compensation  Deferral  Plan
              Amended and Restated,  effective January 1, 1990 (filed as Exhibit
              10(ac) to the 2002 Form 10-K, File No. 1-3548).

   +10(aa)2 - October  2003  Amendment  to  the  Minnesota  Power   (now ALLETE)
              Director Compensation Deferral Plan.

         12 - Computation of Ratios of Earnings to Fixed Charges (Unaudited).

        *21 - Subsidiaries of the Registrant (reference is made to ALLETE's Form
              U-3A-2 for the year ended December 31, 2003, File No. 69-78).

      23(a) - Consent  of  Independent  Accountants.

      23(b) - Consent  of   General Counsel.

      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 Annual Report by the Chief Executive
              Officer and Chief Financial Officer Pursuant to Section 906 of the
              Sarbanes-Oxley Act of 2002.

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

*  Incorporated herein by reference as indicated.

+  Management contract or compensatory plan or arrangement required  to be filed
   as an exhibit to this report pursuant to Item 15(c) of Form 10-K.

(b)   Reports on Form 8-K.

      Report on Form 8-K filed October 15, 2003 with  respect  to  Item 5. Other
      Events and Regulation FD Disclosure.

      Report on Form 8-K filed October 24, 2003 with  respect  to  Item 5. Other
      Events and Regulation FD Disclosure and Item 7. Financial  Statements  and
      Exhibits.

      Report on Form 8-K filed October 30, 2003  with  respect to Item 5.  Other
      Events  and Regulation FD Disclosure.

      Report on Form 8-K filed October 31, 2003 with  respect  to  Item 5. Other
      Events and Regulation FD Disclosure.

      Report on Form 8-K filed November 6, 2003 with  respect  to  Item 5. Other
      Events and Regulation FD Disclosure.

      Report on Form 8-K filed November 13, 2003 with  respect  to Item 5. Other
      Events and Regulation FD Disclosure and  Item 7. Financial  Statements and
      Exhibits.

      Report  on  Form 8-K  filed December 5, 2003 with respect to Item 5. Other
      Events and Regulation FD Disclosure.

      Report  on Form 8-K filed January 26, 2004 with  respect to  Item 5. Other
      Events and Regulation FD Disclosure.

--------------------------------------------------------------------------------
                                     PAGE 58


<PAGE>
                              ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------

                                   SIGNATURES

   Pursuant  to the  requirements  of  Section  13 or  15(d)  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.

Dated: March 11, 2004                       By           David G. Gartzke
                                                 -------------------------------
                                                         David G. Gartzke
                                                             Chairman

   Pursuant to the  requirements  of the Securities  Exchange Act of 1934,  this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
               SIGNATURE                              TITLE                                     DATE      
-------------------------------------------------------------------------------------------------------------
<S>                                   <C>                                                 <C>
         David G. Gartzke                      Chairman and Director                      March 11, 2004
----------------------------------
         David G. Gartzke

         Donald J. Shippar            President and Chief Executive Officer               March 11, 2004
---------------------------------- 
         Donald J. Shippar

         James K. Vizanko                    Senior Vice President,                       March 11, 2004
----------------------------------
         James K. Vizanko             Chief Financial Officer and Treasurer

         Mark A. Schober               Senior Vice President and Controller               March 11, 2004
----------------------------------
         Mark A. Schober

         Wynn V. Bussmann                           Director                              March 11, 2004
----------------------------------
         Wynn V. Bussmann

         Thomas L. Cunningham                       Director                              March 11, 2004
----------------------------------
         Thomas L. Cunningham

         Dennis O. Green                            Director                              March 11, 2004
----------------------------------
         Dennis O. Green

         Peter J. Johnson                           Director                              March 11, 2004
----------------------------------
         Peter J. Johnson

         George L. Mayer                            Director                              March 11, 2004
----------------------------------
         George L. Mayer

         Jack I. Rajala                             Director                              March 11, 2004
----------------------------------
         Jack I. Rajala

         Nick Smith                                 Director                              March 11, 2004
----------------------------------
         Nick Smith

         Bruce W. Stender                           Director                              March 11, 2004
----------------------------------
         Bruce W. Stender

         Donald C. Wegmiller                        Director                              March 11, 2004
----------------------------------
         Donald C. Wegmiller

         Deborah L. Weinstein                       Director                              March 11, 2004
----------------------------------
         Deborah L. Weinstein
</TABLE>


--------------------------------------------------------------------------------
                                     PAGE 59


<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                                    REPORTS


REPORT OF INDEPENDENT AUDITORS
                                               [PRICEWATERHOUSECOOPERS LLP LOGO]
To the Shareholders and
Board of Directors of ALLETE, Inc.

   In our opinion,  the accompanying  consolidated balance sheet and the related
consolidated  statements of income,  of cash flows and of  shareholders'  equity
present fairly, in all material respects, the financial position of ALLETE, Inc.
and its  subsidiaries  at December  31, 2003 and 2002,  and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting  principles  generally accepted
in  the  United  States  of  America.   These   financial   statements  are  the
responsibility of the Company's management;  our responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  statements in  accordance  with  auditing  standards  generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe that our audits provide a reasonable basis for our opinion.
   As  discussed  in  Note 6  to  the  consolidated  financial  statements,  the
Company  adopted  Statement  of  Financial   Accounting   Standards,   No.  143,
"Accounting for Asset  Retirement  Obligations" on January 1, 2003. As discussed
in Notes 2 and 9 to the consolidated  financial statements,  the Company adopted
Statement  of  Financial  Accounting  Standards,  No. 142,  "Goodwill  and Other
Intangible Assets" on January 1, 2002.


PricewaterhouseCoopers LLP

Minneapolis, Minnesota
February 9, 2004, except as to Note 3 which is as of March 8, 2004


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

REPORT OF MANAGEMENT

   The consolidated  financial  statements and other financial  information were
prepared by management,  who is responsible for their integrity and objectivity.
The  financial  statements  have been  prepared  in  conformity  with  generally
accepted  accounting  principles and  necessarily  include some amounts that are
based on informed judgments and best estimates and assumptions of management.
   To meet management's  responsibilities with respect to financial information,
we maintain  and enforce a system of internal  accounting  controls  designed to
provide assurance,  on a cost effective basis, that transactions are carried out
in accordance with management's  authorizations  and that assets are safeguarded
against  loss from  unauthorized  use or  disposition.  The system  includes  an
organizational   structure   that  provides  an   appropriate   segregation   of
responsibilities,  careful selection and training of personnel, written policies
and  procedures,  and periodic  reviews by our  internal  audit  department.  In
addition,  we have  personnel  policies that require all employees to maintain a
high standard of ethical  conduct.  Management  believes the system is effective
and provides  reasonable  assurance that all transactions are properly  recorded
and have been executed in accordance with management's authorization. Management
modifies and improves our system of internal  accounting controls in response to
changes in business  conditions.  Our  internal  audit staff is charged with the
responsibility for determining compliance with our procedures.
   Six  of our  directors,  not  members  of  management,  serve  as  the  Audit
Committee.  Our  Board of  Directors,  through  the  Audit  Committee,  oversees
management's responsibilities for financial reporting. The Audit Committee meets
regularly with management, the internal auditors and the independent auditors to
discuss  auditing and financial  matters and to assure that each is carrying out
their responsibilities.  The internal auditors and the independent auditors have
full  and  free  access  to the  Audit  Committee  without  management  present.
PricewaterhouseCoopers  LLP,  independent  auditors,  are  engaged to express an
opinion on the financial statements. Their audit is conducted in accordance with
generally accepted auditing standards and includes a review of internal controls
and tests of transactions to the extent necessary to allow them to report on the
fairness of our operating results and financial condition.


David G. Gartzke

David G. Gartzke
Chairman


Donald Shippar

Donald J. Shippar
President and Chief Executive Officer


James Vizanko

James K. Vizanko
Chief Financial Officer


--------------------------------------------------------------------------------
                                    PAGE 60


<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                       CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
ALLETE CONSOLIDATED BALANCE SHEET
<CAPTION>
DECEMBER 31                                                           2003                 2002
==================================================================================================
MILLIONS
<S>                                                                <C>                   <C>

Assets
Current Assets
   Cash and Cash Equivalents                                       $  223.0              $  193.3
   Trading Securities                                                     -                   1.8
   Accounts Receivable - Net                                          403.8                 383.8
   Inventories                                                         37.9                  36.6
   Prepayments and Other                                               15.8                  14.1
   Discontinued Operations                                             14.9                  28.8
--------------------------------------------------------------------------------------------------
         Total Current Assets                                         695.4                 658.4
Property, Plant and Equipment - Net                                 1,499.0               1,364.7
Investments                                                           204.6                 170.9
Goodwill                                                              511.0                 502.0
Other Intangible Assets                                                33.3                  37.6
Other Assets                                                           70.1                  67.5
Discontinued Operations                                                87.9                 346.1
--------------------------------------------------------------------------------------------------
Total Assets                                                       $3,101.3              $3,147.2
--------------------------------------------------------------------------------------------------

Liabilities and Shareholders' Equity
Liabilities
Current Liabilities
   Accounts Payable                                                $  243.9              $  202.6
   Accrued Taxes, Interest and Dividends                               35.2                  36.4
   Notes Payable                                                       53.0                  74.5

   Long-Term Debt Due Within One Year                                  37.5                 283.7
   Other                                                              107.1                 111.3
   Discontinued Operations                                             49.5                  29.7
--------------------------------------------------------------------------------------------------
         Total Current Liabilities                                    526.2                 738.2
Long-Term Debt                                                        747.7                 696.4
Mandatorily Redeemable Preferred Securities                               -                  75.0
Accumulated Deferred Income Taxes                                     160.7                 139.8
Other Liabilities                                                     161.5                 137.6
Discontinued Operations                                                45.0                 127.8
Commitments and Contingencies
--------------------------------------------------------------------------------------------------
         Total Liabilities                                          1,641.1               1,914.8
--------------------------------------------------------------------------------------------------
Shareholders' Equity
Common Stock Without Par Value, 130.0 Shares Authorized
   87.3 and 85.6 Shares Outstanding                                   859.2                 814.9
Unearned ESOP Shares                                                  (45.4)                (49.0)
Accumulated Other Comprehensive Gain (Loss)                            14.5                 (22.2)
Retained Earnings                                                     631.9                 488.7
--------------------------------------------------------------------------------------------------
         Total Shareholders' Equity                                 1,460.2               1,232.4
--------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity                         $3,101.3              $3,147.2
==================================================================================================
                 The accompanying notes are an integral part of these statements.

</TABLE>


--------------------------------------------------------------------------------
                                    PAGE 61



<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                       CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
ALLETE CONSOLIDATED STATEMENT OF INCOME
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31                               2003          2002          2001
==================================================================================================
MILLIONS EXCEPT PER SHARE AMOUNTS
<S>                                                        <C>           <C>           <C>
Operating Revenue
      Energy Services
         Regulated Utility                                 $  512.8      $  505.6      $  538.7
         Nonregulated                                         146.8         120.4          80.0
      Automotive Services                                     922.3         835.8         832.1
      Investments                                              36.9          32.5          74.8
--------------------------------------------------------------------------------------------------
         Total Operating Revenue                            1,618.8       1,494.3       1,525.6
--------------------------------------------------------------------------------------------------
Operating Expenses
      Fuel and Purchased Power
         Regulated Utility                                    212.5         206.7         233.1
         Nonregulated                                          40.0          28.1             -
      Operations
         Regulated Utility                                    217.7         197.0         204.1
         Nonregulated                                          98.0         107.5          74.9
         Automotive and Investments                           749.0         693.4         728.3
      Interest                                                 66.6          70.5          83.0
--------------------------------------------------------------------------------------------------
         Total Operating Expenses                           1,383.8       1,303.2       1,323.4
--------------------------------------------------------------------------------------------------
Operating Income from Continuing Operations                   235.0         191.1         202.2
Income Tax Expense                                             91.9          72.2          73.3
--------------------------------------------------------------------------------------------------
Income from Continuing Operations                             143.1         118.9         128.9
Income from Discontinued Operations - Net of Tax               93.3          18.3           9.8
--------------------------------------------------------------------------------------------------
Net Income                                                 $  236.4      $  137.2      $  138.7
--------------------------------------------------------------------------------------------------
Average Shares of Common Stock
      Basic                                                    82.8          81.1          75.8
      Diluted                                                  83.3          81.7          76.5
--------------------------------------------------------------------------------------------------
Earnings Per Share of Common Stock
      Basic
         Continuing Operations                                $1.72         $1.47         $1.70
         Discontinued Operations                               1.13          0.22          0.13
--------------------------------------------------------------------------------------------------
                                                              $2.85         $1.69         $1.83
--------------------------------------------------------------------------------------------------
      Diluted
         Continuing Operations                                $1.72         $1.46         $1.68
         Discontinued Operations                               1.12          0.22          0.13
--------------------------------------------------------------------------------------------------
                                                              $2.84         $1.68         $1.81
--------------------------------------------------------------------------------------------------
Dividends Per Share of Common Stock                           $1.13         $1.10         $1.07
==================================================================================================
                 The accompanying notes are an integral part of these statements.
</TABLE>


--------------------------------------------------------------------------------
                                    PAGE 62

<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                       CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
ALLETE CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31                                    2003           2002           2001
=======================================================================================================
MILLIONS
<S>                                                              <C>            <C>           <C>
Operating Activities
   Net Income                                                    $ 236.4        $ 137.2       $ 138.7
   Gain on Sale of Plant                                          (141.5)             -             -
   Depreciation and Amortization                                    86.7           82.1         101.6
   Deferred Income Taxes                                            14.3           26.9          10.3
   Changes in Operating Assets and Liabilities - Net of the
      Effects of Acquisitions
           Trading Securities                                        1.8          153.8         (64.8)
           Accounts Receivable                                      (8.8)          74.9         (82.4)
           Inventories                                              (1.0)          (3.8)         (3.0)
           Prepayments and Other                                    (2.5)           2.0          (9.2)
           Accounts Payable                                         37.0          (38.0)        (23.9)
           Other Current Liabilities                                 7.3           (7.8)         16.4
   Other Assets                                                     (2.0)          (3.9)         (8.9)      
   Other Liabilities                                                18.1           29.6          28.8
-------------------------------------------------------------------------------------------------------
           Cash from Operating Activities                          245.8          453.0         103.6
-------------------------------------------------------------------------------------------------------
Investing Activities    
   Proceeds from Sale of Plant                                     444.7              -             -
   Proceeds from Sale of Available-For-Sale Securities               7.4            1.9           2.6
   Additions to Investments                                        (49.1)         (24.5)        (11.2)
   Additions to Property, Plant and Equipment                     (181.3)        (201.2)       (149.2)
   Acquisitions - Net of Cash Acquired                              (1.8)         (32.7)       (157.1)
   Other                                                            (7.6)          12.1          17.5
-------------------------------------------------------------------------------------------------------
           Cash from (for) Investing Activities                    212.3         (244.4)       (297.4)
-------------------------------------------------------------------------------------------------------
Financing Activities
   Issuance of Long-Term Debt                                       85.2           18.4         125.2
   Issuance of Common Stock                                         44.3           43.2         189.2
   Changes in Notes Payable - Net                                  (18.6)        (200.5)          5.5
   Reductions of Long-Term Debt                                   (413.4)         (14.5)        (18.1)
   Reductions of Mandatorily Redeemable Preferred Securities       (75.0)             -             -
   Dividends on Common Stock                                       (93.2)         (89.2)        (81.8)
-------------------------------------------------------------------------------------------------------
           Cash from (for) Financing Activities                   (470.7)        (242.6)        220.0
-------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash                             39.2            2.7         (11.3)
-------------------------------------------------------------------------------------------------------
Change in Cash and Cash Equivalents                                 26.6          (31.3)         14.9
Cash and Cash Equivalents at Beginning of Period <F1>              202.9          234.2         219.3
-------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period <F1>                  $ 229.5        $ 202.9       $ 234.2
-------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information
   Cash Paid During the Period for
      Interest - Net of Capitalized                                $69.2          $71.9         $84.2
      Income Taxes                                                 $87.4          $49.2         $60.5
=======================================================================================================
<FN>
<F1> Included $6.5 million  of  cash  from Discontinued Operations at December 31, 2003 ($9.6 million at 
     December 31, 2002).
</FN>
                     The accompanying notes are an integral part of these statements.
</TABLE>


--------------------------------------------------------------------------------
                                    PAGE 63

<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                       CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
ALLETE CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<CAPTION>
                                                                                        ACCUMULATED
                                                           TOTAL                           OTHER        UNEARNED
                                                       SHAREHOLDERS'     RETAINED      COMPREHENSIVE      ESOP       COMMON
                                                          EQUITY         EARNINGS      INCOME (LOSS)     SHARES       STOCK
=============================================================================================================================
MILLIONS
<S>                                                    <C>               <C>           <C>              <C>          <C>
Balance at December 31, 2000                            $  900.8          $383.8          $(4.2)        $(55.7)      $576.9

Comprehensive Income
    Net Income                                             138.7           138.7
    Other Comprehensive Income - Net of Tax
        Unrealized Gains on Securities - Net                 2.5                            2.5
        Interest Rate Swap                                  (1.5)                          (1.5)
        Foreign Currency Translation Adjustments           (11.3)                         (11.3)
                                                        --------
           Total Comprehensive Income                      128.4
Common Stock Issued - Net                                  193.4                                                      193.4
Dividends Declared                                         (81.8)          (81.8)
ESOP Shares Earned                                           3.0                                           3.0
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001                             1,143.8           440.7          (14.5)         (52.7)       770.3

Comprehensive Income
    Net Income                                             137.2           137.2
    Other Comprehensive Income - Net of Tax
        Unrealized Gains on Securities - Net                (8.1)                          (8.1)
        Interest Rate Swap                                   1.3                            1.3
        Foreign Currency Translation Adjustments             2.6                            2.6
        Additional Pension Liability                        (3.5)                          (3.5)
                                                        --------
           Total Comprehensive Income                      129.5
Common Stock Issued - Net                                   44.6                                                       44.6
Dividends Declared                                         (89.2)          (89.2)
ESOP Shares Earned                                           3.7                                           3.7
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002                             1,232.4           488.7          (22.2)         (49.0)       814.9

Comprehensive Income
    Net Income                                             236.4           236.4
    Other Comprehensive Income - Net of Tax
        Unrealized Gains on Securities - Net                 3.6                            3.6
        Interest Rate Swap                                   0.2                            0.2
        Foreign Currency Translation Adjustments            39.2                           39.2
        Additional Pension Liability                        (6.3)                          (6.3)
                                                        --------
           Total Comprehensive Income                      273.1
Common Stock Issued - Net                                   44.3                                                       44.3
Dividends Declared                                         (93.2)          (93.2)
ESOP Shares Earned                                           3.6                                           3.6
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003                            $1,460.2          $631.9          $14.5         $(45.4)      $859.2
=============================================================================================================================
                              The accompanying notes are an integral part of these statements.

</TABLE>



--------------------------------------------------------------------------------
                                    PAGE 64



<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                          NOTES TO FINANCIAL STATEMENTS

1  BUSINESS SEGMENTS

<TABLE>
BUSINESS SEGMENTS 
<CAPTION>
                                                                                                         INVESTMENTS
                                                                                                             AND
                                                                           ENERGY      AUTOMOTIVE         CORPORATE
FOR THE YEAR ENDED DECEMBER 31                          CONSOLIDATED      SERVICES      SERVICES           CHARGES
====================================================================================================================
MILLIONS
<S>                                                     <C>              <C>           <C>               <C>
2003
Operating Revenue                                         $1,618.8         $659.6         $922.3 <F3>      $ 36.9
Operation and Other Expense                                1,230.7          517.1          681.4             32.2
Depreciation and Amortization Expense                         86.5           51.1           35.3              0.1
Interest Expense                                              66.6           22.4           16.0             28.2
--------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) from Continuing Operations           235.0           69.0          189.6            (23.6)
Income Tax Expense (Benefit)                                  91.9           26.6           74.8             (9.5)
--------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations                     143.1           42.4          114.8            (14.1)
Income from Discontinued Operations - Net of Tax              93.3 <F1>         -            0.3                -
--------------------------------------------------------------------------------------------------------------------
Net Income                                                $  236.4 <F1>     $42.4         $115.1           $(14.1)
--------------------------------------------------------------------------------------------------------------------
Total Assets                                              $3,101.3 <F2>  $1,213.3       $1,632.7 <F4>      $152.5
Capital Expenditures                                        $136.3 <F2>     $73.6          $26.9                -
--------------------------------------------------------------------------------------------------------------------
2002
Operating Revenue                                         $1,494.3         $626.0         $835.8 <F3>      $ 32.5
Operation and Other Expense                                1,151.0          490.5          627.7             32.8
Depreciation and Amortization Expense                         81.7           48.8           32.8              0.1
Interest Expense                                              70.5           21.2           21.2             28.1
--------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) from Continuing Operations           191.1           65.5          154.1            (28.5)
Income Tax Expense (Benefit)                                  72.2           23.7           59.9            (11.4)
--------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations                     118.9           41.8           94.2            (17.1)
Income (Loss) from Discontinued Operations - Net of Tax       18.3 <F1>      (1.2)          (5.9)               -
--------------------------------------------------------------------------------------------------------------------
Net Income                                                $  137.2 <F1>     $40.6          $88.3           $(17.1)
--------------------------------------------------------------------------------------------------------------------
Total Assets                                              $3,147.2 <F2>  $1,150.9       $1,471.1 <F4>      $150.3
Capital Expenditures                                        $201.2 <F2>     $80.9          $66.5             $5.7
--------------------------------------------------------------------------------------------------------------------
2001
Operating Revenue                                         $1,525.6         $618.7         $832.1 <F3>       $74.8
Operation and Other Expense                                1,151.5          466.2          635.1             50.2
Depreciation and Amortization Expense                         88.9           45.9           42.7              0.3
Interest Expense                                              83.0           22.5           35.3             25.2
--------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) from Continuing Operations           202.2           84.1          119.0             (0.9)
Income Tax Expense (Benefit)                                  73.3           32.4           44.2             (3.3)
--------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations                            128.9           51.7           74.8              2.4
Income (Loss) from Discontinued Operations - Net of Tax        9.8 <F1>      (1.6)          (7.0)               -
--------------------------------------------------------------------------------------------------------------------
Net Income                                                  $138.7 <F1>     $50.1          $67.8             $2.4
--------------------------------------------------------------------------------------------------------------------
Total Assets                                              $3,282.5 <F2>  $1,049.1       $1,515.4 <F4>      $365.5 
Capital Expenditures                                        $149.2 <F2>     $59.9          $57.2                - 
====================================================================================================================
<FN>
<F1> Included $93.0 million of income from Water Services businesses ($25.4 million in 2002; $18.4 million in 2001).
<F2> Discontinued operations  represented  $102.8  million  of  total assets in 2003 ($374.9 million in 2002; $352.5 
     million in 2001) and $35.8 million of capital expenditures in 2003 ($48.1 million  in  2002;  $32.1  million in 
     2001).
<F3> Included $173.1 million of Canadian operating revenue in 2003 ($141.9 million in 2002; $139.4 million in 2001).
<F4> Included $220.1 million of Canadian assets in 2003 ($184.7 million in 2002; $187.6 million in 2001). 
</FN>
</TABLE>

--------------------------------------------------------------------------------
                                    PAGE 65



<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS

2  OPERATIONS AND SIGNIFICANT ACCOUNT POLICIES

   FINANCIAL STATEMENT PREPARATION.  References in this report to "we," "us" and
"our" are to ALLETE and its subsidiaries, collectively. We prepare our financial
statements in conformity with generally accepted  accounting  principles.  These
principles  require  management to make informed  judgments,  best estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses. Actual results could differ from those estimates.
   PRINCIPLES OF CONSOLIDATION.  Our consolidated  financial  statements include
the accounts of ALLETE and all of our majority owned subsidiary  companies.  All
material   intercompany  balances  and  transactions  have  been  eliminated  in
consolidation.  Information  for prior periods has been  reclassified to present
comparable information for all periods.
   BUSINESS  SEGMENTS.  Energy  Services and Automotive  Services  segments were
determined based on products and services provided. The Investment and Corporate
Charges segment was determined based on short-term corporate liquidity needs and
the need to provide financial flexibility to pursue strategic initiatives in the
other  business  segments.  We measure  performance  of our  operations  through
careful  budgeting and monitoring of contributions to consolidated net income by
each business segment. Discontinued Operations included financial results of our
Water  Services  businesses,  our vehicle  transport  and import businesses, and
our retail stores.
   ENERGY SERVICES. Energy Services is engaged in the generation,  transmission,
distribution  and  marketing  of  electricity,   as  well  as  coal  mining  and
telecommunications. 
   Minnesota Power, an operating  division of ALLETE,  and SWL&P, a wholly owned
subsidiary,  provide  regulated  utility  electric  service  to  149,000  retail
customers in northeastern  Minnesota and northwestern  Wisconsin.  Approximately
50% of regulated  utility  electric  sales are to large power  customers  (which
consists of five  taconite  producers,  four paper and pulp mills,  two pipeline
companies and one manufacturer) under all-requirements contracts with expiration
dates extending from March 2005 through April 2009.  Regulated  utility electric
rates  are under the  jurisdiction  of  various  state  and  federal  regulatory
authorities.  Billings  are  rendered on a cycle  basis.  Revenue is accrued for
service  provided  but not billed.  Regulated  utility  electric  rates  include
adjustment  clauses that bill or credit  customers for fuel and purchased energy
costs  above or below the base  levels in rate  schedules  and that bill  retail
customers for the recovery of CIP expenditures not collected in base rates.
   Minnesota Power and wholly owned subsidiary  Rainy River Energy,  through its
Kendall County power purchase  agreement,  also engage in nonregulated  electric
generation  and  power  marketing.  Nonregulated  generation  is  non-rate  base
generation sold at market-based rates to the wholesale market.
   BNI Coal,  a wholly  owned  subsidiary,  mines and sells  lignite coal to two
North Dakota mine-mouth  generating units, one of which is Square Butte.  Square
Butte supplies approximately 71% (323 MW) of its output to Minnesota Power under
a long-term contract. (See Note 15.)
   Enventis  Telecom,  a  wholly  owned  subsidiary,  is our  telecommunications
business  which  is  an  integrated  data  services   provider   offering  fiber
optic-based   communication   and  advanced  data  services  to  businesses  and
communities in Minnesota, Wisconsin and Missouri.
   Split Rock Energy is a joint venture between  Minnesota Power and Great River
Energy  from which we are  withdrawing.  Split Rock Energy was formed to combine
power supply  capabilities  and  customer  loads for power pool  operations  and
generation  outage  protection.  In response to the changing  strategies of both
parties, as of February 2004 we withdrew from active participation in Split Rock
Energy and will  terminate our ownership  interest upon receipt of FERC approval
which is expected in the first half  of 2004.  We  have  retained  some  of  the
benefits of the partnership,  such as joint load and capability reporting.  As a
result of  withdrawing  from active  participation,  we received a $10.0 million
distribution in February 2004  representing  the majority of our capital account
balance on the date of withdrawal.  The remaining balance in our capital account
will be  distributed  upon  FERC  approval.  Prior to  withdrawing  from  active
participation,  we accounted for our 50% ownership interest in Split Rock Energy
under the equity method of accounting.  For the year ended December 31, 2003 our
pre-tax  equity  income from Split Rock Energy was $2.9 million ($7.3 million in
2002;  $3.6  million in 2001).  We did not receive any cash  distributions  from
Split Rock  Energy in 2003  ($2.6  million in 2002;  $2.1  million in 2001).  We
purchased  power from Split Rock Energy to serve  native load  requirements  and
sold generation to Split Rock Energy.  Purchases and sales were at market rates.
In 2003 we made power  purchases  from Split Rock Energy of $50.9 million ($34.3
million in 2002;  $56.1 million in 2001) and power sales to Split Rock Energy of
$19.6 million ($14.5 million in 2002; $13.3 million in 2001).
   AUTOMOTIVE  SERVICES.  Automotive  Services  operates (through several wholly
owned  subsidiaries)  two main businesses that are integral parts of the vehicle
redistribution  industry: auctions and related  services, and dealer  financing.
   We are a service  provider  and do not  actually  buy and sell  vehicles.  We
provide auction, reconditioning, logistics, and other administrative outsourcing
services to wholesale  vehicle buyers and sellers for a fee. Buyers are licensed
franchised,  independent  and  wholesale  used vehicle  dealers,  while  sellers
include vehicle manufacturers, dealers, automotive fleet/lease companies, credit
unions  and other  financial  institutions,  finance  companies  and  rental car
companies. We also provide floorplan financing.

--------------------------------------------------------------------------------
                                    PAGE 66


<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS

   Revenue is  recognized  when the services we provide are  performed.  Revenue
includes the Company's  fees for such services and interest  earned on floorplan
receivables.  We do not report the gross sales price of the  vehicles in revenue
nor the related purchase price in operating expense.
   Wholesale  vehicle  auctions  include 53 used  vehicle  auctions,  27 salvage
vehicle auctions and other related  services.  Used vehicles are sold to dealers
through our used vehicle  auctions,  and salvage  vehicle  services are provided
primarily to insurance  companies  through our salvage  auctions.  Other related
services  include  inbound  and  outbound  logistics,  reconditioning,   vehicle
inspection and certification, and titling services.
   Dealer financing consists of AFC which provides  short-term inventory-secured
financing for used vehicle dealers who purchase vehicles at auctions. AFC has 80
loan  production  offices  located across North America.  These offices  provide
qualified  dealers  credit to purchase  vehicles at any of the 500 plus auctions
and other outside sources approved by AFC.
   AFC's revenue is comprised of gains on sales of receivables, and interest and
fee income.  Revenue from AFC was $104.0 million in 2003 ($98.6 million in 2002;
$91.7 million in 2001). As is customary for finance companies,  AFC's revenue is
reported net of interest  expense of $0.3 million in 2003 ($1.3 million in 2002;
$3.4 million in 2001) and is included in Operating Revenue - Automotive Services
on our  consolidated  statement of income.  Interest on finance  receivables  is
recognized  based  on the  number  of days the  vehicle  remains  financed.  AFC
generally sells its United States dollar denominated finance receivables through
a private securitization structure. Gains and losses on such sales are generally
recognized at the time of settlement  based on the difference  between the sales
proceeds and the allocated basis of the finance  receivables sold,  adjusted for
transaction fees.
   INVESTMENTS AND CORPORATE CHARGES.  Investments and Corporate Charges include
real estate  operations,  investments  in emerging  technologies  related to the
electric utility industry and general corporate  expenses,  including  interest,
not specifically related to any one business segment. Our real estate operations
include several wholly owned  subsidiaries  and an 80% ownership in Lehigh which
are consolidated in ALLETE's financial  statements.  All are Florida real estate
companies  principally engaged in real estate acquisition,  sales and investment
activities.  Full profit  recognition is recorded on sales upon closing provided
cash  collections  are  at  least  20% of  the  contract  price  and  the  other
requirements of GAAP concerning profit recognition are met.
   Investments  and  corporate  charges  included  Operation  and Other  Expense
totaling  $17.6 million in 2003 ($16.5  million in 2002;  $22.8 million in 2001)
for general corporate expenses such as employee salaries and benefits, and legal
and other outside  contract  service fees, and Interest Expense of $28.0 million
in 2003  ($28.1  million in 2002;  $25.2  million  in 2001).  Also  included  in
Investments and Corporate Charges was our trading securities portfolio which was
liquidated during the second half of 2002.
   PROPERTY, PLANT AND EQUIPMENT.  Property, plant and equipment are recorded at
original  cost  and  are  reported  on the  balance  sheet  net  of  accumulated
depreciation.  Expenditures  for  additions  and  significant  replacements  and
improvements  are  capitalized;  maintenance  and repair  costs are  expensed as
incurred.  Expenditures  for major plant  overhauls are also accounted for using
this same policy. Gains or losses on nonregulated property,  plant and equipment
are  recognized  when they are retired or otherwise  disposed of. When regulated
utility property,  plant and equipment are retired or otherwise  disposed of, no
gain or loss is recognized.
   LONG-LIVED ASSET  IMPAIRMENTS.  We periodically  review our long-lived assets
whenever  events  indicate  the  carrying  amount  of  the  assets  may  not  be
recoverable.  Excluding  impairment  losses recorded on certain  remaining water
assets held for sale,  as of December  31, 2003 no  write-downs  were  required.
   ACCOUNTS  RECEIVABLE.  Accounts  receivable are reported on the balance sheet
net of an  allowance  for  doubtful  accounts.  The  allowance  is  based on our
evaluation of the receivable portfolio under current conditions, the size of the
portfolio, overall portfolio quality, review of specific problems and such other
factors that in our judgment deserve recognition in estimating losses. 


<TABLE>
ACCOUNTS RECEIVABLE
<CAPTION>
DECEMBER 31                                              2003          2002
================================================================================
MILLIONS
<S>                                                     <C>           <C>
Trade Accounts Receivable                               $224.2        $214.9
   Less:Allowance for Doubtful Accounts                    8.4           8.8
--------------------------------------------------------------------------------
                                                         215.8         206.1
--------------------------------------------------------------------------------
Finance Receivables
   AFC - Net                                             187.0         177.3
   Real Estate - Net                                       1.0           0.4
--------------------------------------------------------------------------------
                                                         188.0         177.7
--------------------------------------------------------------------------------
Total Accounts Receivable - Net                         $403.8        $383.8
================================================================================
</TABLE>


   AFC  sells  the  majority  of  United  States   dollar  denominated   finance
receivables on a revolving basis to a wholly owned,  bankruptcy remote,  special
purpose  subsidiary that is consolidated  for accounting  purposes.  The special
purpose subsidiary has entered into a securitization agreement, which expires in
2005,  that allows for the revolving sale to a bank conduit  facility of up to a
maximum of $500 million in undivided interests in eligible finance  receivables.
The  outstanding  receivables  sold  and a cash  reserve  equal  to 1% of  total
receivables  sold serve as security  interest for the receivables that have been
sold to the bank conduit facility.

--------------------------------------------------------------------------------
                                    PAGE 67

<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS


<TABLE>
FINANCE RECEIVABLES MANAGED BY AFC
<CAPTION>
AT DECEMBER 31                                         TOTAL      DELINQUENT<F1>
================================================================================
MILLIONS
<S>                                                    <C>        <C>
2003
Finance Receivables Managed                            $538.8          $7.8
   Less: Amounts Sold to Bank Facility                  333.8
--------------------------------------------------------------------------------
Gross Finance Receivables Recognized                    205.0
   Less: Allowance for Doubtful Accounts                 18.0
--------------------------------------------------------------------------------
Net Finance Receivables Recognized                     $187.0
--------------------------------------------------------------------------------
2002
Finance Receivables Managed                            $501.1          $8.0
   Less: Amounts Sold to Bank Facility                  303.8
--------------------------------------------------------------------------------
Gross Finance Receivables Recognized                    197.3
   Less: Allowance for Doubtful Accounts                 20.0
--------------------------------------------------------------------------------
Net Finance Receivables Recognized                     $177.3
--------------------------------------------------------------------------------
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31                         2003          2002
--------------------------------------------------------------------------------
MILLIONS
<S>                                                  <C>           <C>
Net Credit Losses from Total
  Receivables Managed                                   $14.2         $14.7
Total Proceeds from Sales of
  Finance Receivables                                $4,134.3      $4,142.3
================================================================================
<FN>
<F1>  Defined as 60 days or more past due.
</FN>
</TABLE>


   AFC's  proceeds from the revolving  sale of  receivables  to the bank conduit
facility  were  used to repay  borrowings  from  ALLETE  and  fund new  loans to
customers.  AFC  and  the  special  purpose  subsidiary  must  maintain  certain
financial  covenants such as minimum tangible net worth to comply with the terms
of the securitization  agreement. AFC has historically performed better than the
covenant  thresholds set forth in the securitization  agreement,  and we are not
aware of any changing circumstances that would put AFC in noncompliance with the
covenants.
   INVENTORIES.  Inventories,  which  include fuel,  material and supplies,  are
stated at the lower of cost or market.  Cost is  determined  by the average cost
method.
   GOODWILL.  All  goodwill  relates  to the  Automotive  Services  segment  and
represents  the excess of cost over  identifiable  tangible and  intangible  net
assets of  businesses  acquired.  As required by SFAS 142,  "Goodwill  and Other
Intangible Assets," goodwill is no longer amortized after 2001. Prior to 2002 we
amortized goodwill on a straight-line basis over 40 years.  
   UNAMORTIZED  EXPENSE,  DISCOUNT  AND PREMIUM ON DEBT.  Expense,  discount and
premium on debt are deferred and amortized over the lives of the related issues.
   CASH AND  CASH  EQUIVALENTS.  We  consider  all  investments  purchased  with
maturities of three months or less to be cash equivalents.
   ACCOUNTING  FOR  STOCK-BASED  COMPENSATION.  We have  elected to account  for
stock-based  compensation in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees."  Accordingly,  we recognize  expense for performance
share awards  granted and do not  recognize  expense for employee  stock options
granted.  The after-tax  expense  recognized  for  performance  share awards was
approximately  $3 million  in 2003 ($4  million in 2002).  The  following  table
illustrates  the effect on net income and  earnings  per share if we had applied
the fair value recognition  provisions of SFAS 123,  "Accounting for Stock-Based
Compensation." 


<TABLE>
<CAPTION>
FOR THE YEAR ENDED 
DECEMBER 31                                         2003       2002      2001 
================================================================================
MILLIONS EXCEPT PER SHARE AMOUNTS
<S>                                                <C>        <C>       <C>   
Net Income
  As Reported                                      $236.4     $137.2    $138.7
  Less: Employee Stock Compensation
        Expense Determined Under
        SFAS 123 - Net of Tax                        (0.5)      (1.4)      0.8
--------------------------------------------------------------------------------
  Pro Forma Net Income                             $235.9     $135.8    $139.5
--------------------------------------------------------------------------------
Basic Earnings Per Share
  As Reported                                       $2.85      $1.69     $1.83
  Pro Forma                                         $2.85      $1.67     $1.84
--------------------------------------------------------------------------------
Diluted Earnings Per Share
  As Reported                                       $2.84      $1.68     $1.81
  Pro Forma                                         $2.83      $1.66     $1.82
================================================================================
</TABLE>


   In the  previous  table,  the  expense for  employee  stock  options  granted
determined under SFAS 123 was calculated using the Black-Scholes  option pricing
model and the following assumptions:


<TABLE>
<CAPTION>
                                            2003         2002          2001
================================================================================
<S>                                        <C>           <C>          <C> 
Risk-Free Interest Rate                     3.1%          4.4%         5.0%
Expected Life - Years                          5             5            5
Expected Volatility                        25.2%         24.2%        22.2%
Dividend Growth Rate                          2%            2%           2%
================================================================================
</TABLE>


   FOREIGN  CURRENCY  TRANSLATION.  Results of  operations  for our Canadian and
Mexican subsidiaries are translated into United States dollars using the average
exchange rates during the period.  Assets and  liabilities  are translated  into
United  States  dollars  using the  exchange  rate on the  balance  sheet  date.
Resulting  translation   adjustments  are  recorded  in  the  Accumulated  Other
Comprehensive  Gain (Loss) section of  Shareholders'  Equity on our consolidated
balance sheet.
   ENVIRONMENTAL  LIABILITIES.  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.


--------------------------------------------------------------------------------
                                    PAGE 68


<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS


   INCOME TAXES. We file a consolidated federal income tax return.  Income taxes
are allocated to each subsidiary  based on their taxable income.  We account for
income taxes using the liability  method as prescribed by SFAS 109,  "Accounting
for Income Taxes." Under the liability  method,  deferred income tax liabilities
are  established  for all  temporary  differences  in the book and tax  basis of
assets and liabilities  based upon enacted tax laws and rates  applicable to the
periods in which the taxes become  payable.  Due to the effects of regulation on
Minnesota Power, certain adjustments made to deferred income taxes are, in turn,
recorded as regulatory  assets or liabilities.  Investment tax credits have been
recorded as deferred  credits and are being amortized to income tax expense over
the service lives of the related property.
   EXCISE  TAXES.  We  collect  an  immaterial  amount of excise  taxes from our
customers levied by government  entities.  These taxes are stated  separately on
the billing to the  customer  and  recorded as a liability to be remitted to the
government  entity.  We account for the collection and payment of these taxes on
the net basis and neither the amounts  collected  or paid are  reflected  on our
consolidated statement of income.
   NEW ACCOUNTING STANDARDS. In January 2004 the FASB issued FASB Staff Position
SFAS 106-1,  "Accounting  and  Disclosure  Requirements  Related to the Medicare
Prescription Drug,  Improvement and Modernization Act of 2003" (Act). This Staff
Position allows employers who sponsor a postretirement health plan that provides
prescription  drug  benefits  to defer  recognizing  the  effects  of the Act in
accounting   for  its  plan  under   SFAS  106,   "Employers'   Accounting   for
Postretirement  Benefits Other Than  Pensions"  until  authoritative  accounting
guidance is issued.  We provide  postretirement  health  benefits  that  include
prescription  drug benefits,  and in accordance with this Staff  Position,  have
elected not to reflect the impact of the Act in our 2003  financial  statements.
We expect the Act will  eventually  reduce our costs for  postretirement  health
benefits and are reviewing the impact on our accumulated plan benefit obligation
and expense going forward.
   In May 2003 the FASB  issued  SFAS 150,  "Accounting  for  Certain  Financial
Instruments  with  Characteristics  of both Liabilities and Equity." In general,
SFAS 150  established  standards for  classification  and measurement of certain
financial  instruments with the  characteristics of both liabilities and equity.
Mandatorily  redeemable financial  instruments must be classified as a liability
and the related  payments  must be reported as interest  expense.  The new rules
became effective in the third quarter of 2003 for previously  existing financial
instruments.  Beginning  with the third  quarter of 2003,  we  reclassified  our
Mandatorily  Redeemable  Preferred  Securities  as  a  long-term  liability  and
reclassified  the  quarterly  distributions  as  interest  expense.  This  was a
reclassification  only  and  did not  impact  our  results  of  operations.  The
Mandatorily Redeemable Preferred Securities were redeemed in December 2003.
   In January  2003 the FASB issued  Interpretation  No. 46,  "Consolidation  of
Variable Interest  Entities." In general, a variable interest entity is one with
equity  investors  that do not have voting  rights or do not provide  sufficient
financial  resources  for the entity to support  its  activities.  Under the new
rules,  variable interest entities are consolidated by the party that is subject
to the  majority of the risk of loss or entitled to the majority of the residual
returns. In December 2003 the FASB issued  Interpretation No. 46R to replace and
clarify some of the provisions of  Interpretation  No. 46. Under  Interpretation
46R,  the rules  became  effective  on December 15, 2003 for interest in certain
structures,  and March 15, 2004 for interest in all other structures. We are not
a party to any  variable  interest  entity  required  to be  consolidated  under
Interpretation No. 46R.

3  SPIN-OFF AND IPO OF AUTOMOTIVE SERVICES

   In October 2003 our Board of Directors  approved a plan to spin off to ALLETE
shareholders  our  Automotive  Services  business  which will  become a publicly
traded  company  doing  business as ADESA.  The spin-off is expected to take the
form of a tax-free  stock dividend to ALLETE's  shareholders,  who would receive
one ADESA share for each share of ALLETE stock they own. The spin-off is subject
to the  approval of the final plan by  ALLETE's  Board of  Directors,  favorable
market conditions, receipt of tax opinions, satisfaction of SEC requirements and
other  customary  conditions,  and is expected to occur in the third  quarter of
2004. In accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived   Assets,"  we  will  report  the  Automotive  Services  business  in
discontinued operations after the spin-off.
   In March 2004 our Board of  Directors  approved  an initial  public  offering
(IPO) of approximately $150 million in common shares of ADESA, representing less
than 20% of all ADESA Common stock  outstanding.  A  registration  statement was
filed with the SEC in March 2004,  with the sale of ADESA stock expected to take
place as soon as practical after the registration  statement becomes  effective.
Subsequent to the IPO, ALLETE will continue to own and consolidate the remaining
portion of ADESA until consummation of the spin-off.

4  DISCONTINUED OPERATIONS

   In 2002 we began to execute plans developed in a strategic  review of all our
businesses to unlock  shareholder value not reflected in the price of our common
stock.  Businesses  identified  as having more value if  operated  by  potential
purchasers  rather than by us include our Water Services  businesses in Florida,
which were under imminent threats of  condemnation,  North Carolina and Georgia,
and our vehicle transport  business.  We sold our vehicle transport business and
exited  our  retail  stores at the end of first  quarter  2002,  and  exited our
vehicle import business in the first quarter of 2003.
   The December  2002 asset  purchase  agreement  Florida  Water signed with the
Florida Water Services Authority, a governmental authority formed under the laws
of the state of Florida,  was  terminated by Florida Water in March 2003 after a
Florida  court  ruling  delayed the sale.  Selling  costs  associated  with this
terminated  transaction were expensed in 2003 and are included in Gain (Loss) on
Disposal in the following table.


--------------------------------------------------------------------------------
                                    PAGE 69


<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS

   During 2003, we sold, under  condemnation or imminent threat of condemnation,
substantially  all of our water  assets in Florida  for a total  sales  price of
approximately  $445  million.  In addition,  we reached an agreement to sell our
North Carolina water assets for $48 million and the assumption of  approximately
$28  million  in debt by the  purchaser.  The North  Carolina  sale is  awaiting
approval of the NCUC and is expected to close in mid-2004. We expect to sell our
remaining water assets in Florida and Georgia in 2004.
   Earnings from Discontinued  Operations for 2003 included a $71.6 million,  or
$0.86  per  share,  after-tax  gain on the sale of  substantially  all our Water
Services businesses.  The gain was net of all selling,  transaction and employee
termination benefit expenses,  as well as impairment losses on certain remaining
assets. In accordance with SFAS 144,  "Accounting for the Impairment or Disposal
of Long-Lived Assets," we recorded an impairment loss on certain remaining water
assets  where the fair  value,  less costs to sell,  was less than our  carrying
amount.
   The net cash proceeds from the sale of all water  assets,  after  transaction
costs,  retirement of most Florida  Water debt and payment of income taxes,  are
expected to be  approximately  $300 million.  These net proceeds have been,  and
will be, used to retire debt at ALLETE.


<TABLE>
SUMMARY OF DISCONTINUED OPERATIONS
================================================================================
MILLIONS
INCOME STATEMENT
<CAPTION>
YEAR ENDED DECEMBER 31                      2003           2002        2001
--------------------------------------------------------------------------------
<S>                                        <C>            <C>         <C>
Operating Revenue                          $109.2         $134.0      $149.3
Pre-Tax Income
     from Operations                       $ 32.8          $36.9       $23.8
Income Tax Expense                           12.4           14.7         9.6
--------------------------------------------------------------------------------
                                             20.4           22.2        14.2
--------------------------------------------------------------------------------
Gain (Loss) on Disposal                     112.1 <F1>      (5.8)       (6.8)
Income Tax Expense (Benefit)                 39.2           (1.9)       (2.4)
--------------------------------------------------------------------------------
                                             72.9           (3.9)       (4.4)
--------------------------------------------------------------------------------
Income from
     Discontinued Operations               $ 93.3          $18.3       $ 9.8
--------------------------------------------------------------------------------
<FN>
<F1> Included a $2.0 million recovery from a settlement related to the 2002 sale
     of our vehicle transport business. 
</FN>

<CAPTION>
BALANCE SHEET INFORMATION

DECEMBER 31                                                2003        2002
--------------------------------------------------------------------------------
<S>                                                       <C>         <C>
Assets of Discontinued Operations
      Cash and Cash Equivalents                           $  6.5      $  9.6
      Other Current Assets                                   8.4        19.2
      Property, Plant and Equipment                         81.2       311.6
      Other Assets                                           6.7        34.5
--------------------------------------------------------------------------------
                                                          $102.8      $374.9
--------------------------------------------------------------------------------
Liabilities of Discontinued Operations
      Current Liabilities                                  $49.5      $ 29.7
      Long-Term Debt                                        19.9        90.7
      Other Liabilities                                     25.1        37.1
--------------------------------------------------------------------------------
                                                           $94.5      $157.5
================================================================================
</TABLE>


   In October  2003 the FPSC voted to initiate a proceeding  to examine  whether
the sale of Florida  Water's  assets  involves a gain that should be shared with
Florida Water's  customers.  The question raised is whether the entire gain from
the asset sales should go to Florida Water and its shareholders, or should it be
shared with customers.  In November 2003 the FPSC issued a final order regarding
a similar  gain on sale issue for  Utilities,  Inc.  In that order the FPSC made
several  findings that could be helpful to Florida  Water's case including among
others;  that  courts  have  found  that  rates  paid by  customers  do not vest
ratepayers  with ownership  rights to the property used to render  service,  and
shareholders  bear the risk of gain or loss associated with  investments made to
provide  service.  Florida Water  intends to vigorously  contest any decision to
seek sharing of the gain with customers.  Florida Water is unable to predict the
outcome of this proceeding.

5  ACQUISITIONS

   ADESA AUCTION FACILITIES.  In January 2001 we acquired all of the outstanding
stock of ComSearch in exchange for ALLETE common stock and paid cash to purchase
all of the assets of Auto  Placement  Center (now ADESA Impact) in  transactions
with an aggregate value of $62.4 million. In May 2001 ADESA purchased the assets
of the I-44 Auto Auction in Tulsa,  Oklahoma.  ADESA Impact and ADESA Tulsa were
accounted for using the purchase method and financial results have been included
in our consolidated  financial statements since the date of purchase.  Pro forma
financial results were not material. ComSearch was accounted for as a pooling of
interests. Financial results for prior periods have not been restated to reflect
this pooling due to immateriality. 
   ACQUISITION OF ENVENTIS, INC. In July 2001 we acquired Enventis, Inc., a data
network systems  provider  headquartered  in the  Minneapolis-St.  Paul area. In
connection  with this  acquisition,  we issued  310,878  shares of ALLETE common
stock.  Enventis was accounted for as a pooling of interests.  Financial results
for  prior  periods  have not been  restated  to  reflect  this  pooling  due to
immateriality.
   ACQUISITION  OF  GENERATING  FACILITY.  In October  2001 we acquired  certain
non-mining  properties from LTV and  Cleveland-Cliffs  Inc. for $75 million. The
non-mining  properties  included  a  200  MW  nonregulated  electric  generating
facility located at Taconite Harbor in northeastern Minnesota.
   REAL  ESTATE  ACQUISITIONS.  In  December  2002  our real  estate  subsidiary
purchased  additional  land  near  Palm  Coast,  Florida.  The  transaction  was
accounted for using the purchase method.
   In  September  2001 our real estate  subsidiary  purchased  Winter Haven Citi
Centre, a retail shopping center.  In December 2001 and January 2002 real estate
subsidiaries   purchased   additional  land  in  Palm  Coast,   Florida.   These
transactions had a combined purchase price of approximately $31 million and were
accounted for using the purchase method.


--------------------------------------------------------------------------------
                                    PAGE 70


<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS


6  PROPERTY, PLANT AND EQUIPMENT


<TABLE>
PROPERTY, PLANT AND EQUIPMENT
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31                         2003             2002
================================================================================
MILLIONS
<S>                                                  <C>              <C>
Energy Services Regulated Utility                    $1,475.7         $1,433.1
Construction Work in Progress                            11.9             13.3
Accumulated Depreciation                               (692.3)          (679.5)
--------------------------------------------------------------------------------
  Energy Services Regulated
    Utility Plant - Net                                 795.3            766.9
--------------------------------------------------------------------------------
Energy Services Nonregulated                            161.2            153.4
Construction Work in Progress                             1.6              4.1
Accumulated Depreciation                                (42.8)           (48.0)
--------------------------------------------------------------------------------
  Energy Services Nonregulated
    Plant - Net                                         120.0            109.5
--------------------------------------------------------------------------------
Automotive Services                                     680.5            525.2
Construction Work in Progress                             2.8             38.5
Accumulated Depreciation                               (103.6)           (79.5)
--------------------------------------------------------------------------------
  Automotive Services Plant - Net                       579.7            484.2
--------------------------------------------------------------------------------
Other Plant - Net                                         4.0              4.1
--------------------------------------------------------------------------------
  Property, Plant and Equipment - Net                $1,499.0         $1,364.7
================================================================================
</TABLE>


   Depreciation  is computed using the  straight-line  method over the estimated
useful  lives of the  various  classes  of  plant.  The  MPUC and the PSCW  have
approved depreciation rates for our Energy Services utility plant.


<TABLE>
ESTIMATED USEFUL LIVES OF PROPERTY, PLANT AND EQUIPMENT
<CAPTION>
================================================================================
<S>                                                     <C>
Energy Services Regulated Utility
    Generation                                           5 to 30 years
    Transmission                                        40 to 60 years
    Distribution                                        30 to 70 years

Energy Services Nonregulated                             5 to 35 years

Automotive Services
    Building and Improvements                            5 to 40 years
    Other                                                2 to 10 years
================================================================================
</TABLE>


   ASSET RETIREMENT OBLIGATIONS.  Effective January 1, 2003 we adopted SFAS 143,
"Accounting  for  Asset  Retirement   Obligations."  Under  the  new  accounting
standard,  we  recognize,  at  fair  value,   obligations  associated  with  the
retirement  of tangible  long-lived  assets  that  result from the  acquisition,
construction or development and/or normal operation of the asset. The associated
retirement  costs are  capitalized as part of the related  long-lived  asset and
depreciated  over the useful  life of the asset.  Asset  retirement  obligations
relate  primarily  to  the  decommissioning  of  our  utility  steam  generating
facilities and reclamation at BNI Coal, and are included in Other Liabilities on
our  consolidated  balance  sheet.  Prior to the  adoption of SFAS 143,  utility
decommissioning   obligations  were  accrued  through  depreciation  expense  at
depreciation  rates approved by the MPUC.  Upon  implementation  of SFAS 143, we
reclassified  previously recorded  liabilities of $12.5 million from Accumulated
Depreciation and capitalized a net asset retirement cost of $6.7 million.


<TABLE>
ASSET RETIREMENT OBLIGATION
<CAPTION>
================================================================================
MILLIONS
<S>                                                             <C>
Obligation at December 31, 2002                                     -
Initial Obligation Upon Adoption of SFAS 143                    $19.0
Accretion Expense                                                 0.7
Additional Liabilities Incurred in 2003                           1.0
--------------------------------------------------------------------------------
Obligation at December 31, 2003                                 $20.7
================================================================================
</TABLE>


7  REGULATORY MATTERS

   We file for periodic rate  revisions  with the MPUC, the FERC and other state
regulatory  authorities.  Interim  rates in  Minnesota  are placed into  effect,
subject to refund with  interest,  pending a final  decision by the  appropriate
commission. In 2003, 29% of our consolidated operating revenue (32% in 2002; 31%
in 2001) was under regulatory authority.  The MPUC had regulatory authority over
approximately  23% in 2003 (25% in 2002 and 2001) of our consolidated  operating
revenue.
   ELECTRIC  RATES.  New  federal  legislation  and FERC  regulations  have been
proposed that aim to maintain  reliability,  assure adequate energy supply,  and
address  wholesale price volatility  while  encouraging  wholesale  competition.
Legislation  or  regulation  that  initiates a process  which may lead to retail
customer choice of their electric service  provider  currently lacks momentum in
both Minnesota and Wisconsin. Legislative and regulatory activity as well as the
actions of competitors  affect the way Minnesota Power  strategically  plans for
its future. We cannot predict the timing or substance of any future  legislation
or regulation.
   DEFERRED REGULATORY CHARGES AND CREDITS. Our regulated utility operations are
subject to the  provisions  of SFAS 71,  "Accounting  for the Effects of Certain
Types of  Regulation."  We capitalize as deferred  regulatory  charges  incurred
costs  which  are  probable  of  recovery  in  future  utility  rates.  Deferred
regulatory  credits  represent  amounts  expected to be credited to customers in
rates.  Deferred regulatory charges and credits are included in other assets and
other liabilities on our consolidated balance sheet.


<TABLE>
DEFERRED REGULATORY CHARGES AND CREDITS 
<CAPTION>
DECEMBER 31                                             2003            2002 
================================================================================
MILLIONS 
<S>                                                   <C>              <C>
Deferred Charges
     Income Taxes                                     $ 14.1           $ 11.8
     Conservation Improvement Programs                   1.5              0.1
     Premium on Reacquired Debt                          3.8              3.9
     Other                                               6.8              4.2
--------------------------------------------------------------------------------
                                                        26.2             20.0
Deferred Credits - Income Taxes                         39.3             39.5
--------------------------------------------------------------------------------
Net Deferred Regulatory Liabilities                   $(13.1)          $(19.5)
================================================================================
</TABLE>



--------------------------------------------------------------------------------
                                    PAGE 71



<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS

8  FINANCIAL INSTRUMENTS

   SECURITIES INVESTMENTS.  At December 31, 2003 Investments included securities
accounted  for as  available-for-sale  under SFAS 115,  "Accounting  for Certain
Investments  in Debt and Equity  Securities,"  and  securities  in our  emerging
technology  portfolio accounted for under the cost method.  Investment gains and
losses were  included in Operating  Revenue -  Investments  on our  consolidated
income statement.
   At December 31, 2003 our available-for-sale securities portfolio consisted of
securities in a grantor trust  established  to fund certain  employee  benefits.
Available-for-sale  securities are recorded at fair value with unrealized  gains
and losses  included in  accumulated  other  comprehensive  income,  net of tax.
Unrealized  losses that are other than temporary are recognized in earnings.  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 the
continued  viability of products offered,  cash flow, share price trends and the
impact of overall market conditions. As a result of our periodic assessments, we
did not record any  impairment  write-down on  available-for-sale  securities in
2003 or 2002.  During  the second  quarter  of 2003 we sold the  publicly-traded
investments  held in our emerging  technology  portfolio  and  recognized a $2.3
million after-tax loss. These  publicly-traded  emerging technology  investments
were accounted for as available-for-sale securities prior to sale.


<TABLE>
AVAILABLE-FOR-SALE SECURITIES 
<CAPTION>
================================================================================
MILLIONS
                                                  GROSS
                                               UNREALIZED                FAIR
AT DECEMBER 31           COST              GAIN         (LOSS)           VALUE
--------------------------------------------------------------------------------
<S>                     <C>               <C>           <C>              <C>
2003                    $18.8              $1.4             -            $20.2
2002                    $25.4              $0.7         $(5.2)           $20.9
2001                    $18.1             $10.3         $(1.9)           $26.5
--------------------------------------------------------------------------------
<CAPTION>
                                                                       NET
                                                                    UNREALIZED
                                                                    GAIN (LOSS)
                                                 GROSS               IN OTHER
YEAR ENDED              SALES                   REALIZED           COMPREHENSIVE
DECEMBER 31            PROCEEDS            GAIN         (LOSS)        INCOME
--------------------------------------------------------------------------------
<S>                    <C>                 <C>          <C>        <C>
2003                     $6.4              $1.2         $(4.7)          $2.4
2002                    $12.1              $1.0             -         $(11.8)
2001                        -                 -             -           $3.6
================================================================================
</TABLE>


   As part of our  emerging  technology  portfolio,  we  have  several  minority
investments in venture capital funds and privately-held start-up companies.  The
total carrying value of these investments was $37.5 million at December 31, 2003
($38.7  million at December 31, 2002).  Our policy is to quarterly  review these
investments  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. We did not record any impairment loss on these
investments in 2003 ($1.5 million pretax in 2002; $0.2 million pretax in 2001).
   During  the  second  half of 2002 we  substantially  liquidated  our  trading
securities  portfolio  and  incurred a $2.9  million  after-tax  loss.  Prior to
liquidation,  the trading securities portfolio consisted primarily of the common
stock of various publicly traded companies and was included in current assets at
fair  value.  Changes in fair value were  recognized  in  earnings,  and the net
unrealized gain included in 2001 income was $0.9 million.
   FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET RISKS. In October 2001 we entered
into an interest rate swap agreement  which expired in January 2003. We have not
entered into any new interest rate swap agreements.
   FAIR VALUE OF FINANCIAL  INSTRUMENTS.  With the exception of the items listed
below,  the estimated fair values of all financial  instruments  approximate the
carrying amount. The fair values for the items below were based on quoted market
prices for the same or similar instruments.


<TABLE>
FINANCIAL INSTRUMENTS
<CAPTION>
                                              CARRYING                FAIR
DECEMBER 31                                    AMOUNT                 VALUE
================================================================================
MILLIONS
<S>                                           <C>                   <C> 
Long-Term Debt
      2003                                     $785.2                 $835.8
      2002                                     $980.1               $1,027.7
Quarterly Income Preferred
  Securities
      2003                                          -                      -
      2002                                      $75.0                  $75.5
================================================================================
</TABLE>


   CONCENTRATION  OF CREDIT  RISK.  Financial  instruments  that  subject  us to
concentrations  of  credit  risk  consist  primarily  of  accounts   receivable.
Minnesota Power sells electricity to about 13 customers in northern  Minnesota's
taconite,  pipeline, paper and wood products industries.  Receivables from these
customers totaled  approximately $8 million at December 31, 2003 ($10 million at
December  31,  2002).  Minnesota  Power  does not obtain  collateral  to support
utility receivables, but monitors the credit standing of major customers.
   Due to the nature of our Automotive  Services'  business,  substantially  all
trade  and  finance  receivables  are due from  vehicle  dealers  and  insurance
companies.  We have possession of vehicles or vehicle titles  collateralizing  a
significant portion of the trade and finance receivables.


--------------------------------------------------------------------------------
                                    PAGE 72


<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS

9  GOODWILL AND OTHER INTANGIBLES

   The table below sets forth what  reported  net income and  earnings per share
would have been exclusive of amortization expense recognized related to goodwill
or other intangible  assets that are no longer being  amortized.  Goodwill is no
longer  amortized  after 2001. All goodwill  amortization  related to continuing
operations.


<TABLE>
<CAPTION>
                                                                 2001
================================================================================
MILLIONS EXCEPT PER SHARE AMOUNTS
<S>                                                             <C>
Net Income
     Reported                                                   $138.7
     Goodwill Amortization                                         9.9
--------------------------------------------------------------------------------
     Adjusted                                                   $148.6
--------------------------------------------------------------------------------
Earnings Per Share
     Basic
         Reported                                                $1.83
         Goodwill Amortization                                    0.13
--------------------------------------------------------------------------------
     Adjusted                                                    $1.96
--------------------------------------------------------------------------------
     Diluted
         Reported                                                $1.81
         Goodwill Amortization                                    0.13
--------------------------------------------------------------------------------
     Adjusted                                                    $1.94
================================================================================
</TABLE>


   We conduct our annual  goodwill  impairment  testing in the second quarter of
each year and the 2003 test  resulted in no  impairment.  No event or change has
occurred that would  indicate the carrying  amount has been  impaired  since our
annual test.


<TABLE>
GOODWILL
<CAPTION>
================================================================================
MILLIONS
<S>                                                                   <C>
Carrying Value, December 31, 2001                                     $491.9
Acquired During Year                                                    10.1
--------------------------------------------------------------------------------
Carrying Value, December 31, 2002                                      502.0

Acquired During Year                                                     0.8
Change Due to Foreign Currency Adjustment                                8.2
--------------------------------------------------------------------------------
Carrying Value, December 31, 2003                                     $511.0
================================================================================
</TABLE>



<TABLE>
OTHER INTANGIBLE ASSETS
<CAPTION>
DECEMBER 31                                        2003                2002
================================================================================
MILLIONS
<S>                                               <C>                 <C>
Customer Relationships                            $ 29.6              $ 29.6
Computer Software                                   28.1                32.6
Other                                                5.7                 6.7
Accumulated Amortization                           (30.1)              (31.3)
--------------------------------------------------------------------------------
Total                                             $ 33.3              $ 37.6
================================================================================
</TABLE>


   Other  Intangible  Assets  are  amortized  using  the  straight-line  method.
Amortization periods are three to fifty years for Customer Relationships, one to
seven  years for  Computer  Software  and three to ten  years for  Other.  Total
amortization expense for Other Intangible Assets was $9.0 million in 2003 ($10.2
million in 2002; $9.5 million in 2001) and is expected to be about $4 million to
$8 million over the next five years.
   Costs  incurred  related to computer  software  developed  or  purchased  for
internal  use are  capitalized  during  the  application  development  stage  of
software   development.   Included  in  total  amortization  expense  for  Other
Intangible Assets was $5.2 million related to computer software ($6.0 million in
2002; $4.0 million in 2001).

10  SHORT-TERM BORROWINGS AND COMPENSATING BALANCES

   We have bank lines of credit  aggregating  $196.5 million  ($217.0 million at
December  31,  2002),  the  majority of which  expire in  December  2004 and are
negotiated  on an  annual  basis.  These  bank  lines of credit  make  financing
available  through   short-term  bank  loans  and  provide  credit  support  for
commercial  paper.  At December 31, 2003,  $196.5  million was available for use
($216.3 million at December 31, 2002).  There was no commercial  paper issued as
of December  31, 2003 ($73.8  million in 2002 with a weighted  average  interest
rate of 1.79%).
   Certain lines of credit require a commitment  fee of 0.0150%.  Interest rates
on  short-term  borrowings  were 2.06% at  December  31, 2003 (1.75% to 1.85% at
December 31, 2002).  The total amount of  compensating  balances at December 31,
2003 and 2002, was immaterial.
   In July 2003 ALLETE  entered  into a credit  agreement to borrow $250 million
from a consortium of financial institutions,  the proceeds of which were used to
redeem $250 million of the  Company's  Floating  Rate First  Mortgage  Bonds due
October 20, 2003.  The credit  agreement  expires in July 2004,  has an interest
rate of LIBOR plus 0.875% and is secured by the lien of the  Company's  Mortgage
and Deed of Trust.  The credit agreement also has certain  mandatory  prepayment
provisions,  including a requirement  to repay an amount equal to 75% of the net
proceeds from the sale of water  assets.  In  accordance  with these  provisions
$197.0 million was repaid in 2003 and $53.0 million was  outstanding at December
31, 2003.
   Our lines of credit contain  financial  covenants.  These  covenants  require
ALLETE (1) not to exceed a maximum  ratio of funded debt to total capital of .60
to 1.0 and (2) to maintain an interest  coverage  ratio of not less than 3.00 to
1.00. Failure to meet these covenants could give rise to an event of default, if
not  corrected  after notice from the lender;  in which event ALLETE may need to
pursue alternative  sources of funding.  As of December 31, 2003, ALLETE's ratio
of funded debt to total capital was .36 to 1.0, the interest  coverage ratio was
5.83 to 1.00 and ALLETE was in compliance with these financial covenants.
   ALLETE's lines of credit contain a  cross-default  provision,  under which an
event of  default  would  arise if other  ALLETE  obligations  in excess of $5.0
million were in default.


--------------------------------------------------------------------------------
                                    PAGE 73


<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS

11  LONG-TERM DEBT


<TABLE>
LONG-TERM DEBT
<CAPTION>
DECEMBER 31                                            2003            2002
================================================================================
MILLIONS
<S>                                                  <C>             <C>
First Mortgage Bonds
     6.68% Series Due 2007                           $ 20.0          $  20.0
     7% Series Due 2007                                60.0             60.0
     7 1/2% Series Due 2007                            35.0             35.0
     7% Series Due 2008                                50.0             50.0
     6% Pollution Control Series E Due 2022           111.0            111.0
     Floating Rate                                        -            250.0
     6 1/4% Series                                        -             25.0
     7 3/4% Series                                        -             50.0

Senior Notes
     7.70% Series A Due 2006                           90.0             90.0
     7.80% Due 2008                                   125.0            125.0
     8.10% Series B Due 2010                           35.0             35.0

Variable Notes
     Due 2006                                          45.0                -
     Due 2020                                          28.4                -

Capital Lease Obligation Due 2013                      34.5                -

Variable Demand Revenue Refunding
     Bonds Series 1997 A, B, C and D
     Due 2007 - 2020                                   39.0             39.0

Industrial Development Revenue Bonds,
     6.50% Due 2025                                    35.1             35.1

Other Long-Term Debt, 2.0 - 8.8%
     Due 2004 - 2026                                   77.2             55.0
--------------------------------------------------------------------------------
Total Long-Term Debt                                  785.2            980.1

Less Due Within One Year                              (37.5)          (283.7)
--------------------------------------------------------------------------------
Net Long-Term Debt                                   $747.7          $ 696.4
================================================================================
</TABLE>


   The aggregate  amount of long-term debt maturing during 2004 is $37.5 million
($30.2 million in 2005;  $137.1 million in 2006;  $119.0 million in 2007; $182.3
million  in 2008;  and  $279.1  million  thereafter).  Substantially  all of our
electric  plant is subject to the lien of the mortgages  securing  various first
mortgage bonds.
   At December 31, 2003 we had long-term bank lines of credit  aggregating $38.0
million ($39.7  million at December 31, 2002).  Drawn portions on these lines of
credit were $28.8 million in 2003 ($5.5 million in 2002). 
   In June 2003 ADESA  restructured its financial  arrangements  with respect to
four  of  its  used  vehicle  auction  facilities  previously  accounted  for as
operating  leases.  The  transactions  included the assumption of $28 million of
long-term  debt and the  issuance  of $45  million of  long-term  debt.  The $28
million  of  assumed  long-term  debt  matures  April 1, 2020 and has a variable
interest  rate equal to the  seven-day AA Financial  Commercial  Paper Rate plus
approximately  1.2%,  while the $45 million of  long-term  debt matures July 30,
2006 and has a variable interest rate of prime or LIBOR plus 1%.
   In July 2003 ALLETE used internally  generated funds to retire $25 million in
principal  amount of the Company's First Mortgage Bonds,  Series 6 1/4% due July
1, 2003.
   In July 2003 $250 million in principal amount of the Company's  Floating Rate
First  Mortgage  Bonds due October 20, 2003 were  redeemed  with proceeds from a
$250 million credit agreement entered into in July 2003. (See Note 10.)
   In November  2003 ALLETE  redeemed  $50  million in  principal  amount of the
Company's  First  Mortgage  Bonds,  7 3/4%  Series due June 1, 2007.  Internally
generated  funds and proceeds from the sale of Florida Water assets were used to
repay the principal,  premium and accrued interest, totaling approximately $52.1
million, to the bondholders.
   In December 2003 ADESA recorded $34.5 million of long-term debt in connection
with the capital lease obligation of one of its used vehicle auction facilities.
The debt matures December 2013 and has a fixed rate of 5%.
   In January 2004 we used internally  generated  funds to retire  approximately
$3.5 million in principal amount of Industrial  Development Revenue Bonds Series
1994-A, due January 1, 2004.
   ALLETE's long-term debt arrangements  contain financial  covenants.  The most
restrictive  covenant  requires  ALLETE not to exceed a maximum  ratio of funded
debt to total capital of .65 to 1.0.  Failure to meet this  covenant  could give
rise to an event of default,  if not corrected  after notice from the trustee or
security holder; in which event ALLETE may need to pursue alternative sources of
funding.  As of December 31, 2003 ALLETE's ratio of funded debt to total capital
was .36 to 1.0 and ALLETE was in compliance with its financial covenants.
   Some  of  ALLETE's  long-term  debt  arrangements   contain   "cross-default"
provisions  that would result in an event of default if there is a failure under
other financing arrangements to meet payment terms or to observe other covenants
that would result in an acceleration of payments due.
   The interest  rate on the 7.80% Senior Note due 2008 will  increase  0.50% to
1.00% in the event of a downgrade in ALLETE's  senior  unsecured  long-term debt
ratings below investment grade.
   The 6.68% Series Due 2007 and the 7% Series Due 2007 cannot be redeemed prior
to maturity.  The 7 1/2% Series Due 2007 are redeemable after August 1, 2005 and
the 7% Series Due 2008 are  redeemable  after March 1, 2006.  The remaining debt
may be redeemed in whole or in part at our option  according to the terms of the
obligations.

12  MANDATORILY REDEEMABLE PREFERRED SECURITIES

   In December 2003 ALLETE  redeemed  through  ALLETE  Capital I, a wholly owned
statutory  trust of ALLETE,  all $75 million of its 8.05% QUIPS.  The redemption
price  was $25 per  QUIPS  plus  accumulated  and  unpaid  distributions  to the
redemption  date. The QUIPS were issued in March 1996 and represented  preferred
ownership  interests in the assets of ALLETE Capital I. The sole asset of ALLETE
Capital I was 8.05% Junior Subordinated Debentures, Series A, Due 2015 issued by
ALLETE.


--------------------------------------------------------------------------------
                                    PAGE 74

<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS

13  COMMON STOCK AND EARNINGS PER SHARE

   Our Articles of Incorporation  and mortgages  contain  provisions that, under
certain circumstances,  would restrict the payment of common stock dividends. As
of December 31, 2003 no retained  earnings were  restricted as a result of these
provisions.


<TABLE>
<CAPTION>
SUMMARY OF COMMON STOCK                              SHARES           EQUITY
================================================================================
MILLIONS
<S>                                                  <C>              <C>
Balance at December 31, 2000                          74.7            $576.9
2001    Public Offering                                6.6             150.0
        Employee Stock Purchase Plan                   0.1               1.4
        Invest Direct <F1>                             0.8              18.9
        Other                                          1.7              23.1
--------------------------------------------------------------------------------
Balance at December 31, 2001                          83.9             770.3
2002    Employee Stock Purchase Plan                   0.1               1.4
        Invest Direct <F1>                             0.8              19.6
        Other                                          0.8              23.6
--------------------------------------------------------------------------------
Balance at December 31, 2002                          85.6             814.9
2003    Employee Stock Purchase Plan                   0.1               1.4
        Invest Direct <F1>                             0.8              19.9
        Other                                          0.8              23.0
--------------------------------------------------------------------------------
Balance at December 31, 2003                          87.3            $859.2
================================================================================
<FN>
<F1>   Invest Direct is ALLETE's direct stock purchase and dividend reinvestment
       plan.
</FN>
</TABLE>


   COMMON STOCK ISSUANCE. In May and June 2001 we sold 6.6 million shares of our
common  stock in a public  offering at $23.68 per share.  Total net  proceeds of
approximately  $150  million  were  used to repay a  portion  of our  short-term
borrowings with the remainder invested in short-term instruments.
   SHAREHOLDER RIGHTS PLAN. In 1996 we adopted a rights plan that provides for a
dividend  distribution  of one  preferred  share  purchase  right  (Right) to be
attached to each share of common stock.
   The Rights,  which are currently not exercisable or  transferable  apart from
our common stock, entitle the holder to purchase one two-hundredth of a share of
ALLETE's  Junior  Serial  Preferred  Stock A, without par value,  at an exercise
price of $45.  These  Rights  would  become  exercisable  if a  person  or group
acquires beneficial  ownership of 15% or more of our common stock or announces a
tender offer which would increase the person's or group's  beneficial  ownership
interest to 15% or more of our common stock,  subject to certain exceptions.  If
the 15%  threshold  is met,  each  Right  entitles  the holder  (other  than the
acquiring   person  or  group)  to  purchase   common   stock  (or,  in  certain
circumstances, cash, property or other securities of ours) having a market price
equal to twice the exercise  price of the Right.  If we are acquired in a merger
or business combination, or 50% or more of our assets or earning power are sold,
each  exercisable  Right  entitles  the holder to purchase  common  stock of the
acquiring or surviving  company having a value equal to twice the exercise price
of  the  Right.  Certain  stock  acquisitions  will  also  trigger  a  provision
permitting  the Board of Directors  to exchange  each Right for one share of our
common stock.
   The Rights which expire on July 23, 2006,  are  nonvoting and may be redeemed
by us at a price of $0.005 per Right at any time they are not  exercisable.  One
million shares of Junior Serial  Preferred  Stock A have been authorized and are
reserved for issuance under the plan.
   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.


<TABLE>
<CAPTION>
RECONCILIATION OF
BASIC AND DILUTED                               BASIC        DILUTIVE    DILUTED
EARNINGS PER SHARE                               EPS        SECURITIES     EPS
================================================================================
<S>                                            <C>          <C>          <C>
2003
Income from
  Continuing Operations                        $143.1            -       $143.1
Common Shares                                    82.8          0.5         83.3
Per Share from
  Continuing Operations                         $1.72            -        $1.72
--------------------------------------------------------------------------------
2002
Income from
  Continuing Operations                        $118.9            -       $118.9
Common Shares                                    81.1          0.6         81.7
Per Share from
  Continuing Operations                         $1.47            -        $1.46
--------------------------------------------------------------------------------
2001
Income from
  Continuing Operations                        $128.9            -       $128.9
Common Shares                                    75.8          0.7         76.5
Per Share from
  Continuing Operations                         $1.70            -        $1.68
================================================================================
</TABLE>


14 JOINTLY OWNED ELECTRIC FACILITY

   We own 80% of the 534-MW Boswell Energy Center Unit 4 (Boswell Unit 4). While
we operate the plant,  certain  decisions about the operations of Boswell Unit 4
are subject to the  oversight  of a committee on which we and  Wisconsin  Public
Power,  Inc.  (WPPI),  the owner of the other 20% of Boswell  Unit 4, have equal
representation and voting rights.  Each of us must provide our own financing and
is obligated to pay our ownership share of operating  costs. Our share of direct
operating  expenses of Boswell  Unit 4 is included in  operating  expense on our
consolidated statement of income. Our 80% share of the original cost included in
electric  plant at December 31, 2003 was $308 million  ($310 million at December
31, 2002). The corresponding  accumulated  depreciation balance was $176 million
at December 31, 2003 ($170 million at December 31, 2002).


--------------------------------------------------------------------------------
                                    PAGE 75

<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS

15 COMMITMENTS, GUARANTEES AND CONTINGENCIES

   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 is entitled to  approximately  71% of the Unit's output under
the Agreement.  After 2005 and upon  compliance  with a two-year  advance notice
requirement,   Minnkota  Power  has  the  option  to  reduce  Minnesota  Power's
entitlement  by 5% annually,  to a minimum of 50%. In December  2003 we received
notice  from  Minnkota  Power  that they will  reduce  our  output  entitlement,
effective January 1, 2006, by 5% to approximately 66%.
   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  is  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 December 31, 2003 Square Butte had
total debt  outstanding of $284.2 million.  Total annual debt service for Square
Butte is expected to be $22.9  million in each of the years 2004  through  2008.
Variable  operating costs include the price of coal purchased from BNI Coal, our
subsidiary, under a long-term contract.
   Minnesota  Power's cost of power  purchased from Square Butte during 2003 was
$52.3 million ($60.9  million in 2002 and $63.3 million in 2001).  This reflects
Minnesota  Power's pro rata share of total  Square  Butte costs based on the 71%
output entitlement in 2003, 2002 and 2001. Included in this amount was Minnesota
Power's  pro rata  share of  interest  expense of $12.8  million in 2003  ($13.7
million in 2002;  $14.2 million in 2001).  Minnesota  Power's payments to Square
Butte are approved as purchased  power expense for  ratemaking  purposes by both
the MPUC and the FERC.
   LEASING AGREEMENTS. In June 2003 ADESA restructured its financial arrangement
with  respect  to  its  used  vehicle  auction   facilities  located  in  Tracy,
California;  Boston,  Massachusetts;  Charlotte,  North Carolina; and Knoxville,
Tennessee.  These used vehicle auction facilities were previously  accounted for
as operating leases. The transactions  included the assumption of $28 million of
long-term  debt,  the  issuance  of  $45  million  of  long-term  debt  and  the
recognition of $73 million of property, plant and equipment.
   We lease other  properties  and  equipment  in addition to those listed above
under operating lease agreements with terms expiring through 2032. The aggregate
amount of minimum lease  payments for all operating  leases during 2004 is $14.8
million ($10.6 million in 2005; $8.2 million in 2006; $6.1 million in 2007; $5.7
million in 2008;  and $59.0  million  thereafter).  Total rent expense was $27.4
million in 2003 ($26.7 million in 2002; $26.9 million in 2001).
   SPLIT ROCK ENERGY. We provided up to $50.0 million of credit support,  in the
form of letters of credit and  financial  guarantees,  to  facilitate  the power
marketing   activities  of  Split  Rock  Energy.   Minimal  credit  support  was
outstanding  at  December  31,  2003 ($7.3  million at December  31,  2002).  We
withdrew from active participation in Split Rock Energy in February 2004.
   KENDALL  COUNTY  POWER  PURCHASE  AGREEMENT.  We have 275 MW of  nonregulated
generation (non rate-base generation sold at market-based rates to the wholesale
market)  through an  agreement  with NRG Energy that extends  through  September
2017.  Under the agreement we pay a fixed capacity charge for the right, but not
the  obligation,  to capacity  and energy from a 275 MW  generating  unit at NRG
Energy's  Kendall  County  facility  near  Chicago,  Illinois.  The annual fixed
capacity  charge is $21.8  million.  We are also  responsible  for arranging the
natural gas fuel supply.  Our strategy is to enter into  long-term  contracts to
sell a significant  portion of the 275 MW from the Kendall County facility;  the
balance  will be sold in the  spot  market  through  short-term  agreements.  We
currently have 130 MW (100 MW in 2003) of long-term capacity sales contracts for
the Kendall  County  generation,  with 50 MW expiring in April 2012 and 80 MW in
September  2017.  Neither the Kendall  County  agreement  nor the related  sales
contracts are derivatives under SFAS 133, "Accounting for Derivative Instruments
and Hedging  Activities." In total,  the Kendall County  facility  operated at a
loss in 2003 due to negative spark spreads (the  differential  between  electric
and  natural  gas  prices)  in the  wholesale  power  market  and our  resulting
inability to cover the fixed capacity charge on approximately  175 MW. We expect
the  facility to continue to generate  losses  until such time as spark  spreads
improve  or we are  able to  enter  into  additional  long-term  capacity  sales
contracts.
   EMERGING TECHNOLOGY INVESTMENTS. We have investments in emerging technologies
through  minority  investments  in  venture  capital  funds  and  privately-held
start-up companies.  We have committed to make additional investments in certain
emerging  technology  holdings.  The total future commitment was $4.8 million at
December  31,  2003 ($7.7  million at December  31,  2002) and is expected to be
invested at various times through 2007.  
   ENVIRONMENTAL  MATTERS.  Our  businesses are subject to regulation by various
U.S. and Canadian federal,  state,  provincial and local authorities  concerning
environmental   matters.   We  do  not  currently   anticipate   that  potential
expenditures for environmental matters will be material;  however, we are unable
to predict the outcome of the issues discussed below.


--------------------------------------------------------------------------------
                                    PAGE 76

<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS


   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's
predecessors  from  1889 to  1904.  The WDNR  requested  SWL&P  to  initiate  an
environmental  investigation.  The WDNR also issued  SWL&P a  Responsible  Party
letter in  February  2002.  The  environmental  investigation  is  underway.  In
February 2003 SWL&P submitted a Phase II environmental site investigation report
to the WDNR. This report  identified some MGP-like  chemicals that were found in
the soil.  During March and April 2003  sediment  samples were taken from nearby
Superior  Bay.  The report on the  results of this  sampling  is  expected to be
completed and sent to the WDNR during the first quarter of 2004. A work plan for
additional  investigation by SWL&P was filed on December 17, 2003 with the WDNR.
This part of the investigation will determine any impact to soil or ground water
between the former MGP site and the Superior Bay. Although it is not possible to
quantify the potential  clean-up cost until the investigation is completed and a
work plan is developed, a $0.5 million liability was recorded as of December 31,
2003  to  address  the  known  areas  of  contamination.   We  have  recorded  a
corresponding dollar amount as a regulatory asset to offset this liability.  The
PSCW has approved SWL&P's deferral of these MGP environmental  investigation and
potential  clean-up  costs for future  recovery in rates,  subject to regulatory
prudency review.
   MINNESOTA POWER COAL-FIRED GENERATING FACILITIES. During 2002 Minnesota Power
received and responded to a third request from the EPA, under Section 114 of the
federal  Clean Air Act  Amendments of 1990 (Clean Air Act),  seeking  additional
information  regarding capital expenditures at all of its coal-fired  generating
stations.  This  action  is part  of an  industry-wide  investigation  assessing
compliance with the New Source Review and the New Source  Performance  Standards
(emissions  standards  that apply to new and changed units) of the Clean Air Act
at electric generating stations. We have received no feedback from the EPA based
on the information we submitted. There is, however, ongoing litigation involving
the EPA and other electric  utilities for alleged  violations of these rules. It
is  expected  that the  outcome of some of the cases  could  provide the utility
industry direction on this topic. We are unable to predict what actions, if any,
may be required as a result of the EPA's request for  information.  As a result,
we have not accrued any liability for this environmental matter.
   SQUARE BUTTE GENERATING  FACILITY.  In June 2002 Minnkota Power, the operator
of Square Butte,  received a Notice of Violation from the EPA regarding  alleged
New Source Review violations at the M.R. Young Station which includes the Square
Butte  generating  unit. The EPA claims certain  capital  projects  completed by
Minnkota  Power  should have been  reviewed  pursuant  to the New Source  Review
regulations  potentially  resulting  in new  air  permit  operating  conditions.
Minnkota  Power has held  several  meetings  with the EPA to discuss the alleged
violations. Based on an EPA request, Minnkota Power performed a study related to
the technological  feasibility of installing  various controls for the reduction
of nitrogen oxides and sulfur dioxide  emissions.  Discussions  with the EPA are
ongoing  and we are still  unable to predict  the  outcome or cost  impacts.  If
Square Butte is required to make significant capital expenditures to comply with
EPA requirements,  we expect such capital expenditures to be debt financed.  Our
future  cost of  purchased  power  would  include  our pro  rata  share  of this
additional debt service.
   ADESA IMPACT TAUNTON FACILITY. In December 2003 the Massachusetts  Department
of  Environmental  Protection  (MDEP)  identified  ADESA Impact as a potentially
responsible  party regarding  contamination  of several  private  drinking water
wells in a residential development that abuts the Taunton, Massachusetts salvage
vehicle  auction  facility.  The wells had elevated  levels of MTBE.  MTBE is an
oxygenating  additive  in  gasoline  to reduce  harmful  emissions.  The EPA has
identified  MTBE as a possible  carcinogen.  ADESA Impact engaged  GeoInsight,an
environmental services firm, to conduct tests of its soil and groundwater at the
salvage vehicle auction site.
   GeoInsight  prepared  an  immediate  response  action  (IRA)  plan,  which is
required by the MDEP,  to determine the extent of the  environmental  impact and
define activities to prevent further environmental contamination.  The IRA plan,
which was filed on January 24,  2004,  describes  the initial  activities  ADESA
Impact performed,  and proposes  additional measures that it will use to further
assess the  existence of any imminent  hazard to human health.  In addition,  as
required  by the MDEP,  ADESA  Impact is  conducting  an  analysis  to  identify
sensitive  receptors  that may have been  affected,  including  area schools and
municipal  wells.  GeoInsight does not believe that an imminent hazard condition
exists at the Taunton site;  however,  the  investigation and assessment of site
conditions are ongoing.
   In December 2003  GeoInsight  collected soil samples,  conducted  groundwater
tests and provided oversight for the installation of monitoring wells in various
locations on and adjacent to the property  adjoining the residential  community.
The results of the soil and water tests indicated  levels of MTBE exceeding MDEP
standards.  In January 2004 we collected air samples from two residences that we
identified as having  elevated  drinking water  concentrations  of MTBE. We have
determined  that  inhalation of, or contact  exposure to, this air poses minimal
risk to human health. In response to our empirical findings, we have proposed to
the MDEP that we install  granular  activated carbon  filtration  systems in the
approximately 30 affected residences.
   ADESA Impact is preparing an IRA status  report that must be submitted to the
MDEP by March 30,  2004,  and will  continue  to prepare  additional  reports as
necessary.  As of December  31, 2003 ADESA  Impact has accrued  $0.7  million to
cover the costs associated with ongoing testing,  remediation and cleanup of the
site.


--------------------------------------------------------------------------------
                                    PAGE 77

<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS

   ALLETE maintains pollution liability insurance coverage and has filed a claim
with respect to this matter. We and our insurer are determining the availability
of insurance coverage at this time.
   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 change
materially our present liquidity position, nor have a material adverse effect on
our financial condition.

16  INCOME TAX EXPENSE

<TABLE>
INCOME TAX EXPENSE
<CAPTION>
YEAR ENDED DECEMBER 31                         2003          2002         2001
================================================================================
MILLIONS
<S>                                          <C>            <C>          <C>
Current Tax Expense
     Federal                                 $ 45.2         $36.4        $51.4
     Foreign                                   14.0          12.6          7.6
     State                                     10.1           7.1          7.7
--------------------------------------------------------------------------------
                                               69.3          56.1         66.7
Deferred Tax Expense (Benefit)
     Federal                                   20.0          14.8          6.9
     Foreign                                      -           0.1          0.2
     State                                      3.1           0.7         (0.1)
--------------------------------------------------------------------------------
                                               23.1          15.6          7.0
Change in Valuation Allowance                   0.9           1.9          1.0
--------------------------------------------------------------------------------
Deferred Tax Credits                           (1.4)         (1.4)        (1.4)
--------------------------------------------------------------------------------
Income Taxes on
     Continuing Operations                     91.9          72.2         73.3
Income Taxes on
     Discontinued Operations                   51.6          12.8          7.2
--------------------------------------------------------------------------------
Total Income Tax Expense                     $143.5         $85.0        $80.5
================================================================================
</TABLE>



<TABLE>
RECONCILIATION OF TAXES
FROM FEDERAL STATUTORY
RATE TO TOTAL INCOME
TAX EXPENSE
<CAPTION>
YEAR ENDED DECEMBER 31                         2003          2002        2001
================================================================================
MILLIONS
<S>                                          <C>            <C>          <C>
Tax Computed at Federal  
    Statutory Rate                           $133.0         $77.8        $76.7
Increase (Decrease) in Tax
    State Income Taxes - Net of
      Federal Income Tax Benefit               17.3           9.8          8.6
    Foreign Taxes                               1.9           3.0          1.9
    Other                                      (8.7)         (5.6)        (6.7)
--------------------------------------------------------------------------------
Total Income Tax Expense                     $143.5         $85.0        $80.5
================================================================================
</TABLE>



<TABLE>
INCOME BEFORE INCOME TAXES
<CAPTION>
YEAR ENDED DECEMBER 31                        2003          2002         2001
================================================================================
MILLIONS
<S>                                          <C>           <C>          <C>
United States                                $341.9        $191.4       $197.3
Canadian                                       38.0          30.8         21.9
--------------------------------------------------------------------------------
Total                                        $379.9        $222.2       $219.2
================================================================================
</TABLE>



<TABLE>
DEFERRED TAX ASSETS AND LIABILITIES
<CAPTION>
DECEMBER 31                                               2003         2002
================================================================================
MILLIONS
<S>                                                     <C>          <C>
Deferred Tax Assets
    Employee Benefits and Compensation                  $ 49.7       $ 43.4
    Property Related                                      30.2         27.3
    Investment Tax Credits                                14.8         15.8
    Allowance for Bad Debts                                9.8         11.5
    State NOL Carryover                                    8.7          8.6
    Other                                                 30.6         26.7
--------------------------------------------------------------------------------
        Gross Deferred Tax Assets                        143.8        133.3
Deferred Tax Asset Valuation Allowance                    (8.7)        (7.8)
--------------------------------------------------------------------------------
Total Deferred Tax Assets                                135.1        125.5
--------------------------------------------------------------------------------
Deferred Tax Liabilities
    Property Related                                     229.6        215.7
    Investment Tax Credits                                21.0         22.4
    Intangibles                                           19.7         13.4
    Employee Benefits and Compensation                    15.1          9.0
    Other                                                 10.4          4.8
--------------------------------------------------------------------------------
Total Deferred Tax Liabilities                           295.8        265.3
--------------------------------------------------------------------------------
Accumulated Deferred Income Taxes                       $160.7       $139.8
================================================================================
</TABLE>


   State net operating loss  carryforwards  of $8.7 million have an $8.2 million
valuation allowance,  as we believe more likely than not they will expire before
they are  utilized.  These state net operating  losses  expire  between 2004 and
2022. 
   UNDISTRIBUTED  EARNINGS.  Undistributed  earnings of our foreign subsidiaries
were approximately $24.5 million at December 31, 2003 ($28.8 million at December
31, 2002).  Since this amount has been or will be reinvested in property,  plant
and working capital, we have not recorded the deferred taxes associated with the
repatriation of these investments.


--------------------------------------------------------------------------------
                                    PAGE 78

<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS


17  OTHER COMPREHENSIVE INCOME


<TABLE>
OTHER COMPREHENSIVE INCOME
<CAPTION>
                                                        PRE-TAX                TAX EXPENSE            NET-OF-TAX
YEAR ENDED DECEMBER 31                                  AMOUNT                  (BENEFIT)               AMOUNT
====================================================================================================================
MILLIONS
<S>                                                     <C>                    <C>                    <C> 
2003
Unrealized Gain (Loss) on Securities
         Gain During the Year                           $  2.4                    $ 1.0                 $ 1.4
         Add: Loss Included in Net Income                  3.5                      1.3                   2.2
--------------------------------------------------------------------------------------------------------------------
               Net Unrealized Gain on Securities           5.9                      2.3                   3.6
Interest Rate Swap                                         0.2                        -                   0.2
Foreign Currency Translation Adjustments                  39.2                        -                  39.2
Additional Pension Liability                             (10.8)                    (4.5)                 (6.3)
--------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income                              $ 34.5                    $(2.2)                $36.7
--------------------------------------------------------------------------------------------------------------------
2002
Unrealized Gain (Loss) on Securities
         Loss During the Year                           $(11.8)                   $(4.3)                $(7.5)
         Less: Gain Included in Net Income                 1.0                      0.4                   0.6
--------------------------------------------------------------------------------------------------------------------
               Net Unrealized Loss on Securities         (12.8)                    (4.7)                 (8.1)
Interest Rate Swap                                         2.3                      1.0                   1.3
Foreign Currency Translation Adjustments                   2.6                        -                   2.6
Additional Pension Liability                              (6.0)                    (2.5)                 (3.5)
--------------------------------------------------------------------------------------------------------------------
Other Comprehensive Loss                                $(13.9)                   $(6.2)                $(7.7)
--------------------------------------------------------------------------------------------------------------------
2001
Unrealized Gain (Loss) on Securities
         Gain During the Year                           $  3.6                    $ 1.1                $  2.5
         Less: Gain Included in Net Income                   -                        -                     -
--------------------------------------------------------------------------------------------------------------------
               Net Unrealized Gain on Securities           3.6                      1.1                   2.5
Interest Rate Swap                                        (2.5)                    (1.0)                 (1.5)
Foreign Currency Translation Adjustments                 (11.3)                       -                 (11.3)
--------------------------------------------------------------------------------------------------------------------
Other Comprehensive Loss                                $(10.2)                   $ 0.1                $(10.3)
====================================================================================================================
</TABLE>



<TABLE>
ACCUMULATED OTHER COMPREHENSIVE INCOME
<CAPTION>
DECEMBER 31                                                                        2003                  2002
====================================================================================================================
MILLIONS
<S>                                                                               <C>                  <C>
Unrealized Gain (Loss) on Securities                                              $ 0.8                $ (2.8)
Interest Rate Swap Loss                                                               -                  (0.2)
Foreign Currency Translation Gain (Loss)                                           23.5                 (15.7)
Additional Pension Liability                                                       (9.8)                 (3.5)
--------------------------------------------------------------------------------------------------------------------
                                                                                  $14.5                $(22.2)
====================================================================================================================
</TABLE>


18  PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

   We have  noncontributory  defined  benefit  pension plans  covering  eligible
Corporate and Energy  Services'  employees.  The plans provide defined  benefits
based  on  years  of  service  and  final  average  pay.  We also  have  defined
contribution pension plans covering  substantially all employees,  for which the
annual  aggregate  cost was $9.1  million  in 2003 ($9.7  million in 2002;  $7.1
million in 2001).
   We have postretirement health care and life insurance plans covering eligible
Corporate and Energy Services'  employees.  The postretirement  health plans are
contributory with participant  contributions  adjusted annually.  Postretirement
health and life benefits are funded through a combination of Voluntary  Employee
Benefit  Association  trusts (VEBAs)  established under section 501(c)(9) of the
Internal Revenue Code and an irrevocable grantor trust. Contributions deductible
for  income  tax  purposes  are  made  directly  to  the  VEBAs;   nondeductible
contributions are made to the irrevocable grantor trust. Amounts are transferred
from the irrevocable  grantor trust to the VEBAs when they become deductible for
income tax purposes.
   We use a September  30  measurement  date for the pension and  postretirement
health and life plans.


--------------------------------------------------------------------------------
                                    PAGE 79

<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS


<TABLE>
PENSION OBLIGATION AND FUNDED STATUS
<CAPTION>
AT SEPTEMBER 30                                         2003            2002
================================================================================
MILLIONS
<S>                                                    <C>             <C>
Change in Benefit Obligation
     Obligation, Beginning of Year                     $297.9          $259.1
     Service Cost                                         6.7             5.6
     Interest Cost                                       19.5            19.5
     Actuarial Loss                                      45.7            29.4
     Benefits Paid                                      (16.4)          (15.7)
--------------------------------------------------------------------------------
     Obligation, End of Year                            353.4           297.9
Change in Plan Assets
     Fair Value, Beginning of Year                      265.7           281.9
     Actual Return on Assets                             33.5            (3.3)
     Benefits Paid                                      (16.4)          (15.7)
     Other                                                2.5             2.8
--------------------------------------------------------------------------------
     Fair Value, End of Year                            285.3           265.7
Funded Status                                           (68.1)          (32.2)
     Unrecognized Amounts
          Net Loss                                       82.3            43.3
          Prior Service Cost                              6.0             6.9
          Transition Obligation                           0.3             0.4
--------------------------------------------------------------------------------
Net Asset Recognized                                   $ 20.5          $ 18.4
--------------------------------------------------------------------------------
Amounts Recognized in Consolidated
     Balance Sheet Consist of:
          Prepaid Pension Cost                         $ 31.9          $ 27.8
          Accrued Benefit Liability                     (31.2)          (18.8)
          Intangible Asset                                3.0             3.4
          Accumulated Other
            Comprehensive Income                         16.8             6.0
--------------------------------------------------------------------------------
Net Asset Recognized                                   $ 20.5          $ 18.4
================================================================================
</TABLE>



<TABLE>
COMPONENTS OF NET PERIODIC PENSION EXPENSE (INCOME)
<CAPTION>
YEAR ENDED DECEMBER 31                     2003          2002            2001
================================================================================
MILLIONS
<S>                                      <C>           <C>             <C>
Service Cost                             $  6.7        $  5.6          $  4.4
Interest Cost                              19.5          19.5            18.3
Expected Return on Assets                 (28.8)        (30.4)          (29.6)
Amortized Amounts
     Unrecognized Gain                        -          (1.4)           (2.5)
     Prior Service Cost                     0.9           0.8             0.5
     Transition Obligation                  0.2           0.2             0.5
--------------------------------------------------------------------------------
Net Pension Income                       $ (1.5)       $ (5.7)         $ (8.4)
================================================================================
</TABLE>



<TABLE>
INFORMATION FOR PENSION PLAN WITH AN ACCUMULATED
BENEFIT OBLIGATION IN EXCESS OF PLAN ASSETS
<CAPTION>
AT SEPTEMBER 30                                         2003            2002
================================================================================
MILLIONS
<S>                                                    <C>             <C>
Projected Benefit Obligation                           $137.8          $114.1
Accumulated Benefit Obligation                         $118.1           $99.8
Fair Value of Plan Assets                               $95.1           $88.6
================================================================================
</TABLE>



<TABLE>
ADDITIONAL PENSION INFORMATION
<CAPTION>
YEAR ENDED DECEMBER 31                     2003         2002            2001
================================================================================
MILLIONS
<S>                                       <C>           <C>             <C>
Increase in Minimum Liability
     Included in Other
     Comprehensive Income                 $10.8         $6.0               -
================================================================================
</TABLE>


   The accumulated  benefit obligation for all defined benefit pension plans was
$303.5 million and $259.3 million at September 30, 2003 and 2002, respectively.


<TABLE>
POSTRETIREMENT HEALTH AND LIFE
OBLIGATION AND FUNDED STATUS
<CAPTION>
AT SEPTEMBER 30                                          2003           2002
================================================================================
MILLIONS
<S>                                                    <C>            <C>
Change in Benefit Obligation
     Obligation, Beginning of Year                     $ 99.5         $ 78.5
     Service Cost                                         3.7            2.9
     Interest Cost                                        6.6            5.9
     Actuarial Loss                                      10.8           15.0
     Participant Contributions                            0.9            1.1
     Benefits Paid                                       (4.3)          (3.9)
--------------------------------------------------------------------------------
     Obligation, End of Year                            117.2           99.5
Change in Plan Assets
     Fair Value, Beginning of Year                       39.5           38.7
     Actual Return on Assets                              6.6           (1.5)
     Employer Contribution                                8.2            5.1
     Participant Contributions                            0.9            1.1
     Benefits Paid                                       (4.3)          (3.9)
--------------------------------------------------------------------------------
     Fair Value, End of Year                             50.9           39.5
Funded Status                                           (66.3)         (60.0)
     Unrecognized Amounts
          Net Loss                                       23.9           15.1
          Transition Obligation                          22.4           25.0
--------------------------------------------------------------------------------
Accrued Cost                                           $(20.0)        $(19.9)
================================================================================
</TABLE>


   Under SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions,"  only  assets in the VEBAs are  treated  as plan  assets in the table
above  for  the  purpose  of  determining  funded  status.  In  addition  to the
postretirement health and life assets reported above, we had $20.2 million in an
irrevocable  grantor  trust at December 31, 2003 ($15.1  million at December 31,
2002).  We  consolidate  the  irrevocable  grantor  trust and it is  included in
Investments on our consolidated balance sheet.


<TABLE>
COMPONENTS OF NET PERIODIC POSTRETIREMENT
HEALTH AND LIFE EXPENSE
<CAPTION>
YEAR ENDED DECEMBER 31                       2003         2002          2001
================================================================================
MILLIONS
<S>                                         <C>          <C>           <C>
Service Cost                                $ 3.7        $ 2.9         $ 2.7
Interest Cost                                 6.6          5.9           5.3
Expected Return on Assets                    (4.0)        (3.9)         (3.5)
Amortized Amounts
     Unrecognized Gain                        0.1         (0.2)         (0.9)
     Transition Obligation                    2.4          2.4           2.4
--------------------------------------------------------------------------------
Net Expense                                 $ 8.8        $ 7.1         $ 6.0
================================================================================
</TABLE>

 
--------------------------------------------------------------------------------
                                    PAGE 80


<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS



<TABLE>
WEIGHTED-AVERAGE ASSUMPTIONS USED TO
DETERMINE BENEFIT OBLIGATIONS
<CAPTION>
AT SEPTEMBER 30                                  2003               2002
================================================================================
<S>                                           <C>                <C>
Discount Rate                                       6.0%              6.75%
Rate of Compensation Increase                 3.5 - 4.5%         3.5 - 4.5%
Health Care Trend Rates:
     Trend Rate                                      10%                10%
     Ultimate Trend Rate                              5%                 5%
     Year Ultimate Trend Rate Effective             2008               2008
================================================================================
</TABLE>



<TABLE>
WEIGHTED-AVERAGE ASSUMPTIONS
USED TO DETERMINE NET PERIODIC
BENEFIT COSTS
<CAPTION>
YEAR ENDED DECEMBER 31                2003             2002              2001
================================================================================
<S>                                <C>              <C>              <C>
Discount Rate                           6.75%             7.75%            8.00%
Expected Long-Term
     Return on Plan Assets:
         Pension                         9.5%             10.0%           10.25%
         Postretirement
           Health and Life         7.6 - 9.5%       8.0 - 10.0%      6.0 - 10.0%
Rate of Compensation
     Increase                      3.5 - 4.5%        3.5 - 4.5%       3.5 - 4.5%
================================================================================
</TABLE>


   In establishing the expected long-term return on plan assets, we consider the
diversification  and allocation of plan assets, the actual long-term  historical
performance  for the  type of  securities  invested  in,  the  actual  long-term
historical  performance  of plan  assets  and the  impact  of  current  economic
conditions,  if any, on long-term  historical  returns.  The expected  long-term
return on plan assets used to determine 2004 pension expense is 9.0%.


<TABLE>
SENSITIVITY OF A ONE-PERCENTAGE-POINT
CHANGE IN HEALTH CARE TREND RATES
<CAPTION>
                                            ONE PERCENT            ONE PERCENT
                                              INCREASE               DECREASE
================================================================================
MILLIONS
<S>                                         <C>                    <C>
Effect on Total of Postretirement
Health and Life Service
and Interest Cost                               $1.9                  $(1.4)

Effect on Postretirement Health
and Life Obligation                            $18.8                 $(12.6)
================================================================================
</TABLE>



<TABLE>
PLAN ASSET ALLOCATIONS
<CAPTION>
AT SEPTEMBER 30                                   2003               2002
================================================================================
<S>                                               <C>                <C>
Pension Plan Asset Categories:
      Equity Securities                            61.6%              44.0%
      Debt Securities                              27.8               32.9
      Real Estate                                   2.8               12.1
      Venture Capital                               5.6                9.0
      Cash                                          2.2                2.0
--------------------------------------------------------------------------------
                                                  100.0%             100.0%
--------------------------------------------------------------------------------
Postretirement Health and Life 
Asset Categories (includes VEBAs 
and irrevocable grantor trust):
      Equity Securities                            62.2%              56.4%
      Debt Securities                              36.3               43.6
      Cash                                          1.5                  -
--------------------------------------------------------------------------------
                                                  100.0%             100.0%
================================================================================
</TABLE>


   Pension plan equity securities  include ALLETE common stock in the amounts of
$25.8  million (9.1% of total plan assets) and $20.3 million (7.7% of total plan
assets) at September 30, 2003 and 2002, respectively.  
   To  achieve  strong  returns  within  managed  risk we  diversify  our  asset
portfolio to  approximate  the target  allocations  in the table  below.  Equity
securities are diversified  among domestic  companies with large,  mid and small
market  capitalizations,  as well as investments in international  companies. In
addition,  all debt  securities must have a Standard & Poor's credit rating of A
or higher.


<TABLE>
PLAN ASSET TARGET ALLOCATIONS 
<CAPTION>
================================================================================
<S>                                                             <C>
Pension Plan Asset Categories:
      Equity Securities                                          58%
      Debt Securities                                            30
      Real Estate                                                 5
      Venture Capital                                             6
      Cash                                                        1
--------------------------------------------------------------------------------
                                                                100%
--------------------------------------------------------------------------------
Postretirement Health and Life 
Asset Categories (includes VEBAs 
and irrevocable grantor trust):
      Equity Securities                                          62%
      Debt Securities                                            35
      Cash                                                        3
--------------------------------------------------------------------------------
                                                                100%
================================================================================
</TABLE>


   We expect to  contribute  approximately  $8  million to our  defined  benefit
pension  plans and $7  million  to our  postretirement  health and life plans in
2004.

--------------------------------------------------------------------------------
                                    PAGE 81

<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS


19  EMPLOYEE STOCK AND INCENTIVE PLANS

   EMPLOYEE  STOCK  OWNERSHIP  PLAN.  We  sponsor  a  leveraged  employee  stock
ownership  plan (ESOP) within the  Retirement  Savings and Stock  Ownership Plan
that covers eligible Corporate and Energy Services' employees.  In 1989 the ESOP
used the proceeds from a $16.5 million  third-party  loan,  guaranteed by us, to
purchase  1.2  million  shares  of our  common  stock  on the open  market.  The
remaining  principal  balance on the loan was refinanced in 2002. The refinanced
loan has a variable  interest  rate based on LIBOR and matures on  December  31,
2004. In 1990 the ESOP issued a $75 million note (term not to exceed 25 years at
10.25%) to us as consideration for 5.6 million shares of our newly issued common
stock.  The Company makes annual  contributions  to the ESOP equal to the ESOP's
debt  service less  available  dividends  received by the ESOP.  The majority of
dividends  received by the ESOP are used to pay debt  service,  with the balance
distributed to certain  participants.  The ESOP shares were initially pledged as
collateral  for its  debt.  As the debt is  repaid,  shares  are  released  from
collateral  and  allocated  to  participants,  based on the  proportion  of debt
service  paid in the  year.  The  third-party  debt of the ESOP is  recorded  as
long-term  debt and the shares  pledged as  collateral  are reported as unearned
ESOP shares on our  consolidated  balance  sheet.  As shares are  released  from
collateral, the Company reports compensation expense equal to the current market
price of the shares,  and the shares become  outstanding for  earnings-per-share
computations.  Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings;  available  dividends on unallocated ESOP shares are recorded
as a reduction of debt and accrued interest.  ESOP compensation expense was $3.7
million in 2003 ($3.9 million in 2002; $2.6 million in 2001).


<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                   2003            2002         2001
================================================================================
MILLIONS
<S>                                     <C>             <C>          <C>
ESOP Shares
    Allocated                              3.6            3.8           3.9
    Unreleased                             3.4            3.7           4.0
--------------------------------------------------------------------------------
    Total                                  7.0            7.5           7.9
--------------------------------------------------------------------------------
Fair Value of Unreleased Shares         $105.0          $84.0        $100.3
================================================================================
</TABLE>


   STOCK  OPTION  AND AWARD  PLANS.  We have an  Executive  Long-Term  Incentive
Compensation Plan (Executive Plan) and a Director Long-Term Stock Incentive Plan
(Director  Plan).  The Executive  Plan allows for the grant of up to 9.7 million
shares of our common stock to key  employees.  To date,  these grants have taken
the form of stock options, performance share awards and restricted stock awards.
The Director Plan allows for the grant of up to 0.3 million shares of our common
stock to nonemployee  directors.  Each nonemployee  director  receives an annual
grant of 1,500 stock options and a biennial grant of performance shares equal to
$10,000  in  value of  common  stock at the date of  grant.  Stock  options  are
exercisable  at the market  price of common  shares on the date the  options are
granted,  and vest in equal annual  installments  over two years with expiration
ten years from the date of grant.  Performance shares are earned over multi-year
time periods and are contingent upon the attainment of certain performance goals
of ALLETE.  Restricted stock vests once certain periods of time have elapsed. At
December 31, 2003,  3.8 million and 0.1 million  shares were held in reserve for
future issuance under the Executive Plan and Director Plan, respectively.


<TABLE>
<CAPTION>
                                                                AVERAGE
                                                               EXERCISE
STOCK OPTION ACTIVITY                       OPTIONS              PRICE
================================================================================
OPTIONS IN MILLIONS
<S>                                         <C>                <C>
2003
Outstanding, Beginning of Year                 2.3              $22.48
Granted                                        0.7              $20.59
Exercised                                     (0.6)             $20.44
Cancelled                                     (0.1)             $22.71
--------------------------------------------------------------------------------
Outstanding, End of Year                       2.3              $21.49
--------------------------------------------------------------------------------
Exercisable, End of Year                       1.4              $22.42
Fair Value of Options Granted
    During the Year                          $2.72
--------------------------------------------------------------------------------
2002
Outstanding, Beginning of Year                 2.3              $20.18
Granted                                        0.8              $25.92
Exercised                                     (0.7)             $18.70
Cancelled                                     (0.1)             $23.77
--------------------------------------------------------------------------------
Outstanding, End of Year                       2.3              $22.48
--------------------------------------------------------------------------------
Exercisable, End of Year                       1.3              $20.23
Fair Value of Options Granted
    During the Year                          $4.55
--------------------------------------------------------------------------------
2001
Outstanding, Beginning of Year                 2.4              $18.52
Granted                                        0.8              $23.63
Exercised                                     (0.8)             $18.39
Cancelled                                     (0.1)             $21.05
--------------------------------------------------------------------------------
Outstanding, End of Year                       2.3              $20.18
--------------------------------------------------------------------------------
Exercisable, End of Year                       1.2              $19.55
Fair Value of Options Granted
    During the Year                          $3.89
================================================================================
</TABLE>



--------------------------------------------------------------------------------
                                    PAGE 82

<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS


   At December  31, 2003  options  outstanding  consisted of 0.2 million with an
exercise  price of $13.69 to $16.25,  and 2.1 million with an exercise  price of
$20.51 to $25.68. The options with an exercise price of $13.69 to $16.25 have an
average remaining  contractual life of 5.4 years with 0.2 million exercisable on
December  31, 2003 at an average  price of $15.82.  The options with an exercise
price of $20.51 to $25.68  have an  average  remaining  contractual  life of 7.5
years with 1.2 million  exercisable  on December 31, 2003 at an average price of
$23.53.
   A total of 0.1 million performance share grants were awarded in February 2004
for  performance  periods  ending in 2005 and 2006.  The  ultimate  issuance  is
contingent  upon the  attainment of certain future  performance  goals of ALLETE
during the  performance  periods.  The grant date fair value of the  performance
share awards was $1.9 million.
   A total of 0.3 million performance share grants were awarded in 2002 and 2003
for the performance period ended December 31, 2003. The grant date fair value of
the share  awards was $8.3  million.  In early  2004,  50% of the shares will be
issued with the balance to be issued in 2005.
   In  February  2004 we granted  stock  options to purchase  approximately  0.1
million shares of common stock  (exercise  price of $32.55 per share).  
   EMPLOYEE  STOCK  PURCHASE  PLAN. We have an Employee Stock Purchase Plan that
permits eligible  employees to buy up to $23,750 per year of our common stock at
95% of the market  price.  At December  31,  2003,  1.3 million  shares had been
issued  under the plan and 0.5  million  shares  were held in reserve for future
issuance.

20  QUARTERLY FINANCIAL DATA (UNAUDITED)

   Information for any one quarterly period is not necessarily indicative of the
results which may be expected for the year.  Financial results for 2003 included
a $71.6 million, or $0.86 per share, after-tax gain on the sale of substantially
all our Water  Services  businesses  ($0.2  million  first  quarter  and  second
quarter;  $3.0 million,  or $0.04 per share,  third quarter;  $68.2 million,  or
$0.82 per share, fourth quarter).  The gain was net of all selling,  transaction
and employee  termination  benefit  expenses,  as well as  impairment  losses on
certain  remaining  assets.  Financial  results  for the first  quarter  of 2002
included  charges of $1.6 million,  or $0.02 per share and the second quarter of
2002 included $2.3 million,  or $0.03 per share,  of charges  related to exiting
our vehicle  transport  business  and retail  store.  Financial  results for the
fourth  quarter of 2002  included  a $5.5  million,  or $0.07 per share,  charge
related to the indefinite delay of a generation project in Superior, Wisconsin.


<TABLE>
<CAPTION>
QUARTER ENDED                                        MAR. 31      JUN. 30     SEPT. 30     DEC. 31
====================================================================================================
MILLIONS EXCEPT
  EARNINGS PER SHARE
<S>                                                  <C>          <C>         <C>          <C>
2003
Operating Revenue                                    $422.9        $409.9      $397.1      $388.9
Operating Income from
    Continuing Operations                             $62.4         $62.1       $65.3       $45.2
Net Income
    Continuing Operations                             $38.0         $37.1       $39.4       $28.6
    Discontinued Operations                             6.3           7.3         8.2        71.5
----------------------------------------------------------------------------------------------------
                                                      $44.3         $44.4       $47.6      $100.1
Earnings Available for
    Common Stock                                      $44.3         $44.4       $47.6      $100.1
Earnings Per Share of
    Common Stock
Basic
    Continuing Operations                             $0.46         $0.45       $0.47       $0.34
    Discontinued Operations                            0.08          0.09        0.10        0.86
----------------------------------------------------------------------------------------------------
                                                      $0.54         $0.54       $0.57       $1.20
Diluted
    Continuing Operations                             $0.46         $0.45       $0.47       $0.34
    Discontinued Operations                            0.08          0.08        0.10        0.86
----------------------------------------------------------------------------------------------------
                                                      $0.54         $0.53       $0.57       $1.20

2002
Operating Revenue                                    $367.2        $374.9      $387.9      $364.3
Operating Income from
    Continuing Operations                             $54.7         $55.6       $60.5       $20.3
Net Income
    Continuing Operations                             $33.2         $33.7       $38.3       $13.7
    Discontinued Operations                             2.0           5.1         6.8         4.4
----------------------------------------------------------------------------------------------------
                                                      $35.2         $38.8       $45.1       $18.1
Earnings Available for
    Common Stock                                      $35.2         $38.8       $45.1       $18.1
Earnings Per Share of
    Common Stock
Basic
    Continuing Operations                             $0.42         $0.41       $0.47       $0.17
    Discontinued Operations                            0.02          0.07        0.08        0.05
----------------------------------------------------------------------------------------------------
                                                      $0.44         $0.48       $0.55       $0.22
Diluted
    Continuing Operations                             $0.42         $0.40       $0.47       $0.17
    Discontinued Operations                            0.02          0.07        0.08        0.05
----------------------------------------------------------------------------------------------------
                                                      $0.44         $0.47       $0.55       $0.22
====================================================================================================
</TABLE>



--------------------------------------------------------------------------------
                                    PAGE 83

<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------


REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
                                       [PRICEWATERHOUSECOOPERS LLP LOGO OMITTED]
To the Board of Directors
of ALLETE, Inc.

   Our audits of the consolidated financial statements referred to in our report
dated  February  9,  2004,  except  as to Note 3 which is as of  March  8,  2004
appearing on page 60 of this Form 10-K of ALLETE, Inc. and its subsidiaries also
included an audit of the Financial  Statement  Schedule  listed in Item 15(a) of
this Form 10-K.  In our  opinion,  the  Financial  Statement  Schedule  presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.


PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 9, 2004



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

<TABLE>
 
                                                                                                         SCHEDULE II
ALLETE
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<CAPTION>
                                                                           ADDITIONS
                                                     BALANCE AT      --------------------   DEDUCTIONS    BALANCE AT
                                                     BEGINNING        CHARGED      OTHER       FROM         END OF
FOR THE YEAR ENDED DECEMBER 31                        OF YEAR        TO INCOME    CHANGES    RESERVES<F1>   PERIOD
=====================================================================================================================
MILLIONS
<S>                                                  <C>             <C>          <C>       <C>           <C>
Reserve Deducted from Related Assets
  Reserve For Uncollectible Accounts
    2003     Trade Accounts Receivable                $ 8.8            $ 3.1         -        $ 3.5         $ 8.4
             Finance Receivables - Current             20.0             14.8         -         16.8          18.0
             Finance Receivables - Long-Term            1.7                -         -          0.5           1.2
    2002     Trade Accounts Receivable                  6.1              5.7         -          3.0           8.8
             Finance Receivables - Current             20.5             17.2         -         17.7          20.0
             Finance Receivables - Long-Term            2.7              0.4         -          1.4           1.7
    2001     Trade Accounts Receivable                  5.1              4.4         -          3.4           6.1
             Finance Receivables - Current             19.8             19.3         -         18.6          20.5
             Finance Receivables - Long-Term            2.6              0.2         -          0.1           2.7
  Deferred Asset Valuation Allowance 
    2003     Deferred Tax Assets                        7.8              0.9         -            -           8.7
    2002     Deferred Tax Assets                        6.0              1.8         -            -           7.8
    2001     Deferred Tax Assets                        5.0              1.0         -            -           6.0
=====================================================================================================================
<FN>
<F1> Reserve for uncollectible accounts includes bad debts written off.
</FN>
</TABLE>



--------------------------------------------------------------------------------
                                    PAGE 84


<PAGE>
                             ALLETE FORM 10-K 2003
--------------------------------------------------------------------------------

                               EXHIBIT INDEX


EXHIBIT
NUMBER
--------------------------------------------------------------------------------
      
    2(b) - Stock Purchase  Agreement  (without  Exhibits  and  Schedules), dated
           November 20, 2003, by and between Philadelphia  Suburban Corporation,
           (now Aqua America, Inc.) as Purchaser,  and  ALLETE  Water  Services,
           Inc., as Shareholder.

  10(o)3 - Amended  Wholesale  Power  Coordination   and   Dispatch    Operating
           Agreement, dated January 30, 2004, between Minnesota Power, Inc. (now
           ALLETE) and Split Rock Energy LLC.

   10(p) - Amended  and  Restated  Withdrawal  Agreement  (without Exhibits  and
           Schedules), dated January 30, 2004, by and between Great River Energy
           and Minnesota Power (now ALLETE). [Portions of this exhibit have been
           omitted  pursuant to a request for  confidential  treatment and filed
           separately with the SEC.]

   10(s) - Third  Amended  and  Restated  Committed  Facility  Letter   (without
           Exhibits),  dated  December  23,  2003,  to ALLETE from  LaSalle Bank
           National Association, as Agent.

 +10(t)2 - November 2003 Amendment to the Minnesota Power (now ALLETE) Executive
           Annual Incentive Plan.

  +10(u) - ALLETE and  Affiliated  Companies Supplemental  Executive  Retirement
           Plan,  as  amended   and restated, effective January 1, 2004.

 +10(v)2 - Amendments  through  December  2003  to  the  Minnesota  Power    and
           Affiliated Companies Executive Investment Plan-I.

 +10(w)2 - Amendments  through   December  2003  to  the  Minnesota  Power   and
           Affiliated Companies  Executive Investment Plan-II.

 +10(z)2 - Amendments through December 2003 to the Minnesota Power (now  ALLETE)
           Director Stock Plan.

+10(aa)2 - October 2003 Amendment to  the  Minnesota Power (now ALLETE) Director
           Compensation Deferral Plan.

      12 - Computation of Ratios of Earnings to Fixed Charges (Unaudited).

   23(a) - Consent of Independent Accountants.

   23(b) - Consent of General Counsel.

   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  Annual  Report by the Chief Executive
           Officer and Chief  Financial  Officer  Pursuant to Section 906 of the
           Sarbanes-Oxley Act of 2002.




<PAGE>
                                                                    EXHIBIT 2(b)
 




                            STOCK PURCHASE AGREEMENT


                                 BY AND BETWEEN



                        PHILADELPHIA SUBURBAN CORPORATION

                                   (PURCHASER)

                                       AND

                           ALLETE WATER SERVICES, INC.

                                  (SHAREHOLDER)








                             DATE: NOVEMBER 20, 2003









<PAGE>

                                TABLE OF CONTENTS
                                -----------------
                                                                            PAGE
                                                                            ----


ARTICLE 1        DEFINITIONS...................................................1

ARTICLE 2        PURCHASE OF STOCK; PURCHASE PRICE............................10

    2.1     Purchase and Sale of Stock........................................10

    2.2     Purchase Price....................................................10
 
    2.3     Payment of Purchase Price on the Closing Date.....................11

    2.4     Closing and Closing Deliveries....................................11

ARTICLE 3        REPRESENTATIONS AND WARRANTIES OF THE
                 SHAREHOLDER..................................................13

    3.1     Organization......................................................13

    3.2     Capitalization....................................................14

    3.3     Due Authorization.................................................14

    3.4     No Breach.........................................................14

    3.5     Clear Title.......................................................15

    3.6     Condition of Assets...............................................15

    3.7     Litigation........................................................15

    3.8     Labor Matters.....................................................15

    3.9     Tax Matters.......................................................16

    3.10    Employee Benefits.................................................17

    3.11    No Guarantees.....................................................20

    3.12    Financial Statements..............................................20

    3.13    Absence of Certain Developments...................................21

    3.14    Intellectual Property.............................................21

    3.15    Compliance with Laws..............................................22

    3.16    Operating Contracts...............................................22

    3.17    Real Estate.......................................................23

    3.18    Accounts Receivable...............................................25

    3.19    Books and Records; Bank Accounts..................................25

    3.20    Employees.........................................................25

    3.21    Permits and Certificate Applications..............................26

    3.22    Developer Contracts...............................................26

                                       -i-



<PAGE>

                                TABLE OF CONTENTS
                                -----------------
                                   (continued)
                                                                            PAGE
                                                                            ----

    3.23    Subsidiaries......................................................26
   
    3.24    Insurance.........................................................26

    3.25    Brokers...........................................................27

    3.26    Relationship with Related Persons.................................27

    3.27    Internal Disclosure Controls and Procedures.......................28


    3.28    Environmental Matters.............................................28

    3.29    Debt Instruments..................................................28

    3.30    Customers and Suppliers...........................................29

    3.31    Shareholder Loans.................................................29

    3.32    Adequacy of Properties............................................29

    3.33    Absence of Certain Business Practices.............................29

    3.34    Trade Regulation..................................................30

    3.35    Shareholder Ownership of the Stock................................30

    3.36    Virginia Operations...............................................30

    3.37    Employee Retention................................................30

    3.38    Regulation as Utilities...........................................31

    3.39    Limitation on Representations and Warranties......................31

    3.40    Internal Accounting Controls......................................31

    3.41    Water Quality.....................................................31

ARTICLE 4        REPRESENTATIONS AND WARRANTIES OF THE
                 PURCHASER....................................................31

    4.1     Organization......................................................32

    4.2     Due Authorization.................................................32

    4.3     No Breach.........................................................32

    4.4     Investment Representations........................................32

    4.5     Brokers...........................................................32

ARTICLE 5        PERFORMANCE AND COVENANTS PENDING CLOSING....................33

    5.1     Continuing Due Diligence..........................................33

    5.2     Conduct of Business...............................................33

    5.3     Encumbrances......................................................33

                                      -ii-


<PAGE>

                                TABLE OF CONTENTS
                                -----------------
                                   (continued)
                                                                            PAGE
                                                                            ----

    5.4     Pay Increases.....................................................34

    5.5     Restrictions on New Contracts.....................................34

    5.6     Preservation of Business..........................................34

    5.7     Payment and Performance of Obligations............................34

    5.8     Restrictions on Sale of Assets....................................34

    5.9     Prompt Notice.....................................................34

    5.10    Consents..........................................................35

    5.11    Copies of Documents...............................................35

    5.12    No Solicitation of Other Offers...................................35

    5.13    Accounts Receivable and Payable...................................35

    5.14    Title Matters; Surveys............................................35

    5.15    Insurance.........................................................37

    5.16    Filing Reports and Making Payments................................37
 
    5.17    Capital Expenditures..............................................37

    5.18    Monthly and Year-End 2003 Financials..............................37

    5.19    Litigation........................................................38

    5.20    Notification of Inaccuracy........................................38

    5.21    Debt Instruments..................................................38

    5.22    Guarantees........................................................38

    5.23    Environmental Assessment..........................................39

    5.24    Cooperation with Respect to Permits, Licenses and
            Regulatory Matters................................................39

    5.25    Performance and Other Bonds.......................................39
 
    5.26    Absence of Certain Developments...................................40

    5.27    Certain Accounting Matters........................................40

    5.28    Capital Expenditures..............................................41

ARTICLE 6        MUTUAL CONDITIONS PRECEDENT TO THE PARTIES'
                 OBLIGATIONS..................................................41

    6.1     Proceedings.......................................................41

    6.2     Consents and Approvals............................................42

    6.3     Antitrust Matters.................................................42

                                      -iii-


<PAGE>

                                TABLE OF CONTENTS
                                -----------------
                                   (continued)
                                                                            PAGE
                                                                            ----

ARTICLE 7        ADDITIONAL CONDITIONS PRECEDENT TO THE
                 PURCHASER'S OBLIGATIONS......................................43

    7.1     Accuracy of Representations and Warranties........................43

    7.2     Compliance with Covenants and Agreements..........................43

    7.3     No Material Adverse Effect........................................43

    7.4     Legal Opinion.....................................................43

ARTICLE 8        ADDITIONAL CONDITIONS PRECEDENT TO THE
                 SHAREHOLDER'S OBLIGATIONS....................................43

    8.1     Accuracy of Representations and Warranties........................43

    8.2     Compliance with Covenants and Agreements..........................43

    8.3     Legal Opinion.....................................................44

    8.4     Delivery of Purchase Price and Other Consideration................44

ARTICLE 9        INDEMNIFICATION..............................................44

    9.1     Indemnification by the Shareholder................................44

    9.2     Indemnification by the Purchaser..................................45

    9.3     Procedure for Indemnification.....................................46

    9.4     Dispute Resolution................................................47

    9.5     Effect of Insurance...............................................48

    9.6     Effect of Taxes...................................................49

ARTICLE 10       TAX MATTERS..................................................50

    10.1    Tax Returns.......................................................50

    10.2    Controversies.....................................................50

    10.3    Transfer Taxes....................................................51

    10.4    Amended Tax Returns...............................................51

    10.5    Non-foreign Person Affidavit......................................51

    10.6    Tax Indemnification...............................................51

    10.7    Section 338 Election..............................................52

    10.8    Post-Closing Access and Cooperation...............................52

ARTICLE 11       PERFORMANCE FOLLOWING THE CLOSING DATE.......................52

    11.1    Further Acts and Assurances.......................................52

    11.2    Non-Competition Agreement.........................................53

                                      -iv-


<PAGE>

                                TABLE OF CONTENTS
                                -----------------
                                   (continued)
                                                                            PAGE
                                                                            ----

    11.3    Non-Solicitation Agreement........................................53

    11.4    Reasonableness of Covenants.......................................53

    11.5    Injunctive Relief.................................................53

    11.6    Blue Pencil Doctrine..............................................54

    11.7    Guarantees........................................................54

    11.8    Employee Matters..................................................54

    11.9    Indemnification of Officers and Directors of the Company and the
            Subsidiaries......................................................56

ARTICLE 12       TERMINATION..................................................57

    12.1    Termination.......................................................57

    12.2    Return of Documents and Nondisclosure.............................57

ARTICLE 13       MISCELLANEOUS................................................58

    13.1    Survival of Representations and Warranties, Covenants and
            Agreements........................................................58

    13.2    Preservation of and Access to Records.............................58

    13.3    Cooperation.......................................................58

    13.4    Public Announcements..............................................58

    13.5    Notices...........................................................59

    13.6    Entire Agreement..................................................59

    13.7    Remedies..........................................................59

    13.8    Amendments........................................................60

    13.9    Successors and Assigns............................................60

    13.10   Fees and Expenses.................................................60

    13.11   Governing Law and Jurisdiction....................................60

    13.12   Counterparts and Facsimile Signature..............................61

    13.13   Headings..........................................................61

    13.14   Scope of Agreement................................................61

    13.15   Number and Gender.................................................61

    13.16   Severability......................................................61

    13.17   Parties in Interest...............................................61

    13.18   Waiver............................................................62

                                       -v-


<PAGE>

                                TABLE OF CONTENTS
                                -----------------
                                   (continued)
                                                                            PAGE
                                                                            ----

    13.19   Construction......................................................62

    13.20   Specific Performance..............................................62

    13.21   Supplementation of Schedules......................................62



                                      -vi-



<PAGE>

                            STOCK PURCHASE AGREEMENT


     THIS STOCK PURCHASE  AGREEMENT (this  "AGREEMENT") is made and entered into
as of the 20th day of  November,  2003,  by and  between  PHILADELPHIA  SUBURBAN
CORPORATION,  a Pennsylvania  corporation  (the  "PURCHASER"),  and ALLETE WATER
SERVICES, INC., a Minnesota corporation (the "SHAREHOLDER").

                                    RECITALS
                                    --------

     A. The Shareholder is the sole owner of 6,000 issued and outstanding shares
of capital  stock (the  "STOCK") of Heater  Utilities,  Inc.,  a South  Carolina
corporation (the "COMPANY").

     B. The Company owns all of the issued and outstanding  capital stock of its
two subsidiary corporations:  (i) Brookwood Water Corporation,  a North Carolina
corporation  ("BROOKWOOD"),  and (ii) LaGrange Waterworks  Corporation,  a North
Carolina corporation ("LAGRANGE") (individually,  each of Brookwood and LaGrange
may herein be referred to as a "SUBSIDIARY," and  collectively,  may be referred
to herein as the "SUBSIDIARIES").

     C. The Company owns and operates  approximately 450 community water systems
and 33 wastewater  utility systems within the State of North Carolina,  and also
owns and operates 2 small  community  water systems  located in Carroll  County,
Virginia.

     D. Brookwood owns and operates  approximately 10 community water systems in
and about  Fayetteville,  North  Carolina (in  Cumberland and Hoke Counties) and
LaGrange owns and operates 3 community water systems in and about  Fayetteville,
North  Carolina (in  Cumberland  County).  Neither of the  Subsidiaries  owns or
operates any wastewater utility systems.

     E. The Purchaser  desires to purchase the Stock held by the Shareholder and
the  Shareholder  desires  to sell the Stock to the  Purchaser  on the terms and
subject to the conditions set forth in this Agreement.

     F. Upon consummation of the purchase and sale of the Stock pursuant to this
Agreement,  the  Purchaser  will own all of the issued and  outstanding  capital
stock of the Company.

                                    AGREEMENT
                                    ---------

     In  consideration  of  the  foregoing  Recitals  and  the  mutual  promises
contained  in this  Agreement,  and other good and valuable  consideration,  the
receipt and sufficiency of which are hereby acknowledged,  the Purchaser and the
Shareholder agree as follows:

                                    ARTICLE 1

                                   DEFINITIONS

     For  purposes of this  Agreement,  the  following  terms have the  meanings
specified:

                                       1



<PAGE>

     "ACQUISITION   PROPOSAL"  means  any  proposal  relating  to  the  possible
acquisition of the Company,  Brookwood  and/or  LaGrange,  whether by way of (i)
merger,  (ii)  purchase of any capital stock of any of the  foregoing,  or (iii)
purchase of all or substantially all of the assets of the foregoing.

     "AFFILIATE" when used in reference to a specified Person,  means any Person
that, directly or indirectly,  through one or more intermediaries,  controls, or
is controlled by, or is under common control with the specified Person.

     "AGREEMENT" has the meaning set forth in the introductory paragraph of this
Agreement.

     "ALLETE,  INC." means ALLETE, Inc., a Minnesota  corporation,  the ultimate
corporate parent of the Shareholder, Company and its Subsidiaries.

     "ALLETE, INC. GUARANTEE" means that certain ALLETE, Inc. Guarantee executed
and delivered on the date hereof by ALLETE, Inc., the form of which is set forth
as EXHIBIT B to this  Agreement,  and which will become  effective only upon the
Closing of this  Agreement and shall be applicable  only to  obligations  of the
Shareholder that arise after the Closing Date.

     "ANCILLARY  DOCUMENTS"  has the  meaning  set forth in Section  3.3 of this
Agreement.

     "APPLICABLE  LAWS" means any and all laws (including  Environmental  Laws),
ordinances,  constitutions,   regulations,  statutes,  treaties,  rules,  codes,
licenses,  certificates,   franchises,  permits,  requirements  and  Injunctions
adopted, enacted, implemented, promulgated, issued, entered or deemed applicable
by or under the authority of any Governmental  Body having  jurisdiction  over a
specified Person or any of such Person's properties or assets.

     "BALANCE  SHEETS"  has  the  meaning  set  forth  in  Section  3.12 of this
Agreement.

     "BALANCE  SHEET  DATE" has the  meaning  set forth in Section  3.12 of this
Agreement.

     "BASKET  AMOUNT"  has the  meaning  set  forth in  Section  9.1(a)  of this
Agreement.

     "BENEFIT  PLAN" means any and all bonus,  stock option,  restricted  stock,
stock  purchase,  stock  appreciation,   phantom  stock,  profit  participation,
profit-sharing,    deferred   compensation,   severance,   retention,   pension,
retirement,  disability insurance,  medical insurance,  dental insurance, health
insurance,  or life insurance,  death benefit,  incentive,  welfare and/or other
benefit,   compensation  and/or  retirement  plan,  policy,  arrangement  and/or
Contract  maintained,  sponsored  or  participated  in by  the  Company  or  any
Subsidiary.

     "BROOKWOOD" has the meaning set forth in the Recitals to this Agreement.
    
     "BUSINESS"  means the  ownership  and/or  operation of community  water and
wastewater utility systems which serve primarily residential customers and, to a
much lesser  extent,  serve a  commercial  customer  base.  With  respect to the
Company,  the Business  refers to community water utility systems and wastewater
utility systems,  and with respect to the  Subsidiaries,  the Business refers to
community water utility systems.

                                       2



<PAGE>

     "CARY  PROPERTY"  has the  meaning  set forth in  Section  5.14(a)  of this
Agreement.

     "CLOSING" has the meaning set forth in Section 2.4(a) of this Agreement.

     "CLOSING  DATE"  has the  meaning  set  forth  in  Section  2.4(a)  of this
Agreement.

     "CODE" means the Internal  Revenue Code of 1986,  as amended,  or rules and
regulations  issued by the IRS  pursuant  to the  Internal  Revenue  Code or any
successor law.

     "COMPANY" has the meaning set forth in the Recitals to this Agreement.

     "COMPANY  PLAN"  has the  meaning  set  forth in  Section  11.8(b)  of this
Agreement.

     "COMPETING  BUSINESS"  has the  meaning  set forth in Section  3.26 of this
Agreement.

     "CONFIDENTIAL   INFORMATION"   means  any  information  or  compilation  of
information  not  generally  known to the  public or the  industry  or which the
Company  or the  Subsidiaries  have not  disclosed  to third  parties  without a
written  obligation of  confidentiality,  which is proprietary to the Company or
the  Subsidiaries,  relating to the Company's or the  Subsidiaries'  procedures,
techniques, methods, concepts, ideas, affairs, products, processes and services,
including, but not limited to, information relating to marketing, merchandising,
selling,   research,   development,   manufacturing,   purchasing,   accounting,
engineering,  financing,  costs,  customers,  plans, pricing,  billing, needs of
customers and products and services  used by  customers,  all lists of customers
and their addresses,  prospects, sales calls, products, services, prices and the
like as well as any specifications, formulas, plans, drawings, accounts or sales
records,  sales  brochures,  code  books,  manuals,  trade  secrets,  knowledge,
know-how,  pricing  strategies,  operating  costs,  sales  margins,  methods  of
operations, invoices or statements and the like.

     "CONTRACT"  means  any  agreement,  lease of  personal  or mixed  property,
license, contract, obligation, promise, commitment,  arrangement,  understanding
or  undertaking,  instrument,  document  (whether  written  or oral and  whether
express or implied) of any type,  nature or description  that is legally binding
but excluding leases of Leased Real Estate. As used herein,  the word "Contract"
shall be limited in scope if modified  by an  adjective  specifying  the type of
contract to which this Agreement or a Section hereof refers.

     "CONVERTIBLE  SECURITIES"  means  any and  all  securities  convertible  or
exchangeable  for  any  shares  of  capital  stock  of  the  Company  or  either
Subsidiary, including, without limitation, common stock.

     "DOJ" means the United States Department of Justice.

     "DEBT  INSTRUMENTS"  has the  meaning  set  forth in  Section  3.29 of this
Agreement.

     "DEBT SECURITIES" means any and all indebtedness  issued by or on behalf of
the  Company  or  either  Subsidiary  which  constitutes  a  security  under the
Securities Act of 1933, as amended (the "SECURITIES ACT").

     "DEVELOPER  CONTRACTS"  has the meaning  set forth in Section  3.16 of this
Agreement.

                                       3



<PAGE>

     "DIRECTOR  INDEMNIFIED  PARTY" or  "DIRECTOR  INDEMNIFIED  PARTIES" has the
meaning set forth in Section 11.9(a) of this Agreement.

     "DISCLOSE" means to reveal,  deliver,  divulge,  disclose,  publish,  copy,
communicate,  show or otherwise make known or available to any other Person,  or
in any way to copy, any of the Confidential Information of the Company and/or
its Subsidiaries.

     "EMPLOYEES" has the meaning set forth in Section 3.20(a) of this Agreement.

     "ENCUMBRANCE" means and includes:

          (i)  with respect to any personal property, any intangible property or
     any  property  other than real  property,  any  security or other  property
     interest or right, claim, lien, pledge, option, charge,  security interest,
     contingent or conditional sale, or other title claim or retention agreement
     or  lease  or use  agreement  in the  nature  thereof  whether  voluntarily
     incurred or arising by  operation of law, and  including  any  agreement to
     grant or submit to any of the foregoing in the future; and

          (ii) with respect to any real property  (whether and  including  Owned
     Real Estate or Leased Real Estate), any mortgage, lien, easement, interest,
     right-of-way,  condemnation or eminent domain proceeding, encroachment, any
     building,  use or other form of  restriction,  encumbrance  or other  claim
     (including  adverse or prescriptive)  or right of third parties  (including
     Governmental  Bodies),  any  lease  or  sublease,   boundary  dispute,  and
     agreements  with respect to any real property  including:  purchase,  sale,
     right of first refusal, option, construction, building or property service,
     maintenance,  property  management,  conditional or contingent sale, use or
     occupancy, franchise or concession, whether voluntarily incurred or arising
     by operation of law, and  including any agreement to grant or submit to any
     of the foregoing in the future.

     "ENVIRONMENTAL  ASSESSMENT"  has the meaning  set forth in Section  5.23 of
this Agreement.

     "ENVIRONMENTAL  ASSESSMENT  FIRM" has the meaning set forth in Section 5.23
of this Agreement.

     "ENVIRONMENTAL  LAWS" means any and all Applicable  Laws (i) regulating the
use,  treatment,  generation,  transportation,   storage,  control,  management,
recycling or disposal of any Hazardous Material,  including, but not limited to,
the  Comprehensive  Environmental  Response,  Compensation and Liability Act (42
U.S.C. Section 9601  ET  SEQ.), the Resource  Conservation and Recovery  Act (42
U.S.C. Section 6901 ET SEQ.), the  Hazardous  Materials  Transportation  Act (49
U.S.C. Section 1801 ET SEQ.), the Federal Water Pollution Control Act (33 U.S.C.
Section 1251 ET SEQ.),  the Clean Water Act  (33 U.S.C.  Section  1251 ET SEQ.),
the  Clean Air Act (42  U.S.C. Section  7401  ET  SEQ.), the  Toxic  Substances 
Control  Act  (15 U.S.C. Section 2601 ET  SEQ.),  and/or (ii)  relating  to  the
protection,  preservation or conservation of the environment,  all  as existing,
defined or interpreted as of the date hereof.

     "ERISA"  means the Employee  Retirement  Income  Security  Act of 1974,  as
amended.

     "ERISA  AFFILIATE"  has the  meaning  set forth in Section  3.10(b) of this
Agreement.

                                       4



<PAGE>

     "EXISTING  POLICY"  has the  meaning  set forth in Section  5.14(a) of this
Agreement.

     "FINAL ORDER" has the meaning set forth in Section 6.2 of this Agreement.

     "FTC" means the United States Federal Trade Commission.

     "GAAP" means generally accepted accounting principles in the United States.
  
     "GOVERNMENTAL BODY" means any:

          (i)   nation,  state,  county,  city, town, village, district or other
     jurisdiction of any nature;

          (ii)  federal, state, local, municipal, foreign or other government;

          (iii) governmental  or  quasi-governmental  authority  of any   nature
     (including any governmental agency, branch, board, commission,  department,
     instrumentality, office or other entity, and any court or other tribunal);

          (iv)  multinational organization or body; and/or

          (v)   body  exercising,  or  entitled or purporting to exercise,   any
     administrative,  executive,  judicial,  legislative,  police, regulatory or
     taxing authority or power of any nature.

     "HSR" means the Hart Scott Rodino  Antitrust  Improvements  Act of 1976, as
amended.

     "HAZARDOUS  MATERIALS" means any and all (i) dangerous,  toxic or hazardous
pollutants,  contaminants,  chemicals, wastes, materials or substances listed or
identified in, or directly or indirectly  regulated by, any  Environmental  Law,
and  (ii)  any of the  following,  whether  or not  included  in the  foregoing:
polychlorinated biphenyls, asbestos in any form or condition, urea-formaldehyde,
petroleum  (including crude oil or any fraction  thereof),  natural gas, natural
gas liquids,  liquefied  natural gas,  synthetic gas usable for fuel or mixtures
thereof,  nuclear fuels or materials,  chemical wastes,  radioactive  materials,
explosives and known possible carcinogens.

     "IRS" means the United States Internal Revenue Service.

     "INACTIVE  EMPLOYEES" has the meaning set forth in Section  3.20(a) of this
Agreement.

     "INDEMNIFIED  PARTY"  has the  meaning  set  forth in  Section  9.3 of this
Agreement.

     "INDEMNIFYING  PARTY"  has the  meaning  set forth in  Section  9.3 of this
Agreement.

     "INJUNCTION"  means  any  and  all  writs,  rulings,  awards,   directives,
injunctions (whether temporary, preliminary or permanent), judgments, decrees or
orders (whether executive, judicial or otherwise) adopted, enacted, implemented,
promulgated,  issued,  entered or deemed applicable by or under the authority of
any Governmental Body.

                                       5



<PAGE>

     "INTELLECTUAL   PROPERTY"  means  any  and  all  (i)  inventions   (whether
patentable  or  unpatentable  and  whether  or not  reduced  to  practice),  all
improvements   thereto,   and  all  patents,   patent  applications  and  patent
disclosures,  together with all  reissuances,  continuations,  continuations  in
part, revisions, extensions and reexaminations thereof; (ii) trademarks, service
marks,  trade dress,  logos,  trade names,  assumed names and  corporate  names,
together  with  all  translations,  adaptations,  derivations  and  combinations
thereof and including all goodwill associated  therewith,  and all applications,
registrations and renewals in connection  therewith;  (iii) copyrightable works,
all copyrights and all  applications,  registrations  and renewals in connection
therewith;  (iv) mask works and all applications,  registrations and renewals in
connection  therewith;  (v) trade secrets and confidential  business information
(including  ideas,  research and development,  know-how,  technology,  formulas,
compositions,  manufacturing and production processes and techniques,  technical
data, designs,  drawings,  specifications,  customer and supplier lists, pricing
and cost  information  and business and  marketing  plans and  proposals);  (vi)
computer software (including data and related software program  documentation in
computer-readable  and hard-copy forms);  (vii) other intellectual  property and
proprietary rights of any kind, nature or description,  including web sites, web
site  domain  names and other  e-commerce  assets and  resources  of any kind or
nature; and (viii) copies of tangible  embodiments  thereof (in whatever form or
medium).

     "KNOWLEDGE" means, with respect to an individual who is a natural being, an
individual's  actual knowledge  (following due inquiry and  investigation)  of a
fact or  other  matter.  With  respect  to an  entity  that  is a party  to this
Agreement,  "Knowledge"  shall  be  solely  attributed  to the  Knowledge  of an
officer,  director,  or the Senior  Management  Employees of the Purchaser,  the
Shareholder, the Company or the Subsidiaries, respectively, and as applicable to
the  context  used in this  Agreement.  As used  herein,  the  Knowledge  of the
Subsidiaries  shall be attributed to the Company for purposes of this  Agreement
and, as a consequence, the "Knowledge of the Company" shall be deemed to include
the Knowledge of the Subsidiaries.

     "LAGRANGE" has the meaning set forth in the Recitals to this Agreement.

     "LEASED  REAL  ESTATE" has the  meaning  set forth in Section  3.17 of this
Agreement.

     "LEASES" has the meaning set forth in Section 3.17(a) of this Agreement.

     "LIABILITY" or "LIABILITIES"  means any and all debts,  liabilities  and/or
obligations  of any  type,  nature or  description  (whether  known or  unknown,
asserted or unasserted, secured or unsecured, absolute or contingent, accrued or
unaccrued, liquidated or unliquidated and whether due or to become due).

     "LOSS"  or  "LOSSES"  has the  meaning  set  forth in  Section  9.1 of this
Agreement.

     "MATERIAL ADVERSE EFFECT" or "MATERIAL ADVERSE CHANGE" means, in connection
with the Company and the  Subsidiaries  (evaluated on the basis of the three (3)
companies  taken as a whole and not on an individual  company-by-company  basis)
with  due  consideration  to  the  size  and  complexity  of  the  Business  and
transactions contemplated by this Agreement, any event, change or effect that is
materially  adverse,   individually  or  in  the  aggregate,  to  the  condition
(financial or otherwise),  properties,  assets,  Liabilities,  revenues, income,
business,  operations,

                                       6



<PAGE>

results of operations of such Persons, taken as a whole; PROVIDED, HOWEVER, that
in no event shall any of the following  constitute a material adverse change, or
be  deemed to have a  material  adverse  effect,  in the  business,  operations,
assets,  results of operations or condition of the Company and the Subsidiaries:
(i) any change or effect  resulting  from  conditions  affecting the industry in
which the  Company  and the  Subsidiaries  operate  or from  changes  in general
business or economic  conditions,  (ii) any change or effect  resulting from the
announcement  or  pendency  of any  of the  transactions  contemplated  by  this
Agreement,  (iii) any change or effect  resulting from compliance by the Company
and/or  the  Subsidiaries  with  the  terms  of,  or the  taking  of any  action
contemplated or permitted by, this Agreement and any Ancillary Document, or (iv)
any change or effect resulting from any change in Applicable Law. In furtherance
of the foregoing, and notwithstanding anything to the contrary set forth in this
Agreement,  any  Material  Adverse  Effect or any Material  Adverse  Change with
respect to the Company and/or either of the  Subsidiaries  shall be evaluated on
the  basis  of the  Company  and  the  Subsidiaries  taken  as a  whole  (in the
aggregate) and not on an individual company-by-company basis.

     "NCDEH"  means the Division of  Environmental  Health of the  Department of
Environment  and Natural  Resources,  a regulatory  agency of the state of North
Carolina  which,  among other  things,  regulates  the  issuance of water system
permits and compliance with federal and state Applicable Laws.

     "NCDWQ"  means  the  Division  of  Water  Quality  of  the   Department  of
Environment  and Natural  Resources,  a regulatory  agency of the state of North
Carolina which, among other things, regulates the issuance of wastewater permits
and compliance with federal and state Applicable Laws.

     "NCUC" means the North Carolina Utilities  Commission,  a regulatory agency
of the state of North  Carolina  which,  among other  things,  regulates  rates,
service and PCN  Certificates  of entities that own and/or operate water systems
and wastewater utility systems.

     "OPERATING  CONTRACTS"  has the meaning  set forth in Section  3.16 of this
Agreement.

     "ORDINARY COURSE OF BUSINESS" means an action taken by a Person only if:
  
          (i)  such action is consistent with the past  practices of such Person
     and is taken in the ordinary course of the normal day-to-day  operations of
     such Person; and

          (ii) such  action is not  required  to be  authorized  by the board of
     directors of such Person (or by any Person or group of Persons constituting
     a governing body of a Person exercising similar authority).

     "OVERLAP  PERIOD"  has  the  meaning  set  forth  in  Section  10.2 of this
Agreement.

     "OWNED REAL ESTATE" has the meaning set forth in Section 3.17 hereof.

     "PBGC" means the Pension Benefit Guaranty Corporation.

     "PCBs" has the meaning set forth in Section 3.28 of this Agreement.

                                       7


<PAGE>

     "PCN  CERTIFICATES"  means  the  certificates  of  public  convenience  and
necessity that are issued and regulated by the NCUC.

     "PERMITS"  means all  right,  title  and  interest  in and to any  permits,
licenses, filings, authorizations, approvals, or other indicia of authority (and
any  pending  applications  for  approval  or  renewal  of a  Permit),  to  own,
construct,  operate, sell, inventory,  disburse or maintain any asset or conduct
any business as issued by any Governmental Body.

     "PERMITTED  ENCUMBRANCES"  has the meaning set forth in Section  3.17(c) of
this Agreement.

     "PERMITTED EXCEPTIONS" has the meaning set forth in Section 5.14(b) of this
Agreement.

     "PERSON"  means  any  individual,  corporation  (including  any  non-profit
corporation),   general,  limited  or  limited  liability  partnership,  limited
liability company, joint venture, estate, trust, association,  organization,  or
other entity or Governmental Body.

     "PRE-CLOSING  PERIOD" has the  meaning set forth in Section  3.9(b) of this
Agreement.

     "PROCEEDING"  means  any suit,  litigation,  arbitration,  hearing,  audit,
investigation,  order, or other action (whether civil, criminal,  administrative
or investigative) noticed, commenced, brought, conducted, or heard by or before,
or otherwise involving, any Governmental Body or arbitrator.

     "PURCHASE  PRICE"  has  the  meaning  set  forth  in  Section  2.2 of  this
Agreement.

     "PURCHASER" has the meaning set forth in the introductory paragraph of this
Agreement.

     "PURCHASER  PLAN" has the  meaning  set forth in  Section  11.8(b)  of this
Agreement.

     "REAL ESTATE" has the meaning set forth in Section 3.17 of this Agreement.

     "RELATED PERSON" or "RELATED  PERSONS" means,  with respect to a particular
individual,

          (i)  each  other member  of such  individual's  Family  (as  hereafter
     defined); and

          (ii) any Affiliate of one or more members of such individual's Family.

     With respect to a specified Person other than an individual:

          (i)  any Affiliate of such specified Person; and

          (ii) each  Person  that  serves  as a  director,  governor,   officer,
     manager, general partner,  executor or trustee of such specified Person (or
     in a similar capacity).

     For purposes  of this definition, the "FAMILY"  of an  individual  includes
(i) such individual, (ii) the individual's spouse,  (iii) any lineal ancestor or
lineal descendant of the individual, or (iv) a trust for  the  benefit of any of
the foregoing.

                                       8



<PAGE>

     "REQUIRED  CONSENT"  has the meaning  set forth in Section  3.17(k) of this
Agreement.

     "RETENTION AND SEVERANCE  AGREEMENTS"  has the meaning set forth in Section
3.37 of this Agreement.

     "RETENTION  PAYMENT"  has the  meaning  set forth in  Section  3.37 of this
Agreement.

     "RIGHTS" means any and all outstanding subscriptions, warrants, options, or
other  arrangements  or  commitments  obligating or which may obligate  (with or
without  notice or passage of time or both) the Company or either  Subsidiary to
issue or  dispose  of any of  their  respective  (as  opposed  to  third  party)
securities  including,  without  limitation,  Convertible  Securities  and  Debt
Securities.

     "SCHEDULES"  has the meaning  set forth in the  introductory  paragraph  to
Article 3 of this Agreement.

     "SECURITIES  ACT" has the  meaning  set  forth in the  definition  of "Debt
Securities" in Article 1 of this Agreement.

     "SENIOR   MANAGEMENT   EMPLOYEE(S)"  means  the  chief  executive  officer,
president,  any vice  president,  the  chief  financial  officer,  treasurer  or
secretary  of a party to this  Agreement.  With  respect to the  Company and the
Subsidiaries,  the Senior Management  Employees shall mean and be limited solely
to  William  E.  Grantmyre,  Jerry  H.  Tweed,  Freda  H.  Hilburn,  Kristin  O.
Brandenburg,   Richard  J.  Durham,  Kenneth  Strickland,  Ruel  C.  Shaw,  Jill
Strickler, Donald Sutter and Gary Moseley.

     "SEVERANCE  PAYMENT"  has the meaning set forth in Section  11.8(f) of this
Agreement.

     "SHAREHOLDER"  has the meaning set forth in the  introductory  paragraph of
this Agreement.

     "SHAREHOLDER  GUARANTEE"  has the meaning  set forth in Section  5.22(b) of
this Agreement.

     "SHAREHOLDER'S REPRESENTATIVE" has the meaning set forth in Section 10.2 of
this Agreement.

     "STOCK" has the meaning set forth in the Recitals to this Agreement.

     "SUBSIDIARY" OR "SUBSIDIARIES" has the meaning set forth in the Recitals to
this Agreement.

     "SUPPLEMENT" has the meaning set forth in Section 13.21 of this Agreement.
      
     "TAX" or "TAXES" means any and all net income, gross income, gross revenue,
gross receipts, net receipts, ad valorem,  franchise,  profits, transfer, sales,
use,   social   security,   employment,   unemployment,   disability,   license,
withholding,   payroll,  privilege,   excise,  value-added,   severance,  stamp,
occupation,   property,   customs,  duties,  real  estate  and/or  other  taxes,
assessments,  levies,  fees or  charges  of any kind  whatsoever  imposed by any
Governmental Body, together with any interest or penalty relating thereto.

                                       9



<PAGE>

     "TAX MATTER" has the meaning set forth in Section 10.2 of this Agreement.

     "TAX RETURN" or "TAX RETURNS" means any return, declaration,  report, claim
for refund or  information  return or  statement  relating to Taxes,  including,
without limitation,  any schedule or attachment thereto,  any amendment thereof,
and any estimated report or statement.

     "THIRD  PARTY  PLANS" has the meaning set forth in Section  11.8(d) of this
Agreement.

     "THREATENED" means a claim,  Proceeding,  dispute,  action, or other matter
for which any demand or statement  has been made,  orally or in writing,  or any
oral or written  notice has been  given,  that would lead a  reasonably  prudent
Person to conclude  that such a claim,  Proceeding,  dispute,  action,  or other
matter  may,  with  reasonable  certainty,  be  asserted,  commenced,  taken  or
otherwise pursued in the future; PROVIDED, HOWEVER, that the foregoing shall not
include customer billing or service disputes in the Ordinary Course of Business.

     "TITLE  DOCUMENTS"  has the  meaning  set forth in Section  5.14(a) of this
Agreement.

     "TITLE  POLICY"  has the  meaning  set  forth in  Section  5.14(c)  of this
Agreement.

     "TRANSACTIONAL EXPENSES" has the meaning set forth in Section 13.10 of this
Agreement.

     "USE"  means to  appropriate  any of the  Confidential  Information  of the
Company and/or its  Subsidiaries  for the benefit of oneself or any other Person
other than the Company.

     "VDH" means the Office of Water  Programs  of the  Virginia  Department  of
Health, a regulatory  agency of the Commonwealth of Virginia which,  among other
things,  regulates  the issuance of water  system  permits and  compliance  with
federal and state Applicable Laws.
     
     "WARN ACTS" has the meaning set forth in Section 3.10(k) of this Agreement.

                                   ARTICLE 2

                        PURCHASE OF STOCK; PURCHASE PRICE

    2.1  PURCHASE  AND SALE OF STOCK.   In  reliance  upon the  representations,
warranties  and covenants  contained in this Agreement as of the date hereof and
on the  Closing  Date,  the  Purchaser  agrees to  purchase  the Stock  from the
Shareholder,  and the Shareholder agrees to sell, transfer,  convey,  assign and
deliver the Stock to the Purchaser on the terms and conditions set forth in this
Agreement. Such sale, transfer, conveyance, assignment and delivery of the Stock
shall convey good and marketable  title to the Stock,  free and clear of any and
all Rights and  Encumbrances,  and at such time the Stock will be fully paid and
non-assessable.  At the Closing the  Shareholder  will deliver to the  Purchaser
certificate(s)  evidencing the Stock duly endorsed in blank or with stock powers
duly executed by the Shareholder.

    2.2  PURCHASE PRICE. The purchase price to be paid to the Shareholder by the
Purchaser  for the Stock (the  "PURCHASE  PRICE") shall be  Forty-Eight  Million
Dollars ($48,000,000).

                                       10


<PAGE>

    2.3  PAYMENT OF PURCHASE PRICE ON THE CLOSING DATE. The Purchase Price shall
be paid on the Closing Date by wire transfer of immediately  available  funds to
an account (or accounts) designated by the Shareholder at least two (2) business
days prior to the Closing.

    2.4  CLOSING AND CLOSING DELIVERIES.

         (a) CLOSING AND CLOSING DATE.  Subject to the satisfaction or waiver of
    the  conditions  precedent  contained  in  Articles  6, 7 and 8 hereof,  the
    closing of the  transactions  contemplated by this Agreement (the "CLOSING")
    shall be held at a mutually  agreed  time,  but in no event no more than ten
    (10) business days after (i) all consents and approvals (including the Final
    Order(s) described and defined in Section 6.2 of this Agreement) required to
    consummate the transactions  contemplated hereby have been received from any
    Governmental  Body,  including  the FTC, DOJ, the NCUC and the VDH, and (ii)
    all other  conditions  to the Closing have been duly  satisfied or waived in
    writing, at the offices of Briggs and Morgan, Professional Association, 2400
    IDS Center, Minneapolis, Minnesota, 55402. The Closing shall be effective as
    of 11:59 P.M.  on the date of Closing  and such date is  referred to in this
    Agreement as the "CLOSING DATE."

         (b) CLOSING  DELIVERIES  BY  THE  SHAREHOLDER.   At  the  Closing,  the
    Shareholder  shall execute,  where necessary or appropriate,  and deliver to
    the Purchaser each and all of the following:

             (i)    A certificate in  the form of EXHIBIT A hereto signed  by  a
         duly authorized officer of the Shareholder, and dated as of the Closing
         Date, to the effect that the representations and warranties made by the
         Shareholder  in this  Agreement  (as modified by the  Schedules and any
         Supplement(s))  and in any document,  instrument and/or agreement to be
         executed and delivered by the  Shareholder  pursuant to this  Agreement
         are true and correct in all material  respects at and as of the Closing
         and  the  Shareholder  has  performed  and  complied  with  all  of its
         covenants, agreements and obligations under this Agreement which are to
         be performed  and complied with by the  Shareholder  on or prior to the
         Closing Date;

             (ii)   The certificates evidencing the  Stock  duly endorsed by the
         Shareholder  in blank or  accompanied  by stock powers duly executed by
         the Shareholder;

             (iii)  A copy certified by the Secretary  of the Shareholder of the
         duly adopted  resolutions of the Board of Directors of the  Shareholder
         approving   this   Agreement,   including  the   Ancillary   Documents,
         authorizing  the  execution  and  delivery  of this  Agreement  and the
         Ancillary   Documents,   and  the   consummation  of  the  transactions
         contemplated hereby and thereby;

             (iv)   The corporate  minute   books,  the  corporate   seals,  and
         stock books for the Company and the Subsidiaries;

             (v)    A satisfaction  of   debt  in  a  form  satisfactory  to the
         Purchaser  executed by the  Shareholder  with respect to the payment of
         intercompany  

                                       11


<PAGE>
         liabilities and obligations  between the Shareholder and its Affiliates
         (other than the Company and the  Subsidiaries)  and the Company and the
         Subsidiaries;

             (vi)   Delivery of any and all documents relating to Permits;

             (vii)  A duly executed written  opinion letter by  counsel for  the
         Shareholder,  dated as of the Closing Date, addressed to the Purchaser,
         as contemplated by Section 7.4 of this Agreement;

             (viii) Duly  executed  resignations  of  (A)  the  officers  of the
         Company and the  Subsidiaries who are also officers of the Shareholder,
         and (B) the directors of the Company and the Subsidiaries, effective as
         of the Closing Date;

             (ix)   Certificates of  good  standing  for  the  Shareholder,  the
         Company and each of the Subsidiaries  dated within five (5) days of the
         Closing  Date  issued  by the  Secretary  of State of their  respective
         states of incorporation;

             (x)    The non-foreign  person  affidavit  required by Section 1445
         of the Code;

             (xi)   The termination documents for  the  guarantees  described in
         Section 5.22;

             (xii)  Evidence reasonably satisfactory to the Purchaser  that  the
         Company  and the  Subsidiaries  have  arranged  for the  payment of the
         Retention Payments concurrently upon the Closing; and

             (xiii) Such other documents and items as are reasonably   necessary
         or  appropriate  to  effect  the   consummation  of  the   transactions
         contemplated hereby or which may be customary under local law.

         (c) CLOSING  DELIVERIES BY THE PURCHASER. At the Closing, the Purchaser
    shall  execute,   where  necessary  or  appropriate,   and  deliver  to  the
    Shareholder each and all of the following:

             (i)    Payment  of  the  Purchase  Price in the manner set forth in
         Section 2.3 of this Agreement;

             (ii)   A certificate  in  the  form of EXHIBIT C hereto signed by a
         duly authorized  officer of the Purchaser,  and dated as of the Closing
         Date, to the effect that the representations and warranties made by the
         Purchaser  in this  Agreement  (as  modified by the  Schedules  and any
         Supplement(s))  and in any document,  instrument and/or agreement to be
         executed and delivered by the Purchaser  pursuant to this Agreement are
         true and correct in all material  respects at and as of the Closing and
         the Purchaser  has  performed  and complied with all of its  covenants,
         agreements  and  obligations  under  this  Agreement  which  are  to be
         performed and complied with by the Purchaser on or prior to the Closing
         Date;

                                       12


<PAGE>

             (iii)  A copy certified by the Secretary of the  Purchaser  of  the
         duly adopted  resolutions  of the Board of  Directors of the  Purchaser
         approving  this  Agreement,  including  the  Ancillary  Documents,  and
         authorizing the execution and delivery of this Agreement, including the
         Ancillary   Documents,   and  the   consummation  of  the  transactions
         contemplated hereby and thereby;

             (iv)   A duly executed written opinion letter by  counsel  for  the
         Purchaser,  dated as of the Closing Date, addressed to the Shareholder,
         as contemplated by Section 8.3 of this Agreement;

             (v)    Evidence reasonably satisfactory to the Shareholder that the
         performance  and other bonds required by Section 5.25 have been secured
         in accordance with the provisions of such section;

             (vi)   A certificate of good standing of the Purchaser dated within
         five (5) days of the Closing  Date issued by the  Secretary of State of
         the Purchaser's state of incorporation; and

             (vii)  Such other documents and items as are  reasonably  necessary
         or  appropriate  to  effect  the   consummation  of  the   transactions
         contemplated hereby or which may be customary under local law.

                                   ARTICLE 3

                REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER

    As an  inducement for  the  Purchaser  to enter  into this Agreement  and to
consummate the transactions  contemplated hereby, the Shareholder represents and
warrants to the Purchaser that each and all of the following representations and
warranties (as modified by the Schedules to this Agreement (the "SCHEDULES") and
any Supplement  delivered by the  Shareholder  pursuant to Section 13.21 of this
Agreement)  are true and  correct as of the date of this  Agreement  and will be
true and  correct as of the Closing  Date.  The  Schedules  shall be arranged in
paragraphs  corresponding  to the  sections  and  subsections  contained in this
Article 3.

    3.1  ORGANIZATION.

         (a) THE SHAREHOLDER. The Shareholder is a Minnesota corporation and  is
    duly  organized,  validly  existing and in good  standing  under the laws of
    Minnesota.  The  Shareholder  has all requisite  power and authority to own,
    operate and lease its  properties  and assets  (including  the Stock) and to
    conduct its business as it is now being conducted.

         (b) THE COMPANY AND THE SUBSIDIARIES. The Company and the  Subsidiaries
    each (i) are a  corporation  duly  organized,  validly  existing and in good
    standing under the laws of their respective  states of  incorporation,  (ii)
    have all requisite  power and authority,  corporate and  otherwise,  to own,
    operate and lease its  properties  and assets and to conduct the Business as
    it is now being conducted by each entity.  The Business is the only business
    conducted  by the  Company  and the  Subsidiaries.  As set forth in SCHEDULE
    3.1(b),  each of the  Company  and the  Subsidiaries  is duly  qualified  to
    transact

                                       13


<PAGE>

    business as a foreign  corporation and is in good standing under the laws of
    every state or  jurisdiction  in which the nature of their  activities or of
    their  properties  (owned,  leased or  operated)  makes  such  qualification
    necessary and in which the failure to be so qualified  could not  reasonably
    be expected to have a Material Adverse Effect.

    3.2  CAPITALIZATION. The authorized capital stock of  the  Company  consists
solely of 6,000 shares of common voting stock,  One Dollar ($1.00) par value, of
which 6,000 shares are issued and outstanding on the date hereof,  and are owned
beneficially and of record by the  Shareholder,  free and clear of all liens and
Encumbrances.   The  Company  is  the  sole  legal,   beneficial  and  equitable
shareholder  of  all  of  the  equity  interests  in  and  with  respect  to the
Subsidiaries.  None of the Stock has been issued in  violation  of the rights of
any Person.  Except as set forth in SCHEDULE 3.2 hereto,  as of the date hereof,
(i) there are no Convertible  Securities or Debt  Securities  outstanding,  (ii)
there are no Rights outstanding,  and (iii) there are no shareholder  agreements
or other agreements, understandings or commitments relating to the rights of the
Shareholder to vote or dispose of the Stock.

    3.3  DUE AUTHORIZATION.  The execution,  delivery  and  performance  of this
Agreement,  including the documents,  instruments  and agreements to be executed
and delivered by the  Shareholder  pursuant to this  Agreement  (the  "ANCILLARY
DOCUMENTS"),  and the consummation of the transactions  contemplated  hereby and
thereby have been duly and validly authorized by all necessary  corporate action
on the part of the Shareholder.  This Agreement and the Ancillary Documents have
been,  or will be on or before the Closing  Date,  duly and validly  authorized,
executed  and  delivered  by  the  Shareholder,   and  the  obligations  of  the
Shareholder  hereunder and  thereunder  are or will be, upon such  execution and
delivery,  valid,  legally  binding and  enforceable  against the Shareholder in
accordance with their respective terms.

    3.4  NO BREACH. The Shareholder has full power and authority,  corporate and
otherwise,  to sell,  assign,  transfer,  convey  and  deliver  the Stock to the
Purchaser and to otherwise  perform its obligations under this Agreement and the
Ancillary  Documents.  The  execution  and  delivery of this  Agreement  and the
Ancillary Documents to be executed and delivered by the Shareholder  pursuant to
this Agreement, and the consummation of the transactions contemplated hereby and
thereby will not: (i) violate any provision of the Articles of  Incorporation or
Bylaws of the  Shareholder,  (ii)  except as set forth in  SCHEDULE  3.4,  or as
contemplated by clause (iii) immediately following,  violate any Applicable Laws
or Injunction  applicable to the Shareholder,  the Company or the  Subsidiaries,
(iii) other than the filings  required by HSR, the NCUC, and the VDH, and except
as provided  in SCHEDULE  3.4 hereto,  require any filing  with,  Permits  from,
authorization,  consent  or  approval  of, or the  giving of any  notice to, any
Person, (iv) except as provided in SCHEDULE 3.4 hereto, result in a violation or
breach of, or constitute (with or without due notice or lapse of time or both) a
default  (or give  another  party any  rights of  termination,  cancellation  or
acceleration)  under any of the terms,  conditions  or  provisions  of any note,
bond,  mortgage,  indenture,  license,  franchise,  Permit  (including,  but not
limited to, any Permits,  approvals or authorizations of any Governmental Body),
lease or other Contract to which the Company and/or the  Shareholder is a party,
or by which  they or any of their  properties  or assets  may be  bound,  or (v)
result in the creation or imposition of any Encumbrance on any of the properties
or  assets  of the  Company  or the  Subsidiaries,  such that in the case of any
violation or the absence of Permit, consent or approval

                                       14


<PAGE>

described in clauses (ii),  (iii) and (iv) above,  the occurrence or omission of
which would not be reasonably likely to have a Material Adverse Effect.

    3.5  CLEAR TITLE.  Except  as  otherwise set forth in  SCHEDULE  3.5  or the
leased property  disclosed in SCHEDULE 3.16 hereto, on the Closing Date, (i) the
Company and each of the  Subsidiaries  will hold good title to their  respective
personal  property,  and (ii) such  personal  property  is and shall be free and
clear  of  any  and  all  Encumbrances  of  any  kind,  nature  and  description
whatsoever,  except for Encumbrances which are disclosed,  reflected or reserved
for or against in the Balance Sheets.

    3.6  CONDITION OF ASSETS. Except as set forth in SCHEDULE 3.6 hereto, all of
the  properties  and assets of the  Company and the  Subsidiaries  (i) have been
maintained in accordance with industry standards in all material respects,  (ii)
are in reasonable  operating condition and repair, and (iii) are the assets used
to operate the Company's Business as currently conducted.

    3.7  LITIGATION. Except as set forth in  SCHEDULE 3.7 hereto, and except for
any Proceeding  which generally  affects the business of all Persons  conducting
business  similar to the Company and the  Subsidiaries  and in which the Company
and/or the Subsidiaries are not a named defendant, there is no Proceeding:

         (a) that  has  been  commenced  by  or  served  upon  the  Company, the
    Subsidiaries or the Shareholder,  or of which the Shareholder or the Company
    have Knowledge; or

         (b) to  the  Knowledge  of  the  Company  or  the   Shareholder,   that
    challenges,  or that will have, the effect of preventing,  delaying,  making
    illegal, or otherwise interfering with, any of the transactions contemplated
    hereby.

To the Knowledge of the Shareholder or the Company,  no such Proceeding has been
Threatened.  Except as provided in SCHEDULE 3.7 hereto,  to the Knowledge of the
Shareholder  or  the  Company,   the  Company  and  the   Subsidiaries  are  not
(individually  or  otherwise)  a party to or  subject to the  provisions  of any
Injunction which could, individually or in the aggregate, reasonably be expected
to have a Material  Adverse Effect,  or impair the ability of the Shareholder to
consummate the transactions contemplated hereby.

    3.8  LABOR MATTERS. Except as set forth in SCHEDULE 3.8 hereto, the  Company
and the Subsidiaries,  individually or collectively,  have never been a party to
any collective  bargaining agreement or other labor Contract and there has never
been,  and there is not presently  pending or existing,  and to the Knowledge of
the  Shareholder  or the  Company,  there  is not  Threatened  (i)  any  strike,
slowdown,   walkout,  picketing,  work  stoppage,  labor  arbitration  or  other
Proceeding in respect of the grievance of any employee,  (ii) any application or
complaint  filed by any  employee  or union with the  National  Labor  Relations
Board, or any comparable Governmental Body, (iii) any organizational activity or
other labor dispute against or affecting the Company or the Subsidiaries, and no
application for  certification of a collective  bargaining  agreement is pending
or, to the Knowledge of the Shareholder or the Company, is Threatened.  There is
no lockout of any  employees  by the  Company  or the  Subsidiaries  and no such
action is 

                                       15


<PAGE>

contemplated by either the Company or the  Subsidiaries.  Except as set forth in
SCHEDULE 3.8 hereto,  there is no Proceeding pending or, to the Knowledge of the
Shareholder or the Company,  Threatened by any Person against the Company or the
Subsidiaries or any of their current or former officers,  directors or employees
relating  to   employment,   equal   employment   opportunity,   discrimination,
harassment,  wrongful  discharge,  unfair labor practices,  immigration,  wages,
hours,  benefits,  collective  bargaining,  the  payment of social  security  or
similar Taxes, occupational safety and health or plant closing.

    3.9  TAX MATTERS.

         (a) TAX RETURNS. The Company and the Subsidiaries have timely filed, or
    caused to be timely  filed,  or will timely file or cause to be timely filed
    with the appropriate taxing  authorities,  all Tax Returns that are required
    to be filed by, or with respect to, the Company and the  Subsidiaries  on or
    prior to the Closing Date.  The Returns have  accurately  reflected and will
    accurately   reflect  all  Liability  for  Taxes  of  the  Company  and  the
    Subsidiaries  for the periods  covered  thereby.  SCHEDULE  3.9(a) lists all
    income Tax  Returns  filed with any  Governmental  Body with  respect to the
    Company  and the  Subsidiaries  for the  taxable  periods  ended on or after
    December 31, 1999.

         (b) PAYMENT OF TAXES. All Taxes and Tax Liabilities of the  Company and
    the  Subsidiaries for all taxable years or periods that end on or before the
    Closing  Date and,  with  respect to any  taxable  year or period  beginning
    before and ending after the Closing  Date,  the portion of such taxable year
    or  period  ending  on  the  day  immediately  preceding  the  Closing  Date
    ("PRE-CLOSING PERIOD") have been timely paid.

         (c) OTHER TAX MATTERS. Except as set forth in SCHEDULE 3.9(c):
         
             (i)    the Company and the Subsidiaries have not been  the  subject
         of a dispute or claim or an audit or other  examination of Taxes by the
         Tax authorities of any  Governmental  Body, nor have the Company or the
         Subsidiaries  received  any  notices  from  any such  Taxing  authority
         relating  to any issue  which  could  have a Material  Adverse  Effect.
         SCHEDULE 3.9(c) also includes a list of all Tax examination reports and
         statements of deficiencies assessed against or agreed to by the Company
         and/or the  Subsidiaries  since January 1, 1998, each of which has been
         provided to the Purchaser.

             (ii)   the Shareholder, the Company and the Subsidiaries  have  not
         (A) entered into an agreement or waiver or been requested to enter into
         an agreement or waiver extending any statute of limitations relating to
         the payment or collection of Taxes of the Company or the  Subsidiaries,
         or (B) is presently  contesting the Tax Liability of the Company or the
         Subsidiaries before any Governmental Body.

             (iii)  the Company and the Subsidiaries have not been  included  in
         any  "consolidated,"  "unitary" or "combined"  Tax Return  provided for
         under  Applicable  Law with respect to Taxes for any taxable period for
         which the statute of limitations has not expired.

                                       16


<PAGE>

             (iv)   all Taxes which the Company or the Subsidiaries are (or have
         been) required by law to withhold or collect have been duly withheld or
         collected,  and have been timely paid over to the proper authorities to
         the extent due and payable.

             (v)    neither the  Company nor  either  of  the Subsidiaries is  a
         "United States real property holding corporation" within the meaning of
         Section 897(c)(2) of the Code.

             (vi)   there  are  no  Tax  sharing, allocation, indemnification or
         similar  agreements  in  effect  as  between  the  Company  and/or  the
         Subsidiaries  or any  predecessor  or  Affiliate  thereof and any other
         party  (including the  Shareholder  and any  predecessors or Affiliates
         thereof)  under  which  the  Purchaser,  the  Company  or either of the
         Subsidiaries  could be  liable  for any  Taxes or other  claims  of any
         Person.

             (vii)  none of  the  Company or the  Subsidiaries have applied for,
         been granted,  or agreed to any  accounting  method change for which it
         will be required to take into account any adjustment  under Section 481
         of the Code or any similar  provision of the Code or the  corresponding
         Tax laws of any nation, state or locality.

             (viii) no election under Section 341(f) of the Code has  been  made
         or shall be made prior to the Closing  Date to treat the Company or the
         Subsidiaries as a consenting corporation,  as defined in Section 341 of
         the Code.

             (ix)   neither the Company nor the Subsidiaries  are,  individually
         or  collectively,  a party to any  agreement  that would require any of
         them to make any payment  that would  constitute  an "excess  parachute
         payment" for purposes of Sections 280G and 4999 of the Code.

             (x)    there are no requests for  rulings  in  respect of any Taxes
         pending between the Company or the Subsidiaries and any Tax authority.

    3.10 EMPLOYEE BENEFITS.

         (a) BENEFIT PLANS.  Except as set forth in  SCHEDULE 3.10  hereto,  the
    Company and the  Subsidiaries  do not maintain or  contribute to any Benefit
    Plans.  Without  limiting the generality of the foregoing  provision of this
    Section,  except as described in SCHEDULE 3.10 hereto,  there are no pension
    plans,  welfare plans, or any employee benefit plans qualified under Section
    401(a) of the Code, to which the Company or either of the  Subsidiaries  are
    required to  contribute.  Except as described in SCHEDULE  3.10 hereto,  the
    Company and the Subsidiaries do not and will not have any unfunded Liability
    for services rendered prior to the Closing Date under any Benefit Plans. The
    Company  and the  Subsidiaries  are not in any  material  default  under any
    Benefit Plan. Other than claims for benefits in ordinary  course,  there are
    no actions,  suits, disputes,  arbitrations or other material claims pending
    or, to the  Knowledge of the  Shareholder  or the Company,  Threatened  with
    respect to any Benefit Plan.

                                       17


<PAGE>

         (b) EMPLOYEE PENSION BENEFIT PLANS.  Except as set  forth  in  SCHEDULE
    3.10, none of the Company,  the  Subsidiaries,  or any Person required to be
    aggregated with the Company and the Subsidiaries under Section 414(b),  (c),
    (m),  or  (o)  of the  Code  ("ERISA  AFFILIATE"),  maintains  or  has  ever
    maintained  an Employee  Pension  Benefit Plan as defined in Section 3(2) of
    ERISA,  that is subject to Section 412 of the Code and Section 302 of ERISA.
    With respect to each such Employee  Pension  Benefit Plan maintained or ever
    maintained by the Company, by either Subsidiary,  or by any ERISA Affiliate:
    (i) no unsatisfied  liabilities to participants,  the IRS, the United States
    Department  of Labor,  the PBGC,  or to any other Person or entity have been
    incurred as a result of the  termination  of any  Employee  Pension  Benefit
    Plan, (ii) no Employee Pension Benefit Plan, which is subject to the minimum
    funding  requirements of Part 3 of Subtitle B of Title I of ERISA or subject
    to  Section  412  of  the  Code,  has  incurred  any  "accumulated   funding
    deficiency" within the meaning of Section 302 of ERISA or Section 412 of the
    Code and there has been no waived funding  deficiency  within the meaning of
    Section 303 of ERISA or Section 412 of the Code,  (iii) all  premiums to the
    PBGC have been  timely  paid in full,  and (iv) the PBGC has not  instituted
    proceedings to terminate any such Plan and no condition exists that presents
    a risk that such  proceedings  will be instituted  or that would  constitute
    grounds  under  Section  4042  of  ERISA  for  the  termination  of,  or the
    appointment of a trustee to administer,  any such Plan.  Neither the Company
    nor the  Subsidiaries  currently  sponsor,  maintain,  contribute to, or are
    required to contribute to an Employee  Pension Benefit Plan subject to Title
    IV of ERISA.

         (c) MULTIEMPLOYER PLANS. Except as set forth in SCHEDULE  3.10  hereto,
    neither the Company nor any of its  Subsidiaries  contributes  to, or has or
    could  have,  any  Liability   (including  but  not  limited  to  withdrawal
    Liability)  with  respect to any  multiemployer  plan (as defined in Section
    4064(a) of ERISA or Section 4001(a)(3) of ERISA).

         (d) OTHER PLANS.  Except as otherwise set forth in SCHEDULE 3.10, there
    are no present or former  employees of the Company or the  Subsidiaries  who
    are entitled to (i) any pensions, group health, or other benefits to be paid
    upon or after termination of employment, including termination on account of
    disability  (except as otherwise  required  under Section 601 of ERISA),  or
    (ii) deferred compensation payments.

         (e) DOCUMENTS. The Shareholder has made available to the Purchaser  the
    following  documents,  as they may have  been  amended  to the date  hereof,
    embodying  or  relating  to  each  Benefit  Plan  of  the  Company  and  the
    Subsidiaries  set  forth in  SCHEDULE  3.10  hereto:  (i) all  written  plan
    documents for each such Benefit Plan,  including all amendments to each such
    Benefit  Plan,  any  related  trust  agreements,  group  annuity  contracts,
    insurance  policies or other funding  agreements or  arrangements,  (ii) the
    most recent  determination  letter  received from the IRS, if any, as to the
    qualified  status of any such Benefit Plan under Section 401(a) of the Code,
    (iii) the current  summary plan  description,  if any, for each such Benefit
    Plan, and (iv) the most recent annual  return/report on form 5500, 5500-C or
    5500-R, if any, for each such Benefit Plan.

         (f) PROHIBITED TRANSACTIONS. The Company and the Subsidiaries have not,
    nor has any other "disqualified  person" or "party in interest",  as defined
    in Section 4975(e)(2) 

                                       18


<PAGE>

    of  the  Code  and  Section  3(14)  of  ERISA,  respectively,  engaged  in a
    "prohibited  transaction,"  as such term is defined  in Section  4975 of the
    Code and  Section  406 of ERISA,  with  respect to any  Benefit  Plan of the
    Company  or any  Subsidiary  subject to ERISA,  which  could  reasonably  be
    expected  to subject the  Company or any  Subsidiary  to a Tax or penalty on
    prohibited transactions imposed by either Section 502(i) of ERISA or Section
    4975 of the Code.  The  execution  and delivery by the  Shareholder  of this
    Agreement and the consummation of the transactions  contemplated hereby will
    not (i) involve any prohibited transaction within the meaning of Section 406
    of ERISA or Section  4975 of the Code with  respect to any Benefit  Plan set
    forth in  SCHEDULE  3.10  hereto,  or (ii)  accelerate  the  payment  of any
    benefits under any Benefit Plan set forth in SCHEDULE 3.10 hereto.

         (g) FIDUCIARY DUTY. None  of the  Company, the  Subsidiaries,  nor  any
    other  fiduciary of any Benefit  Plan set forth in SCHEDULE  3.10 hereto are
    engaged in any  transaction  with  respect to such Benefit Plan or failed to
    act in a manner with respect to such Benefit Plan which could  reasonably be
    expected to subject the Company or any Subsidiary to any material  Liability
    for a breach of fiduciary duty under ERISA or any other Applicable Law.

         (h) GROUP  HEALTH  PLANS.  Except  as set forth in  SCHEDULE 3.10,  the
    Company,  the  Subsidiaries  and all ERISA  Affiliates  have complied in all
    material  respects  with  the  coverage  continuation  requirements  of  all
    Applicable Laws,  including Sections 601 through 609 of ERISA, Section 4980B
    of the  Code,  and the  requirements  of any  similar  state  law  regarding
    continued  health  coverage,  and  the  Company  and the  Subsidiaries  have
    incurred  no  material  Liability  with  respect to its  failure to offer or
    provide  continued  coverage in accordance with the foregoing  requirements,
    nor is there any suit or other action  pending,  or to the  Knowledge of the
    Shareholder or the Company,  Threatened,  with respect to such requirements.
    Except as set forth in SCHEDULE 3.10, (i) there has been no violation of the
    obligations  imposed by Section 9801 of the Code and Part 7 of Subtitle B of
    Title I of ERISA with respect to any Benefit Plan to which such  obligations
    apply, (ii) none of the Company, the Subsidiaries or any ERISA Affiliate has
    contributed  to a  nonconforming  group  health  plan (as defined in Section
    5000(c) of the Code), and (iii) none of the Company, the Subsidiaries or any
    ERISA  Affiliate has incurred a Tax under Section  5000(a) of the Code which
    is, or is  reasonably  expected to become,  a Liability of the Company,  the
    Subsidiaries or an ERISA Affiliate.

         (i) TRIGGERING OF OBLIGATION AND OTHER BINDING COMMITMENTS. Except  for
    the claims set forth in SCHEDULE 3.10, the  consummation of the transactions
    described in this Agreement,  in and of themselves,  or in conjunction  with
    any other event which has occurred on or prior to the date hereof (excluding
    the  Retention and  Severance  Agreements),  will not entitle any current or
    former  employee  of the  Company  or the  Subsidiaries  to  severance  pay,
    unemployment  compensation or any other similar  payment,  or accelerate the
    time of payment or vesting,  or increase the amount of  compensation  due to
    any such employee or former employee.

         (j) OPERATIONAL  COMPLIANCE.  Each Benefit Plan  has been  administered
    in all material  respects in  accordance  with its terms and all  Applicable
    Laws,  and, except as set 

                                       19


<PAGE>

    forth in SCHEDULE  3.10,  each Benefit Plan  intended to be qualified  under
    Section 401(a) of the Code is so qualified and is, as most recently amended,
    the subject of a favorable determination letter as to its qualification.  No
    event  has  occurred  and no  condition  or set of  circumstances  exists in
    connection  with which the  Company or any  Subsidiary  could be directly or
    indirectly  subject to any  Encumbrance or loss of Tax deduction under ERISA
    or the Code or under  any  agreement,  instrument,  statute,  rule of law or
    regulations  pursuant to or under which the  Company or any  Subsidiary  has
    indemnified  or is  required  to  indemnify  any  Person  against  any  such
    liability  (except  liability  for benefit  claims and  funding  obligations
    payable in the ordinary course).

         (k) WARN COMPLIANCE. The Company and the Subsidiaries have complied in 
    all respects with the Worker Adjustment and Retraining  Notification Act, 29
    U.S.C. ss. 2101 et seq., and its corresponding regulations,  and any similar
    state law, rule or regulation or local  ordinance,  rule or  regulation,  in
    each case in effect as of the date hereof,  providing  for  notification  to
    employees affected by closing,  relocation, sale of business, mass layoff or
    similar  event  (collectively,  the "WARN  ACTS") on  account  of  closings,
    relocations,  sales of businesses,  mass layoffs or similar events occurring
    on or prior to the  Closing  and all  related  notices,  payments,  fines or
    assessments due to any Government Body pursuant to such WARN Acts.

         (l) ABSENCE  OF  TERMINATION  RESTRICTIONS.  Except  as  set  forth  in
    SCHEDULE  3.10,  (i) each Benefit Plan may be  terminated  by the Company or
    either Subsidiary,  as applicable,  in accordance with its terms and without
    the Company or any Subsidiary  incurring any obligation or liability arising
    or resulting  from such  termination,  and (ii) neither the Company,  either
    Subsidiary nor the Shareholder has made any  representations to employees of
    the Company or either  Subsidiary  that any Benefit  Plan would be continued
    without  change for any period of time on and after the  Closing  Date.  The
    foregoing shall not be applicable to the Retention and Severance  Agreements
    described in Section 3.37 and 11.8 hereof.

    3.11 NO GUARANTEES. Except as set forth in SCHEDULE 3.11, (i)  none  of  the
obligations of the Company or the Subsidiaries is guaranteed by, or subject to a
similar  contingent  Liability to, any Person,  and (ii) neither the Company nor
the Subsidiaries have,  individually or collectively,  guaranteed,  or otherwise
become contingently liable for, any Liability of any Person. To the Knowledge of
the Shareholder or the Company,  no event has arisen that would give rise to any
obligation  under any  guarantee  set forth in SCHEDULE 3.11 or under any of the
bonds set forth in SCHEDULE 5.25.

    3.12 FINANCIAL STATEMENTS. The Shareholder has caused the  Company  and  the
Subsidiaries  to furnish  true and correct  copies of the  financial  statements
identified  in SCHEDULE  3.12  hereto to the  Purchaser.  All of said  financial
statements,  including  any  notes  thereto,  fairly  present  the  consolidated
financial position and condition of the Company and the Subsidiaries as of their
respective  dates and the results of their operations for the periods covered in
accordance with GAAP applied by the Company and the Subsidiaries on a consistent
basis throughout the periods covered thereby and on a basis consistent with that
of prior years and periods; PROVIDED, HOWEVER, that any unaudited and/or interim
financial  statements  listed on such  SCHEDULE  3.12 are  subject  to  year-end
adjustments and lack footnotes and other required 

                                       20


<PAGE>

presentation  items. Except for Liabilities (i) reflected or reserved against in
the  consolidated  balance sheets (the "BALANCE  SHEETS") of the Company and the
Subsidiaries  as of December 31, 2002 (the "BALANCE SHEET DATE") or in the notes
thereto,  (ii)  incurred in the  Ordinary  Course of Business  since the BALANCE
SHEET DATE (none of which  resulted  from,  arose out of, is related  to, or was
caused by any breach of Contract), (iii) arising under Contracts entered into in
the Ordinary Course of Business to which the Company or the  Subsidiaries  are a
party,  and/or  (iv) set forth in  SCHEDULE  3.12  hereto,  the  Company and the
Subsidiaries  do  not  have  any  Liabilities  which,  individually  or  in  the
aggregate,  would have a Material Adverse Effect.  The reserves reflected in the
Balance Sheets are adequate.

    3.13 ABSENCE   OF  CERTAIN  DEVELOPMENTS.   Except  for   the   transactions
contemplated  by this  Agreement  or as  otherwise  set forth on  SCHEDULE  3.13
hereto,  since the Balance Sheet Date, (i) there has not been any development or
combination of developments  affecting the Company or the  Subsidiaries of which
the Shareholder, the Company or the Subsidiaries have Knowledge that has had, or
is likely to have,  a Material  Adverse  Effect,  and (ii) the  Company  and the
Subsidiaries  have conducted the Business in the Ordinary Course of Business and
have not:

         (a) declared,  set  aside  or  paid  a  dividend  or  made  any   other
    distribution  with  respect to any class of capital  stock of the Company or
    the Subsidiaries;

         (b) changed  accounting  methods   or  practices  (including,   without
    limitation,  any change in  depreciation,  amortization  or cost  accounting
    policies or rates);

         (c) except as set forth in SCHEDULE 3.37, entered  into  any employment
    contract or collective  bargaining  agreement,  written or oral, or modified
    the terms of any  existing  employment  contract  or  agreement  or adopted,
    amended, modified or terminated any Benefit Plan;

         (d) made any change or amendment in its  articles  of  incorporation or
    bylaws;

         (e) issued or sold any securities; acquired, directly or indirectly, by
    redemption  or  otherwise,  any  securities;  or granted or entered into any
    options, warrants, calls or commitments of any kind with respect thereto;

         (f) made any capital expenditure exceeding One Hundred Thousand Dollars
    ($100,000); and/or

         (g) incurred any obligations for borrowed money or purchase money  debt
    other than that incurred pursuant to the Debt Instruments  described and set
    forth in SCHEDULE 3.29 of this Agreement.

    3.14 INTELLECTUAL  PROPERTY.  SCHEDULE  3.14  hereto  contains  a  list  and
description  of  all  Intellectual   Property  owned  by  the  Company  and  the
Subsidiaries or used by the Company or the  Subsidiaries in the operation of the
Business. Except as set forth in SCHEDULE 3.14, the Company and the Subsidiaries
have all rights necessary to use such Intellectual Property, and the Shareholder
and the Company have no  Knowledge of any asserted  claim to the effect that the
operation of the Business or the possession or use in the Business of any of the
Intellectual  Property  listed and set forth in SCHEDULE 3.14 hereto,  infringes
the  Intellectual  Property  rights of 

                                       21


<PAGE>

any other Person.  Except as set forth in SCHEDULE 3.14, the Shareholder and the
Company have no Knowledge of any claim that any of the Intellectual Property set
forth in SCHEDULE  3.14 is invalid;  and,  except as set forth in SCHEDULE  3.14
hereto,  neither the Company nor any Subsidiary is obligated  under any Contract
or otherwise to pay royalties, fees or other payments with respect to any of the
Intellectual  Property  listed and set forth in SCHEDULE 3.14 hereto.  Except as
set forth in SCHEDULE 3.14, the consummation of the transactions contemplated by
this  Agreement  will  not  adversely  affect  the  use  by the  Company  or the
Subsidiaries  of any of the  Intellectual  Property  set forth in SCHEDULE  3.14
hereto.

    3.15 COMPLIANCE WITH LAWS. Except as set  forth in  SCHEDULE  3.15,  (i) the
Business  has  been  operated  and  the  Company  and  the  Subsidiaries  are in
compliance in all respects with the requirements of Applicable Laws to which the
Company and the  Subsidiaries are subject such that any lack of compliance would
not have a  Material  Adverse  Effect,  and (ii)  neither  the  Company  nor the
Subsidiaries  have received any notice of, and neither the  Shareholder  nor the
Company have Knowledge of, any violation of a material  nature of any Applicable
Laws respecting the Company or the Subsidiaries.

    3.16 OPERATING CONTRACTS.  Except  as  disclosed  in  SCHEDULE  3.16 and the
developer Contracts set forth in SCHEDULE 3.22 (the "DEVELOPER CONTRACTS"),  and
except with respect to (i)  Contracts  that have been fully  performed as of the
date  hereof and have no further  force or effect,  (ii)  Contracts  for capital
expenditures  having a remaining  balance of Fifty Thousand Dollars ($50,000) or
less, (iii) leases of personal  property having a term of less than one (1) year
or which  require  payments on an annual basis of Twenty Five  Thousand  Dollars
($25,000)  or less per  annum,  (iv)  Contracts  for  services,  raw  materials,
supplies or equipment  involving  payments of Ten Thousand Dollars  ($10,000) or
less per annum,  or (v)  Contracts  for the sale of any  properties  or services
involving  a value of  Fifty  Thousand  Dollars  ($50,000)  or less  per  annum,
excluding  properties or services sold in the Ordinary  Course of Business,  the
Company and the  Subsidiaries  are not a party to any oral or written  Contract.
All of the  Contracts  set forth in SCHEDULE 3.16 hereto are referred to in this
Agreement as the "OPERATING  CONTRACTS." All of the Operating  Contracts and the
Developer  Contracts were made in the Ordinary  Course of Business,  and, to the
Knowledge of the Shareholder or the Company, are valid, binding and currently in
full force and effect. Except as set forth in SCHEDULE 3.16 hereto,  neither the
Company nor the  Subsidiaries are in material default under any of the Operating
Contracts or the Developer  Contracts,  and, to the Knowledge of the Shareholder
or the Company, no event has occurred which,  through the passage of time or the
giving of notice,  or both,  would  constitute  a default by the  Company or the
Subsidiaries,  or give rise to a right of termination or cancellation by another
party under any of the Operating Contracts or the Developer Contracts,  or cause
the acceleration of any Liability of the Company or the Subsidiaries,  or result
in the creation of any  Encumbrance  upon any of the properties or assets of the
Company or the Subsidiaries. Except as set forth in SCHEDULE 3.16 hereto, to the
Knowledge of the Shareholder or the Company,  no other party is in default under
any of the Operating Contracts or the Developer  Contracts.  Except as set forth
in SCHEDULE  3.16  hereto,  none of the  Operating  Contracts  or the  Developer
Contracts have been  canceled,  terminated,  amended or modified.  Except as set
forth in SCHEDULE 3.4 hereto, the consummation of the transactions  contemplated
hereby will not  require the consent or approval of any Person  under any of the
Operating Contracts or the Developer Contracts.

                                       22


<PAGE>

    3.17 REAL ESTATE. With  respect  to  real  estate  (including  fixtures  and
improvements)  owned  by  the  Company  or the  Subsidiaries  (the  "OWNED  REAL
ESTATE"),  and real estate (including  fixtures and improvements)  leased by the
Company or the Subsidiaries (the "LEASED REAL ESTATE") (collectively, Owned Real
Estate and Leased Real Estate shall be referred to herein as "REAL ESTATE"):

         (a) SCHEDULE 3.17 contains a description (including system name, county
    internal  identification  numbers and deed and map references) segregated by
    each of the Company and the Subsidiaries of each parcel of Owned Real Estate
    and a listing and  description  (including  the  parties,  term,  expiration
    date(s), address, and the general use description of the leased premises) of
    each  written  or oral  lease  regarding  Leased  Real  Estate  which is not
    otherwise  set forth in  SCHEDULE  3.16  hereto  (the  leases of Leased Real
    Estate  described in SCHEDULE 3.16 and SCHEDULE 3.17 are  collectively,  the
    "LEASES");

         (b) Except as set forth in  SCHEDULE 3.17 hereto, there are no deferred
    property Taxes or  assessments  with respect to the Real Estate which may or
    will  become  due  and  payable  as a  result  of  the  consummation  of the
    transaction contemplated hereby;

         (c) The  Company,  and each Subsidiary, respectively, is the sole owner
    in fee simple title of each parcel of Owned Real Estate and each such parcel
    is free and clear of any and all  Encumbrances,  except (A) those parcels of
    Owned  Real  Estate  that are held in fee  simple  determinable,  fee simple
    subject to  condition  subsequent  or are held  solely  pursuant to easement
    (perpetual  or  otherwise),  and (B) (i)  those  Encumbrances  set  forth in
    SCHEDULE 3.17 hereto, (ii) municipal zoning ordinances,  recorded or platted
    easements for public  utilities and recorded  building and use  restrictions
    and covenants,  (iii) general Real Estate Taxes and  installments of special
    assessments  payable  in  the  year  of  Closing,   and  (iv)  minor  survey
    exceptions,  Encumbrances, licenses, easements or reservations of, or rights
    of others for, oil, gas  minerals,  ores or metals,  rights of way,  sewers,
    electric lines, telegraph and telephone lines and other similar purposes, or
    zoning or other  restrictions on the use of real property,  minor defects in
    title or other  similar  charges  or  Encumbrances  not  interfering  in any
    material respect with the Ordinary Course of Business of the Company or with
    the use or ownership of the Owned Real Estate  (collectively  the "PERMITTED
    ENCUMBRANCES").  To the  Knowledge  of the Company or the  Shareholder,  the
    Permitted  Encumbrances  and those  Encumbrances  set forth in SCHEDULE 3.17
    hereto do not individually or in the aggregate materially impair or prohibit
    the current use or  operation of the Owned Real Estate by the Company or the
    Subsidiaries;

         (d) Except  as  set  forth  in  SCHEDULE  3.17  hereto,  there  are  no
    condemnation  Proceedings pending or, to the Knowledge of the Company or the
    Shareholder,  Threatened  with  respect  to all or any part of any parcel of
    Real  Estate.  SCHEDULE  3.17  hereto  sets forth all  private  condemnation
    proceedings  that have been initiated by the Company under a statutory power
    of condemnation granted by the North Carolina General Statutes (Chapter 40A,
    Section 40A-3(a)(1));

         (e) To the Knowledge of the Company or the Shareholder, except  for the
    Permitted  Encumbrances  and those  Encumbrances  set forth in SCHEDULE 3.17
    hereto, 

                                       23


<PAGE>

    there are no Encumbrances  which  materially and adversely affect the use or
    occupancy  of all or any part of any  parcel  of Owned  Real  Estate  or any
    easements;

         (f) Except as set forth in SCHEDULE  3.17 hereto, to  the Knowledge  of
    the Company or the Shareholder,  the improvements  located on each parcel of
    Real Estate, including fences, driveways and other structures occupied, used
    or  claimed  by the  Company  or the  Subsidiaries,  are  wholly  within the
    boundary lines of such parcels of Real Estate and such  improvements and the
    present uses thereof by the Company and the Subsidiaries,  as applicable, do
    not in any material respect infringe upon the rights of any other Person;

         (g) Except as set forth in SCHEDULE 3.17  hereto, to  the  Knowledge of
    the Company or the  Shareholder,  no buildings,  fences,  driveways or other
    structures of any adjoining  owner encroach,  in any material  respect which
    interferes  with the operation of the Business,  upon any part of any parcel
    of Real Estate or any easements;

         (h) Except  as  set  forth  in  SCHEDULE  3.17,  the  Company  and  the
    Subsidiaries,  as  applicable,  have all easements (or access through public
    utility  easements) on to private property,  construction  permits,  highway
    encroachment agreements and permits (and other similar licenses and permits)
    and  right-of-way-licenses  reasonably necessary to conduct the Business and
    to use and operate the Real Estate in the manner it is currently  being used
    and operated by the Company and the  Subsidiaries,  except where the failure
    to  have  any  such  easements  or  access,  construction  permits,  highway
    encroachment   agreements  and  permits  (and  other  similar  licenses  and
    permits),  and  right-of-way  licenses  would  not have a  Material  Adverse
    Effect;

         (i) Neither  the  Company  nor  any  Subsidiary  is  in  default in the
    performance of any material obligation under the Leases or easements, and to
    the Knowledge of the Company or the  Shareholder,  none of the other parties
    to the Leases or easements are in default in  performance  of their material
    obligations  thereunder,  the  Leases  and  easements  are in full force and
    effect, and neither the Company nor any of the Subsidiaries has assigned its
    rights under the Leases or easements;

         (j) Except as set forth in  SCHEDULE 3.17  neither  the Company nor any
    Subsidiary  has leased or granted to any other Person or entity the right to
    use or occupy all or any  portion of the Owned  Real  Estate,  and the Owned
    Real Estate is not subject to an option or right to purchase in favor of any
    Person or entity;

         (k) Except as set forth in SCHEDULE 3.17, no consents to or approval of
    the transactions contemplated by this Agreement are required from any Person
    or entity under the terms of the  easements  or Leases,  and to the extent a
    consent or approval is required (each, a "REQUIRED  CONSENT"),  on or before
    Closing,  the  Shareholder  shall,  at its sole cost,  obtain  the  Required
    Consent, in form reasonably satisfactory to the Purchaser; and

         (l) Except as set  forth in SCHEDULE 3.17, each of the parcels of Owned
    Real Estate  constitutes  a separate  tax parcel,  and is not taxed with any
    other real property.

                                       24


<PAGE>

    The Purchaser acknowledges and agrees that the title commitment  and  survey
work and  documentation  provided in Section 5.14 of this  Agreement may contain
additional  information regarding the Owned Real Estate of which the Shareholder
does not have Knowledge as of the date of this  Agreement and, as a result,  may
be properly included in a Supplement  submitted by the Shareholder in accordance
with the terms of Section 13.21 of this Agreement.

    3.18 ACCOUNTS RECEIVABLE. The accounts receivable of  the  Company  and  the
Subsidiaries,  and other  rights to the payment of money  represent,  and on the
Closing Date will represent,  valid obligations arising from sales actually made
or services actually performed in the Ordinary Course of Business.

    3.19 BOOKS AND RECORDS; BANK ACCOUNTS. All of the books of account and other
financial and corporate  records of the Company and the  Subsidiaries  have been
made  available to the  Purchaser  and its  representatives  (or will be so made
available  prior to the  Closing  Date).  Such books of account  and records are
current and  complete in all material  respects.  All such books and records are
consistent with the financial statements set forth in SCHEDULE 3.12 hereto.

    3.20 EMPLOYEES.

         (a) SCHEDULE 3.20  sets forth a complete and accurate list of  all  the
    employees  of the  Company  and each  Subsidiary  as of the date hereof (the
    "EMPLOYEES"),   together  with  the  following  information  for  each  such
    Employee:  name, position held, current salary,  2002 bonus,  commission and
    incentive  amounts (if any), Fair Labor Standards Act status,  date of hire,
    current  salary grade,  annual  vacation  entitlement,  accrued,  but unused
    vacation,  service date for employee benefit plan purposes,  social security
    number,   work  locations  and  any  other  information  the  Purchaser  may
    reasonably  request.  SCHEDULE  3.20 will indicate  which  Employees are not
    actively at work due to an approved medical,  family,  military, or personal
    leave under the  policies of the Company or any  Subsidiary  (the  "INACTIVE
    EMPLOYEES")  and,  to the  extent  known,  the date on which  each  Inactive
    Employee is expected to return to active  employment.  SCHEDULE 3.20 will be
    updated as of five (5)  business  days prior to the Closing Date and will be
    true and correct in all material respects as of that date.

         (b) Except as set forth in SCHEDULE 3.20, none  of the  Employees  have
    informed the Company or either of the  Subsidiaries  that he/she  intends to
    terminate  employment  with the  Company or either of the  Subsidiaries,  as
    applicable.  SCHEDULE  3.20 also sets  forth a  description  of any  written
    Contract,  other than the Benefit  Plans set forth in SCHEDULE  3.10 hereto,
    with respect to the  conditions of employment of any of the  Employees.  All
    Employees are employed on an "at-will" basis.

         (c) Except as set forth in SCHEDULE 3.20, none  of  the  Employees  are
    working based upon a non-resident  visa and the Company and the Subsidiaries
    have complied with their respective obligations under the Immigration Reform
    Control Act.

         (d) Based  on  the  Contracts  to  which  the  Company  and each of the
    Subsidiaries is a party,  neither the Company nor either of the Subsidiaries
    is presently subject to the requirements of Executive Order 11246.

                                       25


<PAGE>

    3.21 PERMITS AND CERTIFICATE APPLICATIONS.

         (a) ISSUED PERMITS.  Except as  set  forth in  SCHEDULE 3.21,  (i)  the
    Company and each  Subsidiary have timely  obtained,  or applied and meet the
    requirements for, all Permits of each Governmental Body, including,  without
    limitation,  the NCDEH, the NCDWQ, the NCUC and the VDH, having jurisdiction
    over  the  Company  and/or  the  Subsidiaries,  or any of  their  respective
    properties  or assets,  required to operate and carry on the Business as now
    being  conducted and have timely applied to renew any such Permits for which
    such renewal  application  is required,  and (ii) the Permits of the Company
    and the  Subsidiaries  are in full force and effect such that the absence of
    or compliance with the requirements of any such Permit, restrictions upon or
    lack of force or effect of any such Permits (either obtained or applied for)
    would not have a  Material  Adverse  Effect.  Neither  the  Company  nor the
    Subsidiaries  have received  notice that any Permit is being  considered for
    non-renewal, termination, revocation or suspension.

         (b) PERMIT APPLICATIONS.  The  Company  and/or  the  Subsidiaries  have
    several  pending  applications  for  Permits and Permit  extensions  pending
    before Governmental Bodies,  including the NCUC and the VDH, as set forth in
    SCHEDULE 3.21, for their respective water and/or  wastewater  utility system
    extension(s).  In connection therewith, the Person applying for every Permit
    certificate  may be required  to post a  performance  or other  bond,  which
    posted  bonds  are  included  in  SCHEDULE  5.25  of  this  Agreement  (or a
    Supplement thereto).

    3.22 DEVELOPER CONTRACTS.  Except  for  Contract agreements  which  have  no
further  executory  obligations  other than compliance with Applicable  Laws, or
which are terminated or expired,  SCHEDULE 3.22 sets forth the  agreements  with
developers  to which  either the Company  and/or the  Subsidiaries  are a party,
including (i) agreements for  installation and acquisition by the Company or any
Subsidiary of new water and/or  wastewater  utility systems which require future
payments  by the  Company or any  Subsidiary  to certain  developers  based upon
prospective  customer/system   connections,  and  (ii)  agreements  whereby  the
developer  has  reserved  portions  of  water  and  wastewater  utility  systems
production facility capacity for the period of years specified in the applicable
Contract.

    3.23 SUBSIDIARIES.    Except  for  the  Subsidiaries,  the  Company  has  no
subsidiaries  and does not own any shares of stock or other securities or equity
interests,  directly or indirectly,  in any other Person. Except as disclosed or
described in this Agreement or as set forth in SCHEDULE 3.23 hereto, the Company
is not subject to any  obligation or  requirement to provide funds to, or invest
in, any such Person.

    3.24 INSURANCE.

         (a) The Shareholder, the Company and the  Subsidiaries, as  applicable,
    have individually or jointly maintained, and will continue to maintain until
    the Closing Date, the insurance set forth in SCHEDULE 3.24,  which insurance
    covers some of the  tangible  real and  personal  property and assets of the
    Company  and the  Subsidiaries,  whether  owned or leased,  against  loss or
    damage by fire or other casualty. All such insurance is in full force 

                                       26


<PAGE>

    on the date of this  Agreement  and is either  self-insured  or carried with
    insurers licensed in the states affected by such policies.

         (b) The Company and the Subsidiaries are presently insured for  general
    liability, vehicle liability and worker's compensation risks through a third
    party  insurance  company,  which  insurance  covers claims made against the
    Company  or any  Subsidiary  related  to  occurrences  arising  on or  after
    February 1, 2003.

         (c) The Company and the Subsidiaries have in the past self-insured  for
    general liability,  vehicle liability and worker's compensation risks with a
    pool of entities through ALLETE,  Inc., which  self-insurance  covers claims
    made against the Company or any Subsidiary  related to  occurrences  arising
    prior to February 1, 2003.

         (d) The  Company  and the Subsidiaries do not maintain, and have not in
    the past maintained, any form of environmental insurance coverage.

         (e) The Company and  the  Subsidiaries  have  promptly  and  adequately
    notified the insurance  carriers of any and all claims known with respect to
    the operations,  products or services of the Company or the Subsidiaries for
    which the Company or the Subsidiaries  are insured and no insurance  carrier
    has denied coverage or reserved its rights with respect to such claims.  The
    Company and the Subsidiaries have not been refused any insurance coverage by
    any insurance  carrier to which they,  individually  or  collectively,  have
    applied for insurance during the past three (3) years.

    3.25 BROKERS.  Except  for  the  engagement  of  UBS  Securities  LLC by the
Shareholder,  neither the Company,  the Subsidiaries,  the Shareholder nor their
respective Affiliates has employed or engaged any broker,  finder, agent, banker
or third party,  nor have they otherwise dealt with anyone  purporting to act in
the  capacity  of a  finder  or  broker  in  connection  with  the  transactions
contemplated hereby. No commissions,  finder's fees or like charges have been or
will be incurred  by the  Company or the  Subsidiaries  in  connection  with the
execution and delivery of this Agreement or the consummation of the transactions
contemplated  hereby. Any such commissions,  finders' fees or like charges shall
be directly chargeable to and will be paid by the Shareholder as contemplated by
the terms of this Agreement.

    3.26 RELATIONSHIP WITH RELATED PERSONS. Except as set forth in SCHEDULE 3.26
hereto,  and except for benefits set forth in SCHEDULE  3.10,  the  Shareholder,
directors,  officers,  and  employees of the Company and the  Subsidiaries,  and
their  Related  Persons do not have any  interest  in any of the  properties  or
assets of or used by the Company or the  Subsidiaries  and do not own, of record
or as a beneficial  owner,  an equity  interest or any other financial or profit
interest  in any  Person  that  (i)  has had  business  dealings  or a  material
financial  interest in any transaction  with the Company or the Subsidiaries or,
(ii)  has  engaged  or is  engaged  in  competition  with  the  Company  or  the
Subsidiaries  with respect to any line of products or services of the Company or
the  Subsidiaries  in  any  market  presently  served  by  the  Company  or  the
Subsidiaries (a "COMPETING BUSINESS") (except for less than five percent (5%) of
the outstanding  capital stock of any Competing Business that is publicly traded
on any recognized exchange or in the over-the-counter  market). To the Knowledge
of the  Company or the  Shareholder,  and except as set forth in  SCHEDULE  3.26
hereto,  neither the Shareholder,  nor any 

                                       27


<PAGE>

director or officer of the Company or any Subsidiary,  and none of their Related
Persons, is a party to any Contract with, or has any claim or right against, the
Company or the Subsidiaries, other than the rights the officers and directors of
the Company and the  Subsidiaries  have with  respect to  indemnification  under
state  law.  All  money  owed by the  Company  and  the  Subsidiaries  to  their
respective shareholders, directors or officers, or their Related Persons, (other
than for  salary)  are for bona fide  debts and are set forth in  SCHEDULE  3.26
hereto.

    3.27 INTERNAL   DISCLOSURE  CONTROLS  AND  PROCEDURES.   ALLETE,  Inc.   has
established  and maintains  disclosure  controls and procedures (as such term is
defined in Rule  13a-15(e) and 15d-15(e)  under the  Securities  Exchange Act of
1934,  as amended);  such  disclosure  controls and  procedures  are designed to
ensure that material information relating to the Company and the Subsidiaries is
made known to ALLETE,  Inc.'s Chief  Executive  Officer and its Chief  Financial
Officer by others  within  those  entities,  and such  disclosure  controls  and
procedures   are  effective  to  perform  the  functions  for  which  they  were
established;  ALLETE,  Inc.'s auditors and the Audit Committee of ALLETE, Inc.'s
Board of Directors have been advised of: (i) any significant deficiencies and/or
material  weaknesses in the design or operation of internal controls which could
adversely  affect  the  Company's  and/or the  Subsidiaries'  ability to record,
process,  summarize,  and report financial data, and (ii) any fraud,  whether or
not material,  that involves Senior  Management  Employees or other employees of
ALLETE,  Inc.  and/or its  Subsidiaries  who have a significant  role in ALLETE,
Inc.'s internal control over financial reporting; and since the date of the most
recent evaluation of such disclosure controls and procedures, there have been no
changes in internal  control over  financial  reporting or in other factors that
could materially affect internal control over financial reporting.

    3.28 ENVIRONMENTAL MATTERS. Except as set forth in SCHEDULE 3.28  and except
as would not have a Material Adverse Effect,  the Company and its  Subsidiaries:
(i) have not  transported,  stored,  and/or disposed of any Hazardous  Materials
handled  by the  Company  and  its  Subsidiaries,  (ii)  do not  have  Knowledge
(including Knowledge by the Shareholder) that the Real Estate is now being used,
or has ever been used, as a landfill, dump or other disposal, storage, transfer,
treating  or  handling  area  for any  Hazardous  Materials,  (iii)  do not have
Knowledge  (including  Knowledge  by  the  Shareholder)  that  asbestos,  "PCBs"
(polychlorinated  biphenyls)  or urea  formaldehyde  has  been  placed,  stored,
located,  or disposed on the Real Estate,  (iv) excluding storage tanks (whether
underground or above ground) which are and have been utilized solely for storage
of potable water, do not have Knowledge (including Knowledge by the Shareholder)
that there are currently or ever have been any  underground  and/or above ground
storage tanks  (whether or not currently in use) on the Real Estate,  (v) do not
have Knowledge  (including  Knowledge by the  Shareholder)  that the Real Estate
contains Hazardous  Materials that require remediation under Environmental Laws,
and (vi) have not agreed to assume and, to the  Knowledge  of the Company or the
Shareholder,  have not assumed by operation of law, any environmental  Liability
of any other  Person.  Except as set forth in  SCHEDULE  3.28  hereto,  the Real
Estate  is not  listed  on  the  National  Priorities  List,  the  Comprehensive
Environmental  Response  Compensation  and  Liability  Information  System,  the
Resource  Conservation and Recovery Information System or any other governmental
list of potentially contaminated properties.

    3.29 DEBT INSTRUMENTS. SCHEDULE 3.29 is a true, correct  and  complete  list
showing  the  names  of  the  parties  and  outstanding  indebtedness  as of the
respective  dates set forth in 

                                       28


<PAGE>

SCHEDULE  3.29 under all  mortgages,  indentures,  notes,  guarantees  and other
obligations  for or relating to borrowed  money,  purchase money debt (including
conditional sales contracts and capital leases) or covenants not to compete (the
"DEBT  INSTRUMENTS")  for which the  Company or a  Subsidiary  is  primarily  or
secondarily obligated. The Shareholder has previously delivered to the Purchaser
true,  complete and correct copies of each of the Debt  Instruments,  other than
the increase in the CoBank, ACB line of credit described in Section 5.26. Except
as described in SCHEDULE  3.29, the Company and each  Subsidiary  have performed
all of the material obligations  required to be respectively  performed by them,
and are not in material  default under any of the  provisions of any of the Debt
Instruments,  and  there has not  occurred  any event  which,  (with or  without
notice,  lapse of time or the  happening or occurrence of any other event) would
constitute such a default.

    3.30 CUSTOMERS AND SUPPLIERS. Except as set  forth  in SCHEDULE 3.30, (i) to
the  Knowledge  of the Company or the  Shareholder,  and except in the  Ordinary
Course of  Business,  no material  customer,  subscriber  or a material  (in the
aggregate)  group of customers or subscribers of the Company or the Subsidiaries
have notified the Company or any  Subsidiary on or after the Balance Sheet Date,
that the customer intends to terminate,  cancel,  limit or modify their business
relationship  with the  Company or any  Subsidiary,  except  such  terminations,
cancellations,  limitations or  modifications as occur in the Ordinary Course of
Business  of the  Company or the  applicable  Subsidiary,  and (ii) no vendor or
supplier of the Company or a  Subsidiary  which is material to the  Business has
notified the Company or any such  Subsidiary  after the Balance Sheet Date, that
it intends to terminate,  cancel, limit or modify its business relationship with
the Company or the applicable Subsidiary in any material respect.

    3.31 SHAREHOLDER LOANS. Except as set forth in SCHEDULE 3.31, there  are  no
loans,  advances or other obligations for borrowed money owing by the Company or
the  Subsidiaries to the  Shareholder or its Affiliates  (other than the Company
and the  Subsidiaries)  as of the date  hereof.  Except as set forth in SCHEDULE
3.31,  the  Shareholder  and its  Affiliates  (other  than the  Company  and the
Subsidiaries)  do not have any  claim of any kind  against  the  Company  or the
Subsidiaries.

    3.32 ADEQUACY  OF  PROPERTIES.  Except  as  set  forth in SCHEDULE 3.32, the
Company  and each  Subsidiary,  respectively,  owns,  leases  or  otherwise  has
adequate rights to use the tangible and intangible  personal property  necessary
for the  conduct  of their  Business  in the manner in which  such  Business  is
presently being conducted with no material  conflict with or infringement of the
rights of others such that the  absence of such  ownership  or rights  could not
reasonably be expected to have a Material Adverse Effect.

    3.33 ABSENCE OF CERTAIN BUSINESS PRACTICES. Except as disclosed in  SCHEDULE
3.33,  none of the  Company,  the  Subsidiaries  nor any Person  acting on their
behalf  has,  directly  or  indirectly,  within the past six (6) years  given or
agreed  to  give  any  gift  or  similar  benefit  to  any  customer,  supplier,
governmental  employee or other Person who is or may be in a position to help or
hinder the Business of the Company or a  Subsidiary  (or assist the Company or a
Subsidiary  in  connection  with any actual or proposed  transaction)  which (i)
might subject the Company or a Subsidiary to any damage or penalty in any civil,
criminal or  governmental  litigation  or  Proceeding,  (ii) if not given in the
past, might have had a Material Adverse Effect, or 

                                       29


<PAGE>

(iii) if not  continued in the future,  could  reasonably  be expected to have a
Material Adverse Effect.

    3.34 TRADE REGULATION. Except as set forth in SCHEDULE 3.34, (i) all of  the
prices  charged by the  Company  and the  Subsidiaries  in  connection  with the
marketing,  sale or  distribution  of services have been in compliance  with all
Applicable Laws, and (ii) no claims have been  communicated or, to the Knowledge
of the  Company  or the  Shareholder,  Threatened  against  the  Company  or the
Subsidiaries with respect to wrongful termination of any third party independent
contractor,  discriminatory  pricing,  price fixing,  unfair competition,  false
advertising,  or  any  other  violation  of  any  Applicable  Laws  relating  to
anti-competitive  practices  or unfair trade  practices of any kind,  and to the
Knowledge  of the  Company or the  Shareholder,  no specific  situation,  set of
facts, or occurrence provides any basis for any such claim.

    3.35 SHAREHOLDER OWNERSHIP OF  THE  STOCK.  The  Shareholder  represents and
warrants that the Shareholder is the lawful owner of 6,000 shares of Stock, free
and clear of all Rights and  Encumbrances.  The  Shareholder  has the full legal
right,  power and authority to enter into this  Agreement  and to sell,  assign,
transfer and convey the shares of Stock so owned by the Shareholder  pursuant to
this  Agreement,  and the delivery to the Purchaser of the Stock pursuant to the
provisions of this  Agreement will transfer to the Purchaser good title thereto,
free and clear of all Rights and Encumbrances.

    3.36 VIRGINIA OPERATIONS.  The operations of the Company in the Commonwealth
of Virginia  consist solely of two (2) water systems  located in Carroll County,
Virginia.  These water systems are subject to the  oversight  and  regulation of
VDH.

    3.37 EMPLOYEE RETENTION. On or about the date hereof, the  Company  and  the
Subsidiaries have entered into certain legal, binding and enforceable  retention
and  severance  agreements in the form of EXHIBIT D hereto (the  "RETENTION  AND
SEVERANCE  AGREEMENTS") with their respective employees as set forth in SCHEDULE
3.37 to this Agreement,  which agreements entitle such employees to, among other
things,  one or more  retention  payments  (the  "RETENTION  PAYMENT")  by their
applicable  employer entity in the event, among other things, of their continued
employment  to and on the  Closing  Date.  Promptly  following  the date of this
Agreement,  the Shareholder  shall deliver to the Purchaser  true,  complete and
correct  copies of each  Retention and Severance  Agreement that is executed and
delivered by the Company and its Subsidiaries. SCHEDULE 3.37 also sets forth the
Retention  Payment  that  may  become  payable  pursuant  to the  Retention  and
Severance  Agreements to each such  employee in the event the employee  complies
with the  terms of the  retention  provisions  of the  Retention  and  Severance
Agreement. The Shareholder represents and warrants that it shall concurrently at
and upon the Closing,  (i) provide and remit to the Company and the Subsidiaries
funds sufficient to pay (x) any interim  payments on or for a Retention  Payment
obligation,  (y) any remaining Retention Payment obligations,  if not previously
paid, as such exist,  in the sole  discretion of the  Shareholder as provided in
the  Retention  and  Severance  Agreements,  on the  Closing  Date,  and (z) any
applicable employment taxes associated therewith, and (ii) cause the Company and
the Subsidiaries to make the required  Retention  Payment on the Closing Date in
accordance with the terms of the Retention and Severance Agreements.

                                       30


<PAGE>

    3.38 REGULATION AS UTILITIES. The Company and the Subsidiaries are regulated
as public  utilities in North  Carolina,  and the Company is also regulated as a
public  utility in  Virginia.  Neither the  Company,  the  Subsidiaries  nor any
"subsidiary  company"  or  "affiliate"  (as such terms are defined in the Public
Utility Holding Companies Act of 1935, as amended) of the Shareholder is subject
to  regulation  as a public  utility  or  public  service  company  (or  similar
designation)  by any other state in the United  States,  by the United States or
any agency or instrumentality of the United States or by any foreign country.

    3.39 LIMITATION   ON  REPRESENTATIONS  AND  WARRANTIES.   Except  for    the
representations  and  warranties  contained  in this  Article  III,  neither the
Shareholder,  the Company, the Subsidiaries nor any of their Affiliates, nor any
other Person acting on behalf of the Shareholder,  the Company, the Subsidiaries
or any of their Affiliates,  makes any  representation  or warranty,  express or
implied,  concerning,  without limitation,  the Stock, the Business, the Company
and its Subsidiaries or any other matter.

    3.40 INTERNAL ACCOUNTING CONTROLS. The Company and each Subsidiary maintains
a system of  internal  accounting  controls  sufficient  to  provide  reasonable
assurances  that in all  material  respects:  (i)  transactions  are executed in
accordance  with the  general or  specific  authorization  of Senior  Management
Employees,  (ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with GAAP and to maintain  accountability for
assets,  (iii) access to assets is permitted only in accordance with the general
or specific authorization of Senior Management Employees,  and (iv) the recorded
accountability  for  assets is  compared  with  existing  assets  at  reasonable
intervals and appropriate action is taken with respect to any differences.

    3.41 WATER QUALITY. Except as set forth in SCHEDULE 3.41 hereto, the quality
of the  drinking  water  supplied by the Company and the  Subsidiaries  to their
respective  customers is in compliance with the maximum  contaminant  levels for
primary contaminants established by the Safe Drinking Water Act, as amended, the
U.S.  Environmental  Protection  Agency,  DEH (for North Carolina only), and VDH
(for Virginia only), in effect, defined, interpreted and enforceable on the date
hereof.  Specifically  excluded  from this  representation  and warranty are any
secondary  drinking water  standards and all maximum  contaminant  levels not in
effect and enforceable on the date of the execution of this Agreement, including
the  promulgated  but  not  yet  effective  and  enforceable  Groundwater  Rule,
Radionuclide Rule and Disinfectant/Disinfection Byproducts Rule.

                                   ARTICLE 4

                 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

    As an  inducement  for the Shareholder to enter into this  Agreement  and to
consummate the transactions  contemplated  hereby, the Purchaser  represents and
warrants to the Shareholder  that each and all of the following  representations
and warranties (as modified by the Schedules and any Supplement delivered by the
Purchaser  pursuant to Section 13.21 of this  Agreement) are true and correct as
of the date of this  Agreement  and will be true and  correct as of the  Closing
Date.  The  Schedules  shall be  arranged  in  paragraphs  corresponding  to the
sections and subsections contained in this Article 4.

                                       31


<PAGE>

    4.1  ORGANIZATION. The Purchaser is a corporation  duly  organized,  validly
existing and in good standing under the laws of the Commonwealth of Pennsylvania
and has all requisite  power and  authority,  corporate and  otherwise,  to own,
operate and lease its properties and assets and to conduct its business as it is
now being conducted.  The Purchaser is duly qualified to transact  business as a
foreign  corporation  and is in good  standing  under the laws of every state or
jurisdiction  in which the nature of its activities or of its properties  owned,
leased or operated makes such  qualification  necessary and in which the failure
to be so  qualified  could  reasonably  be expected  to have a Material  Adverse
Effect on the Purchaser.

    4.2  DUE AUTHORIZATION. The execution,  delivery  and  performance  of  this
Agreement  and the  Ancillary  Documents  to be executed  and  delivered  by the
Purchaser  pursuant to this Agreement,  and the consummation of the transactions
contemplated  hereby and thereby  have been duly and validly  authorized  by all
necessary corporate action on the part of the Purchaser.  This Agreement and the
Ancillary  Documents  have been, or will be on or before the Closing Date,  duly
and  validly  authorized,  executed  and  delivered  by the  Purchaser  and  the
obligations of the Purchaser  hereunder and thereunder are or will be, upon such
execution and  delivery,  valid,  legally  binding and  enforceable  against the
Purchaser in accordance with their respective terms.

    4.3  NO BREACH. The Purchaser has full power  and  authority, corporate  and
otherwise,  to purchase  the Stock being  purchased  hereunder  and to otherwise
perform its obligations  under this Agreement and the Ancillary  Documents to be
executed and  delivered by the  Purchaser  pursuant  hereto.  The  execution and
delivery of this  Agreement  and the  Ancillary  Documents  to be  executed  and
delivered by the Purchaser  pursuant to this Agreement,  and the consummation of
the  transactions  contemplated  hereby and  thereby  will not:  (i) violate any
provision of the Articles of  Incorporation  or Bylaws (or comparable  governing
documents or instruments) of the Purchaser,  (ii) violate any Applicable Laws or
Injunction  applicable to the Purchaser,  (iii) other than filings and approvals
required to comply with  Applicable  Laws,  including (A) any filing required by
HSR,  and  (B)  applicable   requirements  of  the  NCUC,  the  VDH  and/or  any
Governmental Body, require any filing with, Permits from, authorization, consent
or  approval  of, or the giving of any notice to, any  Person,  (iv) result in a
violation  or breach of, or  constitute  (with or without due notice or lapse of
time or both) a  default  (or give  another  party any  rights  of  termination,
cancellation or acceleration) under, any of the terms,  conditions or provisions
of any note, bond, mortgage,  indenture,  license, franchise, Permit (including,
but not limited to, any Permits,  appeals or  authorizations of any Governmental
Body), lease or other Contract to which the Purchaser is a party, or by which it
or any of its assets or properties may be bound.

    4.4  INVESTMENT REPRESENTATIONS. The Purchaser understands  that  the  Stock
has not been  registered  under the Securities Act, or under the securities laws
of any jurisdiction, by reason of reliance upon certain exemptions.

    4.5 BROKERS. The Purchaser has not employed or engaged any  broker,  finder,
agent, banker or third party, nor has it otherwise dealt with anyone purporting
to act in the capacity of a finder or broker, in connection with the
transactions contemplated hereby.

                                       32


<PAGE>

                                   ARTICLE 5

                    PERFORMANCE AND COVENANTS PENDING CLOSING

    The Shareholder covenants and agrees that from and after  the  date  of this
Agreement and until the earlier of the Closing Date or the  termination  of this
Agreement in accordance with Article 12 hereof:

    5.1  CONTINUING  DUE  DILIGENCE.  At  the  request  of  the  Purchaser,  the
Shareholder  shall,  from  time  to  time,  give or  cause  to be  given  to the
Purchaser,   its   officers,   employees,   counsel,   accountants   and   other
representatives,  upon reasonable  notice to the Shareholder,  reasonable access
during normal  business hours,  without undue  disruption to the Business of the
Company or any  Subsidiary,  to the  properties and assets and all of the books,
minute books,  title papers,  records,  files,  Contracts,  insurance  policies,
environmental  records and reports,  licenses and  documents of every  character
solely to conduct continuing due diligence investigations of the Company and the
Subsidiaries relating to the Business for the purpose of monitoring the Business
until and through the Closing Date and to plan for  transitional  matters  after
the Closing.  For these purposes,  the Shareholder  shall furnish or cause to be
furnished to the Purchaser, its officers,  employees,  counsel,  accountants and
other  representatives  the information with respect to the properties or assets
of the Company and the Subsidiaries as any of them may reasonably  request.  The
Purchaser,   its   officers,   employees,   counsel,   accountants   and   other
representatives  shall have the authority to interview,  as reasonably necessary
and without undue  disruption to the Business of the Company or any  Subsidiary,
all  employees,   customers,   vendors,   suppliers  and  other  parties  having
relationships  with the Company  and/or the  Subsidiaries,  and the  Shareholder
shall make such  introductions  as may be  requested;  PROVIDED,  HOWEVER,  that
access  to  customers  for  investigatory  purposes  shall,  if  granted  by the
Shareholder,  be undertaken in a commercially  reasonably manner consistent with
the best interests of the Company and the  Subsidiaries  and shall be subject to
the prior consent of the  Shareholder,  which consent shall not be  unreasonably
withheld.

    5.2  CONDUCT OF BUSINESS. The  Shareholder  shall  cause the Company and the
Subsidiaries  to carry  on their  respective  Business  diligently,  only in the
Ordinary Course of Business and  substantially  in the same manner as heretofore
conducted.  The  Company  and the  Subsidiaries  shall  not make any  regulatory
filings with any Governmental Body, except in the Ordinary Course of Business or
with the prior  written  consent of the  Purchaser  (which  consent shall not be
unreasonably withheld, delayed or conditioned).  The Shareholder shall cause the
Company  and each  Subsidiary  to provide to the  Purchaser  copies of each such
regulatory filing made by the Company or such Subsidiary.  The Shareholder shall
not cause or permit any amendment of the Articles of  Incorporation or Bylaws of
the Company or any Subsidiary (or other governing instrument).

    5.3  ENCUMBRANCES.  The  Shareholder  shall  not,  directly  or  indirectly,
perform  or fail to  perform  any act  which  would  result in the  creation  or
imposition of any  Encumbrance on any of the properties or assets of the Company
or any  Subsidiary,  or  otherwise  adversely  affect the  marketability  of the
Company's or a Subsidiary's title to any of its properties or assets, outside of
the Ordinary Course of Business.

                                       33


<PAGE>

    5.4  PAY  INCREASES.  Except for  payments  pursuant  to the  Retention  and
Severance  Agreements and normal  increases in the Ordinary  Course of Business,
the  Shareholder  shall not permit the Company or a Subsidiary,  and the Company
and the  Subsidiaries  shall  not,  without  the prior  written  consent  of the
Purchaser,  grant  any  increase  in the  salaries  or rate of pay to any of its
employees,  grant any increase in any benefits or establish,  adopt, enter into,
make any new  grants  or  awards  under,  or  amend  any  collective  bargaining
agreement,  employment  agreement  or Benefit Plan for the benefit of any of its
employees.

    5.5  RESTRICTIONS ON NEW CONTRACTS. Except with the prior written consent of
the  Purchaser,  which consent shall not be  unreasonably  withheld,  delayed or
conditioned,  the Shareholder  shall not permit the Company and the Subsidiaries
to, and the Company and the  Subsidiaries  shall not,  enter into any  Contract,
incur any Liability, assume, guarantee or otherwise become liable or responsible
for any  Liability  of any other  Person,  make any loans,  advances  or capital
contributions  to any  other  Person  (except  for  extensions  of credit to its
customers in the Ordinary Course of Business),  or waive any right or enter into
any  other  transaction,  in each  case  other  than in the  Ordinary  Course of
Business and consistent  with normal  business  practices of the Company and the
Subsidiaries.   Without  limiting  the  foregoing,  for  the  purposes  of  this
Agreement,  any Contract other than Contracts for capital improvements described
in  Section  5.17  hereof  involving  the sum of One  Hundred  Thousand  Dollars
($100,000)  or more  shall be  deemed  to be  outside  the  Ordinary  Course  of
Business; PROVIDED, HOWEVER, for purposes of this Agreement, Developer Contracts
involving a purchase price paid by the Company or any Subsidiary of Seventy-five
Thousand Dollars ($75,000) or less shall be considered to have been entered into
in the Ordinary Course of Business.

    5.6  PRESERVATION  OF  BUSINESS.  The  Shareholder  shall  use  commercially
reasonable  efforts (i) to preserve  intact the  Business of the Company and the
Subsidiaries,  (ii) to keep available to the Purchaser the Employees,  and (iii)
to preserve  for the  Purchaser  the present  goodwill and  relationship  of the
Company and the Subsidiaries with their respective vendors, suppliers, customers
and others having business relationships with the Company and the Subsidiaries.

    5.7  PAYMENT  AND  PERFORMANCE  OF   OBLIGATIONS.   The   Company   and  the
Subsidiaries  shall,  and the  Shareholder  shall  cause  the  Company  and  the
Subsidiaries to, timely pay and discharge all invoices, bills and other monetary
Liabilities.

    5.8  RESTRICTIONS  ON  SALE  OF  ASSETS.   Except  for  sales  or  transfers
contemplated  on the date of this  Agreement  and set forth in SCHEDULE 5.8, the
Shareholder  shall not  permit  the  Company  and the  Subsidiaries  to, and the
Company and the Subsidiaries shall not, sell, assign, transfer, lease, sublease,
pledge or  otherwise  encumber  or dispose of any of its  properties  or assets,
except for the  provision of services in the Ordinary  Course of Business and at
regular prices.

    5.9  PROMPT NOTICE. The  Shareholder and the Purchaser shall promptly notify
the other in writing upon becoming aware of any of the following: (i) any claim,
demand  or  other  Proceeding  that  may be  brought,  Threatened,  asserted  or
commenced  against  the Company or any  Subsidiary  or the  Purchaser,  or their
respective  officers  or  directors,  (ii) any  changes in the  accuracy  of the
representations  and warranties made by the Shareholder or the Purchaser in this

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<PAGE>

Agreement,  (iii) any  Injunction  or any  complaint  praying for an  Injunction
restraining  or enjoining  the  consummation  of the  transactions  contemplated
hereby,  or (iv) any notice from any Person of its  intention  to  institute  an
investigation  into,  or  institute  a  Proceeding  to  restrain  or enjoin  the
consummation  of the  transactions  contemplated  hereby or to nullify or render
ineffective this Agreement or such transactions if consummated.

    5.10 CONSENTS.  As soon as  reasonably  practicable  and in any  event on or
before  the  Closing  Date,  the   Shareholder  and  the  Purchaser  shall  work
cooperatively and will use commercially reasonable efforts to obtain or cause to
be obtained  all of the  consents  and  approvals  of all Persons  necessary  to
consummate  the  transactions  contemplated  hereby,  including the consents and
approvals set forth in SCHEDULE 3.4 hereto.

    5.11 COPIES OF DOCUMENTS. The Shareholder has furnished or made available to
the Purchaser a true,  complete and accurate copy of each Operating Contract set
forth in SCHEDULE 3.16 hereto and any  Developer  Contract set forth in SCHEDULE
3.22 hereto.

    5.12 NO SOLICITATION OF OTHER OFFERS.  The Shareholder,  the Company and the
Subsidiaries  will not,  and will not permit their  respective  representatives,
investment  bankers,  agents and Affiliates of any of the foregoing to, directly
or  indirectly,  (i)  solicit  or  encourage  submission  of or  any  inquiries,
proposals or offers by, (ii) participate in any negotiations  with, (iii) afford
any  access  to  the  properties,  books  or  records  of  the  Company  or  the
Subsidiaries,  (iv) accept or approve,  or (v) otherwise  assist,  facilitate or
encourage,  or enter into any Contract with, any Person or group (other than the
Purchaser and its Affiliates,  agents and  representatives),  in connection with
any Acquisition  Proposal.  In addition,  the  Shareholder,  the Company and the
Subsidiaries  will not,  and will not permit their  respective  representatives,
investment  bankers,  agents and Affiliates of any of the foregoing to, directly
or indirectly,  make or authorize any statement,  recommendation or solicitation
in support of any  Acquisition  Proposal made by any Person or group (other than
the Purchaser).  In addition, the Shareholder shall immediately cease, and shall
cause  the  Company  and the  Subsidiaries  to  immediately  cease,  any and all
existing  activities,  discussions or negotiations with any parties with respect
to any of the foregoing.

    5.13 ACCOUNTS RECEIVABLE AND PAYABLE. Except for payments to the Shareholder
or its Affiliates (other than the Company and the Subsidiaries), the Company and
the Subsidiaries  shall not, and the Shareholder  shall not cause the Company or
any Subsidiary to, accelerate the collection of its accounts receivable or delay
the payments of its accounts payable or other Liabilities,  in each case arising
out of the  operation of the  Business in a manner  which would be  inconsistent
with past practice.

    5.14 TITLE MATTERS; SURVEYS.

         (a) TITLE DOCUMENTS.  As soon as practicable following the execution of
    this  Agreement,  the  Shareholder,  at its sole cost,  shall provide to the
    Purchaser: (i) a current A.L.T.A. Form 1992 title insurance commitment, with
    extended coverage  endorsements,  from a title insurance company  reasonably
    acceptable  to the  Purchaser  (or if  there  is an  existing  title  policy
    ("EXISTING  POLICY")  for such parcel  issued by a title  insurance  company
    reasonably  acceptable to the Purchaser,  from such title insurance company)
    for 

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<PAGE>

    the parcel of Owned Real Estate  which  serves as the Cary,  North  Carolina
    operations  center of the  Company  and  which is more  fully  described  in
    SCHEDULE 3.17 of this  Agreement  ("CARY  PROPERTY")  agreeing to insure the
    title of the owner in amounts  reasonably  satisfactory to the Purchaser for
    such  parcel,  but in no event in excess of an insurable  amount  reasonably
    determined by the title insurance company,  with standard exceptions waived,
    together  with copies of all  documents  mentioned  in said title  insurance
    commitment,  as well as a copy of the  Existing  Policy,  if any, and (ii) a
    current-on-the-ground  ALTA  survey  for the Cary  Property,  prepared  by a
    reputable  licensed  surveyor in the State of North  Carolina,  containing a
    certification in form reasonably  satisfactory to the Purchaser, in favor of
    the  Purchaser,  the  title  insurance  company  and the  owner  of the Cary
    Property  (collectively,  with the items described in clause (i), the "TITLE
    DOCUMENTS").

         (b) REVIEW OF TITLE  DOCUMENTS. The  Purchaser  shall be allowed twenty
    (20) days after receipt of the Title Documents for  examination  thereof and
    the making and  delivering  of any written  objections  to the  condition of
    title. If no title objection is made within such period, any objection shall
    be  deemed  to have  been  waived  by the  Purchaser.  If there is a written
    objection to the condition of title to the Cary Property and such  objection
    is made by the Purchaser within said twenty (20) day period, the Shareholder
    shall use commercially  reasonable efforts, at its sole cost and expense, to
    cure said title  objections  within  thirty (30) days after said  objections
    have been raised by the Purchaser.  If the Purchaser's  title objections are
    not cured or endorsed over to the Purchaser's reasonable satisfaction within
    such thirty (30) day period,  then the Purchaser  shall have the right for a
    period of five (5) business days  following the  termination  of such thirty
    (30) day cure period,  (i) to  terminate  this  Agreement by giving  written
    notice  of  termination  to the  Shareholder,  or (ii) if  there  is a title
    objection that can be stated in monetary  terms,  and if the Shareholder and
    the  Purchaser  mutually  agree to such  monetary  terms,  the Purchaser may
    accept the title  objection  and the Purchase  Price shall be reduced by the
    mutually agreed upon amount. If the Purchaser does not exercise its right to
    terminate  or if the parties  cannot  agree upon a reduction of the Purchase
    Price,  the  Purchaser  shall be  deemed  to have  waived  all such  uncured
    objections to the condition of title disclosed by the Title  Documents.  The
    title matters approved or deemed approved by the Purchaser  pursuant to this
    Section 5.14(b) are referred to as "PERMITTED EXCEPTIONS").

         (c) TITLE  POLICY.  It   shall  be  a  condition  to  the   Purchaser's
    obligations  to  close  the  transactions   contemplated   herein  that  the
    Shareholder shall, at Closing, cause the title insurance company approved by
    the  Purchaser  pursuant  to Section  15.4(a),  to issue and  deliver to the
    Purchaser (i) an ALTA owners extended  coverage policy of title insurance on
    the 1970 form (or 1992 form,  so long as all  creditors  rights,  fraudulent
    conveyance  and  other  similar  exceptions  are  deleted),   in  an  amount
    satisfactory to the Purchaser,  showing title to the Cary Property vested in
    the Company  and/or  applicable  Subsidiary,  subject only to the  Permitted
    Exceptions,  and containing such endorsements as may be reasonably  required
    by the  Purchaser  (the  "TITLE  POLICY"),  or (ii) if there is an  Existing
    Policy from a title  insurance  company  satisfactory  to the Purchaser,  an
    endorsement  or  endorsements  to the  Existing  Policy in each case in form
    reasonably  satisfactory to the Purchaser,  increasing the liability amounts
    thereunder to an amount  satisfactory  to the 

                                       36


<PAGE>

    Purchaser,  but in no event in  excess  of an  insurable  amount  reasonably
    determined  by  the  title  insurance   company.   The  Purchaser  shall  be
    responsible  for paying the costs of the  foregoing  and providing the title
    insurance  company with such  documentation and  indemnifications  as may be
    reasonably required to issue such coverage.

         (d) OTHER  OWNED  REAL  ESTATE.  In addition to the Cary Property,  the
    Company and the  Subsidiaries  own  approximately  nine hundred  fifty (950)
    water well lots, thirty-three (33) wastewater treatment plant lots, fourteen
    (14) elevated  tank lots,  and  approximately  eighty (80)  wastewater  pump
    (lift) station lots.  While most of these properties are either (i) owned in
    fee simple absolute title (with several titled in fee simple determinable or
    fee simple subject to a condition  subsequent),  or (ii) are leased, some of
    the properties, as indicated, have perpetual easements only. The Shareholder
    shall be under no  obligation  pursuant  to the terms of this  Agreement  to
    provide any title commitment, title insurance, survey or other documentation
    to the Purchaser  unless such  documentation  is presently  available in the
    files of the Shareholder, the Company or the Subsidiaries.

    5.15 INSURANCE. The Shareholder shall maintain in full force and effect, for
the benefit of the Company and the Subsidiaries, all insurance coverages for the
Company and the Subsidiaries  substantially  comparable to coverages existing on
the date hereof.

    5.16 FILING  REPORTS   AND MAKING PAYMENTS. The Company and the Subsidiaries
shall,  and the  Shareholder  shall cause the Company and the  Subsidiaries  to,
timely file all required reports and notices with applicable Governmental Bodies
and timely make all uncontested payments due and owing to each such Governmental
Body,  including,  but not by way of  limitation,  any filings,  notices  and/or
payments required by reason of the transactions contemplated by this Agreement.

    5.17 CAPITAL EXPENDITURES.  The Company and the Subsidiaries shall not,  and
the  Shareholder  shall not permit the  Company or any  Subsidiary  to, make any
capital  expenditures  in excess of its  approved  capital  expenditures  budget
(which has been  previously  provided to the Purchaser)  without the Purchaser's
prior written consent, which consent shall not be unreasonably withheld, delayed
or conditioned.

    5.18 MONTHLY AND YEAR-END 2003 FINANCIALS.  Within  fifteen (15) days of the
close of each month after the execution of this Agreement by all parties hereto,
the Shareholder shall deliver to the Purchaser a consolidated  balance sheet and
income statement for the Company and the  Subsidiaries  disclosing the financial
position and results of operations of the Company and the  Subsidiaries  for the
preceding month and  year-to-date  which shall be prepared on a basis consistent
with the interim financial  statements of the Company and the Subsidiaries,  and
consistent with the prior months and year-to-date financial statements. At least
ten (10) days prior to Closing,  the Shareholder  shall deliver to the Purchaser
audited consolidated financial statements,  including a balance sheet and income
statement,  for the  Company and the  Subsidiaries  which,  including  any notes
thereto, fairly present the consolidated financial position and condition of the
Company and the  Subsidiaries  as of December  31, 2003 and the results of their
operations  for the period  then ended in  accordance  with GAAP  applied by the
Company  and the  Subsidiaries  on a  consistent  basis  throughout  the periods
covered.

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<PAGE>

    5.19 LITIGATION. From the date hereof and  through  the  Closing  Date,  the
Shareholder  will notify the Purchaser in writing of any actions or  Proceedings
of the type  required to be  described in Section 3.7 of this  Agreement,  that,
from the time hereof,  are, to the Knowledge of the  Shareholder or the Company,
Threatened or commenced  against the Company or either Subsidiary or against any
officer, director or Employee of the Company or either Subsidiary.

    5.20 NOTIFICATION OF INACCURACY.  The Shareholder agrees to promptly  notify
the Purchaser in writing of any material  inaccuracy  made by the Shareholder in
this Agreement of which the Shareholder  becomes aware prior to the Closing Date
and which could result in a Material  Adverse  Effect.  The Purchaser  agrees to
promptly  notify the  Shareholder in writing of any material  inaccuracy made by
the Purchaser in this  Agreement of which the  Purchaser  becomes aware prior to
the Closing Date. The foregoing  shall not limit the ability of the  Shareholder
to Supplement the Schedules.
 
    5.21 DEBT INSTRUMENTS.  The  Shareholder  has  provided  the  Purchaser with
copies of all Debt  Instruments  of the Company and the  Subsidiaries  which are
described in Section 3.29 of this  Agreement and which are set forth in SCHEDULE
3.29.  Upon  payment  of  the  Purchase  Price  at  the  Closing,  any  and  all
indebtedness  of  the  Company  and  the  Subsidiaries  to  ALLETE,   Inc.,  the
Shareholder and/or any of their Affiliates shall be deemed paid in full.

    5.22 GUARANTEES.

         (a) COMPANY AND SUBSIDIARY GUARANTEES.  All  guarantees  set  forth  in
    SCHEDULE  3.11  hereof and all other  guarantees  made by the Company or the
    Subsidiaries,  contingent or otherwise, of any kind or nature made for or on
    behalf of ALLETE,  Inc., the Shareholder,  any Affiliate of ALLETE,  Inc. or
    the  Shareholder  (other than the Company and the  Subsidiaries),  or any of
    their respective  officers,  directors,  employees or other  representatives
    shall be fully and finally  terminated,  without recourse,  and delivered to
    the Purchaser at and upon the Closing.

         (b) SHAREHOLDER AND AFFILIATE  GUARANTEES.  SCHEDULE 5.22(b) sets forth
    a  list  of  guarantees  made  by  the  Shareholder  and/or  its  Affiliates
    (excluding the Company and the  Subsidiaries)  with respect to the Business.
    Each of the parties shall use all commercially  reasonable  efforts prior to
    the Closing to cause the  Shareholder and its Affiliates to be released from
    any and all such guarantees, contingent or otherwise, of any kind or nature,
    made for or on  behalf of the  Company  or any of the  Subsidiaries  (each a
    "SHAREHOLDER GUARANTEE").  The release of the Shareholder Guarantee(s) shall
    be evidenced  by the return of the  original  guarantee at the Closing or by
    delivery  of an  irrevocable  release  executed  by the named  guarantee  or
    beneficiary of the Shareholder  Guarantee.  In the event that such a release
    is not obtained at or prior to the Closing,  the Purchaser,  the Company and
    the Subsidiaries  shall make continuous  commercially  reasonable efforts to
    terminate,  extinguish or otherwise obtain the release of any such remaining
    Shareholder  Guarantee(s)  (along  with all  documents  and  instruments  to
    evidence such binding termination extinguishment or release). In furtherance
    of the  foregoing,  the  Purchaser  shall  defend,  indemnify  and  hold the
    Shareholder  and its  Affiliates  harmless from and against any  Shareholder
    and/or Affiliate Guarantee.

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<PAGE>

    5.23 ENVIRONMENTAL ASSESSMENT. The Shareholder shall  permit  and  cooperate
with  the  Purchaser  or  any  reasonably  qualified  environmental   consultant
designated by the Purchaser (the  "ENVIRONMENTAL  ASSESSMENT FIRM") to conduct a
Phase I environmental  site assessment (the  "ENVIRONMENTAL  ASSESSMENT") of any
Owned  Real  Estate  or other  Real  Estate  used in the  Business  prior to the
Closing.  The  Purchaser  shall pay all fees and  expenses of the  Environmental
Assessment Firm. Any and all written report(s) of the  Environmental  Assessment
Firm  shall  be  concurrently  delivered  to the  Shareholder  with and upon the
delivery of such  report(s) to the  Purchaser.  The  Shareholder  shall have the
right to Supplement its Schedules to this  Agreement  with specific  information
contained in the report(s) of the  Environmental  Assessment  Firm in accordance
with the Supplement provisions of Section 13.21 of this Agreement.

    5.24 COOPERATION WITH RESPECT TO PERMITS, LICENSES AND REGULATORY MATTERS.

         (a) PERMITS.  The  Shareholder  shall  at  its  sole  cost and  expense
    promptly  perform such lawful acts and execute and deliver to the  Purchaser
    such  documents as the  Purchaser may request to obtain the full benefits of
    the  transfer  of  ownership  of the Stock,  and the  Shareholder  shall use
    commercially reasonable efforts to and shall cooperate with the Purchaser to
    obtain for the Purchaser all transferable and nontransferable Permits issued
    by a Governmental Body necessary or appropriate to continue the operation of
    the Company and the Subsidiaries in the Ordinary Course of Business from and
    after the Closing Date.

         (b) REGULATORY MATTERS. Upon execution of this Agreement, the Purchaser
    and the Shareholder shall promptly proceed,  and the Shareholder shall cause
    the Company and each Subsidiary to file, all applications,  consent requests
    and associated  documentary  material required by or necessary to obtain all
    approvals  of any  Governmental  Body  necessary  to complete or satisfy the
    conditions to Closing with respect to the transactions  contemplated by this
    Agreement,  including those required by HSR (if  applicable),  and the North
    Carolina  General  Statutes,  the VDH and other  Applicable Laws. Each party
    shall  bear its own costs  with  respect to such  applications  and  consent
    requests.

    5.25 PERFORMANCE AND OTHER BONDS. As of or immediately following the Closing
the Purchaser  shall arrange to obtain  replacement  performance and other bonds
which have been posted by the Company,  the Subsidiaries  and/or the Shareholder
(in the  coverage  amounts  and for the  term(s)  set forth on such  bonds)  for
delivery at the Closing (and to the  appropriate  Governmental  Body,  including
those  required by the NCUC and the VDH) which are set forth in  SCHEDULE  5.25.
All such bonds to be  obtained by the  Purchaser  shall be  effective  as of the
Closing  Date  for  events  arising  on or  after  the  Closing  Date.  Evidence
satisfactory  to the  Shareholder of compliance  with  Applicable Law (including
North Carolina  General Statute 62-110.3 and NCUC rules R7-37 (water) and R10-24
(wastewater))  with  respect to such bonds shall also be provided at the Closing
by the Purchaser.  The Purchaser acknowledges that (i) it shall have no right or
claim to the  performance  and other bonds  presently in existence and which are
executed  by  the  Shareholder,   and  (ii)  the  Shareholder  shall  cause  the
termination and  cancellation of each such  performance and other bond as of the
Closing Date, and the  Shareholder  shall have the right to any and all proceeds
and  rebates,   if  any,   therefrom  with  respect  to  such   termination  and
cancellation;  PROVIDED,  HOWEVER,  that the cost for such 

                                       39


<PAGE>

performance  and other  bonds was not  previously  charged  to (and paid by) the
Company and/or the Subsidiaries by the Shareholder.

    5.26 ABSENCE   OF  CERTAIN  DEVELOPMENTS.   Except   for   the  transactions
contemplated  by this  Agreement  or as  otherwise  set forth on  SCHEDULE  5.26
hereto,  the Company and the Subsidiaries  will conduct the Business only in the
Ordinary Course of Business and will not:

         (a) Declare, set aside or pay a dividend or make any other distribution
    with  respect  to  any  class  of  capital  stock  of  the  Company  or  the
    Subsidiaries;

         (b) Change  accounting  methods  or   practices   (including,   without
    limitation,  any change in  depreciation,  amortization  or cost  accounting
    policies or rates);

         (c) Except for the transactions contemplated by this Agreement  and  as
    otherwise set forth in SCHEDULE 3.37, enter into any employment  contract or
    collective bargaining agreement, written or oral, or modify the terms of any
    existing  employment  contract  or  agreement  or  adopt,  amend,  modify or
    terminate any Benefit Plan;

         (d) Make any change or amendment in its  articles  of  incorporation or
    bylaws;

         (e) Issue or sell any securities; acquire, directly or  indirectly,  by
    redemption or otherwise, any securities; or grant or enter into any options,
    warrants, calls or commitments of any kind with respect thereto;

         (f) Make any capital expenditure exceeding One Hundred Thousand Dollars
    ($100,000) which are not in the capital expenditure operating budgets of the
    Company and its Subsidiaries; and/or

         (g) Incur any obligations for borrowed money (as  opposed  to  purchase
    money debt) other than pursuant to the existing credit  facilities under the
    Debt Instruments described and set forth in SCHEDULE 3.29 of this Agreement;
    PROVIDED,  HOWEVER,  the  Purchaser  (i)  acknowledges  that the  Company is
    presently  in the process of expanding  its line of credit with CoBank,  ACB
    from an $8.5 million maximum  principal  amount available under such line of
    credit  to a maximum  principal  amount of $11.0  million,  and (ii)  hereby
    consents to such expansion of the CoBank, ACB line of credit.

    5.27 CERTAIN ACCOUNTING MATTERS.

         (a) UNAMORTIZED  ACQUISITION  COSTS.   As  an  affirmative response and
    accommodation  to  the  Purchaser's  request,  the  Company  has  agreed  to
    write-off in the November 30, 2003 and December 31, 2003,  interim financial
    statements  of  the  Company  and  its  Subsidiaries   certain   capitalized
    preliminary  investigation  costs arising from  development  of a wastewater
    treatment  system  which would be  permitted  for  discharge  in  Williamson
    County,  Tennessee. The write-off will approximate $97,000, or $59,000 on an
    after-tax basis. The Company will also propose this write-off adjustment for
    the  December 31,  2003,  audited  financial  statements  by  including  the
    write-off in the year-end trial balance prepared for the Company's auditor.

                                       40


<PAGE>

         (b) INTERIM ACCRUAL OF VACATION LIABILITY.  As  a  further  affirmative
    response and  accommodation  to the Purchaser's  request,  the Company shall
    present an accrual of vacation  pay  liability  for each  interim  financial
    statement of the Company and the Subsidiaries, to be prepared by the Company
    for delivery to the  Purchaser,  pursuant to and in accordance  with Section
    5.18 of this Agreement.

         In furtherance of  the  foregoing,  the  Shareholder  shall  cause  the
    Company  to,  and the  Company  shall,  as of  January  1,  2004,  accrue in
    accordance with the Company's  vacation pay policy,  a full year of vacation
    pay  liability  anticipated  and  calculated by the Company for the calendar
    year  2004.  The  amount  shall  be (i)  initially  recorded  by a debit  to
    "Vacation Pay Deferred  Asset" (a balance sheet  account) and by a credit to
    "Vacation Pay Liability" (a balance sheet account),  and (ii) amortized on a
    monthly  basis based on actual use of vacation  time by all  employees by an
    entry that  debits  "Vacation  Pay  Liability"  and  credits  "Vacation  Pay
    Deferred Asset". In the event an employee terminates employment in 2004, the
    full amount paid to such employee for accrued but unused vacation time shall
    be recorded as expense in the period  incurred as a consequence  of the cash
    payment  to the  employee,  with a  corresponding  entry (in the same  gross
    amount of the gross  vacation  pay  liability  which  was  remitted  to such
    employee)  that debits  "Vacation Pay  Liability"  and credits  Vacation Pay
    Deferred Asset". In the event an employee has carry-over vacation from 2003,
    the use of that  vacation  shall be  recorded  as a debit to  "Vacation  Pay
    Liability" and a credit to "Vacation Pay Deferred Asset".

    5.28 CAPITAL EXPENDITURES. The Company and its Subsidiaries shall make  best
reasonable  commercial efforts to continue their investment in capital resources
in the  Ordinary  Course  of  Business  consistent  with the  capital  budget(s)
established for the Company and the Subsidiaries.

                                   ARTICLE 6
             MUTUAL CONDITIONS PRECEDENT TO THE PARTIES' OBLIGATIONS

    Unless waived in writing by the parties, each and every  obligation  of  the
Purchaser and the Shareholder to be performed at the Closing shall be subject to
the satisfaction at or prior thereto of each and all of the following conditions
precedent:

    6.1  PROCEEDINGS.  There  being no  (i) Proceedings which have been brought,
asserted or  commenced  against the  Purchaser,  the Company,  the  Subsidiaries
and/or the  Shareholder by any Person which enjoins or otherwise  materially and
adversely  affects the  Purchaser's,  the Company's,  the  Subsidiaries'  or the
Shareholder's  ability to consummate  the  transactions  contemplated  hereby or
which could  reasonably  be expected  to have a Material  Adverse  Effect if the
transactions  contemplated  hereby were consummated,  (ii) Proceedings that have
been Threatened against the Purchaser,  the Company, the Subsidiaries and/or the
Shareholder by any Person which would enjoin or materially and adversely  affect
the Purchaser's,  the Company's,  the Subsidiaries' or the Shareholder's ability
to consummate the transactions  contemplated hereby or which could reasonably be
expected  to have a  Material  Adverse  Effect  in the  event  the  transactions
contemplated  hereby were  consummated,  or (iii) Applicable Laws restraining or
enjoining or which may  reasonably be expected to nullify or render  ineffective
this Agreement or 

                                       41


<PAGE>

the  consummation  of the  transactions  contemplated  hereby or which otherwise
could  reasonably  be  expected  to  have  a  Material  Adverse  Effect  if  the
transactions contemplated hereby were consummated.

    6.2  CONSENTS AND APPROVALS.  The Purchaser  and  the Shareholder shall have
received  evidence,  in  form  and  substance  reasonably  satisfactory  to  the
respective  counsel for the  Purchaser  and the  Shareholder,  that all material
consents, waivers, releases, authorizations,  approvals, licenses, certificates,
Permits and  franchises of all Persons  (including  each and every  Governmental
Body) as may be necessary to lawfully  consummate the transactions  contemplated
by this  Agreement and for the Purchaser to carry on and continue the operations
of the  Company  and the  Subsidiaries  as  they  are now  conducted  have  been
obtained. All consents of a Governmental Body shall be by Final Order; PROVIDED,
HOWEVER,  that if the  Purchaser  and the  Shareholder  waive the  condition  of
Governmental  Body  consent by Final  Order,  the  parties  shall  consider  the
Governmental  Body consent without Final Order  sufficient to proceed to Closing
according to the other terms of this Agreement. All Final Orders shall impose no
conditions  that  could  have a Material  Adverse  Effect on the  Company or the
Subsidiaries  after giving effect to the consummation of this Agreement.  "FINAL
ORDER" means an action or decision of the  Governmental  Body as to which (i) no
request for a stay is pending, no stay is in effect, and any deadline for filing
such  request  that may be  designated  by  Applicable  Law has passed,  (ii) no
petition for rehearing or  reconsideration  or application for review is pending
and the time for the filing of such petition or  application  has passed,  (iii)
the Governmental Body does not have the action or decision under reconsideration
on its own motion and the time within  which it may effect such  reconsideration
has passed, and (iv) no judicial appeal is pending or in effect and any deadline
for filing any such appeal that may be designated by statute or rule has passed.

    6.3  ANTITRUST MATTERS. All waiting  periods  under  HSR  have  expired,  no
temporary  restraining  order,  preliminary  Injunction or permanent  Injunction
enjoining the  consummation  of the  transactions  contemplated  herein has been
entered by any court,  no action  seeking  to enjoin  the  consummation  of this
transaction  has been commenced by any Person,  and neither the FTC, the DOJ nor
any  State  Attorney  General  has  Threatened  to take any  action to enjoin or
challenge the transaction  contemplated herein.  Promptly after the execution of
this  Agreement,  the Purchaser and the  Shareholder  shall make all filings and
submit  information  requested  or required  under HSR with the FTC and the DOJ.
Neither party hereto shall initiate any  substantive  discussion with the FTC or
DOJ concerning the  transactions  contemplated by this Agreement  without giving
the other party  reasonable  prior  notice of such  discussion  and a reasonable
opportunity to  participate  therein.  Each party shall  promptly  report to the
other the fact and general nature of any substantive  discussion  initiated with
it by the FTC or DOJ concerning the transactions contemplated by this Agreement.
Notwithstanding the foregoing, the parties hereto have presently determined that
filings  under HSR are not required due to the amount of the Purchase  Price for
the Stock.

                                       42


<PAGE>

                                   ARTICLE 7

         ADDITIONAL CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATIONS

    Unless  waived  by  the  Purchaser  in writing, each and every obligation of
the  Purchaser  to  be  performed  at  the  Closing  shall  be  subject  to  the
satisfaction  at or prior  thereto of each and all of the  following  conditions
precedent:

    7.1  ACCURACY OF REPRESENTATIONS AND  WARRANTIES.  The  representations  and
warranties  (as  amended  by any  Supplement)  made by the  Shareholder  in this
Agreement,  and the  Ancillary  Documents  to be executed  and  delivered by the
Shareholder  pursuant  to this  Agreement,  shall  be true  and  correct  in all
material  respects  at and as of the  Closing  with the same force and effect as
though such  representations  and warranties had been made or given at and as of
the Closing.

     7.2 COMPLIANCE WITH COVENANTS AND AGREEMENTS. The Shareholder,  the Company
and the  Subsidiaries  shall  have  performed  and  complied  with  all of their
covenants,  agreements  and  obligations  under this Agreement and the Ancillary
Documents  which are to be performed or complied with by them at or prior to the
Closing,  including  the  execution  and  delivery  of the  Ancillary  Documents
specified  in  Section  2.4(b)   hereof,   all  of  which  shall  be  reasonably
satisfactory in form and substance to the Purchaser.

     7.3 NO MATERIAL ADVERSE EFFECT. As of the Closing Date,  nothing shall have
occurred which would,  individually or in the aggregate, have a Material Adverse
Effect on the Company and/or the Subsidiaries.

     7.4 LEGAL  OPINION.  The Purchaser  shall have received an opinion from the
counsel for the Shareholder, dated as of the Closing Date, in form and substance
satisfactory  to  the  Purchaser  in  the  Purchaser's   reasonable   commercial
discretion.

                                   ARTICLE 8

        ADDITIONAL CONDITIONS PRECEDENT TO THE SHAREHOLDER'S OBLIGATIONS

    Unless waived  by  the  Shareholder  in writing,  each and  every obligation
of the  Shareholder  to be  performed  at the  Closing  shall be  subject to the
satisfaction  at or prior  thereto of each and all of the  following  conditions
precedent:

    8.1  ACCURACY OF REPRESENTATIONS  AND  WARRANTIES. The  representations  and
warranties  (as  amended  by any  Supplement)  made  by the  Purchaser  in  this
Agreement  and the  Ancillary  Documents  to be executed  and  delivered  by the
Purchaser pursuant to this Agreement,  shall be true and correct in all material
respects at and as of the Closing  with the same force and effect as though such
representations and warranties had been made or given at and as of the Closing.

    8.2  COMPLIANCE  WITH  COVENANTS AND  AGREEMENTS.  The Purchaser  shall have
performed and complied with all of its  covenants,  agreements  and  obligations
under this 

                                       43


<PAGE>

Agreement  and the  Ancillary  Agreements  which are to be performed or complied
with by it at or prior to the Closing,  including  the execution and delivery of
the Ancillary Documents specified in Section 2.4(c) hereof.

    8.3  LEGAL OPINION. The Shareholder  shall have received an opinion from the
counsel for the  Purchaser,  dated as of the Closing Date, in form and substance
satisfactory  to the  Shareholder  in the  Shareholder's  reasonable  commercial
discretion.

    8.4  DELIVERY OF PURCHASE PRICE AND OTHER CONSIDERATION. The Purchaser shall
have delivered to the  Shareholder,  against receipt of the certificates for the
Stock, the Purchase Price.

                                   ARTICLE 9

                                 INDEMNIFICATION

    9.1  INDEMNIFICATION BY THE SHAREHOLDER.  The Shareholder hereby  covenants 
and  agrees  to  indemnify  and hold the  Purchaser,  its  officers,  directors,
employees,  Affiliates,  shareholders  and agents,  and each of their respective
successors  and assigns,  harmless  from,  against and in respect of any and all
losses,  costs,  expenses (including without limitation,  reasonable  attorneys'
fees and  disbursements of counsel),  Liabilities,  damages,  fines,  penalties,
charges, assessments, judgments, settlements, claims, causes of action and other
obligations  of any nature  whatsoever  (excluding,  however,  Purchaser  claims
against  the  Shareholder  for  incidental,  consequential  or special  damages,
including  punitive  damages,  other than those  claims which arise from a third
party  claim  against  the  Company)  (individually,  a "LOSS" and  collectively
"LOSSES")  that any of them may at any time,  directly  or  indirectly,  suffer,
sustain,  incur or become  subject to,  arising out of,  based upon or resulting
from or on account of each of the following:

         (a) the  breach  or  falsity of any  representation  or  warranty  made
    by the  Shareholder  in this  Agreement  and the Ancillary  Documents  to be
    executed  and  delivered  by the  Shareholder  pursuant  hereto and thereto;
    PROVIDED,  HOWEVER,  that the  Shareholder  shall not be required to provide
    such indemnification for the breach or falsity of any such representation or
    warranty  (other than  representations  or warranties  contained in Sections
    3.1, 3.2, 3.3, 3.4, 3.9, 3.10,  3.23,  3.29, 3.31, 3.33 and 3.35) unless and
    until the  Purchaser,  its officers,  directors,  employees,  Affiliates and
    other  representatives shall have sustained cumulative Losses as a result of
    one or more such  breaches or  falsities of Five  Hundred  Thousand  Dollars
    ($500,000) (the "BASKET  AMOUNT").  Once the aggregate of Losses exceeds the
    Basket Amount, the Shareholder shall provide  indemnification for all Losses
    sustained as a result of such  breach(es) or  falsity(ies) of the applicable
    representations and warranties in excess of the Basket Amount; or

         (b) the breach of any covenant or agreement made by the  Shareholder in
    this  Agreement and the Ancillary  Documents to be executed and delivered by
    the Shareholder or its representatives pursuant hereto or thereto; or

                                       44


<PAGE>

         (c) any incurrence by the Purchaser, the Company or the Subsidiaries of
    an amount or amounts for Transactional Expenses of the Shareholder; or

         (d) any claim (i) for Retention Payments, severance pay, bonus,  unpaid
    wages or  salaries  accruing,  incurred or  triggered  by a  termination  of
    employment  (voluntary or involuntary)  of any employee of the  Shareholder,
    the  Company or the  Subsidiaries  which  occurred  at any time prior to the
    Closing  or  which  arises  immediately  upon  and as a  consequence  of the
    occurrence  of  the  Closing  (but  not as a  consequence  of a  hiring  and
    subsequent  termination by the Purchaser),  or (ii) relating to any claim or
    Proceeding  of  any  employee  of  the  Shareholder,   the  Company  or  the
    Subsidiaries arising from any act, occurrence,  or event, the basis of which
    is dated at any time prior to, or attributable to, the Closing; or

         (e) any and all Losses that arise from, in connection  with or incident
    to any claim,  obligation,  cost or expense  under a  guarantee  made by the
    Company or the  Subsidiaries  on behalf of the  Shareholder  as described in
    Section  5.22(a)  that are not  within the scope of the  indemnity  from the
    Purchaser to the Shareholder; or

         (f) any and all Losses that arise from, are in connection with, or  are
    incident to any claims set forth in SCHEDULE  3.24 to the extent such Losses
    would   otherwise  be  covered   under  any   insurance  or   self-insurance
    arrangement.

    Notwithstanding   the  foregoing,  any  Loss  or  aggregate  Losses  to   be
indemnified by the  Shareholder to the Purchaser  under this Agreement shall not
exceed Seven Million Five Hundred Thousand Dollars ($7.5 Million).  Any claim of
indemnification  by the Purchaser  from,  in connection  with or incident to any
Loss or  Losses  related  to  Taxes  shall be  governed  by  Article  10 of this
Agreement.

    9.2  INDEMNIFICATION BY THE PURCHASER. The Purchaser covenants and agrees to
defend,  indemnify  and  hold  the  Shareholder  and  its  respective  officers,
directors,  successors and assigns, harmless from, against and in respect of any
and all Losses that it may at any time, directly or indirectly, suffer, sustain,
incur or become  subject to,  arising out of, based upon or resulting from or on
account of each or all of the following:

         (a) the breach or falsity of any representation or warranty made by the
    Purchaser in this  Agreement and the Ancillary  Documents to be executed and
    delivered by the Purchaser pursuant hereto and thereto; or

         (b) the breach of any covenant or agreement made  by  the  Purchaser in
    this  Agreement and the Ancillary  Documents to be executed and delivered by
    the Purchaser pursuant hereto or thereto;

         (c) any and all Losses arising from, in connection with or incident  to
    the Shareholder and Affiliate Guarantees described in Section 5.22; or

         (d) any and all Losses arising from, in connection with or incident  to
    the Severance Payments.

                                       45


<PAGE>

    9.3  PROCEDURE FOR INDEMNIFICATION.  In  the  event  a  party, including its
trustees, officers, directors,  employees, Affiliates and other representatives,
intends to seek  indemnification  pursuant to the  provisions of Sections 9.1 or
9.2 hereof (the "INDEMNIFIED  PARTY"), the Indemnified Party shall promptly give
notice  hereunder  to the other party (the  "INDEMNIFYING  PARTY") of a claim or
after obtaining written notice of any claim, investigation,  or the service of a
summons  or other  initial  or  continuing  legal or  administrative  process or
Proceeding in any action  instituted  against the Indemnified  Party as to which
recovery or other action may be sought against the Indemnified  Party because of
the  indemnification  provided  for in Section 9.1 or 9.2  hereof,  and, if such
indemnity  shall arise from the claim of a third party,  the  Indemnified  Party
shall permit the Indemnifying  Party to assume the defense of any such claim and
any  litigation  resulting  from  such  claim;   PROVIDED,   HOWEVER,  that  the
Indemnified  Party shall not be required  to permit  such an  assumption  of the
defense of any claim or  Proceeding  which,  if not first  paid,  discharged  or
otherwise  complied with, would result in a material  interruption or disruption
of the  business  of  the  Indemnified  Party,  or any  material  part  thereof.
Notwithstanding the foregoing, the right to indemnification  hereunder shall not
be affected by any failure of the  Indemnified  Party to give such notice (or by
delay by the Indemnified  Party in giving such notice) unless,  and then only to
the extent that,  the rights and remedies of the  Indemnifying  Party shall have
been  prejudiced  as a result of the failure to give,  or delay in giving,  such
notice. Failure by the Indemnifying Party to notify the Indemnified Party of its
election to defend any such claim or action by a third party within  twenty (20)
days after notice thereof shall have been given to the Indemnifying  Party shall
be deemed a waiver by the  Indemnifying  Party of its right to defend such claim
or action.

    If the Indemnifying  Party assumes the defense of such claim,  investigation
or Proceeding  resulting  therefrom,  the obligations of the Indemnifying  Party
hereunder as to such claim, investigation or Proceeding shall include taking all
steps  necessary in the defense or  settlement of such claim,  investigation  or
Proceeding and holding the  Indemnified  Party harmless from and against any and
all Losses  arising  from,  in  connection  with or incident  to any  settlement
approved by the  Indemnifying  Party or any judgment  entered in connection with
such claim,  investigation  or Proceeding,  except where, and only to the extent
that, the Indemnifying  Party has been prejudiced by the actions or omissions of
the Indemnified  Party. The Indemnifying Party shall not, in the defense of such
claim or any Proceeding  resulting  therefrom,  consent to entry of any judgment
(other than a judgment of dismissal on the merits without costs) except with the
written  consent  of  the   Indemnified   Party  (which  consent  shall  not  be
unreasonably  withheld,  delayed or  conditioned)  or enter into any  settlement
(except with the written consent of the Indemnified  Party,  which consent shall
not be unreasonably  withheld,  delayed or  conditioned)  unless (i) there is no
finding or admission of any violation of Applicable  Law and no material  effect
on any claims  that could  reasonably  be  expected to be made by or against the
Indemnified  Party,  (ii) the sole relief provided is monetary  damages that are
paid in full for Losses which are or may be properly  applied against the Basket
Amount, and (iii) the settlement shall include the giving by the claimant or the
plaintiff to the  Indemnified  Party a release from all  Liability in respect to
such claim or litigation.

    If the Indemnifying  Party assumes the defense of such claim,  investigation
or Proceeding  resulting  therefrom,  the Indemnified Party shall be entitled to
participate in the defense of the claim,  but solely by observation  and comment
to the Indemnifying  Party,  and the counsel  selected by the Indemnified  Party
shall  not  appear  on its  behalf  in any  Proceeding  arising  

                                       46


<PAGE>

hereunder.  The  Indemnified  Party  shall  bear the fees  and  expenses  of any
additional  counsel  retained by it to  participate in its defense unless any of
the following  shall apply:  (i) the  employment of such counsel shall have been
authorized  in  writing  by the  Indemnifying  Party,  or (ii) the  Indemnifying
Party's  legal counsel shall advise the  Indemnifying  Party in writing,  with a
copy to the Indemnified  Party,  that there is a conflict of interest that would
make it inappropriate under applicable standards of professional conduct to have
common counsel.  If clause (i) or (ii) in the immediately  preceding sentence is
applicable,  then the  Indemnified  Party may  employ  separate  counsel  at the
expense of the Indemnifying  Party to represent the Indemnified Party, but in no
event shall the Indemnifying Party be obligated to pay the costs and expenses of
more than one such  separate  counsel for any one  complaint,  claim,  action or
Proceeding in any one jurisdiction.

    If the Indemnifying Party does not assume the defense of any such claim by a
third party or litigation  resulting  therefrom after receipt of notice from the
Indemnified  Party,  the  Indemnified  Party may  defend  against  such claim or
litigation in such manner as it  reasonably  deems  appropriate,  and unless the
Indemnifying  Party shall deposit with the Indemnified Party a sum equivalent to
the total  amount  demanded  in such claim or  litigation  plus the  Indemnified
Party's estimate of the cost (including  attorneys' fees) of defending the same,
the  Indemnified  Party may settle such claim or  Proceeding on such terms as it
may reasonably deem appropriate and the Indemnifying Party shall, subject to its
defenses and the  applicability of any remaining  threshold loss amount provided
for in Section 9.1(a) hereof,  promptly  reimburse the Indemnified Party for the
amount of such  settlement and for all reasonable  costs  (including  attorneys'
fees), expenses and damages incurred by the Indemnified Party in connection with
the defense against or settlement of such claim, investigation or litigation, or
if any such claim or litigation is not so settled, the Indemnifying Party shall,
subject to its defenses and the  applicability  of any  remaining  Basket Amount
provided for in Section 9.1(a) hereof,  promptly reimburse the Indemnified Party
for the amount of any final nonappealable  judgment rendered with respect to any
claim  by a  third  party  in such  litigation  and  for  all  costs  (including
attorneys'  fees),  expenses  and damage  incurred by the  Indemnified  Party in
connection  with the defense  against such claim or  litigation,  whether or not
resulting from,  arising out of, or incurred with respect to, the act of a third
party.

    Each  party  shall  cooperate  in good faith and in all  respects  with each
Indemnifying  Party and its  representatives  (including  without limitation its
counsel) in the investigation,  negotiation, settlement, trial and/or defense of
any  Proceedings  (and any appeal arising  therefrom) or any claim.  The parties
shall cooperate with each other in any notifications to and information requests
of any insurers. No individual representative of any Person, or their respective
Affiliates  shall  be  personally  liable  for any  Loss or  Losses  under  this
Agreement, except as specifically agreed to by said individual representative.

    9.4  DISPUTE RESOLUTION. In the event a dispute arises under this Agreement,
except with  respect to Section 2.2 or  equitable  remedies  pursued  under this
Agreement,  such  disputes  shall be  resolved  in the  manner set forth in this
Section 9.4.

         (a) If a dispute  arises under this  Agreement,  including any question
    regarding the existence,  validity,  interpretation  or termination  hereof,
    which is not  described as an  exception in this Section 9.4, the  Purchaser
    and the Shareholder may invoke the dispute 

                                       47


<PAGE>

    resolution  procedure set forth in this Section 9.4 by giving written notice
    to the other party. The parties shall enter into discussions concerning this
    dispute.  If the dispute is not resolved as a result of such  discussion  in
    ten (10)  days,  an attempt  will be made to resolve  the matter by a formal
    nonbinding  mediation with an independent  neutral mediator agreed to by the
    parties.  If the parties  cannot agree on a mediator  within a period of ten
    (10) days after  expiration  of the ten (10) day period  for  resolution  by
    discussion,   then  either  party  may  apply  to  any  court  of  competent
    jurisdiction  for  appointment  of a mediator,  which  appointment  shall be
    binding and nonappealable.  Upon commencement of the mediation process,  the
    parties shall promptly  communicate with respect to a procedure and schedule
    for the conduct of the  Proceeding  and for the  exchange of  documents  and
    other  information  related to the dispute.  The mediation  process shall be
    deemed ended if the dispute has not been  resolved  within  thirty (30) days
    after appointment of the mediator.

         (b) All claims, disputes  or  other  matters  in question  between  the
    parties to this Agreement arising out of or relating to this Agreement which
    are not resolved by  mediation in  accordance  with  Section  9.4(a)  within
    thirty (30) days after appointment of a mediator may be resolved pursuant to
    Section 9.4(c).

         (c) The  Shareholder  and the   Purchaser   agree and consent  that any
    legal action,  suit or Proceeding  seeking to enforce this Section 9.4 shall
    be instituted and adjudicated solely and exclusively in any court of general
    jurisdiction  in North  Carolina,  or in the United  States  District  Court
    having  jurisdiction in North Carolina and the Shareholder and the Purchaser
    agree that venue will be proper in such courts and waive any objection which
    they may have now or  hereafter  to the  venue of any such  suit,  action or
    Proceeding  in  such  courts,  and  irrevocably  consent  and  agree  to the
    jurisdiction  of said  courts in any such suit,  action or  Proceeding.  The
    Shareholder  and the  Purchaser  further  agree to  accept  and  acknowledge
    service of any and all process which may be served in any such suit,  action
    or  Proceeding  in said  courts,  and also agree that  service of process or
    notice  upon them  shall be deemed in every  respect  effective  service  of
    process or notice upon them, in any suit, action or Proceeding,  if given or
    made:  (i) by a Person over the age of eighteen who  personally  serves such
    notice or service of process on the  Shareholder  or the  Purchaser,  as the
    case may be, or (ii) by certified mail, return receipt requested,  mailed to
    the  Shareholder or the Purchaser,  as the case may be, at their  respective
    addresses set forth in this Agreement.

         (d) In the  event  of  a  Proceeding  filed  or  instituted between the
    parties  pursuant to this Section 9.4, the prevailing party will be entitled
    to receive from the adverse party all costs, damages and expenses, including
    reasonable  attorney's fees,  incurred by the prevailing party in connection
    with that action or Proceeding, whether or not the controversy is reduced to
    judgment or award.

    9.5  EFFECT OF  INSURANCE.  An  Indemnified  Party who has a right to make a
claim under any policy of insurance with respect to an indemnified claim made by
the Indemnified  Party shall use  commercially  reasonable  efforts to make such
claim on a prompt and competent basis in the manner required by the insurer. The
Indemnified  Party shall use  commercially  reasonable  efforts to promptly  and
diligently  pursue such claim and shall cooperate fully with the 

                                       48


<PAGE>

insurer and the Indemnifying Party in the prosecution of the claim or claims. In
the event an  Indemnified  Party  receives  insurance  proceeds  with respect to
Losses for which the Indemnified Party has made an  indemnification  claim prior
to the date on which the Indemnifying Party is required pursuant to this Article
9 to pay such indemnification  claim, the indemnification claim shall be reduced
by an amount equal to such insurance  proceeds received by the Indemnified Party
less all reasonable out-of-pocket costs incurred by the Indemnified Party in its
pursuit of such insurance  proceeds.  If such insurance proceeds are received by
the Indemnified Party after the date on which the Indemnifying Party is required
pursuant to this Article 9 to pay such  indemnification  claim,  the Indemnified
Party  shall,  no later than five (5) days after the  receipt of such  insurance
proceeds,  reimburse the Indemnifying Party in an amount equal to such insurance
proceeds (but in no event in an amount greater than the Losses  theretofore paid
to the  Indemnified  Party  by  the  Indemnifying  Party)  less  all  reasonable
out-of-pocket  costs  incurred  by  the  Indemnified  Party  in  obtaining  such
insurance proceeds.  In either case, the Indemnifying Party shall compensate the
Indemnified  Party for all costs incurred by the Indemnified Party subsequent to
either the  reduction of any  indemnification  claim as provided  above,  or the
delivery of any such insurance  proceeds to the  Indemnifying  Party as provided
above, as the case may be, as a result of any such insurance, including, but not
limited  to,  retrospective   premium  adjustments,   experience-based   premium
adjustments  (whether  retroactive or prospective) and indemnification or surety
obligations  of the  Indemnified  Party to any  insurer.  A claim for such costs
shall be made by an  Indemnified  Party by delivery  of a written  notice to the
Indemnifying  Party  requesting  compensation and specifying this Section 9.5 as
the basis on which  compensation for such costs is sought,  and the Indemnifying
Party shall pay such costs no later than thirty  (30) days after  receiving  the
written notice  requesting  such  compensation.  Notwithstanding  the foregoing,
except to the extent set forth in the first two  sentences  of this Section 9.5,
the Indemnified  Party is not required to pursue a recovery from an insurer as a
precondition to the Indemnifying  Party's obligation to pay any  indemnification
claim as required  by this  Article 9, and the  Indemnifying  Party shall not be
entitled  to delay any  payment  beyond  the  respective  payment  dates for any
indemnification claims referred to in this Article 9 for the purpose of awaiting
receipt of insurance proceeds or credits therefor as provided herein.

    9.6  EFFECT OF TAXES.  The  amount  of indemnification payment due hereunder
shall be reduced by the amount of any Income Tax benefit that the Purchaser, the
Company and the Subsidiaries (or their Affiliates) realizes (or will realize) as
a result of incurring such Loss.  The amount of the Income Tax benefit  realized
(or that will be  realized) as a result of incurring a Loss shall be computed on
a  hypothetical  basis and shall  equal  the  product  of (i) the sum of (A) the
amount of each Income Tax deduction (or similar  benefit) of the Purchaser,  the
Company and the Subsidiaries (or their Affiliates)  resulting from the Loss that
is reasonably  anticipated  to be deductible (or used) in the tax year including
the date of  indemnification  payment  (or in any prior tax years)  plus (B) the
present value as of the date of the  indemnification  payment of each Income Tax
deduction  (or  similar   benefit)  of  the  Purchaser,   the  Company  and  the
Subsidiaries  (or their  Affiliates)  resulting from the Loss that is reasonably
anticipated to be deductible (or used) in any tax year after the tax year of the
indemnification  payment multiplied by (ii) forty percent (40%). For purposes of
clause  (B),  the present  value of a future  Income Tax  deduction  (or similar
benefit)  shall be  determined  using a discount  rate of five  percent (5%) and
assuming  that all Tax  benefits  from the  deduction  (or similar  benefit) are
realized  on the 182nd day of the  Company's  tax year for the year in which the
deduction (or similar benefit) is reasonably anticipated to be claimed.

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<PAGE>

                                   ARTICLE 10

                                   TAX MATTERS

    The following  provisions  shall  govern  the  allocation  of responsibility
as between the Purchaser and the Shareholder  for certain Tax matters  following
the Closing Date:

    10.1 TAX RETURNS.

         (a) The Shareholder  has  the exclusive  authority  and  obligation  to
    prepare,  execute on behalf of the Company and the  Subsidiaries  and timely
    file,  or cause to be  prepared  and timely  filed,  all Tax  Returns of the
    Company and the  Subsidiaries  that are due with respect to any taxable year
    or other  taxable  period  ending  prior to or ending on and  including  the
    Closing  Date.  Such  authority  shall  include,  but not be limited to, the
    determination of the manner in which any items of income,  gain,  deduction,
    Loss or credit  arising out of the income,  properties and operations of the
    Company and the  Subsidiaries  shall be reported  or  disclosed  in such Tax
    Returns;  PROVIDED,  HOWEVER,  that such Tax  Returns  shall be  prepared by
    treating  items on such Tax  Returns  in a manner  consistent  with the past
    practices  with  respect to such items and in a manner  consistent  with all
    applicable IRS regulations.

         (b) Except as provided in  Section 10.1(a),  the Purchaser  shall  have
    the exclusive authority and obligation to prepare,  execute on behalf of the
    Company and the  Subsidiaries  and timely file,  or cause to be prepared and
    timely filed, all Tax Returns of the Company and the  Subsidiaries  that are
    due with respect to any taxable year or other  taxable  period  ending after
    the Closing Date; PROVIDED, HOWEVER, with respect to Tax Returns to be filed
    by the Purchaser pursuant to this Section 10.1 for taxable periods beginning
    before the Closing Date and ending after the Closing  Date,  items set forth
    on such Tax Returns  shall be treated in a manner  consistent  with the past
    practices with respect to such items. Such authority shall include,  but not
    be limited to, the determination of the manner in which any items of income,
    gain,  deduction,  Loss or credit arising out of the income,  properties and
    operations  of the  Company  shall  be  reported  or  disclosed  on such Tax
    Returns.

    10.2 CONTROVERSIES. The Purchaser shall promptly notify the  Shareholder  in
writing  upon  receipt  by the  Purchaser  or  any  Affiliate  of the  Purchaser
(including the Company and the  Subsidiaries  after the Closing Date) of written
notice of any  inquiries,  claims,  assessments,  audits or similar  events with
respect to Taxes  relating to a taxable  period ending prior to or ending on and
including  the Closing Date for which the  Shareholder  may be liable under this
Agreement (any such inquiry, claim,  assessment,  audit or similar event, a "TAX
MATTER").   The  Shareholder,   or  its  duly  appointed   representative   (the
"SHAREHOLDER'S  REPRESENTATIVE"),  at its sole expense, shall have the authority
to represent the interests of the Company and the  Subsidiaries  with respect to
any  Tax  Matter  before  the  IRS,  any  other  taxing  authority,   any  other
governmental  agency or  authority or any court and shall have the sole right to
control the defense, compromise or other resolution of any Tax Matter, including
responding to inquiries,  filing Tax Returns and contesting,  defending  against
and resolving any assessment for additional Taxes or notice of Tax deficiency or
other adjustment of Taxes of, or relating to, a Tax Matter;  PROVIDED,  HOWEVER,
that  

                                       50


<PAGE>

neither the Purchaser nor any of its Affiliates  shall enter into any settlement
of or  otherwise  compromise  any Tax Matter that  affects or may affect the Tax
Liability of the Shareholder,  the Company, the Subsidiaries or any Affiliate of
the foregoing for any period  ending after the Closing  Date,  which  includes a
portion of a period  beginning  before  the  Closing  Date and ending  after the
Closing Date (the "OVERLAP  PERIOD"),  without the prior written  consent of the
Shareholder  or the  Shareholder's  Representative,  which  consent shall not be
unreasonably withheld, delayed or conditioned. The parties hereto shall keep the
other fully and timely  informed  with respect to the  commencement,  status and
nature of any Tax Matter.

    Except as otherwise  provided in this Section 10.2, the Purchaser shall have
the sole  right to control  any audit or  examination  by any taxing  authority,
initiate any claim for refund or amend any Tax Return, and contest,  resolve and
defend against any assessment for additional Taxes,  notice of Tax deficiency or
other  adjustment of Taxes of, or relating to, the income,  assets or operations
of the Company and the Subsidiaries for all taxable periods; PROVIDED,  HOWEVER,
that the  Purchaser  shall not, and shall cause its  Affiliates  (including  the
Company and the  Subsidiaries)  not to, enter into any settlement of any contest
or  otherwise  compromise  any issue with  respect to the portion of the Overlap
Period ending on or prior to the Closing Date without the prior written  consent
of the Shareholder, which consent shall not be unreasonably withheld, delayed or
conditioned.

    10.3 TRANSFER TAXES. All transfer, documentary,  stamp, registration,  sales
and use and  similar  Taxes and fees  (including  all  penalties  and  interest)
imposed in connection with the sale of the Stock or any other  transaction  that
occurs pursuant to this Agreement shall be the obligation of the Shareholder.

    10.4 AMENDED TAX RETURNS. The Shareholder,  the Company and the Subsidiaries
shall not file or cause to be filed any  amended Tax Return or claims for refund
without the prior written  consent of the Purchaser,  which consent shall not be
unreasonably  withheld,  delayed or  conditioned,  except for such  amended  Tax
Returns or claims for refund filed in connection  with the resolution of any Tax
Matter in accordance with Section 10.2.

    10.5 NON-FOREIGN  PERSON  AFFIDAVIT.  The Shareholder  shall furnish to the
Purchaser  on or before the  Closing  Date a  non-foreign  Person  affidavit  as
required by Section 1445 of the Code.

    10.6 TAX INDEMNIFICATION.

         (a) TAX  INDEMNIFICATION.  The Shareholder hereby covenants  and agrees
    to  indemnify,  defend  and hold  harmless  the  Purchaser,  its  Affiliates
    (including  the  Company and the  Subsidiaries)  and the  successors  to the
    foregoing (and their respective shareholders, officers, directors, employees
    and agents)  against  (i) all Losses with  respect to any claims that may be
    asserted  by any  party  based  upon the  breach  of any  representation  or
    warranty made with respect to Taxes in this Agreement,  including those made
    pursuant to Section 3.9, (ii) all Taxes  imposed on or asserted  against the
    properties,  income or operations of the Company or the Subsidiaries for all
    Pre-Closing  Periods to the extent  such Taxes have not been fully  reserved
    for in the  financial  statements  of the  Company as of the last day of the
    month preceding the Closing Date, and (iii) all Taxes 

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<PAGE>

    imposed on the Company or the Subsidiaries,  or for which the Company or the
    Subsidiaries may be liable,  as a result of any transaction  contemplated by
    this  Agreement.  The Purchaser  shall promptly give the  Shareholder or its
    respective  representatives  written notice of all Taxes, Losses, claims and
    expenses  which the Purchaser has  reasonably  determined may give rise to a
    right of indemnification under this Section 10.6(a), including a computation
    of the amount of the  claimed  indemnification  with  sufficient  detail and
    particularity  to enable the Shareholder to reasonably  determine the amount
    of such required indemnification.

         (b) NOTIFICATION OF CLAIMS.  In  the  event that the Purchaser fails to
    notify the  Shareholder  with respect to a Tax Matter in accordance with the
    provisions  of Section  10.2,  the  Shareholder  shall not be  obligated  to
    indemnify  the  Purchaser  under this  Section  10.6 to the extent that such
    failure  to notify the  Shareholder  has a  Material  Adverse  Effect on the
    Shareholder's ability to defend against such Tax Matter.

    10.7 SECTION 338 ELECTION. The  Shareholder  and  the  Purchaser have agreed
that an election under Section  338(h)(10) of the Code, and any comparable state
or local Tax provision,  shall be made by the Purchaser and the Shareholder with
respect to the  Purchaser's  acquisition  of the Stock of the  Company  and each
Subsidiary.  In this regard,  the Purchaser  shall prepare,  and the Shareholder
shall assist in the preparation of, Forms 8883 or comparable  state or local Tax
forms in a manner consistent with the allocation of the Purchase Price to assets
reflected  in  SCHEDULE  10.7.  Upon  presentation  of any  such  Form  8883  or
comparable  state or local  Tax form by the  Purchaser,  the  Shareholder  shall
promptly  execute and return such forms to the Purchaser for inclusion  with the
Purchaser's Tax Return and, if necessary,  the Shareholder  shall include a copy
of such  form with its own Tax  Return  for the Tax  period  that  includes  the
purchase of the Stock.

    10.8 POST-CLOSING ACCESS AND COOPERATION.  From and  after the Closing Date,
the Purchaser agrees,  and agrees to cause the Company and the Subsidiaries,  to
permit the Shareholder and its representatives to have reasonable access, during
normal  business  hours,  to the  books  and  records  of the  Company  and  the
Subsidiaries,  to the extent that such books and records relate to a Pre-Closing
Period,  and  personnel,  for the purpose of enabling  the  Shareholder  to: (i)
prepare  Tax  Returns,  (ii)  investigate  or contest  any Tax Matter  which the
Shareholder  has the  authority  to conduct,  and (iii)  evaluate  any claim for
indemnification.

                                   ARTICLE 11

                     PERFORMANCE FOLLOWING THE CLOSING DATE

    The following covenants and agreements are to be performed after the Closing
by the  parties  and shall  continue  in  effect  for the  periods  respectively
indicated or, where no indication is made, until performed:

    11.1 FURTHER ACTS AND  ASSURANCES.  The parties  agree that, at any time and
from time to time, on and after the Closing Date, upon the reasonable request of
the  other  party,  they will do or cause to be done all such  further  acts and
things  and  execute,   acknowledge  and  deliver,  or  cause  to  be  executed,
acknowledged  and  delivered  any  and  all  papers,   documents,   instruments,

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<PAGE>

agreements,  assignments,  transfers,  assurances  and  conveyances  as  may  be
necessary or desirable to carry out and give effect to the provisions and intent
of this Agreement.  In addition,  from and after the Closing Date, the Purchaser
will  afford  to the  Shareholder  and  its  attorneys,  accountants  and  other
representatives  access, during normal business hours, to such personnel,  books
and records relating to the Company and/or the Subsidiaries as may reasonably be
required in connection  with the  preparation  of financial  information  or the
filing  of Tax  Returns  and  will  cooperate  in  all  reasonable  respects  in
connection  with claims and  Proceeding  asserted by or against  third  parties,
relating to or arising from the transactions contemplated hereby.

    11.2 NON-COMPETITION AGREEMENT.  During the period of thirty-six (36) months
from and after the Closing Date,  the  Shareholder,  on behalf of itself and its
Affiliates (other than the Company and the  Subsidiaries),  covenants and agrees
that it will not, without the Purchaser's  prior written  consent,  which may be
withheld  or  given  in  its  sole  discretion,   directly  or  indirectly,   or
individually  or  collectively  within  the  State of North  Carolina,  lend any
material credit,  advice or assistance,  or engage in any activity or act in any
manner,  including but not limited to, as a founder,  promoter,  partner,  joint
venturer, shareholder other than as a less than five percent (5%) shareholder of
a publicly traded corporation,  officer,  director,  trustee, manager, licensor,
licensee,  principal,  agent,  broker,  representative,   consultant,   advisor,
investor or otherwise for the purpose of establishing, operating or managing any
business or entity that is engaged in activities  competitive  with the Business
of the Company or the Subsidiaries.

    11.3 NON-SOLICITATION AGREEMENT. During the period of thirty-six (36) months
from and after the Closing Date,  the  Shareholder  covenants and agrees that it
will not,  whether for its own  account or for the account of any other  Person,
directly or indirectly  interfere  with the  relationship  of the Company or the
Subsidiaries with, or endeavor to divert or entice away from, the Company or the
Subsidiaries  any  Person  who or  which  at any  time  during  the  term of the
Shareholder's  affiliation  with the Company or the Subsidiaries is an employee,
vendor,  supplier or customer of the Company or the Subsidiaries.  The foregoing
shall not apply to employees, vendors, suppliers or customers who do not, at the
time of any  solicitation,  have a relationship with the Company or a Subsidiary
in such capacity.

    11.4 REASONABLENESS OF COVENANTS. The Shareholder,  on behalf of itself, its
trustees,  shareholders  and  Affiliates,   acknowledges  and  agrees  that  the
geographic scope and period of duration of the restrictive  covenants  contained
in Sections  11.2 and 11.3 of this  Agreement are both fair and  reasonable  and
that the interests sought to be protected by the Purchaser,  the Company and the
Subsidiaries are legitimate  business  interests  entitled to be protected.  The
Shareholder  further  acknowledges  and agrees that the Purchaser would not have
purchased  the  Shareholder's  Stock in the Company  pursuant to this  Agreement
unless the Shareholder agreed to the covenants contained in such Sections.

    11.5 INJUNCTIVE  RELIEF. The parties agree that the remedy of damages at law
for the breach by any party of any of the  covenants  contained in Sections 11.2
and 11.3 is an inadequate  remedy. In recognition of the irreparable harm that a
violation  by  the  Shareholder,  its  officers,   directors,   shareholders  or
Affiliates,  of any of the covenants,  agreements or  obligations  arising under
Sections  11.2  and  11.3  would  cause  the  Purchaser  and  the  Company,  the
Shareholder,  on behalf of itself,  its officers,  directors,  shareholders  and
Affiliates,  agrees that in addition to any other remedies or relief afforded by
law, an Injunction  against an actual or threatened  violation 

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<PAGE>

or  violations  may be issued  against  it and/or  them and every  other  Person
concerned  thereby,  it being the understanding of the parties that both damages
and  Injunction  shall be proper  modes of relief  and are not to be  considered
alternative remedies.

    11.6 BLUE  PENCIL  DOCTRINE.  In the  event  that  any  of  the  restrictive
covenants  contained  in this  Article  shall be  found by a court of  competent
jurisdiction  to be  unreasonable  by  reason of its  extending  for too great a
period of time or over too great a geographic area or by reason of its being too
extensive in any other respect,  then such restrictive  covenant shall be deemed
modified to the minimum extent  necessary to make it reasonable and  enforceable
under the circumstances.

    11.7 GUARANTEES.  In  furtherance of the provisions of  Section 5.22 hereof,
the  Shareholder  shall (i) have a  continuing  obligation  after the Closing to
terminate,  extinguish  or  otherwise  remove  any  and  all of  the  guarantees
described in Section 5.22 hereof,  and (ii) defend and  indemnify  the Purchaser
with respect to such  guarantees in accordance with Article 9 of this Agreement,
including Section 9.1.

    11.8 EMPLOYEE MATTERS.

         (a) EMPLOYMENT. Each Employee who is  employed by the Company or either
    Subsidiary on the Closing Date shall  continue to be employed by the Company
    or the  Subsidiary,  as  applicable,  on  and  after  the  Closing  Date  at
    substantially the same base wage or salary as in effect immediately prior to
    the Closing Date. Such continued employment shall be employment at-will, and
    nothing in this  Section  11.8 is  intended  to create,  or shall  create or
    confer, any right of employment after the Closing Date for any Employee.

         (b) BENEFIT PLANS. Prior to the Closing  Date,  the Company  shall have
    (i) with respect to the Benefit Plans  sponsored by the Company as set forth
    in SCHEDULE  3.10(a)(1),  (2),  (3), (4) AND (11) THROUGH (23) (the "COMPANY
    PLANS"),  terminated  the  participation  in any  such  Company  Plan of any
    individual  who is not an employee of the Company,  (ii) with respect to the
    Company Plan set forth in SCHEDULE  3.10(a)(4),  timely amended such Company
    Plan to lower the health care spending  account  maximum annual election for
    the 2004 plan year to $3,600, and (iii) with respect to the Company Plan set
    forth in SCHEDULE 3.10(a)(13),  prepared and made any necessary 5500 filings
    and,  to  the  extent  necessary,  entered  into  the  Department  of  Labor
    Delinquent  Filers Voluntary  Compliance  Program to assure plan compliance.
    The Purchaser shall, in its sole discretion, decide (i) whether benefits for
    the  Employees  shall be provided  under  benefit  plans  designated  by the
    Purchaser which are maintained by the Purchaser and its Affiliates for their
    employees  (each a "PURCHASER  PLAN") or (ii) whether  such  benefits  shall
    continue  to be  provided  under  one or  more  of the  Company  Plans.  The
    Shareholder  shall cause the Company and the  Subsidiaries to cooperate with
    the Purchaser,  and the Purchaser  shall  cooperate with the Company and the
    Subsidiaries,  in making arrangements to terminate on the Closing Date those
    Company Plans  designated by the Purchaser and any contracts with respect to
    the provision of benefits under such Company Plans,  in accordance  with the
    terms of such Company Plans and contracts. Notwithstanding the foregoing, in
    the event that  arrangements  cannot be made to ensure that termination of a
    Company Plan (which is to be replaced in whole or in part by a 

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<PAGE>

    corresponding  Purchaser Plan) cannot occur without a period of non-coverage
    or interruption in coverage,  then  arrangements for the termination of such
    Company  Plan  shall not occur  until it is  ensured  that  there will be no
    period of  non-coverage  or  interruption of coverage in the transition from
    the  applicable  Company  Plan  to the  corresponding  Purchaser  Plan.  The
    Purchaser  shall waive any waiting  periods for  coverage  under a Purchaser
    Plan which replaces a Company Plan for Employees covered under such replaced
    Company  Plan.  The Purchaser  shall credit the  Employees  with any amounts
    credited under the Company's  medical plan toward an  out-of-pocket  maximum
    with respect to satisfaction of an out-of-pocket  maximum under  Purchaser's
    medical  plan.   The  Purchaser   shall  also  cause  the  Company  and  the
    Subsidiaries to continue to recognize and honor each Employee's  accrued but
    unused  vacation  days  as of  the  Closing  Date  and in  the  event  of an
    Employee's  termination  of  employment,  to provide for payment of any such
    accrued  vacation days which remain unused and to which the Employee remains
    entitled upon termination of employment.

         (c) ROLLOVER OF ACCOUNTS.  With respect to the Benefit Plan  set  forth
    in  SCHEDULE  3.10(a)(5)  (i) the  Company  shall,  and/or  shall  cause its
    Affiliate:  (A) to  submit  to the  IRS,  prior  to the end of the  remedial
    amendment period, an application for a determination  letter with respect to
    such  Benefit  Plan as  adopted  effective  January  1, 1997 and as  amended
    thereafter and (B) to take such action, prior to the Closing Date, as may be
    necessary or  appropriate  to terminate the Company's and the  Subsidiaries'
    participation  in such Benefit Plan, and (ii) the Purchaser  shall take such
    action,  prior to the Closing  Date, as may be necessary or  appropriate  to
    enable the Employees,  effective  immediately following the Closing Date, to
    rollover  account  balances  and  outstanding  plan loans under such Benefit
    Plan, to a comparable pension benefit plan sponsored by the Purchaser.

         (d) DISCONTINUE  PARTICIPATION  IN  THIRD  PARTY  PLANS.   Prior to the
    Closing Date, the Company and the Subsidiaries  shall, and shall cause their
    Affiliates,  to take  such  action as may be  necessary  or  appropriate  to
    discontinue the Company's and the Subsidiaries' participation in the Benefit
    Plans sponsored by the Shareholder or Florida Water Services  Corporation as
    set forth in SCHEDULE  3.10(a)(6),  (7), (8), (9) AND (10) (collectively the
    "THIRD PARTY PLANS").  The parties understand and agree that (i) the Company
    and/or its  Affiliates may amend such Third Party Plans prior to the Closing
    Date as may be necessary or  appropriate,  in the  discretion of the Company
    and/or its Affiliates,  to discontinue the Company's  participation  in such
    Third Party Plans or for other  reasons,  (ii) the Purchaser is not assuming
    any of such Third Party Plans nor the liabilities associated therewith,  and
    (iii) the Shareholder  shall assume all  liabilities  under such Third Party
    Plans with respect to  Employees or former  employees of the Company and the
    Subsidiaries and shall indemnify and hold the Purchaser, the Company and the
    Subsidiaries   and  their  officers,   directors,   employees,   Affiliates,
    shareholders and agents and each of their respective successors and assigns,
    harmless from,  against and in respect of all such liabilities and any costs
    or expenses (including without limitation,  reasonable  attorneys' fees) and
    any and all other Losses with respect to such Third Party Plans.

         (e) SERVICE CREDIT. All past service of the Employees with the  Company
    and/or  the  Subsidiaries  shall be  taken  into  account  for  purposes  of
    eligibility  and vesting

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<PAGE>

    under the  benefit  plans  provided  by the  Purchaser  and for  purposes of
    calculating vacation benefits and severance benefits under the vacation plan
    and  severance  plan  maintained by the  Purchaser.  Nothing in this Section
    11.8(e) shall abrogate or otherwise  affect any  Employee's  right under the
    Employee  severance  provisions  set forth in the  Retention  and  Severance
    Agreements.

         (f) EMPLOYEE SEVERANCE. The Purchaser acknowledges and agrees that  the
    Company and each of the  Subsidiaries  have entered into legal,  binding and
    enforceable Retention and Severance Agreements with each of the Employees as
    set forth in  Exhibit  D to this  Agreement.  The  "SEVERANCE  PAYMENT"  (as
    defined  in EXHIBIT  D) is  calculated  in  accordance  with the  Employee's
    employment position,  term of service and is capped at a specified level, as
    set forth in SCHEDULE 11.8. The Company or the applicable  Subsidiary  shall
    be  responsible  for funding and payment of any and all Severance  Payments,
    without recourse to the Shareholder.

    11.9 INDEMNIFICATION  OF  OFFICERS  AND  DIRECTORS  OF  THE  COMPANY AND THE
SUBSIDIARIES.

         (a) INDEMNIFICATION.  After  the  Closing,  the  Company  will, and the
    Purchaser  will  cause the  Company  and each of the  Subsidiaries  to:  (i)
    indemnify,  defend  and hold  harmless  the  present  and  former  officers,
    directors, employees,  representatives and agents of the Company and each of
    the  Subsidiaries  (collectively,  the  "DIRECTOR  INDEMNIFIED  PARTIES" and
    individually,  a  "DIRECTOR  INDEMNIFIED  PARTY")  in  respect  of  acts  or
    omissions  occurring on or prior to the Closing Date to the extent  provided
    under Applicable Law or under the organizational documents of the Company or
    the  Subsidiaries,  in each case as in effect on the date  hereof,  and (ii)
    advance  expenses  as  incurred  by  such  officers,  directors,  employees,
    representatives  and agents of the Company  and/or the  Subsidiaries  to the
    fullest extent  permitted under  Applicable Law or under the  organizational
    documents of the Company and/or the Subsidiaries,  whichever is greater,  in
    each  case  as  in  effect  on  the  date   hereof;   PROVIDED,   that  such
    indemnification  and  advancement  of  expenses  shall  be  subject  to  any
    limitation imposed from time to time under Applicable Law.

         (b) NO CLAIMS.  Except  as  set  forth  in  SCHEDULE 11.9, there are no
    pending,  nor,  to the  Knowledge  of the  Company,  Threatened,  claims  as
    described in Section 11.9(a) for indemnification by any Director Indemnified
    Party.

         (c) INSURANCE PROCEEDS. If the Company and/or the Subsidiaries  provide
    indemnification  and/or  advancement  of expenses as provided for in Section
    11.9(a) above, the Company and/or the Subsidiaries  shall be entitled to all
    of the  proceeds of any  insurance  providing  coverage  under any  policies
    maintained by the Parent, the Shareholder, the Company, the Subsidiaries, or
    any of their  Affiliates  for such acts or  omissions  prior to the  Closing
    Date.

         (d) THIRD PARTY BENEFICIARIES.  Notwithstanding any contrary  provision
    set forth in this  Agreement or any Ancillary  Document,  the  provisions of
    this  Section  11.9 

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<PAGE>

    are intended for the benefit of, and shall be directly  enforceable by, each
    of  the   Director   Indemnified   Parties,   their   heirs   and   personal
    representatives.

                                   ARTICLE 12

                                   TERMINATION

    12.1 TERMINATION.  This  Agreement  may  be terminated and the  transactions
contemplated  herein may be abandoned after the date of this Agreement,  but not
later than the Closing:

         (a) by mutual written consent of all parties hereto;

         (b) by the Purchaser or the Shareholder if (i)  any  of  the conditions
    provided for in Article 6 of this  Agreement  have not been met and have not
    been waived in writing by the party  seeking to  terminate  on or before the
    Closing Date, and (ii) any party seeking to terminate this Agreement was not
    the cause of the failure of the condition to be satisfied;

         (c) by the Purchaser  if  (i)  any  of  the  conditions provided for in
    Article 7 of this  Agreement  have not been met and have not been  waived in
    writing  by the  Purchaser  on or  before  the  Closing  Date,  and (ii) the
    Purchaser was not the cause of the failure of the condition to be satisfied;

         (d) by the Shareholder if (i) any of the  conditions  provided  for  in
    Article 8 of this  Agreement  have not been met and have not been  waived in
    writing by the  Shareholder  on or before  the  Closing  Date,  and (ii) the
    Shareholder  was  not  the  cause  of the  failure  of the  condition  to be
    satisfied;

         (e) by either the Purchaser or the Shareholder if the Closing shall not
    have occurred on or before September 30, 2004; and

         (f) by a party who objects to a Supplement and  meets the  criteria for
    the exercise of a termination right under and pursuant to Section 13.21.

In the event of termination or abandonment by  any  party  as  provided in  this
Section 12.1,  written  notice shall  forthwith be given to the other party and,
except as  otherwise  provided  herein,  each party  shall pay its own  expenses
incident to preparation or consummation  of this Agreement and the  transactions
contemplated  hereunder  and neither party shall have any Liability to the other
hereunder except such Liability as may arise as a result of a breach hereof.

    12.2 RETURN OF DOCUMENTS AND NONDISCLOSURE.  If this Agreement is terminated
for any reason pursuant to Section 12.1 hereto, each party and its counsel shall
return all  documents  and  materials  which shall have been  furnished by or on
behalf of the  other  party,  and all  copies  thereof,  and each  party  hereby
covenants  that it will  not Use or  Disclose  to any  Person  any  Confidential
Information  about the other  party or any  information  about the  transactions
contemplated  hereby,  except  insofar as may be  necessary  to comply  with the
requirements  of  any  Governmental  Body  or  Order  or to  assert  its  rights
hereunder.

                                       57


<PAGE>

                                   ARTICLE 13

                                  MISCELLANEOUS

    13.1 SURVIVAL OF REPRESENTATIONS  AND WARRANTIES,  COVENANTS AND AGREEMENTS.
Each of the (i)  representations and warranties of the parties contained in this
Agreement and in any Ancillary Documents delivered by or on behalf of any of the
parties  hereto  pursuant to this  Agreement and the  transactions  contemplated
hereby,  and (ii)  indemnification  covenants  set forth in Sections 9.1 and 9.2
hereof,  shall survive the Closing of the transactions  contemplated  hereby and
any  investigation  made by the parties or their agents for a period of eighteen
(18) months after the Closing,  after which no claim for indemnification for any
breach of any  representation  or warranty  under this Agreement or covenants to
indemnify  under Sections 9.1 and 9.2 hereof (i) may be brought,  (ii) no action
with  respect  thereto  may be  commenced,  and  (iii) no party  shall  have any
Liability or obligation with respect thereto,  unless (i) the Indemnified  Party
gave written notice to the Indemnifying  Party specifying with particularity the
breach of representation or warranty or  indemnification  covenants set forth in
either of  Sections  9.1 or 9.2  claimed  on or before  the  expiration  of such
eighteen  (18)  month  period,  (ii)  the  claim  relates  to a  breach  of  any
representations or warranties  contained in Sections 3.9, 3.10, 3.11 or 3.25, in
which case the right to  indemnification  shall survive until the  expiration of
the  applicable  statute  of  limitations,  or (iii)  the claim  relates  to any
representation  or  warranty  in  Sections  3.2  or  3.35,  in  which  case  the
representation or warranty shall indefinitely survive the Closing. The covenants
and agreements  arising from,  incident to or in connection with this Agreement,
other than the indemnification covenants set forth in Section 9.1 and 9.2 hereof
shall survive the Closing indefinitely,  until such covenants and agreements are
fully  satisfied and require no performance or  forbearance,  or the rights of a
party hereto expire on a specific date by the terms hereof.

    13.2 PRESERVATION OF AND ACCESS TO RECORDS.  The Purchaser shall preserve or
cause the Company and the  Subsidiaries to preserve all books and records of the
Company  and the  Subsidiaries  for a period of six (6) years  after the Closing
Date,  or any later date of  retention  required by  Applicable  Law;  PROVIDED,
HOWEVER,  the  Purchaser  may  destroy  any part or parts of such  records  upon
obtaining written consent of the Shareholder for such destruction, which consent
may be withheld in the Shareholder's absolute discretion.  Such records shall be
made  available to the  Shareholder  and its  representatives  at all reasonable
times during normal  business hours of the Company and/or the  Subsidiaries,  as
applicable,  during said  six-year  period  with the right at the  Shareholder's
expense to make abstracts from and copies thereof.

    13.3 COOPERATION.  The parties hereto shall cooperate with each other in all
respects,  including using commercially  reasonable efforts to assist each other
in satisfying the conditions  precedent to their  respective  obligations  under
this Agreement,  to the end that the  transactions  contemplated  hereby will be
consummated.

    13.4 PUBLIC   ANNOUNCEMENTS.   The   timing   and   content  of  all  public
announcements  relating to the execution of this Agreement and the  consummation
of the transactions  contemplated hereby shall be approved by both the Purchaser
and the Shareholder prior to the release of such public announcements,  and each
party agrees to cooperate with the other party as appropriate to comply with all
Applicable Laws.

                                       58


<PAGE>

    13.5 NOTICES.  All notices,  demands and other  communications  provided for
hereunder shall be in writing and shall be given (i) by personal delivery,  (ii)
via  facsimile  transmission  (receipt  telephonically   confirmed),   (iii)  by
nationally  recognized  overnight  courier  (prepaid),  or (iv) by  certified or
registered first class mail, postage prepaid, return receipt requested,  sent to
each  party,  at its and its  representative's  address as set forth below or at
such other address or in such other manner as may be designated by such party or
the respective  representative in a written notice to each of the other parties.
All  such  notices,  demands  and  communications  shall be  effective  (i) when
personally delivered,  (ii) one (1) business day after delivery to the overnight
courier,  (iii) upon telephone confirmation of facsimile  transmission,  or (iv)
upon receipt after dispatch by mail to the party to whom the same is so given or
made:

         If to the Purchaser:       Philadelphia Suburban Corporation
                                    762 West Lancaster Avenue
                                    Bryn Mawr, PA  19010
                                    Fax No.:  (610) 645-1061
                                    Attention: Chairman, President and Chief 
                                    Executive Officer

         With a copy to:            Piper Rudnick LLP
                                    3400 Two Logan Square
                                    18th and Arch Streets
                                    Philadelphia, PA  19103
                                    Fax No.:  (215) 606-3341
                                    Attention: Peter J. Tucci

         If to the Shareholder:     ALLETE Water Services, Inc.
                                    30 West Superior Street
                                    Duluth, MN  55802-2093
                                    Fax No.:  (218) 723-3960
                                    Attention: General Counsel

         With a copy to:            Briggs and Morgan, Professional Association
                                    2400 IDS Center
                                    80 South Eighth Street
                                    Minneapolis, MN  55402
                                    Fax No.:  (612) 334-8650
                                    Attention: Michael J. Grimes

    13.6 ENTIRE AGREEMENT.  Except for any confidentiality agreement executed by
a party hereto (which shall, by the terms hereof, expire upon the Closing), this
Agreement,  including  the  Ancillary  Documents  to be  executed by the parties
pursuant  hereto,  contains  the  entire  agreement  of the  parties  hereto and
supersedes all prior or contemporaneous  agreements and understandings,  oral or
written, between the parties hereto with respect to the subject matter hereof.

    13.7 REMEDIES. The respective indemnification obligations of the parties set
forth in Article 9 of this  Agreement are the exclusive  remedies of the parties
and their  successors,  assigns or others  seeking to claim by,  through,  or on
behalf of a party,  under  this  Agreement,  and no 

                                       59


<PAGE>

other remedy or remedies,  whether  arising under any Applicable Law, common law
or  otherwise,  may be used,  asserted or  prosecuted  in  connection  with this
Agreement  and  any  transaction,  occurrence,  or  omission  arising  from,  in
connection with or otherwise based upon this Agreement;  PROVIDED, HOWEVER, that
all equitable remedies shall remain available other than rescission, which shall
not  be an  available  remedy  of  either  party  hereto,  or  their  respective
successors and assigns,  under or pursuant to this Agreement.  This Section 13.7
shall not be  applicable  in the specific  instances in which a party hereto has
committed fraud.

    13.8  AMENDMENTS.  No  purported  amendment,  modification  or waiver of any
provision of this Agreement or any of the  documents,  instruments or agreements
to be executed by the parties  pursuant  hereto shall be  effective  unless in a
writing  specifically  referring  to this  Agreement  and  signed  by all of the
parties hereto.

    13.9 SUCCESSORS AND ASSIGNS.  This Agreement shall be binding upon and inure
to the  benefit of the  parties  hereto  and their  respective  heirs,  personal
representatives,  successors  and permitted  assigns,  but except as hereinafter
provided in this  Section,  nothing in this  Agreement  is to be construed as an
authorization  or right of any party to assign its rights or delegate its duties
under this  Agreement  without the prior  written  consent of the other  parties
hereto.  In its sole  discretion  the  Purchaser may assign its rights in and/or
delegate its duties under this  Agreement to an Affiliate of the  Purchaser.  In
the event of such an  assignment  of rights  and/or  delegation  of duties,  all
references to the Purchaser or the Shareholder,  as applicable to the assignment
in this  Agreement  shall also be deemed to be references to the Person to which
this Agreement is assigned;  provided that no such assignment  and/or delegation
shall relieve the assignor of any of its duties or obligations hereunder.

    13.10 FEES AND  EXPENSES.  Each party  hereto  shall pay their own fees  and
expenses  incurred in connection  with  negotiating and preparing this Agreement
and consummating the transactions contemplated hereby, including but not limited
to fees  and  disbursements  of  their  respective  attorneys,  accountants  and
investment  bankers.  If the transaction is consummated,  all fees and expenses,
including legal, accounting,  investment banking, broker's and finder's fees and
expenses  incurred by the Shareholder in connection with this  transaction  (the
"TRANSACTIONAL  EXPENSES") shall be deemed expenses of the Shareholder and shall
be borne by the Shareholder.

    13.11 GOVERNING  LAW  AND  JURISDICTION.   This  Agreement,  including   the
Ancillary  Documents to be executed  and/or  delivered  by the parties  pursuant
hereto,  shall be  construed,  governed by and enforced in  accordance  with the
internal  laws of the  State of North  Carolina,  without  giving  effect to the
principles  of comity or  conflicts of laws  thereof.  The  Shareholder  and the
Purchaser agree and consent that any legal action, suit or Proceeding seeking to
enforce any provision of this Agreement with the exception of Section 9.4 (which
is governed by Section  9.4(c)) shall be instituted and  adjudicated  solely and
exclusively in any court of general  jurisdiction in North  Carolina,  or in the
United  States  District  Court having  jurisdiction  in North  Carolina and the
Shareholder and the Purchaser agree that venue will be proper in such courts and
waive any  objection  which they may have now or  hereafter  to the venue of any
such suit,  action or  Proceeding  in such courts,  and each hereby  irrevocably
consents and agrees to the jurisdiction of said courts in any such suit,  action
or Proceeding.  The  Shareholder  and the Purchaser  further agree to accept and
acknowledge service of any and all process which may be 

                                       60


<PAGE>

served in any such suit,  action or  Proceeding  in said courts,  and also agree
that  service of process  or notice  upon them shall be deemed in every  respect
effective  service  of  process  or  notice  upon  them,  in any  suit,  action,
Proceeding,  if given or made (i) according to Applicable  Law, (ii) by a Person
over the age of 18 who  personally  served  such notice or service of process on
the  Shareholder  or the  Purchaser,  as the case may be, or (iii) by  certified
mail, return receipt requested,  mailed to the Shareholder or the Purchaser,  as
the case may be, at their respective addresses set forth in this Agreement.

    13.12 COUNTERPARTS AND FACSIMILE  SIGNATURE.  This Agreement may be executed
in two or more  counterparts,  each of which shall be deemed an original but all
of which together shall constitute one and the same Agreement.  The counterparts
of this  Agreement and all Ancillary  Documents may be executed and delivered by
facsimile  signature by any of the parties to any other party and the  receiving
party may rely on the  receipt of such  document so executed  and  delivered  by
facsimile as if the original had been received.

    13.13 HEADINGS.  The headings of the articles,  sections and  subsections of
this Agreement are intended for the convenience of the parties only and shall in
no way be  held to  explain,  modify,  construe,  limit,  amplify  or aid in the
interpretation of the provisions hereof.  The terms "this Agreement,"  "hereof,"
"herein,"  "hereunder," "hereto" and similar expressions refer to this Agreement
as a whole  and not to any  particular  article,  section,  subsection  or other
portion  hereof and include the Schedules and Exhibits  hereto and any document,
instrument  or  agreement  executed  and/or  delivered  by the parties  pursuant
hereto.

    13.14 SCOPE OF  AGREEMENT.  Unless  the  context  otherwise   requires,  all
references  in this  Agreement  or in any  Schedule  or Exhibit  hereto,  to the
assets, properties, operations, business, financial statements, employees, books
and  records,  accounts  receivable,   accounts  payable,   Contracts  or  other
attributes of the Business  shall mean such items or attributes as they are used
in, apply to, or relate to the Business.

    13.15 NUMBER AND  GENDER.   Unless the  context  otherwise  requires,  words
importing the singular  number shall include the plural and vice versa and words
importing the use of any gender shall include all genders.

    13.16 SEVERABILITY.  In the event  that any  provision of this  Agreement is
declared  or held by any  court  of  competent  jurisdiction  to be  invalid  or
unenforceable,  such provision  shall be severable  from, and such invalidity or
unenforceability  shall not be  construed  to have any effect on, the  remaining
provisions of this  Agreement,  unless such invalid or  unenforceable  provision
goes to the essence of this Agreement, in which case the entire Agreement may be
declared invalid and not binding upon any of the parties.

    13.17 PARTIES  IN  INTEREST.  Except  for  the  third  party   beneficiaries
specifically  identified as a class in Section 11.9 hereof,  nothing  implied in
this  Agreement  is  intended  or shall be  construed  to confer  any  rights or
remedies  under or by reason of this  Agreement  upon any Person  other than the
Purchaser and the Shareholder and their respective  representatives,  successors
and  permitted  assigns.  Nothing in this  Agreement  is  intended to relieve or
discharge  the  Liabilities  of  any  third  Person  to  the  Purchaser  or  the
Shareholder.

                                       61


<PAGE>

    13.18 WAIVER.   The  terms,  conditions,  warranties,   representations  and
indemnities  contained in this Agreement,  including the documents,  instruments
and agreements  executed and delivered by the parties  pursuant  hereto,  may be
waived only by a written  instrument  executed by the party waiving  compliance.
Any such waiver shall only be  effective  in the  specific  instance and for the
specific  purpose for which it was given and shall not be deemed a waiver of any
other  provision  hereof or of the same  breach or default  upon any  recurrence
thereof.  No failure on the part of a party  hereto to exercise  and no delay in
exercising any right  hereunder  shall operate as a waiver thereof nor shall any
single or partial exercise of any right hereunder  preclude any other or further
exercise thereof or the exercise of any other right.

    13.19 CONSTRUCTION. The parties have participated jointly in the negotiation
and drafting of this Agreement.  In the event an ambiguity or question of intent
or  interpretation  arises,  this  Agreement  shall be  construed  as if drafted
jointly  by the  parties  and no  presumption  or  burden of proof  shall  arise
favoring  or  disfavoring  any party by virtue of the  authorship  of any of the
provisions of this  Agreement.  The words  "including,"  "include" or "includes"
shall  mean  including  without   limitation.   The  parties  intend  that  each
representation,  warranty and covenant  contained  herein shall have independent
significance. If any party has breached any representation, warranty or covenant
contained   herein  in  any  respect,   the  fact  that  there  exists   another
representation,  warranty  or  covenant  relating  to the  same  subject  matter
(regardless  of the  relative  levels  of  specificity)  which the party has not
breached shall not detract from or mitigate the fact that the party is in breach
of the first representation, warranty or covenant.

    13.20 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable damage
would occur in the event that any of the  provisions of this  Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to injunctive relief to
prevent  breaches of this  Agreement and to enforce  specifically  the terms and
provisions  hereof  in any  court  of the  United  States  or any  state  having
jurisdiction,  this  being in  addition  to any other  remedy to which  they are
entitled at law or in equity.

    13.21  SUPPLEMENTATION  OF SCHEDULES.  The  Shareholder or the Purchaser may
elect to deliver a  supplement  ("SUPPLEMENT")  to one or more of the  Schedules
previously delivered to the other in accordance with the procedures set forth in
this Section 13.21 as follows:

           (a) Prior to the Closing  Date,  any and all  Supplements  must be in
    writing and must be delivered to the other party as soon as practicable, but
    in no event later than the date that is five (5) business  days prior to the
    scheduled  Closing  Date.  The other  party  shall be given the  opportunity
    during the five (5)  business  days  following  the delivery of the proposed
    Supplement to consider that Supplement.  If the recipient does not object to
    the contents of the Supplement within such period,  the Schedule in question
    shall be deemed amended as of the date of this Agreement by the  Supplement.
    If the recipient objects to a proposed  Supplement,  the sole remedy of such
    objecting party shall be termination of this Agreement in accordance Section
    12.1(f) of this Agreement,  PROVIDED,  HOWEVER, such termination right shall
    only  be  available  if the  matter(s)  disclosed  in the  Supplement  could
    reasonably  be  determined  to have a Material  Adverse  Effect (and, if the
    foregoing prevents a termination due to the determination that the matter(s)
    disclosed in the  Supplement  could not  reasonably  be determined to have a
    Material  Adverse Effect,  

                                       62


<PAGE>

    the Schedule in question shall be deemed amended,  as described above);  and
    PROVIDED,  FURTHER,  the  right to  provide  the  Supplement  shall  only be
    available if (i) the Supplement was prepared in connection  with or was made
    necessary  by a change in  circumstance  of which the  party  proposing  the
    Supplement  was unaware  from the date of this  Agreement to the date of the
    proposed Supplement,  or (ii) the omission from the original Schedule(s) was
    ministerial  in nature and the Supplement is not material to the Company and
    the Subsidiaries taken as a whole; and

           (b) Any and all Supplements delivered within five (5) business   days
    prior to the scheduled  Closing Date must be in writing and delivered to the
    other party  pursuant to Section  13.5 of this  Agreement,  and will only be
    deemed to amend a Schedule with the written  consent of the recipient of the
    Supplement.



                            [SIGNATURE PAGE FOLLOWS]










                                       63


<PAGE>


         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by duly authorized representatives as of the day, month and year  first
above written.



SHAREHOLDER:                                PURCHASER:

ALLETE WATER SERVICES, INC.                 PHILADELPHIA SUBURBAN
                                            CORPORATION


By /s/ James K. Vizanko                      By /s/ Nicholas DeBenedictis
  -------------------------------------        ---------------------------------
  James K. Vizanko                             Nicholas DeBenedictis
  President and Chief Financial Officer        Its Chairman, President and
                                                 Chief Executive Officer

















                  [SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT]





                                       64






<PAGE>
                                                                  EXHIBIT 10(o)3

Minnesota Power                                             Original Sheet No. 1
First Revised Rate Schedule FERC No. 175















                          WHOLESALE POWER COORDINATION

                        AND DISPATCH OPERATING AGREEMENT



                                     Between



                              MINNESOTA POWER, INC.



                                       and



                              SPLIT ROCK ENERGY LLC










Issued by: Eric R. Norberg                           Effective: February 1, 2004
Issued on: January 30, 2004


<PAGE>

Minnesota Power                                             Original Sheet No. 2
First Revised Rate Schedule FERC No. 175


         This WHOLESALE POWER COORDINATION AND DISPATCH OPERATING AGREEMENT
("AGREEMENT") dated the 14th day of April, 2000, as amended as of January 30,
2004, between Minnesota Power, Inc, a Minnesota corporation ("MP"), and SPLIT
ROCK ENERGY LLC, a Minnesota limited liability company ("Split Rock"). For
purposes of this AGREEMENT, MP or Split Rock shall be referred to individually
as a "Party" and collectively as the "Parties."



                                    RECITALS



         WHEREAS, MP is an investor-owned electric utility that owns electric
generation, transmission and distribution facilities and is engaged in the
generation, transmission and sale of electric power and energy to retail
customers in the state of Minnesota and to wholesale customers in Minnesota and
throughout the Midwest; and



         WHEREAS, Great River Energy ("GRE") is an electric cooperative company
that owns electric generation
 and transmission facilities and is engaged in the
generation, transmission, and sale of electric power and energy at wholesale in
the state of Minnesota; and



         WHEREAS, MP and GRE, operate their respective electric systems within
the interconnected electrical transmission network in accordance with the
requirements and guidelines set forth by the Mid-Continent Area Power Pool
("MAPP"); and



         WHEREAS, MP and GRE desire to jointly commit their generating and
purchased power resources for load and capability requirements under MAPP; and



         WHEREAS, Split Rock is a limited liability company, of which GRE is a
member; and



         WHEREAS, MP desires to enter into a power coordination agreement with
Split Rock setting out the terms and conditions under which MP will, among other
things, make its generating and purchased power resources available to Split
Rock, along with GRE's generating and purchased power resources, to meet the
End-Use Load Obligations of MP and GRE, and Split Rock will, among other things,
be responsible for meeting MP's load and capability responsibilities under MAPP.



         NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt, adequacy and sufficiency of which are
hereby acknowledged, and intending to be legally bound, MP and Split Rock hereto
agree as follows:

Issued by: Eric R. Norberg                           Effective: February 1, 2004
Issued on: January 30, 2004


<PAGE>

Minnesota Power                                             Original Sheet No. 3
First Revised Rate Schedule FERC No. 175

                                   SECTION 1.
                       TERM OF AGREEMENT AND DEFINITIONS


Section 1.01      Term of Agreement.

         This AGREEMENT shall become effective on the latest of: (1) the date
this AGREEMENT is approved by the Administrator of the RUS or accepted for
filing by any other regulatory agencies as required by law; or (2) the date
hereof. After such effective date, this AGREEMENT shall remain in effect until
terminated by either party in accordance with this AGREEMENT.


Section 1.02      Purpose of Agreement.

         The purpose of this AGREEMENT, among other things, is to establish the
terms and conditions under which Split Rock shall: (i) be responsible for the
commitment of MP's Generation Resources, and the procurement of capacity and
energy, with the Generation Resources of GRE to serve safely and reliably, the
full requirements of MP's End-Use Loads and GRE's End-Use Loads; and (ii) be a
member of MAPP and undertake those MAPP obligations and responsibilities
necessary for Split Rock to assume the MAPP End-Use Load Obligation for the
combined electric loads of MP and GRE and to represent the interests of MP and
GRE in MAPP and its subcommittees for that purpose. Moreover, this agreement
provides the foundation for meeting the Joint Reporting of Load and Capability
requirements set forth in the MAPP Restated Agreement, Section 6.4.3 and the
MAPP Generation Reserve Sharing Pool Handbook, Section 4.2.1.7.


Section 1.03      Definitions.

         The following terms, when used herein, shall have the meanings 
specified below

a.       "Due Diligence" means the exercise of good faith efforts to perform
a required or requested act on a timely basis and in accordance with Good
Utility Practice, using the technical and human resources reasonably available.


b.       "End-Use Load" means the load of persons or other entities that
purchase or produce electric energy for their own consumption and not for
resale, as defined in the MAPP Restated Agreement or by any similar successor
organization.


c.       "End-Use Load Obligation" means an obligation imposed by law,
regulation or contract to serve End-Use Load within the MAPP Region including
any obligation imposed by an assignment of End-Use Load Obligation, as defined
in the MAPP Restated Agreement, or by any similar successor organization.


d.       "FERC" means the Federal Energy Regulatory Commission (or its
successor).


e.       "Force Majeure" means any cause beyond the control of the Party
affected, including, without limitation, the following: acts of God, fire,
flood, landslide, lightning, earthquake, tornado, storm, freeze, drought,
blight, famine, epidemic or quarantine; strike, lockout, or other labor
difficulty; act or failure to act on the part of any Party that impedes or
prevents the others Party's

Issued by: Eric R. Norberg                           Effective: February 1, 2004
Issued on: January 30, 2004


<PAGE>

Minnesota Power                                             Original Sheet No. 4
First Revised Rate Schedule FERC No. 175

performance; theft, casualty, accident, equipment breakdown, failure or shortage
of, or inability to obtain from usual sources goods, labor, equipment,
information or drawings, machinery, supplies, energy, fuel, or materials;
embargo; injunction; litigation or arbitration with suppliers or manufacturers;
civil unrest, war, civil disorder or disturbance, explosion, or breach of
contract by any supplier, contractor, subcontractor, laborer or materialman,
including, but not limited to, failure of facilities, flood, earthquake, storm,
fire, lightning, epidemic, war, riot, civil disturbance, labor disturbance,
sabotage, and restraint by court or public authority.


f.       "Generation Resources" means MP's electric generation resources and/or
GRE's electric generation resources, whether owned or under contract.


g.       "Good Utility Practice" means any of the practices, methods, and acts
engaged in or approved by a significant portion of the electric utility industry
during the relevant time period, or any of the practices, methods, and acts
which, in the exercise of reasonable judgment in light of the facts known at the
time the decision was made, could have been expected to accomplish the desired
result at the lowest possible cost consistent with good business practices,
reliability, and safety. Good Utility Practice is not intended to be limited to
the optimum practice, method, or act to the exclusion of all others, but rather
as a spectrum of possible practices, methods, or acts which could have been
expected to accomplish the desired result at the lowest possible cost consistent
with good business practices, reliability, and safety. Good Utility Practice
includes due regard for manufacturers' warranties and the requirements of
regulatory authorities.


h.       [intentionally left blank]


i.       "MAPP" means the Mid-Continent Area Power Pool or its successor
organization.


j.       "MAPP Agreement" means the Mid-Continent Area Power Pool Restated
Agreement dated January 12, 1996, as amended, and as may be further amended from
time to time.


k.       "MAPP Generation Reserve Sharing Pool Handbook" means the Mid-Continent
Area Power Pool Handbook that sets forth the basic requirements for the approval
of joint reporting of load and capacity between two or more MAPP End-Use Load
Members.


l.       [intentionally left blank]


m.       [intentionally left blank]


n.       "Power" means either electric capacity or energy or both.


o.       "RUS" means the U.S.D.A. Rural Utilities Service or its successor.


p.       [intentionally left blank]



                      SECTION 2.[intentionally left blank]

Issued by: Eric R. Norberg                           Effective: February 1, 2004
Issued on: January 30, 2004


<PAGE>

Minnesota Power                                             Original Sheet No. 5
First Revised Rate Schedule FERC No. 175

                                   SECTION 3.


                            PARTIES' RESPONSIBILITIES

Section 3.01      Split Rock Responsibilities.

         Section 3.01.1 The responsibilities of Split Rock shall include:

a.       Establish procedures and operating protocols consistent with the
provisions hereof governing the coordination of MP's Generation Resources and
GRE's' Generation Resources to serve End-Use Load pursuant to this AGREEMENT.

b.       [intentionally left blank]

c.       [intentionally left blank]

d.       Represent MP's End-Use Load interests in NERC and MAPP and perform, on
behalf of MP, those responsibilities and undertake those obligations that are
consistent with and required by such organizations and/or councils.

e.       [intentionally left blank]

f.       Take such other actions and perform such other duties as may be
required in connection with the terms of this AGREEMENT and approved by MP and
GRE.



         Section 3.01.2 Limitation on Split Rock Responsibilities. Nothing in
         this AGREEMENT or otherwise shall be interpreted as requiring that
         Split Rock assume any responsibility, and Split Rock shall not have any
         responsibility, for the physical operation and/or maintenance of any of
         MP's Generation Resources or facilities, employees, fuel arrangements
         or obligations, economic dispatch of MP Generation, control area
         operation, or for any MP debt or other obligations related to ownership
         or operation and maintenance of those resources or facilities.



Section 3.02      MP Responsibilities.

         The responsibilities of MP under this AGREEMENT shall include but are
not necessarily limited to the following:

a.       [intentionally left blank]

b.       [intentionally left blank]

c.       MP shall be responsible for the costs of owning and operating its 
control center and providing or obtaining from third parties all necessary
control area functions and services. MP shall provide to Split Rock control
center information and coordinate control area functions and services with Split
Rock and/or GRE as reasonably necessary for Split Rock to fulfill its
obligations hereunder.

d.       MP shall coordinate with Split Rock, and may designate Split Rock as
its agent, to obtain from third parties the transmission service necessary to
implement this AGREEMENT.

Issued by: Eric R. Norberg                           Effective: February 1, 2004
Issued on: January 30, 2004


<PAGE>

Minnesota Power                                             Original Sheet No. 6
First Revised Rate Schedule FERC No. 175

                                   SECTION 4.

                    DISPATCH OF MEMBERS' GENERATION RESOURCES



Section 4.01      Dispatch and Scheduling.

a.       Split Rock shall provide services that are necessary and appropriate to
commit and dispatch the Generation Resources of MP and GRE to serve the combined
End-Use Load of MP and GRE. Split Rock shall not commit and dispatch MP
Generation Resources to meet loads that are not End-Use Loads of MP and GRE. MP
operators may take any and all actions that they reasonably believe, based on
the circumstances and information available to them at the time, are necessary
and appropriate to avoid or alleviate emergency conditions or to protect the
safety of persons or property.

b.       MP shall provide and maintain, at its own expense, in accordance with
specifications and procedures satisfactory to meet its obligations hereunder,
such telecommunications and other facilities at its premises as are necessary to
transfer data relating to its Generation Resources, and other necessary
operating data, to and from Split Rock.

c.       The Parties shall develop and maintain any necessary operating
guidelines to implement the provisions of this Agreement. Such operating
guidelines shall include a priority of the use of MP Generation Resources for MP
End-Use Loads and GRE Generation Resources for GRE End-Use Loads.



Section 4.02      Ownership and Maintenance of Generation Resources.

a.       MP shall have the responsibility, at its cost, to operate and maintain
its Generation Resources, including maintaining any necessary accreditation,
consistent with Good Utility Practice and any operating practices or protocols
implemented by Split Rock pursuant to this AGREEMENT.

b.       MP may retire or dispose of any of its existing Generation Resources,
or choose not to renew or extend the contractual arrangements for Generation
Resources under contract, upon reasonable notice to Split Rock and GRE, and MP
shall have no obligation to Split Rock or GRE to replace any retired, disposed
or lapsed Generation Resource.

c.       Should an event of Force Majeure or other event of partial or complete
outage of MP's Generation Resources occur, MP shall immediately notify Split
Rock and GRE of such event, its expected duration, and MP's intentions to
address such event. During such Force Majeure events, MP shall take all
reasonable actions, in coordination with Split Rock, to restore the operation
and rating of any Generation Resource adversely affected by such Force Majeure
events.

d.       Should MP experience an outage of any of its Generation Resources that
may affect the ability of Split Rock to fulfill its responsibilities under this
AGREEMENT or any applicable prevailing regional reliability requirements, MP
will take any actions that it reasonably believes are necessary and appropriate
to obtain replacement capacity or energy from other resources.

Issued by: Eric R. Norberg                           Effective: February 1, 2004
Issued on: January 30, 2004


<PAGE>

Minnesota Power                                             Original Sheet No. 7
First Revised Rate Schedule FERC No. 175

e.       MP shall be responsible for procuring any fuel or other resources
needed for the operation of its Generation Resources and for maintaining and
administering any contacts for the purchase and delivery of such fuel or
resources.



                                   SECTION 5.

                              END-USE LOAD SERVICE



Section 5.01      Split Rock Obligations.

         As provided for in Section 6.4.3(f) of the MAPP Restated Agreement, MP
hereby assigns to Split Rock, and Split Rock hereby accepts such assignment from
MP, all of MP's End-Use Load Obligation. Notwithstanding Split Rock's
obligations hereunder, MP at all times retains all of the rights and obligations
it may have under its own contracts to provide electric service to MP's End-Use
Loads, including contracts with municipal electric utility customers.



Section 5.02.     [intentionally left blank]



Section 5.03      Generation Resource Obligations.

         MP shall designate a level of Generation Resources, and be required to
operate and maintain such Generation Resources consistent with Good Utility
Practices, sufficient to meet MP's contribution to Split Rock's End-Use Load
Obligation. Unless otherwise agreed, MP shall be solely responsible for any
costs incurred by Split Rock as a result of MP's failure to meet its obligations
herein.



                      SECTION 6. [intentionally left blank]

Issued by: Eric R. Norberg                           Effective: February 1, 2004
Issued on: January 30, 2004


<PAGE>

Minnesota Power                                             Original Sheet No. 8
First Revised Rate Schedule FERC No. 175

                                   SECTION 7.

                               MEMBERSHIP IN MAPP



Section 7.01      End-Use Load and Reliability Membership.

         In recognition of the End-Use Load Obligation assumed by Split Rock
under this AGREEMENT, Split Rock shall apply for and become an End-Use Load and
Reliability Member of MAPP, taking responsibility for the End-Use Loads and the
Generation Resources of MP and satisfying MP's related obligations under the
MAPP Agreement.



Section 7.02       MAPP Application.

         MP and Split Rock, in conjunction with the other Members, shall
mutually cooperate in preparation of Split Rock's MAPP membership application,
and MP shall support the application through the MAPP approval process. As part
of that process, MP shall prepare and submit to MAPP an application for a change
in its MAPP membership status consistent with Split Rock's assumption of End-Use
Load Obligation and Reliability Membership for MP's End-Use Loads and Generation
Resources. Notwithstanding the foregoing, MP intends to participate in MAPP as a
Transmission Owning Member.

         Section 7.02.1   Change in MAPP Membership Status.

         If, during the term of this AGREEMENT, (a) MP ceases to be a MAPP
         Member, (b) the MAPP Agreement is terminated or materially modified,
         (c) some or all of MAPP's functions and responsibilities are assumed
         under a successor or different organization or entity, all terms and
         conditions with respect to MAPP shall remain in force until new terms
         and conditions are mutually agreed upon by Split Rock, GRE and MP.



Section 7.03      Costs of MAPP Membership.

         The costs of Split Rock's participation in MAPP shall be charged to MP
and GRE in proportion to their individual shares of Split Rock's End-Use Load
Obligation.



                                   SECTION 8.

                         STANDARDS FOR SYSTEM OPERATIONS



Section 8.01      Operating Standards.

         To the extent applicable, MP shall operate its electrical systems and
Split Rock shall carry out its responsibilities under this AGREEMENT consistent
with Good Utility Practice and in compliance with NERC and MAPP requirements.



Section 8.02      [intentionally left blank]

Issued by: Eric R. Norberg                           Effective: February 1, 2004
Issued on: January 30, 2004


<PAGE>

Minnesota Power                                             Original Sheet No. 9
First Revised Rate Schedule FERC No. 175

Section 8.03      Information Requirements.

         The Parties shall maintain records reflecting hourly schedules of power
and energy generated and actual deliveries of power and energy from MP
Generation Resources, and shall make such records available to each other and to
Split Rock, GRE and MP upon request. Nothing in this AGREEMENT shall obligate
either Party to retain records longer than the period prescribed by FERC, RUS,
MAPP, or other applicable regulatory body, reliability council or operational
standard.



                                   SECTION 9.

                                   TERMINATION



Section 9.01      Notice of Termination.

         This AGREEMENT may be terminated by MP upon one hundred and eighty
(180) days' notice of termination. Termination will be effective on the first
day of the month, and written notice of termination must be given at least one
hundred and eighty days prior to the first day of the month that MP intends for
its notice to become effective and for the AGREEMENT to terminate. Upon
termination in accordance with this Section 9.01, MP shall be excused and
relieved of all obligations and liabilities under this AGREEMENT, except those
liabilities incurred before the effective date of termination or as a result of
the termination. Each Party shall use every reasonable effort to mitigate any
damages resulting from a breach and/or termination of this AGREEMENT.



Section 9.02      Effect of Termination.

         If, upon termination of this AGREEMENT, the Parties are unable to
mutually agree as to the effects of termination, any dispute over the effects of
termination shall be resolved through arbitration under Section 11 of this
AGREEMENT. The termination of this AGREEMENT shall not discharge either Party
from any obligation it owes to the other or to GRE by reason of any transaction,
cost, damage, expense, investment, or liability which shall occur or arise prior
to such termination. The Parties intend that any such obligation owed (whether
the same shall be known or unknown at the termination of this AGREEMENT) shall
survive the termination of this AGREEMENT.



                                   SECTION 10.

                                     GENERAL



Section 10.01     Continuity of Operation.

a.       Unless otherwise directed by Split Rock as part of its integrated
dispatch, the operating performance of MP's electrical system under this
AGREEMENT shall be continuous, except for the following:

Issued by: Eric R. Norberg                           Effective: February 1, 2004
Issued on: January 30, 2004


<PAGE>

Minnesota Power                                            Original Sheet No. 10
First Revised Rate Schedule FERC No. 175

(1)      Interruptions or reductions due to Force Majeure, which, by exercise of
due diligence and foresight, could not reasonably have been avoided.

(2)      Interruptions or reductions due to operation of devices installed for
power system protection.

(3)      Temporary interruptions or reductions which are necessary or desirable
for the purposes of maintenance, repairs, replacements, installation of
equipment or investigation and inspection. MP will give Split Rock and GRE
reasonable advance notice of such interruptions or reductions, except in cases
of emergency make such advance notice impracticable as reasonably determined by
MP, and MP will use best reasonable efforts to remove the cause thereof as
quickly as practicable under the circumstances.

b.       The Party prevented from performing its obligations for any of the
reasons set forth in Section 10.01(a), above, shall exercise Due Diligence in
attempting to remove the cause of its failure to perform, and nothing herein
shall be construed as permitting that Party to continue to fail to perform after
said cause has been removed; however, the Party shall not be obligated to agree
to any settlement of a strike or labor dispute which, in that Party's sole
discretion, may be inadvisable or detrimental to its interests.



Section 10.02.    Character of Power and Energy.

         All deliveries of electric power and energy hereunder shall be of the
character commonly known as three-phase, sixty-Hertz power and energy, unless
explicitly stated otherwise.



Section 10.03     Successors and Assigns.

         This AGREEMENT shall be binding upon the respective Parties, their
successors and assigns, on and after the effective date hereof. None of the
provisions of this AGREEMENT, whether in whole or in part, shall be assigned nor
their performance delegated by any Party to any third party without the written
consent of the other, which shall not be unreasonably withheld, unless such
assignment is to an affiliate or successor that assumes all of the rights and
obligations hereunder so long as such assignment would not adversely affect any
of the federal, state or reliability council approvals or findings required or
in place for Split Rock's operations under this AGREEMENT.



Section 10.04     No Third Party Beneficiary.

         No provision of this AGREEMENT shall in any way inure to the benefit of
any customer, or any other third party, so as to constitute any such person as a
third party beneficiary under this AGREEMENT, or of any one or more of the terms
hereof, or otherwise give rise to any cause of action in any person not a Party
hereto.

Issued by: Eric R. Norberg                           Effective: February 1, 2004
Issued on: January 30, 2004


<PAGE>

Minnesota Power                                            Original Sheet No. 11
First Revised Rate Schedule FERC No. 175

Section 10.05     Notices.

         Any notice, demand, request, or communication required or authorized by
this AGREEMENT shall be either hand-delivered or mailed by certified mail,
return-receipt requested, with postage prepaid, to:

                  Minnesota Power, Inc.                Great River Energy
                  30 West Superior Street              17845 East Highway 10
                  Duluth, Minnesota  55802             P.O. Box 800
                  Attn:  Donald J. Shippar             Elk River, MN  55330-0800
                                                       Attn: Jim Van Epps
with copies to:

                  Steven W. Tyacke                     David Saggau
                  Assistant General Counsel            General Counsel
                  Minnesota Power, Inc.                Great River Energy
                  30 West Superior Street              17845 East Highway 10
                  Duluth, Minnesota  55802             P.O. Box 800
                                                       Elk River, MN  55330-0800


On behalf of Split Rock to:

                  Ron Larson
                  President and CEO
                  Split Rock Energy LLC
                  301 4th Avenue South - Suite 860N
                  Minneapolis, MN  55415



         The designation and titles of the persons to be notified or the address
of such person may be changed at any time by written notice.



Section 10.06     Billing and Payment Procedure.

         Unless governed by separate written agreement, the Parties shall bill
and make payments in accordance with the following procedures:

a.       The Party (selling Party) providing any billable services to the other
Party (buying Party) shall issue an invoice by the fifteenth of each month for
services provided during the previous month.

b.       The buying Party's payments to the selling Party shall be due if by
mail at the selling Party's general office, or if by wire transfer to a bank and
account named by the selling Party, no later than fifteen days following the
date of the invoice, but such payment shall not be due before the 20th day of
the month. The buying Party shall have the right to dispute the amount of any
such invoice by protest on or before the payment date, but such dispute shall
not relieve the buying Party of the obligation to pay the entire amount,
including the disputed portion, by the payment date. If such due date falls on a
Saturday, Sunday, or holiday, such due date shall be the next working day.
Payments received after the due date shall be considered late and shall bear
interest on the payment

Issued by: Eric R. Norberg                           Effective: February 1, 2004
Issued on: January 30, 2004


<PAGE>

Minnesota Power                                            Original Sheet No. 12
First Revised Rate Schedule FERC No. 175

due at a rate equal to the rate set out in Section 35.19a(a) of FERC's
Regulations, as such section may be amended from time to time, for the number of
days elapsed from and including the day after the due date, to and including the
payment date.

c. Upon the failure of the buying Party to pay all amounts due within thirty
days of the due date, the buying Party shall be in default.



Section 10.07     Right of Access; Right to Audit.

a.       Each Party, after receiving reasonable notice from another Party, will
give authorized agents and employees of the other the right to enter its
premises at all reasonable times for the purpose of reviewing hourly metering
and scheduling records, for reading or checking meters, or for constructing,
testing, repairing, renewing, exchanging, or removing any or all of its
equipment which may be located on the property of the other, or for any work
incident to performing system operations under this AGREEMENT or rendering
service contracted for.

b.       Each Party shall have the right from time to time, upon written request
and at its own expense, to audit the other Party's books and records to verify
the information provided by that Party as required under this AGREEMENT.



Section 10.08     Drafting Responsibility.

         No Party shall be deemed solely responsible for drafting all or any
portion of this AGREEMENT and, in the event of a dispute, responsibility for any
ambiguities arising from any provision of this AGREEMENT shall be equally
shared.



Section 10.09     Captions.

         All titles, subject headings, section titles, and similar items are
provided for the purpose of reference and convenience and are not intended to be
inclusive, definitive, or to affect the meaning of the contents or scope of this
AGREEMENT.



Section 10.10     Governing Law.

         This AGREEMENT shall be interpreted and governed by the laws of the
state of Minnesota, or the laws of the United States, as applicable.



Section 10.11     Regulation.

         This AGREEMENT, and all rights and obligations of MP hereunder is
subject to all applicable state and federal laws and regulations. The Parties
agree to defend this AGREEMENT before any regulatory body, and to cooperate to
seek to obtain any necessary regulatory approvals. Each Party will be
responsible for its own fees or costs associated with obtaining any such
approvals.

Issued by: Eric R. Norberg                           Effective: February 1, 2004
Issued on: January 30, 2004


<PAGE>

Minnesota Power                                            Original Sheet No. 13
First Revised Rate Schedule FERC No. 175

Section 10.12     No Joint Venture or Partnership.

         No provision of this AGREEMENT shall be interpreted to mean or imply
that the Parties, or MP and GRE, have established or intend to establish a joint
venture or a partnership.



Section 10.13     Amendment.

         Any amendment, alteration, variation, modification, or waiver of the
provisions of this AGREEMENT shall be valid only after it has been signed by the
Parties and, if required, approved or accepted by any regulatory body with
jurisdiction over MP or this AGREEMENT.



Section 10.14     Severability.

         If any governmental agency or court of competent jurisdiction holds
that any provision of this AGREEMENT is invalid, or if, as a result of a change
in any federal or state law or constitutional provision, or any rule or
regulation promulgated pursuant thereto, any provision of this AGREEMENT is
rendered invalid or results in the impossibility of performance thereof, the
remainder of this AGREEMENT shall not be affected thereby and shall continue in
full force and effect. In such an event, the Parties shall promptly renegotiate
in good faith new provisions to restore this AGREEMENT as nearly as possible to
its original intent and effect.



Section 10.15     Superseding Effect.

         This AGREEMENT supersedes and has merged into it all prior oral and
written agreements on the same subjects by or among the Parties, with the effect
that this AGREEMENT shall control.



                                   SECTION 11.

                                   ARBITRATION



Section 11.01     Arbitration.

         Any controversy or claim arising out of or relating to this AGREEMENT
or the breach hereof which cannot be resolved amicably shall be settled by
arbitration. A Party desiring to invoke this arbitration provision shall serve
written notice upon the other of its intention to do so. The arbitration shall
be conducted in accordance with the Commercial Arbitration Rules of the American
Arbitration Association then prevailing. The American Arbitration Association
shall administer the arbitration and act as appointing authority of the
arbitrator. Each Party shall bear its own costs and expenses of the arbitration,
including attorneys and expert witness fees, and shall equally share the expense
of the arbitrator and the administrative expenses of the arbitration. The
arbitration shall be governed by the United States Arbitration Act, 9 U.S.C.
Sections 1-16. The award of the arbitrator shall be final, and judgment on the
award rendered by the arbitrator may be entered by any court having
jurisdiction. The arbitration shall be conducted in Minneapolis, Minnesota
unless the Parties agree otherwise.

Issued by: Eric R. Norberg                           Effective: February 1, 2004
Issued on: January 30, 2004


<PAGE>

Minnesota Power                                            Original Sheet No. 14
First Revised Rate Schedule FERC No. 175

Section 11.02     Effect of Termination on Arbitration.

         This Section 11 shall survive the termination of this AGREEMENT as
necessary to resolve any outstanding disputes that arose prior to the time that
termination of this AGREEMENT became effective as well as any disputes involving
termination, as provided for in Section 9.02 herein





                      [The next page is the signature page]

Issued by: Eric R. Norberg                           Effective: February 1, 2004
Issued on: January 30, 2004


<PAGE>

Minnesota Power                                            Original Sheet No. 15
First Revised Rate Schedule FERC No. 175

         IN WITNESS WHEREOF, the Parties have caused this AGREEMENT to be
executed by their duly authorized representatives as of the day and year first
above written.



                                        MINNESOTA POWER, INC.



                                        By:     /s/ Donald J. Shippar
                                           ---------------------------------
                                        Title:  /s/ President & CEO
                                              ------------------------------



                                        SPLIT ROCK ENERGY LLC



                                        By:     /s/ Ronald Larson
                                           ---------------------------------
                                        Title:  /s/ President & CEO
                                              ------------------------------



              [SIGNATURE PAGE TO WHOLESALE POWER COORDINATION AND
         DISPATCH AGREEMENT - FIRST REVISED RATE SCHEDULE FERC NO. 175]



Issued by: Eric R. Norberg                           Effective: February 1, 2004
Issued on: January 30, 2004


<PAGE>
                                                                   EXHIBIT 10(p)

                             CONFIDENTIAL TREATMENT










                              AMENDED AND RESTATED

                              WITHDRAWAL AGREEMENT

                                 BY AND BETWEEN

                               GREAT RIVER ENERGY

                                       AND

                                 MINNESOTA POWER




                             DATED: JANUARY 30, 2004









<PAGE>

                             CONFIDENTIAL TREATMENT

                                TABLE OF CONTENTS
                                -----------------
                                                                            Page
                                                                            ----

ARTICLE 1         DEFINED TERMS................................................3

ARTICLE 2         TRANSFER OF MP FINANCIAL RIGHTS AND CERTAIN
                  BUSINESS ASSETS; MP WITHDRAWAL PAYMENTS;
                  WITHDRAWAL...................................................9

     2.01   Assignment of MP Financial Rights and Certain Business Assets......9

     2.02   Withdrawal........................................................11

ARTICLE 3         RECONCILIATION AND PAYMENT OF MP CAPITAL
                  ACCOUNT.....................................................11

     3.01   Estimated Execution Date MP Capital Account.......................11

     3.02   MP Capital Account Reconciliation.................................13

ARTICLE 4         EMPLOYEES...................................................15

     4.01   [   *   ].........................................................15

     4.02   [   *   ].........................................................15

     4.03   [   *   ].........................................................15

     4.04   [   *   ].........................................................15

ARTICLE 5         OPERATION OF SRE PRIOR TO CLOSING...........................15

     5.01   MP Credit Support of SRE..........................................15

     5.02   Risk Management...................................................15

     5.03   Generation Availability Credit ("GAC") and Combustion Turbine Use
            ("CTU")...........................................................16

ARTICLE 6         CONCURRENT EXECUTION DATE AND CLOSING DATE
                  AGREEMENTS AND COOPERATION..................................16

     6.01   Execution Date and Closing Date Agreements........................16

     6.02   Cooperation on Certain Operational Matters........................16

     6.03   Transmission Matters..............................................16

     6.04   Transfer of Data..................................................17

     6.05   FERC Filing and Approval Order....................................17

     6.06   MP Exclusive Purchases and Sales..................................17

ARTICLE 7         INDEMNIFICATION.............................................17

     7.01   Indemnification by MP of GRE......................................17

     7.02   Indemnification
 by GRE of MP......................................18

     7.03   Principles Regulating Indemnity Rights............................19


*  TEXT HAS BEEN OMITTED PURSUANT  TO A REQUEST FOR CONFIDENTIAL  TREATMENT  AND
   HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
                                       i


<PAGE>

     7.04   Procedure for Indemnification.....................................19

     7.05   Dispute Resolution................................................22

ARTICLE 8         ADDITIONAL AGREEMENTS WITH RESPECT TO
                  OPERATION OF SRE PRIOR TO CLOSING...........................23

     8.01   Actions Refrained From Prior to Closing...........................23

     8.02   Affirmative Actions Prior to Closing..............................24

ARTICLE 9         REPRESENTATIONS AND WARRANTIES OF MP........................24

     9.01   Corporate Standing and Authority; Binding Agreement...............24

     9.02   Absence of Conflicting Agreements or Required Consents............25

     9.03   Title.............................................................25

     9.04   Relinquished Assets...............................................25

     9.05   Litigation........................................................25

ARTICLE 10        REPRESENTATIONS AND WARRANTIES OF GRE.......................25

     10.01  Organization and Authority........................................25

     10.02  Litigation........................................................26

     10.03  Notice of Development.............................................26

ARTICLE 11        CLOSING.....................................................26

     11.01  Time and Place....................................................26

     11.02  Conditions to MP's Obligations to Close...........................26

     11.03  Conditions to GRE's Obligation to Close...........................27

     11.04  Efforts to Satisfy Conditions.....................................28

ARTICLE 12        TERMINATION.................................................29

     12.01  Termination of Agreement..........................................29

     12.02  Procedure Upon Termination........................................29

ARTICLE 13        OTHER MATTERS...............................................29

     13.01  Announcements.....................................................29

     13.02  Use of SRE Name...................................................30

     13.03  Confidentiality...................................................30

     13.04  Tax Matters.......................................................31

ARTICLE 14        MISCELLANEOUS...............................................33

     14.01  Survival of Representations, Warranties and Covenants.............33

     14.02  No Broker.........................................................33
 
     14.03  Expenses..........................................................33

                                       ii


<PAGE>

     14.04  Notices...........................................................33

     14.05  Binding Effect; No Assignment Without Prior Written Consent.......34

     14.06  Entire Agreement..................................................34

     14.07  Choice of Law.....................................................35

     14.08  Amendment; Waiver.................................................35

     14.09  Pre Closing and Post Closing Cooperation..........................35

     14.10  Counterparts and Facsimile/Electronic Signatures..................35

     14.11  Interpretation....................................................35

     14.12  Payments..........................................................35

     14.13  Termination of Withdrawal Agreement...............................35



                                      iii


<PAGE>

                              AMENDED AND RESTATED
                              WITHDRAWAL AGREEMENT


     THIS AMENDED AND  RESTATED  WITHDRAWAL  AGREEMENT  (this  "AGREEMENT"),  is
entered into January 30, 2004, to be effective  from and after December 12, 2003
(the  "EFFECTIVE  DATE") by and between  MINNESOTA  POWER, a division of ALLETE,
Inc., a Minnesota corporation,  an investor-owned utility ("MP") and GREAT RIVER
ENERGY, a Minnesota cooperative corporation ("GRE").

                                    RECITALS
                                    --------

     A.     Split  Rock  Energy LLC is a  Minnesota  limited  liability  company
("SRE")  (i)  owned  equally  (50%/50%)  by MP and GRE  (MP  and  GRE  are  each
individually  a  "MEMBER,"  and may  collectively  be  referred to herein as the
"MEMBERS"),  and (ii)  engaged in the  business  of  providing  Core  Operations
(defined below) and Trading Operations (defined below).

     B.     SRE is governed  pursuant to that certain  Member  Control Agreement
dated April 14, 2000, entered into by MP and GRE, as amended by (i) that certain
letter  agreement  dated  February  5,  2002,  between  MP and  GRE  (concerning
withdrawal by a Member of SRE),  and (ii) this  Agreement  (the "MEMBER  CONTROL
AGREEMENT").

     C.     MP gave notice to GRE  of its desire to withdraw from its membership
in SRE, which notice is acknowledged by the parties hereto to have been properly
given,  even if not strictly in  accordance  with the  provisions  of the Member
Control Agreement.  MP and GRE agree said notice is deemed to have been given on
November 1, 2003.

     D.     MP and  GRE  entered  into  that  certain  Interim  Agreement  dated
November  18,  2003,  as amended by  Amendment  No. 1 dated  November  21, 2003,
Amendment No. 2 dated December 5, 2003,  Amendment No. 3 dated December 23, 2003
and  Amendment  No.  4  dated  January  30,  2004  (collectively,  the  "INTERIM
AGREEMENT"),  pursuant  to which MP and GRE became  bound to certain  agreements
arising under Sections 2 (operating  expenses;  Net Income and Losses from Power
Trading Transactions; negotiation of a withdrawal agreement), 3 (indemnity), and
4 (termination), of the Interim Agreement (the "BINDING PROVISIONS").

     E.     MP and GRE shall be bound  to  their  covenants  set  forth  in  the
Binding  Provisions  of the  Interim  Agreement  for the  period  from and after
November 1, 2003,  through the Execution Date (defined below).  At and after the
Closing Date of this Agreement,  the Interim  Agreement,  this Agreement and the
Ancillary  Documents  (defined  below) shall control all relations of MP and GRE
for the respective time periods set forth therein and herein. To the extent this
Agreement conflicts with the Interim Agreement, this Agreement shall govern.

     F.     MP and GRE  entered  into  that  certain  Withdrawal Agreement dated
December 12, 2003,  as amended by Amendment  No. 1 dated  December 23, 2003 (the
"WITHDRAWAL  AGREEMENT")  pursuant  to which MP and GRE set  forth  the terms by
which,  among other things,  it was anticipated  that MP would withdraw from its
membership in SRE (the "MP WITHDRAWAL").

                                       1


<PAGE>

     G.     Subsequent to the execution and delivery of the Withdrawal Agreement
it was  determined  that  additional  time would be  required  to obtain a prior
consent order from FERC (as defined below) pursuant to applicable law, including
Section 203 of the Federal Power Act, before the MP Withdrawal could be lawfully
effected (the "FERC APPROVAL").

     H.     As a consequence of delay  occasioned by  the FERC Approval process,
MP and GRE have hereby  amended and  restated  the  Withdrawal  Agreement in its
entirety to (i) set forth the amended and restated  agreement of MP and GRE with
respect to the MP Withdrawal,  (ii)  terminate the  Withdrawal  Agreement in its
entirety,  and (iii) establish the further understandings and covenants by which
certain actions of MP and GRE will (x) restate and revise the existing  business
relations  between MP and GRE as Members of SRE pending the FERC  Approval,  and
(y)  amend  the  Member  Control  Agreement  to  incorporate  the  terms of this
Agreement.

     I.     The initial  actions taken by MP  and GRE to effect the  matters set
forth in Recital H above shall occur at and upon  January 31, 2004 at 11:59 p.m.
CST (the "EXECUTION  DATE") to be followed by the Closing (defined below) on the
Closing  Date,  upon  satisfaction  of the  conditions  to Closing  set forth in
Article 11 of this Agreement.

     J.     Within five (5) business days  after  receipt of the  FERC Approval,
and and the  satisfaction  of the conditions set forth in Article 11 hereof,  MP
will  withdraw as a Member of SRE  effective  on the Closing  Date at 11:59 P.M.
(CST) (the "WITHDRAWAL  EFFECTIVE TIME") and, effective upon the Closing of this
Agreement and at the Withdrawal  Effective  Time, MP shall no longer be a Member
of SRE nor have any further  obligations  under the Member Control  Agreement or
any other SRE governing document or ancillary agreement,  instrument or document
(other  than the  Ancillary  Documents)  arising  from,  in  connection  with or
pursuant to the organization,  operation or continuing operations of SRE, except
as set forth herein  and/or  pursuant to the Binding  Provisions  of the Interim
Agreement;  PROVIDED,  HOWEVER, that nothing herein shall affect the validity or
continued effectiveness of the Margin Agreement between the Members.

     K.     Subject  to the Closing of  this Agreement, the timing and method of
withdrawal  by MP as set  forth  in this  Agreement  and the  Interim  Agreement
constitutes a proper amendment and/or waiver of the withdrawal provisions of the
Member Control Agreement with respect to MP.

     L.     From  and after the  Closing  date, all rights and obligations of MP
arising in connection  with SRE shall be determined  solely by the terms of this
Agreement  and the  documents,  instruments,  agreements  and  schedules  hereto
(collectively, the "ANCILLARY DOCUMENTS"),  including any rights and obligations
to or from SRE, GRE and any and all Third Parties.

                                    AGREEMENT
                                    ---------

     NOW, THEREFORE,  in  consideration  of the  foregoing  Recitals,  which are
incorporated  herein as essential terms of this Agreement,  the mutual covenants
and agreements

                                       2


<PAGE>

hereinafter contained,  and other good and valuable  consideration,  the receipt
and  sufficiency of which are hereby  acknowledged,  the parties hereto agree as
follows:

                                   ARTICLE 1

                                  DEFINED TERMS

     For  purposes  of this  Agreement and  the Schedules to this Agreement, the
following terms have the meanings specified:

     "AAA RULES" shall  have the  meaning  set forth  in Section 7.05(b) of this
Agreement.

     "ACCOUNTING ARBITRATOR" shall have the meaning set forth in Section 3.02(b)
of this Agreement.

     "ADMINISTRATIVE FEES" or "ADMINISTRATIVE FEE" shall  have  the meaning  set
forth in Section 2.01(d) of this Agreement.

     "AGREEMENT" shall  have  the  meaning  set  forth in the  Preamble to  this
Agreement.

     "ANCILLARY DOCUMENTS" shall have the meaning set forth  in the  Recitals to
this Agreement.

     "ASSETS"  shall  have  the  meaning set  forth in  Section 2.01(b) of  this
Agreement.

     "ASSOCIATED INDEMNIFIED  PARTIES"  shall  have  the  meaning  set  forth in
Section 7.01 of this Agreement.

     "AUTHORIZED REPRESENTATIVES"  shall  have the  meaning set forth in Section
13.03 of this Agreement.

     "BINDING PROVISIONS"  shall  have  the meaning set forth in the Recitals to
to this Agreement.

     "BUSINESS" shall  mean the Core  Operations and  Trading Operations of SRE,
wherever its operations are conducted.

     "CAPITAL ACCOUNT" means, for purposes of Section 3.01 and other  provisions
of this  Agreement  and the  Ancillary  Documents,  the capital  accounts of the
Members derived by generally accepted accounting principles consistently applied
by SRE, as  maintained  on a "book"  basis (as opposed to any tax basis  capital
account),  which  includes  the  initial  investments  of the  Members  and  the
subsequent activities of SRE from and after such investments.

     "CAPITAL VIG" shall have the meaning set  forth in  Section 3.01(b) of this
Agreement.

     "CTU" shall have the meaning set forth in Section 5.03 of this Agreement.

     "CLOSING" shall  have  the  meaning  set  forth  in  Section 11.01 of  this
Agreement.

     "CLOSING DATE" shall have the meaning set  forth in  Section 11.01 of  this
Agreement.

                                       3


<PAGE>

     "COBANK CREDIT FACILITY"  means  that certain Credit Agreement dated August
16, 2000 as amended by First  Amendment  to Credit  Agreement  dated  August 15,
2001, by Second  Amendment to Credit  Agreement  dated August 14, 2002, by Third
Amendment to Credit  Agreement  dated August 13,  2003,  by Fourth  Amendment to
Credit  Agreement  dated  November  12, 2003,  and by Fifth  Amendment to Credit
Agreement  dated  January  30,  2004,  by and  between  SRE  and  the  financial
institutions  from time to time party  thereto and CoBank ACB in its capacity as
agent for the Banks as  Administrative  Agent, (as such terms are defined in the
CoBank Credit Facility).

     "CODE" means the  Internal  Revenue  Code  of  1986, as  amended,  and  any
successor  thereto.  Any reference to specific  Sections of the Code shall be to
the Section as it now exists and to any successor provision.

     "CONFIDENTIAL INFORMATION" shall  have  the  meaning set  forth in  Section
13.03 of this Agreement.

     "CONSENTS" shall have the  meaning  set  forth  in  Section  9.02  of  this
Agreement.

     "CORE OPERATIONS" means the various core utility operations SRE conducts on
behalf  of its  Members,  including  but not  limited  to joint  and  economical
dispatch of the combined generation  resources of its Members to optimally serve
the native  load of each,  marketing  and  selling to third  parties  the excess
generation of its Members not used to serve Members' native load customers,  and
purchase and brokering of energy from third parties for least cost supply to its
Members to serve  their  native  load  customers,  and  related  services as are
performed by SRE.

     "EFFECTIVE DATE" shall have the meaning set forth in the  Preamble to  this
Agreement.

     "ESTIMATED EXECUTION DATE MP CAPITAL ACCOUNT" has the meaning  set forth in
Section 3.01(a) of this Agreement.

     "EXCLUSIVE MEMBER SALES"  are  capacity  and energy  sales  contracts  that
Members have  entered  into prior to becoming SRE Members,  or direct sales by a
Member to another  Member or any Third Party that have been  approved by the SRE
Board of Governors.

     "EXCLUSIVE PURCHASE" is a purchase that flows  directly to a  specific  SRE
Member.

     "EXECUTION DATE" shall  have  the meaning set forth in the Recitals to this
Agreement.

     "EXECUTION DATE MP CAPITAL ACCOUNT"  has  the  meaning set forth in Section
3.01(b) of this Agreement.

     "EXECUTION DATE MP CAPITAL ACCOUNT DISTRIBUTION" shall have the meaning set
forth in Section 3.01(a) of this Agreement.

     "FERC" means the Federal Energy  Regulatory  Commission, an  agency of  the
United States government.

     "FERC APPROVAL" shall have the meaning set forth in  the  Recitals to  this
Agreement.

                                       4


<PAGE>

     "FERC FILING" shall have  the meaning  set forth in  Section 6.05  of  this
Agreement.

     "FERC ORDER"  shall  have the  meaning  set forth  in Section 6.05 of  this
Agreement.

     "GAC" shall have the meaning set forth in Section 5.03 of this Agreement.

     "GRE" shall have the meaning set forth in the Preamble to this Agreement.

     "GRE ATTORNEY FEES" shall have the meaning set forth in  Section 7.01(e) of
this Agreement.

     "GRE INDEMNIFIED PARTY" or "GRE INDEMNIFIED PARTIES" shall have the meaning
set forth in Section 7.04(a) of this Agreement.

     "GOVERNMENTAL BODY" means any:

            (i)   nation,  state, county, city, town, village, district or other
     jurisdiction of any nature;

            (ii)  federal, state, local, municipal, foreign or other government;

            (iii) governmental  or  quasi-governmental authority of  any  nature
     (including any governmental agency, branch, board, commission,  department,
     instrumentality, office or other entity, and any court or other tribunal);

            (iv)  multinational organization or body; and/or

            (v)   body exercising,  or  entitled  or purporting to exercise, any
     administrative, executive,  judicial,  legislative,  police,  regulatory or
     taxing authority or power of any nature.

     The foregoing definition of  Governmental Body  does not and shall  not  be
     deemed to include MAPP or MAIN.

     "IMO" means Ontario Independent Market Operator.

     "INDEMNIFIED PARTY" or  "INDEMNIFYING PARTY"  shall  have  the  meaning set
forth in Section 7.04(c) of this Agreement.

     "INTERIM AGREEMENT" shall have the  meaning set  forth in  the Recitals  to
this Agreement.

     "INTERIM PERIOD" shall mean the period commencing November 1, 2003, through
the Execution Date.

     "JOINT REPORTING TRANSMISSION"  means  the MAPP firm  transmission  service
required by the MAPP reliability handbook rules to support exchanges of capacity
and  energy  between  MP and GRE  during  such time as SRE is  engaged  in joint
reporting of load and capability for MP and GRE.

                                       5


<PAGE>

     "KENDALL COUNTY" means the Kendall  County, Illinois  Unit No. 3 generator,
from which RREC purchases and remarkets power on the wholesale market.

     "LOSS" or "LOSSES" shall have the meaning set forth in Section 7.01 of this
Agreement.

     "MAIN" means MidAmerica Interconnected Network.

     "MAPP" means the Mid-Continent Area Power Pool.

     "MISO" means the Midwest Independent System Operator, Inc., a FERC approved
regional transmission organization.

     "MLLCA" means the Minnesota Limited Liability  Company Act, Chapter 322B of
the Minnesota Statutes.

     "MP" shall have the meaning set forth in the Preamble to this Agreement.

     "MP-GRE BLOCK A AND B AGREEMENTS" means the Block A and Block B Transaction
and Confirmation Agreements dated August 28, 2003 between MP and GRE.

     "MP INDEMNIFIED PARTY" or "MP  INDEMNIFIED PARTIES" shall  have the meaning
set forth in Section 7.04(b) of this Agreement.

     "MP LEAST COST  SUPPLY"  means such  MP  transactions  for  power,  energy,
transmission  and  financial  products  entered  into for  supply of its  native
utility end use load obligations.

     "MP REPRESENTATIVE" shall have the meaning set forth in Section 13.04(b) of
this Agreement.

     "MP WITHDRAWAL" shall have the meaning set  forth in the  Recitals  to this
Agreement.

     "MPUC" shall mean the Minnesota Public Utilities  Commission, a  regulatory
political subdivision of the State of Minnesota.

     "MANAGEMENT EMPLOYEES" shall have the meaning set forth  in Section 4.01 of
this Agreement.

     "MARGIN AGREEMENT" means that certain  Margin Agreement  between MP and GRE
dated February 22, 2001.

     "MEMBER" or "MEMBERS" shall have the  meaning set  forth in the Recitals to
this Agreement.

     "MEMBER CONTROL AGREEMENT" shall have the meaning set forth in the Recitals
to this Agreement.

     "MEMBERSHIP INTEREST PAYMENT"  shall have  the meaning set forth in Section
2.02(b) of this Agreement.

                                       6


<PAGE>

     "MEMBERSHIP INTEREST TRANSFER ORDER" shall  have the  meaning  set forth in
Section 6.05(i) of this Agreement.

     "MEMBERSHIP  INTEREST"  or  "MEMBERSHIP  INTERESTS"  shall mean the  entire
membership  interest of MP in SRE, as that term is
defined in Minn. Stat.ss. 322B.03 subd. 31 (2003).

     "NET INCOME" and "NET LOSSES" means, for each taxable year or other period,
an amount  equal to SRE's  taxable  income or loss,  as the case may be, for the
year or other period,  determined in accordance  with Section 703(a) of the Code
(including all items of income,  gain,  loss or deduction  required to be stated
separately under Section 702(a) of the Code), with the following adjustments:

            (1)   Any income of SRE that is exempt from  federal income tax  and
     not otherwise taken into account in computing Net Income or Net Losses will
     be added to taxable income or shall reduce a loss;

            (2)   Any expenditures of SRE described in Code Section 705(a)(2)(B)
     or treated as Section 705(a)(2)(B) expenditures under  Treasury Regulations
     Section 1.704-1(b)(2)(iv)(i), and  not  otherwise  taken  into  account  in
     computing profits or  losses, will be  subtracted  from taxable  income  or
     loss;

            (3)   Any items which are  specially allocated to a Member of SRE as
     required by applicable provisions of the Code, will not affect calculations
     of Net Income or Net Losses; and

            (4)   For this purpose, any deduction for a loss on sale or exchange
     of SRE property which is disallowed to SRE under  Code Section 267(a)(1) or
     Section 707(b) shall be treated as a Code Section 705(a)(2)(B) expenditure.

     "ORDER" means an action or decision of  the Governmental  Body as to  which
(i) no request for a stay is pending, no stay is in effect, and any deadline for
filing such request that may be  designated  by any  applicable  law has passed,
(ii) no petition for rehearing or  reconsideration  or application for review is
pending and the time for the filing of such petition or application  has passed,
(iii)  the  Governmental  Body  does not  have  the  action  or  decision  under
reconsideration  on its own motion and the time within  which it may effect such
reconsideration  has passed, and (iv) no judicial appeal is pending or in effect
and any deadline for filing any such appeal that may be designated by statute or
rule has passed.

     "OVERLAP PERIOD" shall have the  meaning set  forth in  Section 13.04(b) of
this Agreement.

     "POWER TRADING TRANSACTION" means power Trading Operations conducted by SRE
with or between  non-Member Third Parties (i.e., not involving any Member),  but
excluding Core Operations and any Exclusive Member Sales or Exclusive Purchases.

     "PROCEEDING"  means  any  claim, suit,  litigation,  arbitration,  hearing,
audit,   investigation,   Order,  or  other  action  (whether  civil,  criminal,
administrative or investigative)  noticed,  commenced,  brought,  conducted,  or
heard by or before, or otherwise involving, any Governmental Body or arbitrator.

                                       7

<PAGE>

     "RREC" means Rainy River Energy Corporation, a Minnesota  corporation  that
is a subsidiary of MP.

     "REQUIRED NOTICE INFORMATION" shall have the  meaning set  forth in Section
7.04(a) of this Agreement.

     "RETAINED MP CAPITAL ACCOUNT" shall have the  meaning set forth in  Section
3.01(b) of this Agreement.

     "SRE" shall have the meaning set forth in the Recitals to this Agreement.

     "STATEMENT OF EXECUTION DATE MP CAPITAL ACCOUNT" shall have the meaning set
forth in Section 3.02(a) of this Agreement.

     "TANGIBLE ASSETS" shall have the meaning set forth in Section 2.01(b)(i) of
this Agreement.

     "TAX" or "TAXES" means any federal, state, local  or foreign  income, gross
receipts,  license, payroll,  employment,  excise, severance, stamp, occupation,
premium,  windfall profits,  environmental  (including taxes under Code ss.59A),
customs duties, capital stock, franchise, profits, withholding,  social security
(or similar), unemployment, disability, real property, personal property, sales,
use,  transfer,  registration,  value  added,  alternative  or  add-on  minimum,
estimated, or other tax of any kind whatsoever,  including any interest, penalty
or addition thereto, whether disputed or not.

     "TAX MATTER" shall have  the  meaning set forth in Section 13.04(b) of this
Agreement.

     "TAX RETURN" means any  return,  declaration, report, claim for  refund, or
information  return or statement  relating to Taxes,  including  any schedule or
attachment thereto, and including any amendment thereof.

     "THIRD PARTY" or "THIRD PARTIES" shall  mean any  person or  entity that is
not a party to this Agreement, other than SRE.

     "TRADING OPERATIONS" means the various wholesale  power trading  operations
SRE  conducts  pursuant  to its  market-based  rate  tariff  on file at the U.S.
Federal Energy Regulatory Commission, including but not limited to Power Trading
Transactions,  wholesale  power trading,  engaging in the physical and financial
trading of electric power and energy,  gas trading,  hedging,  including but not
limited to foreign  exchange  hedges,  and trading  transmission  service  under
separately tagged and segregated portfolio  operations,  other than trading done
for Core Operations.

     "WITHDRAWAL AGREEMENT" shall have the meaning set forth  in the Recitals to
this Agreement.

     "WITHDRAWAL EFFECTIVE TIME"  shall  have  the  meaning  set  forth  in  the
Recitals to this Agreement.

                                       8


<PAGE>

     "WITHDRAWAL PAYMENT" shall have the meaning set forth in Section 2.01(c) of
this Agreement.

     "WITHDRAWAL SETTLEMENT" shall have the meaning set forth in Section 2.01(c)
of this Agreement.

                                   ARTICLE 2

         TRANSFER OF MP FINANCIAL RIGHTS AND CERTAIN BUSINESS ASSETS; MP
                        WITHDRAWAL PAYMENTS; WITHDRAWAL

     2.01   ASSIGNMENT OF MP  FINANCIAL  RIGHTS  AND  CERTAIN  BUSINESS  ASSETS.
Effective at and upon the Execution Date:

            (a)   ASSIGNMENT OF FINANCIAL RIGHTS. Except as contemplated by  the
     terms of this  Agreement,  MP hereby  assigns to GRE, free and clear of all
     liens, claims,  encumbrances,  restrictions and security interests, any and
     all   financial   rights  in  the  profits  and  losses  of  SRE,  and  any
     distributions  thereof,  to which MP would  otherwise be entitled under the
     Member Control  Agreement or the MLLCA.  This assignment by MP shall (i) be
     governed  by  Section  322B.31  of the  MLLCA,  and (ii) serve to amend the
     following   provisions  of  the  Member  Control  Agreement:   Section  4.3
     (Allocations  of  Net  Income  and  Net  Losses),  Section  4.5  (Mandatory
     Distributions),   Section  4.6  (Distributions  in  Kind),  Section  4.7(c)
     (Qualified  Income  Offset),  Section 4.9  (Discretionary  Adjustment)  and
     Section 4.10  (Special  Allocations  to Founding  Members - New Member Fee;
     Distributions).  Based on and in clarification of the foregoing,  except as
     provided in this Agreement, upon and after the Execution Date MP shall:

                        (A)   have no further  right  under the  Member  Control
                  Agreement to (i) any further  allocations of net income or net
                  losses,  (ii)  mandatory or  permissive  distributions,  (iii)
                  distributions in kind, or (iv) special  allocations  described
                  in Section 4.10 of the Member Control Agreement.

                        (B)   not be (1) allocated any adjustment, allocation or
                  distribution described in Section 4.7(c) of the Member Control
                  Agreement,  or (2)  subject  to any  discretionary  adjustment
                  described in Section 4.9 of the Member Control  Agreement,  it
                  being  agreed that the matters  which take effect  pursuant to
                  and on the Execution Date,  including  without  limitation the
                  termination  of MP's credit support for the operations of SRE,
                  have  and  reflect  the  substantial  economic  effect  of the
                  respective economic interests of MP and GRE from and after the
                  Execution   Date  and  are   intended  to  conform   with  the
                  requirements  of  Code  Section  704(b)  and  the  regulations
                  thereunder. As a consequence of the foregoing, with respect to
                  any and all  allocations of any economic  activity of SRE upon
                  and after  the  Execution  Date,  MP shall be  allocated  zero
                  percent  (0%) and GRE shall be allocated  one hundred  percent
                  (100%).

                                       9


<PAGE>

            (b)   ASSIGNMENT OF CERTAIN  BUSINESS  ASSETS.  MP  hereby  assigns,
     relinquishes and transfers any and all right,  title and interest in and to
     the assets set forth below to GRE, or its designee,  on the Execution  Date
     (the "ASSETS").

                  (i)   All  tangible  property  of  MP used  presently  in  the
            Business (the "TANGIBLE ASSETS").

                  (ii)  All rights to  use  and  all  copies of (i)  the  ZaiNet
            software that are conferred by the Sungard  (Caminus)  license,  and
            (ii)  the  maintenance  and  other  agreements  attached  hereto  as
            SCHEDULE  2.01(b)(ii),  pursuant  to the ZaiNet  Novation  Agreement
            substantially in the form attached hereto as EXHIBIT A.

                  (iii) Any software (other than the ZaiNet software  referenced
            above)  developed or modified by SRE and/or MP for use by SRE as set
            forth on SCHEDULE  2.01(b)(iii).  This  software  includes,  without
            limitation,   all  source   code,   object  code  other   associated
            documentation,  and new  versions,  revisions,  updates and upgrades
            currently in the possession of MP;  PROVIDED,  HOWEVER,  that at the
            Closing   GRE  shall   grant  to  MP  a   perpetual,   royalty-free,
            non-transferable  license to use and/or modify such software for use
            in its core least cost supply  license  and any  Trading  Operations
            post-Closing.

                  (iv)  The  telephone,  servers,  office  furniture  and  other
            personal  property,  and the leased Dell personal computer equipment
            and associated software described on SCHEDULE 2.01(b)(iv) hereto.

                  (v)   Copies of all data used in the  Business that is in MP's
            control,  including  but not limited to data  contained in MP's data
            warehouse.  MP shall  have the right to  retain  copies of such data
            without restriction, except as set forth herein.

            The Assets shall be  relinquished  and  transferred to  GRE  or  its
     designee pursuant to a bill of relinquishment and transfer substantially in
     the form of EXHIBIT B hereto.

            (c)   PAYMENT OF WITHDRAWAL  SETTLEMENT.  In  full  settlement  (the
     "WITHDRAWAL  SETTLEMENT") of MP's termination of financial participation in
     SRE and as an advance  payment for MP's withdrawal as a party to the Member
     Control  Agreement at the Withdrawal  Effective  Time, MP has, on or before
     the Execution  Date,  remitted a payment to GRE of One Million Nine Hundred
     Seventy-Nine Thousand Dollars ($1,979,000) (the "WITHDRAWAL PAYMENT").

            (d)   ADMINISTRATIVE  FEES. On or  within  five (5) days  after  the
     Execution Date, MP shall remit to GRE an administrative fee of $100,000. In
     the event that the FERC Order is not  received on or before  April 1, 2004,
     MP shall remit to GRE an additional  administrative  fee(s) of $200,000 for
     the month of April,  2004,  and each  succeeding  month  thereafter  to the
     Closing or  termination  of this  Agreement,  which  payments shall be made
     respectively  on April 30, 2004,  and the last day of each such  succeeding
     month  thereafter,  unless the Closing or a termination  of this  Agreement
     occurs within or before any of such months. If the Closing or a termination
     of this Agreement occurs in any of

                                       10


<PAGE>

     the months set forth  above,  the  administrative  fee for (i) the month in
     which the Closing or a  termination  occurs shall be prorated by the number
     of days in the month through the Closing Date or the termination  date (for
     example,  if the Closing Date is April 16, 2004, the administrative fee for
     the  month  will be  (16/30 X  $150,000)),  and (ii) all  months  after the
     Closing Date or the termination  date shall not become due (any amount that
     accrues  pursuant  to  the  above  shall  be  referred  to  herein  as  the
     "ADMINISTRATIVE  FEES" and any full or partial payment relating to a single
     month is an "ADMINISTRATIVE FEE").

     2.02   WITHDRAWAL.

            (a)   MP WITHDRAWAL. At and  upon  the Withdrawal Effective Time, MP
     shall be deemed to have withdrawn from the Member Control  Agreement.  As a
     consequence,  MP shall no  longer  be a Member  of SRE or have any  further
     rights or  obligations  under the  Member  Control  Agreement  or any other
     governing  document,  or agreement  arising from,  in  connection  with, or
     pursuant to the  organization,  operation or continuing  operations of SRE,
     except as set forth herein and/or  pursuant to the Ancillary  Documents and
     the Binding Provisions of the Interim Agreement.

            (b)   RELINQUISHMENT AND  TRANSFER OF MP MEMBERSHIP INTEREST. At and
     upon the  Closing,  for a payment by GRE to MP of One  Million  Dollars ($1
     million),  plus the Capital Vig (the  "MEMBERSHIP  INTEREST  PAYMENT")  and
     other  good and  valuable  consideration,  on the  Closing  Date,  MP shall
     relinquish and transfer to GRE the  Membership  Interest of MP in SRE, free
     and clear of all liens,  claims,  encumbrances,  restrictions  and security
     interests  pursuant  to  a  Relinquishment  and  Assignment  of  Membership
     Interest substantially in the form of EXHIBIT C hereto.

                                   ARTICLE 3

                RECONCILIATION AND PAYMENT OF MP CAPITAL ACCOUNT

     3.01   ESTIMATED EXECUTION DATE MP CAPITAL ACCOUNT.

            (a)   ESTIMATION AND PARTIAL DISTRIBUTION OF THE MP CAPITAL ACCOUNT.
     GRE has caused SRE to deliver to MP a statement of the estimated MP Capital
     Account,  which  estimate was  determined  on a basis  consistent  with the
     methodology to be employed in the  calculation of the Capital Account of MP
     pursuant to Section 3.01(c) below (such estimate,  the "ESTIMATED EXECUTION
     DATE MP CAPITAL  ACCOUNT").  GRE and MP agree that the Estimated  Execution
     Date MP Capital Account amount is  $12,406,996.  On the Execution Date, GRE
     shall cause SRE to remit $10 million to MP as a partial  distribution  from
     the  Capital  Account  of  MP  (the  "EXECUTION  DATE  MP  CAPITAL  ACCOUNT
     DISTRIBUTION").

            (b)   EXECUTION  DATE MP CAPITAL  ACCOUNT  AND  RETAINED  MP CAPITAL
     ACCOUNT.  Subsequent to the Execution Date, the Estimated Execution Date MP
     Capital  Account shall be  reconciled to the actual  balance of the Capital
     Account of MP (the "EXECUTION DATE MP CAPITAL  ACCOUNT") in accordance with
     Section 3.02 below.  The  difference  between the Execution Date MP Capital
     Account and the sum of: (x) $10 million

                                       11


<PAGE>

     Execution  Date MP Capital  Account  Distribution,  and (y) the  Membership
     Interest  Payment  (less the Capital Vig  thereon)  (such  difference,  the
     "RETAINED MP CAPITAL ACCOUNT") will be remitted to MP at the Closing, along
     with interest at an annual rate of 1.25%  thereon from the  Execution  Date
     through the Closing Date (the  "CAPITAL  VIG"),  pursuant to receipt of the
     FERC Order (defined in Section 6.05(ii)). The parties acknowledge and agree
     that,  at and upon the  Closing,  $1 million of the Capital  Account of MP,
     representing  the initial  capital  contribution of MP in SRE, shall be (1)
     retained in SRE,  and (2) will  become  part of the GRE Capital  Account in
     SRE.

            (c)   COMPUTATIONS FOR MP CAPITAL ACCOUNT. For purposes of computing
     (i) the Estimated Execution Date MP Capital Account, and (ii) the Execution
     Date MP Capital  Account,  each such capital account shall be determined in
     accordance  with the book value of such MP Capital  Account  (as opposed to
     the Tax basis Capital  Account of MP)  determined  in  accordance  with the
     generally  accepted  accounting  principles  of SRE  consistently  applied,
     except  that MP and GRE  have  agreed  to  amend  hereby  such  controlling
     provisions  of the Member  Control  Agreement in order to  incorporate  the
     following deviations from prior practice.  In furtherance of the foregoing,
     GRE   shall   cause   SRE  to   adopt   and   incorporate   the   following
     accounting/allocation principles into the SRE accounting for its operations
     and its Capital  Accounts  for the  period(s)  commencing  November 1, 2003
     through the Execution Date:

                  (i)   All trading gross margin (gross  margin  or  gross  loss
            from  marketing   activities)  as  determined  in  accordance   with
            generally accepted accounting principles consistently applied by SRE
            arising from or incident to Power Trading Transactions (i) initiated
            on or after November 1, 2003, and (ii) those  initiated prior to and
            delivered  on or after  November 1, 2003,  in each case  through the
            Execution  Date,  shall be allocated in their entirety (100%) to GRE
            and no allocation shall be made to MP; and

                  (ii)  All core  gross  margin  (gross  margin  from  marketing
            activities)  as  determined in accordance  with  generally  accepted
            accounting  principles  consistently  applied by SRE arising from or
            incident to Core Operations  prior to and through the Execution Date
            shall be allocated equally (50%/50%) to MP and GRE; and

                  (iii) The  operating   expenses  and  costs  arising  from  or
            incident to Core Operations and Power Trading  Transactions  for the
            period (A) commencing  November 1, 2003,  through December 31, 2003,
            shall be allocated equally (50%/50%) to MP and GRE, except that MAPP
            and MAIN fees  shall be  allocated  in  accordance  with  historical
            practices,  and (B)  commencing  January 1, 2004,  to the  Execution
            Date, the  allocation of such operating  expenses and costs shall be
            wholly (100%) to GRE, and no allocation  shall be made to MP, except
            that (i) MAPP and MAIN fees shall be  allocated in  accordance  with
            historical  practices,  and (ii) Three Hundred  Twenty Five Thousand
            ($325,000)  shall be allocated to MP for payment of Core  Operations
            expenses for January, 2004; and

                                       12


<PAGE>

                  (iv)  All credit facility fees and interest expense and gains/
            losses on foreign  currency  allocations  relating to Power  Trading
            Transactions for the period commencing November 1, 2003, through the
            Execution  Date shall be allocated in their  entirety  (100%) to GRE
            and no allocation shall be made to MP; and

                  (v)   All interest income for the  period  commencing November
            1, 2003,  through  the  Execution  Date shall be  allocated  equally
            (50%/50%) to MP and GRE; and

                  (vi)  Any adjustments,  mark-to-market adjustments, and normal
            accounting adjustments made in the ordinary course of business shall
            be allocated (A) equally  (50%/50%) to MP and GRE if such adjustment
            relates to the period prior to November 1, 2003,  or (B)  consistent
            with Sections  3.01(c)  (i)-(v) of this Agreement if such adjustment
            relates to the period from and after  November  1, 2003  through the
            Execution Date; and

                  (vii) In computation  of  any  of  the  foregoing, or  the  MP
            Capital  Account   generally,   all  SRE  Management   Employee  and
            non-Management  Employee  severance  pay or other  such  termination
            costs  (including  non-cash  benefits)  shall be  allocated in their
            entirety (100%) to GRE and no allocation shall be made to MP.

     3.02   MP CAPITAL ACCOUNT RECONCILIATION.

            (a)   STATEMENT OF EXECUTION  DATE MP CAPITAL  ACCOUNT.  As soon  as
     practicable,  and in no  event  later  than  twenty  (20)  days  after  the
     Execution  Date,  GRE shall  cause SRE to prepare and provide to MP a final
     calculation of the Execution Date MP Capital  Account  determined as of the
     Execution  Date (the  "Statement  of Execution  Date MP Capital  Account"),
     which  Statement of Execution Date MP Capital  Account shall be prepared in
     accordance with generally accepted accounting  principles and procedures of
     SRE consistently  applied,  except for the adjustments  required by Section
     3.01(c)  above.  The  reasonable  fees,  costs and  expenses of Third Party
     professionals  (but not the internal costs to SRE or GRE)  associated  with
     the preparation of the Statement of Execution Date MP Capital Account shall
     be borne one hundred percent (100%) by MP. MP shall have concurrent  access
     to  any  of  the  work  papers  and  source  documentation  of  SRE  or its
     professionals  that are utilized in any way in the  compilation  of data or
     preparation of the Statement of Execution Date MP Capital  Account.  Within
     ten (10) days  after its  receipt of the  Statement  of  Execution  Date MP
     Capital Account,  MP shall provide SRE with notice of any disagreement with
     the  preparation  of  or  the  calculations  underlying  the  Statement  of
     Execution  Date MP Capital  Account,  specifying in reasonable  detail such
     disagreement.  If within such ten (10) day period MP makes no  objection to
     the Statement of Execution Date MP Capital  Account,  then the Statement of
     Execution  Date MP Capital  Account shall become final and binding upon the
     parties and the amount  therein shall state the  Execution  Date MP Capital
     Account.

            (b)   DISPUTE  RESOLUTION.  If  MP   objects  to  the  Statement  of
     Execution  Date MP  Capital  Account in any  manner,  then GRE and MP shall
     negotiate in good faith for a

                                       13


<PAGE>

     period of ten (10) days from and after the date of the MP  objection(s)  to
     resolve such  objection(s).  If the parties fail to agree on a Statement of
     Execution Date MP Capital  Account within the  aforementioned  ten (10) day
     period,  then, as to any matters  still in dispute,  MP and GRE shall refer
     the matter to  arbitration  conducted by a mutually  acceptable  accounting
     firm  independent  of GRE and MP (such  firm to serve  as  arbitrator  (the
     "ACCOUNTING ARBITRATOR") for the sole purpose of this Section 3.02(b)). The
     Accounting  Arbitrator  so  selected  will  consider  only those  items and
     amounts set forth in the Statement of Execution Date MP Capital  Account as
     to which MP and GRE have disagreed within the time periods and on the terms
     specified  above and must resolve the matter in  accordance  with the terms
     and provisions of this Agreement. In submitting a dispute to the Accounting
     Arbitrator,  each of MP and GRE shall  concurrently  furnish,  at their own
     respective expense,  to the Accounting  Arbitrator and the other party such
     documents and  information as the Accounting  Arbitrator may request.  Each
     party may also furnish to the Accounting  Arbitrator such other information
     and documents as it deems relevant,  with copies of such submission and all
     such documents and information being concurrently given to the other party.
     Neither party shall have or conduct any  communication,  either  written or
     oral, with the Accounting Arbitrator without the other party, respectively,
     either  being  present  or  receiving  a  concurrent  copy  of any  written
     communication.   The   Accounting   Arbitrator  may  conduct  a  conference
     concerning the objections  and  disagreements  between MP and GRE, at which
     conference  each party shall have the right to (i)  present its  documents,
     materials  and  other  evidence  (previously  provided  to  the  Accounting
     Arbitrator  and the  other  party),  and  (ii)  have  present  its or their
     advisors,  accountants,  counsel and other representatives.  The Accounting
     Arbitrator  shall  resolve  each item of  disagreement  based solely on the
     presentations  and  supporting  material  provided  by the  parties and not
     pursuant to any  independent  review  (the  foregoing,  however,  shall not
     preclude the Accounting  Arbitrator from  independent  research of facts or
     determining  proper  application  of  SRE  generally  accepted   accounting
     principles  consistently  applied  or the terms of this  Agreement  and the
     Ancillary  Documents  with respect to the subject  matter of the objections
     and  disagreement  between the parties).  The Accounting  Arbitrator  shall
     issue a detailed written report that sets forth the resolution of all items
     in dispute and that contains, as applicable, a final Statement of Execution
     Date MP Capital Account  according to the dispute(s)  noticed.  Such report
     shall state the Execution Date MP Capital  Account and be final and binding
     upon MP and GRE.  The  Accounting  Arbitrator  may  choose to  circulate  a
     preliminary report(s) for the comment of the parties. The fees and expenses
     of the Accounting  Arbitrator incurred in connection with the determination
     of the disputed items by the Accounting  Arbitrator  shall be borne equally
     by MP and GRE.  MP and GRE  shall,  and GRE shall  cause SRE to,  cooperate
     fully with the  Accounting  Arbitrator and respond on a timely basis to all
     requests for  information  or access to documents or personnel  made by the
     Accounting  Arbitrator  or by MP, all with the intent to fairly and in good
     faith resolve all disputes  relating to the Statement of Execution  Date MP
     Capital Account as promptly as reasonably practicable.

                                       14


<PAGE>

                             CONFIDENTIAL TREATMENT

                                    ARTICLE 4

                                    EMPLOYEES

     4.01   [   *   ]


     4.02   [   *   ]


     4.03   [   *   ]


     4.04   [   *   ]




*  TEXT HAS BEEN OMITTED  PURSUANT TO A REQUEST FOR  CONFIDENTIAL TREATMENT  AND
   HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.





                                    ARTICLE 5

                        OPERATION OF SRE PRIOR TO CLOSING

     For the period from November 1, 2003 through the dates indicated below, the
parties agree to operate SRE as set forth in this Article 5.

     5.01   MP CREDIT SUPPORT OF SRE. MP credit support of SRE  cannot  be  used
for (i) Trading Operations  transactions initiated after October 31, 2003, where
delivery  occurs  after  the  Execution  Date,  nor  (ii)  for  Core  Operations
transactions  initiated  after the Execution  Date. MP will continue to maintain
existing credit support and provide new credit support,  on the same basis as MP
has  provided  credit  support  in the past,  until the  Execution  Date  unless
otherwise  agreed by the parties and SRE.  As set forth on SCHEDULE  5.01,  MP's
credit  support  consists of  guarantees  to Third  Parties and support of SRE's
existing Co-Bank Credit  Facility.  MP's credit exposure  continues  through the
cash settlement of all transactions for which it has provided credit support. MP
and GRE have  taken  all  steps  necessary  to assure  that the  Co-Bank  Credit
Facility  will remain in place until June 30, 2004,  although the guaranty of MP
has been released.

     5.02 RISK  MANAGEMENT. Until  the  Execution  Date, SRE  will  conduct  its
Business  within the risk  limits  established  by the SRE board  resolution  of
November 12, 2003,  which  includes a $2.5 million for stress limit,  and within
the $5.0 million stop-loss limit, and any

                                       15


<PAGE>

additional  policies as described in the SRE board minutes  dated  September 24,
2003, each as set forth in SCHEDULE 5.02.

     5.03   GENERATION AVAILABILITY CREDIT ("GAC") AND  COMBUSTION  TURBINE  USE
("CTU").  GAC shall be settled  with no payment to either  party for all periods
ending  October  31,  2003.  SRE  shall  not use or apply  the GAC from the time
November 1, 2003 through  Closing.  The  methodology  developed to determine CTU
during the month of October,  2003, as shown in SCHEDULE 5.03, will also be used
to determine CTU for the Interim  Period.  GRE shall continue to promptly notify
MP of the CTU  amount on the first day of the next  month and MP shall  promptly
pay the CTU amount.

                                   ARTICLE 6

            CONCURRENT EXECUTION DATE AND CLOSING DATE AGREEMENTS AND
                                  COOPERATION

     6.01   EXECUTION DATE AND CLOSING DATE AGREEMENTS. On the Execution Date MP
and GRE shall enter into the Core Consulting Services Agreement substantially in
the form of EXHIBIT D hereto, whereby GRE shall provide transitional  consulting
services to MP. Promptly  following the Closing,  MP shall,  and GRE shall cause
SRE to, enter into the Support Services  Agreement  substantially in the form of
EXHIBIT E hereto,  whereby MP shall provide transitional  services to SRE, which
shall terminate the existing  administrative  services  agreement between MP and
SRE, the invoiced  costs of which shall not exceed  $25,000 per month  beginning
February 1, 2004.

     6.02   COOPERATION ON CERTAIN OPERATIONAL MATTERS. The parties have reached
an  understanding  and  agreement  with  respect  to the  matters  set  forth in
SCHEDULES 6.02 (a)-(e), as described below, as set forth in each such schedule.

     SCHEDULE 6.02(a)  Operational Matters: for International Falls,
                          GENSYS and SMMPA, and Least Cost Supply
     SCHEDULE 6.02(b)  Joint Reporting
     SCHEDULE 6.02(c)  Mutual Generator Outage Protection
     SCHEDULE 6.02(d)  Kendall Brokering Agreement
     SCHEDULE 6.02(e)  Ancillary Agreements
     SCHEDULE 6.02(f)  MP-GRE Capacity Reservation and Option
                          Agreements

     6.03   TRANSMISSION MATTERS. MP and GRE agree that the current transmission
positions  and  requests  now  held by SRE  will be (i)  retained  by SRE,  (ii)
immediately  assigned to MP, (iii) immediately  assigned to RREC, or (iv) remain
conditionally with SRE with some future predetermined disposition, as listed and
described in SCHEDULE  6.03.  The  contracts to  effectuate  these  transmission
assignments  are attached in EXHIBIT F and GRE shall cause SRE to execute  these
contracts on the Execution  Date and promptly file with MISO and any  regulatory
agencies, as may be required. In the event that the FERC Order is not issued, MP
shall cause the transmission assignments to be reassigned to SRE.

                                       16


<PAGE>

     6.04   TRANSFER OF DATA. MP and GRE shall, promptly following the Execution
Date,  effectuate the transfer to SRE of all copies of data used in the Business
that is in MP's control  including,  but not limited to, data  contained in MP's
data  warehouse or MP shall retain such data  pending  future  transfer at SRE's
request,  subject  to the data  retention  policy  set forth in  SCHEDULE  6.04.
Pending such transfer of data, the parties shall  mutually  cooperate to provide
SRE with the same access to the data it had in the  ordinary  course of business
prior to Closing.

     6.05   FERC FILING AND APPROVAL ORDER.  Promptly  following  the  Execution
Date, MP shall prepare and submit a statutory filing to FERC (the "FERC FILING")
which seeks authority from FERC to relinquish MP's Membership Interest to GRE in
accordance  with  Section  203  of the  Federal  Power  Act,  16  U.S.C.  824(b)
(alternatively, the "MEMBERSHIP INTEREST TRANSFER ORDER" or the "FERC ORDER").

     In the event that either MP or GRE become aware that the Membership Initial
Transfer  Order may be, or is, the subject of an  objection  and  therefore  may
result in a petition for rehearing,  the parties shall determine  whether or not
to proceed with or delay the Closing pending  resolution of the objection and/or
rehearing,  as the case may be. GRE agrees to support  such  filings at FERC and
further agrees to cooperate with MP in providing any  information  regarding SRE
and GRE in such proceedings.

     6.06   MP EXCLUSIVE PURCHASES AND SALES. From and after the Execution Date,
MP and GRE agree that (i) MP shall  assume all  obligations  and  liability  for
least cost  supply to serve its own native  load  customers,  including  but not
limited  to,  purchase of  capacity  and energy  from Third  Parties and sale of
excess MP  generation  resources not needed to serve the native load of MP, (ii)
SRE shall have no obligation or liability  for Core  Operations  with respect to
MP, (iii) MP waives its rights under the Member  Control  Agreement  for any and
all  allocations  of gains or losses of SRE arising from Core  Operations of SRE
and MP shall have no further  liability for any expenses of SRE Core Operations,
and (iv) each shall  immediately  cause SRE to designate  all MP  purchases  and
sales of capacity and energy as "Exclusive Purchase and Sales" as defined in the
SRE Rate Schedule No. 4 effective September 12, 2001 on file at FERC.

     Nothing in this section  shall alter  any pre-existing MP obligation to SRE
to fulfill any  pre-existing  SRE  obligations  to Third Parties for capacity or
energy,  including  but not  limited  to, the GENSYS and SMMPA  transactions  as
indicated in SCHEDULE 6.02(a).

                                   ARTICLE 7

                                 INDEMNIFICATION

     7.01   INDEMNIFICATION BY MP OF GRE. MP  hereby  covenants  and  agrees  to
defend,  indemnify and hold harmless GRE and SRE, and their respective  members,
officers,  directors,  employees,  affiliates,  agents,  successors  and assigns
(collectively,  the "ASSOCIATED  INDEMNIFIED PARTIES"),  from and against and in
respect of any and all losses,  costs, expenses (including reasonable attorneys'
fees and  disbursements of counsel),  liabilities,  damages,  fines,  penalties,
charges,  assessments,  judgments,  settlements,  claims,  causes of action, and
other  obligations  of any nature  whatsoever  (excluding,  however,  claims for
incidental, consequential, or special damages, including punitive damages, other
than  which  arise  from a Third  Party  claim  against

                                       17


<PAGE>

the indemnified  party  hereunder)  (individually,  a "LOSS," and  collectively,
"LOSSES")  that GRE,  SRE or their  Associated  Indemnified  Parties may suffer,
sustain,  incur or be subject to arising out of, based upon or resulting from or
on account of any of the following:

            (a)   the breach or falsity of any  representation or warranty  made
     by MP in this Agreement,  the Interim Agreement or the Ancillary Documents;
     and

            (b)   the breach of any  covenant or  agreement  made by MP in  this
     Agreement,  the Interim Agreement and/or the Ancillary  Documents (although
     the  pre-Closing  covenants  to obtain all  Consents  shall expire upon the
     Closing); and

            (c)   one-half (1/2) of expenses of  SRE (net of any Tax  benefit by
     way of deduction or deferral and  insurance  recoveries),  which arise from
     any period prior to the Execution Date,  which are (i) not accounted for in
     the  computation  of the  Execution  Date MP  Capital  Account  as  finally
     determined,  and  (ii)  not  excluded  in a  category  of  expenses  in the
     reconciliation  of the MP Capital  Account  pursuant to the  provisions  of
     Section 3.01(c) of this Agreement; and

            (d)   one-half (1/2) of any Losses (excluding severance pay or other
     such termination  costs made to a  non-Management  Employee of SRE) arising
     out of any claim(s)  arising from,  in  connection  with or incident to the
     termination   of  the   employment  of  any  SRE  employee  to  the  extent
     attributable to downsizing or  restructuring of SRE as a consequence of the
     withdrawal of MP from SRE where such  termination  occurs during the period
     from and after the Execution Date through October 31, 2004; and

            (e)   the reasonable attorneys fees and expenses incurred by GRE and
     SRE from and after  January 23, 2004  through the Closing  Date or the date
     this Agreement is terminated,  whichever date occurs earlier,  arising from
     and in  connection  with the  requirement  of the FERC Filing  described in
     Section 6.05 hereof (the "GRE ATTORNEY  FEES").  All such GRE Attorney Fees
     shall be paid by MP within fifteen (15) days of presentment by GRE.

     7.02   INDEMNIFICATION BY GRE OF MP. GRE  hereby  covenants and  agrees  to
defend,  indemnify and hold harmless MP, and its Associated Indemnified Parties,
from and against any Loss and all Losses that MP or its  Associated  Indemnified
Parties may suffer,  sustain, incur, or be subject to arising out of, based upon
or resulting from or on account of any of the following:

            (a)   the breach or falsity of any  representation or warranty  made
     by GRE in this Agreement,  the Interim Agreement or any Ancillary Document;
     and

            (b)   the breach of any covenant or agreement made by GRE, or by GRE
     on behalf of SRE,  in this  Agreement,  the Interim  Agreement,  and/or any
     Ancillary Document; and

            (c)   any SRE Losses, as defined in  the  Interim  Agreement,  which
     arise from, in connection  with or incident to (i) SRE Trading  Operations,
     including market or credit exposure,  (ii) MP credit support of the Trading
     Operations, including (x) any MP

                                       18


<PAGE>

     guaranty providing credit support to SRE's Trading  Operations,  or (y) any
     letters  of credit  issued  to  provide  credit  support  to SRE's  Trading
     Operations  under the CoBank  Credit  Facility,  and (iii) cash  collateral
     posted by SRE to support Trading  Operations,  including but not limited to
     Five Million  Dollars  ($5,000,000)  posted by SRE in deposit with American
     Electric  Power on or about December 23, 2003, and any such cash posted for
     deposit  by SRE  will not  impact  the  distribution  of cash to MP or MP's
     Capital Account; and

            (d)   any claim(s) arising from, in connection with or  incident  to
     any lease of premises to which SRE is a party or MP's guaranty thereof; and

            (e)   any claim(s) arising from, in connection  with or incident  to
     the  operations  or contracts of SRE or GRE (with respect to SRE) after the
     Execution  Date,  except  (i) for  Power  Trading  Transactions  that  were
     initiated  prior to November 1, 2003, but which are not settled until after
     the  Execution  Date,  and  (ii)  to  the  extent  of  the  indemnification
     obligation of MP described in Section 7.01(d) of this Agreement.

     7.03   PRINCIPLES REGULATING INDEMNITY RIGHTS.

            (a)   Without limiting the generality of the foregoing, with respect
     to any measurement of damages or costs or expenses owing hereunder,  either
     party shall have the right to be put in the same  financial  position as it
     would  have been had the  matter  leading  to the claim of  indemnification
     never  occurred or arose.  Each party shall be reimbursed by the other on a
     monthly basis for all liabilities  and damages  incurred and all reasonable
     costs and reasonable expenses incurred in enforcing this indemnity.

            (b)   Notwithstanding any other provision herein, either party shall
     be entitled to seek  equitable  relief with respect to any  indemnification
     claim which arises from a covenant hereof.  Each party shall use reasonable
     efforts to provide prompt notice to the other of each  indemnifiable  claim
     it believes it has suffered;  PROVIDED,  HOWEVER, no delay in providing any
     such notice shall affect its right to recover  damages or equitable  relief
     as appropriate  under this Agreement.  The foregoing  covenant shall be for
     the benefit of the parties hereto and shall not be deemed to give any Third
     Party rights under this Agreement.

            (c)   The parties understand and  agree that GRE shall  prevent  SRE
     from asserting any claim of any kind against MP and its affiliates  arising
     from, in connection with or incident to any action or omission of MP or its
     affiliates prior to the Closing Date, as a consequence of the occurrence of
     the Closing.

     7.04   PROCEDURE FOR INDEMNIFICATION.

            (a)   MP DIRECT INDEMNIFICATION OF GRE. In the event that GRE and/or
     any of its Associated Indemnified Parties (individually, a "GRE INDEMNIFIED
     PARTY" and  collectively,  the "GRE INDEMNIFIED  PARTIES")  intends to seek
     indemnification under this Agreement pursuant to the provisions of Sections
     7.01 of this  Agreement,  the GRE  Indemnified  Party shall  promptly  give
     notice  hereunder  to MP,  specifying  in such  notice,  to the extent such
     specific information is available, (i) the specific  nature of the  Loss or

                                       19


<PAGE>

     Losses to be indemnified, (ii) the amount and, as applicable, a computation
     of the amount,  of such Loss or Losses,  (iii) any and all evidence of such
     Loss or Losses, including all documents, instruments, notices and financial
     data,  in  whatever  form or  media,  sufficient  for MP to  ascertain  the
     propriety and amount of the  indemnification  claim,  and (iv) any relevant
     dates relating to the assertion,  accrual and payment of the Loss or Losses
     (collectively,  the "REQUIRED NOTICE INFORMATION").  MP shall have ten (10)
     days to consider such claim and, within such period shall either (x) object
     by written notice to the GRE Indemnified Party to the claim, in whole or in
     part, or (y) remit the undisputed  amount  requested by the GRE Indemnified
     Party.  In the  event  that the claim is  objected  to by MP in whole or in
     part,  the parties  shall  attempt to resolve  the dispute  within ten (10)
     business  days of the receipt of the MP  objection  by the GRE  Indemnified
     Party.  In the event the parties are unable to resolve the  disputed  claim
     within  such  period,   the  matter  shall  be  resolved  pursuant  to  the
     arbitration procedure set forth in Section 7.04(e) hereof.

            (b)   GRE DIRECT INDEMNIFICATION OF MP. In  the event that MP and/or
     any of its Associated Indemnified Parties (individually, an "MP INDEMNIFIED
     PARTY" and  collectively,  the "MP  INDEMNIFIED  PARTIES")  intends to seek
     indemnification  under this Agreement pursuant to the provisions of Section
     7.02 of this Agreement, the MP Indemnified Party shall promptly give notice
     hereunder  to  GRE,   specifying   in  such  notice  the  Required   Notice
     Information,  to the extent such specific  information  is  available.  GRE
     shall have ten (10) days to consider  such claim and,  within such  period,
     shall either (x) object by written  notice to the MP  Indemnified  Party to
     the  claim,  in  whole or in  part,  or (y)  remit  the  undisputed  amount
     requested  by the MP  Indemnified  Party.  In the  event  that the claim is
     objected  to by GRE in whole or in  part,  the  parties  shall  attempt  to
     resolve the dispute within ten (10) business days of the receipt of the GRE
     objection by the MP Indemnified  Party. In the event the parties are unable
     to resolve the  disputed  claim  within such  period,  the matter  shall be
     resolved pursuant to the arbitration procedure set forth in Section 7.04(e)
     hereof.

            (c)   PROCEDURE FOR  INDEMNIFICATION  OF THIRD PARTY CLAIMS.  In the
     event any of the GRE  Indemnified  Parties  or the MP  Indemnified  Parties
     intend to seek indemnification  pursuant to the provisions of Sections 7.01
     or 7.02 hereof as a result of the claim of a Third Party (the  "INDEMNIFIED
     PARTY"),  the Indemnified Party shall promptly give notice hereunder to the
     other party (the  "INDEMNIFYING  PARTY") after obtaining  written notice of
     any service of a summons or notice of a Proceeding in any action instituted
     against the  Indemnified  Party as to which recovery or other action may be
     sought  against  the  Indemnified  Party  because  of  the  indemnification
     provided for in Sections  7.01 or 7.02 hereof,  and the  Indemnified  Party
     shall  permit  the  Indemnifying  Party to assume  the  defense of any such
     Proceeding;  PROVIDED,  HOWEVER,  that the  Indemnified  Party shall not be
     required to permit  such an  assumption  of the  defense of any  Proceeding
     which,  if not first paid,  discharged or otherwise  complied  with,  would
     result in a material  interruption  or  disruption  of the  business of the
     Indemnified  Party,  or any  material  part  thereof.  Notwithstanding  the
     foregoing, the right to indemnification  hereunder shall not be affected by
     any  failure of the  Indemnified  Party to give such notice (or by delay by
     the Indemnified  Party in giving such notice) unless,  and then only to the

                                       20


<PAGE>

     extent that, the rights and remedies of the  Indemnifying  Party shall have
     been  prejudiced  as a result of the  failure to give,  or delay in giving,
     such notice.

            If the Indemnifying Party  assumes  the  defense of such  Proceeding
     referenced  in the  Indemnified  Party's  notice,  the  obligations  of the
     Indemnifying Party hereunder as to such Proceeding shall include taking all
     steps necessary in the defense or settlement of such Proceeding and holding
     the Indemnified  Party harmless from and against any and all Losses arising
     from,  in  connection  with or incident to any  settlement  approved by the
     Indemnifying  Party  or  any  judgment  entered  in  connection  with  such
     Proceeding,  except where,  and only to the extent that,  the  Indemnifying
     Party has been  prejudiced  by the actions or omissions of the  Indemnified
     Party.  Notwithstanding the foregoing, the assumption of the defense of any
     Proceeding by the  Indemnifying  Party shall not constitute an admission of
     responsibility  to  indemnify  or in any  manner  impair  or  restrict  the
     Indemnifying  Party's  rights to later seek to be reimbursed  its costs and
     expenses  if  indemnification  under this  Agreement  with  respect to such
     Proceeding  was not  required.  The  Indemnifying  Party  shall not, in the
     defense of such Proceeding,  consent to entry of any judgment (other than a
     judgment of dismissal on the merits  without costs) except with the written
     consent of the  Indemnified  Party (which consent shall not be unreasonably
     withheld, delayed or conditioned) or enter into any settlement (except with
     the written  consent of the Indemnified  Party,  which consent shall not be
     unreasonably  withheld,  delayed  or  conditioned)  unless  (i) there is no
     finding or admission of any  violation  of  applicable  law and no material
     effect on any claims that could  reasonably  be expected to be made against
     the Indemnified  Party,  (ii) the sole relief provided is monetary damages,
     and (iii) the  settlement  shall  include the giving by the claimant or the
     plaintiff to the Indemnified  Party a release from all liability in respect
     to such claim or litigation.

            If the Indemnifying Party assumes  the  defense of  such  Proceeding
     referenced in the Indemnified  Party's notice,  the Indemnified Party shall
     be entitled to  participate  in the defense of the claim.  The  Indemnified
     Party shall bear the fees and expenses of any additional  counsel  retained
     by it to  participate  in its  defense  unless any of the  following  shall
     apply:  (i) the  employment of such counsel  shall have been  authorized in
     writing by the Indemnifying  Party, or (ii) the Indemnifying  Party's legal
     counsel shall advise the Indemnifying Party in writing,  with a copy to the
     Indemnified  Party, that there is a conflict of interest that would make it
     inappropriate  under applicable  standards of professional  conduct to have
     common counsel. If clause (i) or (ii) in the immediately preceding sentence
     is applicable,  then the Indemnified  Party may employ separate  counsel at
     the expense of the Indemnifying  Party to represent the Indemnified  Party,
     but in no event shall the Indemnifying  Party be obligated to pay the costs
     and expenses of more than one such separate  counsel for any one complaint,
     claim, action or Proceeding in any one jurisdiction.

            If the Indemnifying Party does not assume the  defense of  any  such
     Proceeding  by a Third Party after  receipt of notice from the  Indemnified
     Party,  the  Indemnified  Party may defend against such  Proceeding in such
     manner as it reasonably deems  appropriate.  The Indemnified  Party may not
     settle  such  claim  or  litigation  without  the  written  consent  of the
     Indemnifying Party, which consent shall not be unreasonably withheld.

                                       21


<PAGE>

            Each party shall cooperate in good faith  and in all  respects  with
     each  Indemnifying  Party  and  its   representatives   (including  without
     limitation  its  counsel) in the  investigation,  negotiation,  settlement,
     trial and/or defense of any Proceedings (and any appeal arising therefrom).
     The parties shall  cooperate  with each other in any  notifications  to and
     information requests of any insurers.  No individual  representative of any
     party, or their respective  affiliates,  shall be personally liable for any
     Loss or Losses under this Agreement,  except as  specifically  agreed to by
     said individual representative.

            (d)   REMEDIES.  The  respective  indemnification obligations of the
     parties set forth in Article 7 of this Agreement are the exclusive remedies
     of the parties and their successors, assigns or others seeking to claim by,
     through, or on behalf of a party, under this Agreement, and no other remedy
     or  remedies,  whether  arising  under any  applicable  law,  common law or
     otherwise,  may be used,  asserted or prosecuted  in  connection  with this
     Agreement and any  transaction,  occurrence,  or omission  arising from, in
     connection with or otherwise based upon this Agreement;  provided, however,
     that all equitable  remedies shall remain  available other than rescission,
     which shall not be an  available  remedy of either party  hereto,  or their
     respective  successors  and assigns,  under or pursuant to this  Agreement.
     This Section  7.04(d) shall not be applicable in the specific  instances in
     which a party hereto has committed fraud.

     7.05   DISPUTE RESOLUTION.  In  the  event  a  dispute  arises  under  this
Agreement,  except with respect to Article 3 or equitable remedies pursued under
this Agreement,  such disputes shall be resolved in the manner set forth in this
Section 7.05.

            (a)   If a  dispute  arises  under  this  Agreement,  including  any
     question regarding the existence,  validity,  interpretation or termination
     hereof,  which is not described as an exception in this Section  7.05,  GRE
     and MP may  invoke  the  dispute  resolution  procedure  set  forth in this
     Section 7.05 by giving written  notice to the other party.  If either party
     gives such a notice,  the parties shall enter into  discussions  concerning
     this dispute. If the dispute is not resolved as a result of such discussion
     in ten (10) days, an attempt will be made to resolve the matter by a formal
     nonbinding  mediation with an independent neutral mediator agreed to by the
     parties.  If the parties cannot agree on a mediator  within a period of ten
     (10) days after  expiration  of the ten (10) day period for  resolution  by
     discussion,  then  either  party  may  apply  to  any  court  of  competent
     jurisdiction  for  appointment of a mediator,  which  appointment  shall be
     binding and nonappealable.  Upon commencement of the mediation process, the
     parties shall promptly communicate with respect to a procedure and schedule
     for the conduct of the  Proceeding  and for the exchange of  documents  and
     other  information  related to the dispute.  The mediation process shall be
     deemed ended if the dispute has not been  resolved  within thirty (30) days
     after appointment of the mediator.

            (b)   All claims, disputes or other matters in question  between the
     parties to this  Agreement  arising out of or  relating  to this  Agreement
     which are not  resolved by  mediation in  accordance  with Section  7.05(a)
     within thirty (30) days after  appointment  of mediator  shall be submitted
     for,  subject  to  and  decided  by  arbitration  in  accordance  with  the
     Commercial  Arbitration  Rules  of  the  American  Arbitration  Association
     currently in effect as of the date of this Agreement ("AAA RULES"),  except
     to the extent  those rules

                                       22


<PAGE>

     are  inconsistent  with this Section 7.05. Any arbitration  must be held in
     Minnesota by a single  arbitrator  mutually  selected by the parties hereto
     or,  if the  parties  hereto  cannot  agree  on  the  appointment  of  such
     arbitrator within ten (10) days following the date notice of the dispute is
     given by a party to the adverse party, an arbitrator  selected according to
     the AAA  Rules.  The  arbitrator's  award  shall be final,  conclusive  and
     binding  upon all parties to this  Agreement,  and  judgment may be entered
     upon  it in  accordance  with  the  Federal  Arbitration  Act in any  court
     described in Section  7.05(c).  The arbitrator shall be required to provide
     in  writing  to the  parties  the  basis  for the  award  or  Order of such
     arbitrator,  and  a  court  reporter  shall  record  all  hearings  (unless
     otherwise  agreed to by the  parties),  with such record  constituting  the
     official  transcript of such  Proceedings.  MP and GRE specifically  desire
     this  Arbitration  clause  to be  governed  by the  United  States  Federal
     Arbitration Act, and not by the arbitration laws of any state.

            (c)   MP and GRE agree and consent that any legal  action,  suit  or
     Proceeding  seeking to enforce  this  Section 7.05 or to confirm or contest
     any  arbitration  award  shall be  instituted  and  adjudicated  solely and
     exclusively in any court of general  jurisdiction  in Minnesota,  or in the
     United States  District Court having  jurisdiction  in Minnesota and MP and
     GRE agree that venue will be proper in such courts and waive any  objection
     which they may have now or hereafter to the venue of any such suit,  action
     or  Proceeding  in such courts,  and  irrevocably  consent and agree to the
     jurisdiction of said courts in any such suit, action or Proceeding.  MP and
     GRE further agree to accept and acknowledge  service of any and all process
     which may be served in any such suit,  action or Proceeding in said courts,
     and also agree that  service of process or notice upon them shall be deemed
     in every respect  effective  service of process or notice upon them, in any
     suit, action or Proceeding,  if given or made: (i) by a Person over the age
     of eighteen who  personally  serves such notice or service of process on MP
     or GRE,  as the case may be,  or (ii) by  certified  mail,  return  receipt
     requested,  mailed to MP or GRE,  as the case may be,  at their  respective
     addresses set forth in this Agreement.

            (d)   In the event of arbitration filed or  instituted  between  the
     parties  pursuant  to this  Section  7.05,  the  prevailing  party  will be
     entitled to receive from the adverse party all costs, damages and expenses,
     including  reasonable  attorney's fees, incurred by the prevailing party in
     connection  with that action or Proceeding,  whether or not the controversy
     is reduced to judgment or award.  The  prevailing  party will be that party
     who is determined by the arbitrator to have prevailed on the major disputed
     issues.

                                   ARTICLE 8

         ADDITIONAL AGREEMENTS WITH RESPECT TO OPERATION OF SRE PRIOR TO
                                    CLOSING

     8.01   ACTIONS REFRAINED FROM PRIOR TO CLOSING. Between the Effective  Date
and the Closing  Date,  GRE and MP shall  cause SRE not do any of the  following
without prior written authorization from MP and GRE:

            (a)   merge or consolidate with or into any  other  entity or  enter
     into any agreements relating thereto; or

                                       23


<PAGE>

            (b)   authorize or make any distribution of capital or  property  to
     any Member of SRE other than as  contemplated  by this  Agreement and, with
     respect to the Retained MP Capital Account, pursuant to the FERC Order.

     8.02   AFFIRMATIVE ACTIONS PRIOR TO CLOSING. Between the Effective Date and
the Closing Date, except as otherwise consented to in writing by MP and GRE, GRE
and MP shall cause SRE to:

            (a)   continue to make available to MP  and  GRE  and  its  counsel,
     accountants  and other  representatives  for  examination  all business and
     financial  books  and  records  of SRE,  as well as all  other  information
     reasonably considered relevant to the Business and affairs of SRE;

            (b)   operate the Business in accordance with the MPUC  Order  dated
     June 1,  2000,  and  consistent  with  that  operation  SRE  shall  use all
     commercially  reasonable  efforts to preserve intact SRE's present business
     organization  and  goodwill  of  customers,  suppliers  and  others  having
     business  relations  with SRE,  and  maintain  SRE's  membership  and joint
     reporting in MAPP.

            (c)   maintain   SRE's   books   of   account,   records  and  files
     substantially  in the same manner as they are maintained as of the date of,
     but giving effect to the  provisions  of, this Agreement and make no change
     in accounting principles utilized presently;

            (d)   maintain  and  enforce  existing  policies  of   insurance  or
     substitute policies providing  reasonably  comparable insurance coverage in
     amounts not less than those in effect on the date of this  Agreement and in
     any event in amounts of coverage  which are at least  typical for companies
     of SRE's size and in SRE's industry; and

            (e)   take all required corporate action  to effectuate and  perform
     the  transactions  contemplated  by this  Agreement  and  use  commercially
     reasonable  efforts to satisfy the  conditions to the  obligations to close
     the  transactions  contemplated  herein,  to the extent such conditions are
     within the reasonable control of SRE.


                                   ARTICLE 9

                      REPRESENTATIONS AND WARRANTIES OF MP

     MP represents and warrants to GRE that:

     9.01   CORPORATE  STANDING  AND  AUTHORITY;  BINDING  AGREEMENT.  MP  is  a
division of ALLETE, Inc., a corporation duly organized,  validly existing and in
good standing  under the laws of the State of Minnesota  and has full  corporate
power to own all of its  properties and assets and to conduct its business as it
is now being conducted.  The execution of this Agreement and consummation of the
transactions  contemplated  herein  shall  not  violate  any  provision  of MP's
Articles of Incorporation or Bylaws, and MP has obtained all necessary corporate
authorization for the execution,  delivery and performance of this Agreement and
the consummation of the transactions  contemplated  hereby.  This Agreement is a
legal, valid and binding agreement of MP,  enforceable  against MP in accordance
with its terms, subject to the laws of bankruptcy,

                                       24


<PAGE>

insolvency and  moratorium and  other  laws  or equitable  principles  generally
affecting creditors' rights.

     9.02   ABSENCE OF CONFLICTING AGREEMENTS OR REQUIRED  CONSENTS.  Except (x)
for submitting the FERC Filing  described in Section 6.05 and obtaining the FERC
Order,  and (y) as set forth in  SCHEDULE  9.02,  the  execution,  delivery  and
performance  of  this  Agreement  by  MP,  including,  without  limitation,  the
assignment  of its  Membership  Interests  to GRE,  does not and will  not:  (i)
conflict with or violate any law, rule,  regulation,  Order,  judgment or decree
applicable  to MP or by which any of MP's  assets  are bound or  affected,  (ii)
result in any breach of or  constitute  a default  under any  contract  or other
agreement or note, bond, mortgage, indenture, lease, license, franchise or other
instrument or obligation to which MP is a party or by which any of the MP assets
are bound or affected, or (iii) require any consent, approval,  authorization or
permit of any governmental or regulatory authority,  domestic or foreign, or any
person or entity not a party to this Agreement ("CONSENTS").

     9.03   TITLE. As  of  the  Execution  Date  (i)  MP  shall  have  good  and
marketable title to the Assets that are Tangible  Assets,  such title to be free
and  clear of all  liens,  claims,  security  interests,  mortgages,  easements,
restrictions,  charges and encumbrances  (other than those in favor of GRE under
the Member  Control  Agreement),  and (ii) with  respect to the Assets  that are
leased or licensed,  MP shall have a valid license or leasehold interest.  As of
the Closing, MP shall have good and marketable title to its Membership Interest.

     9.04   RELINQUISHED ASSETS. MP has title to or a valid leasehold or license
interest to the Assets.  The Assets  relinquished  and  transferred by MP are in
operating condition and are as is, where is, as used at and by SRE in the normal
course of  business.  The Assets are all of the Assets used  exclusively  in the
Business,  but shall not include assets used in the Business which are also used
in the operation of the business of MP (by way of example, the Oracle accounting
system software).

     9.05   LITIGATION. There is no litigation pending or, to the best knowledge
of MP after due inquiry of its  officers,  threatened  against MP which seeks to
prevent,  or if successful  would  prevent,  MP from  consummating  the purchase
contemplated by this Agreement.

     9.06   NOTICE  OF  DEVELOPMENT.  MP  shall  notify  GRE  of  any  event  or
occurrence  that has as its basis an event or  occurrence  that arose  after the
date  hereof  which  would  cause  a  breach  at  the  Closing  of  any  of  the
representations and warranties set forth in Sections 9.01, 9.02 and 9.05.


                                   ARTICLE 10

                      REPRESENTATIONS AND WARRANTIES OF GRE

     GRE represents and warrants to MP that:

     10.01  Organization and  Authority. GRE is a  cooperative  duly  organized,
validly  existing and in good standing under the laws of the State of Minnesota,
and has full power and authority to carry on its current business operations and
consummate the transactions

                                       25


<PAGE>

contemplated by this Agreement. The execution of this Agreement and consummation
of the transactions contemplated herein shall not violate any provision of GRE's
governing  documents or any law, regulation or ordinance or any provision of any
contract,  instrument,  Order, award, judgment or decree to which GRE is a party
or by which GRE is bound. This Agreement is a legal, valid and binding agreement
of GRE enforceable against GRE in accordance with its terms, subject to the laws
of bankruptcy,  insolvency and moratorium and other laws or equitable principles
generally   affecting   creditors'   rights.  GRE  has  obtained  all  necessary
cooperative   authorization  and  approval  for  the  execution,   delivery  and
performance  of  this  Agreement  and  the   consummation  of  the  transactions
contemplated hereby. No consent, authorization, Order or approval of any person,
governmental authority or any court is required in connection with the execution
and  delivery  by GRE  of  this  Agreement  or  the  consummation  by GRE of the
transactions contemplated hereby.

     10.02  LITIGATION. There is no litigation pending or, to the best knowledge
of GRE after due inquiry of its officers,  threatened against GRE which seeks to
prevent,  or if successful  would prevent,  GRE from  consummating  the purchase
contemplated by this Agreement.

     10.03  NOTICE  OF  DEVELOPMENT.  GRE  shall  notify  MP  of  any  event  or
occurrence  that has as its basis an event or  occurrence  that arose  after the
date  hereof  which  would  cause  a  breach  at  the  Closing  of  any  of  the
representations and warranties set forth in Sections 10.01 and 10.02.


                                   ARTICLE 11

                                     CLOSING

     11.01  TIME AND PLACE. Upon receipt of  the  Membership  Interest  Transfer
Order which is not  subject to an  objection  that may result in a rehearing  by
FERC (such that the parties have agreed to delay the Closing pursuant to Section
6.05 hereof), MP and GRE shall schedule the Closing,  which shall take place not
later than five (5) business  days after receipt of the FERC Order (the "CLOSING
DATE"). The closing hereunder (the "CLOSING") shall take place at the offices of
Leonard, Street and Deinard,  Professional Association,  150 South Fifth Street,
Suite 2300,  Minneapolis,  Minnesota,  55402, or at such other time and place as
may be agreed to by the parties.  The Closing shall be deemed to be effective at
11:59  P.M.  (CST) on the  Closing  Date,  which  shall  also be the  Withdrawal
Effective Time.

     11.02  CONDITIONS TO MP'S OBLIGATIONS  TO  CLOSE. The  obligation of MP  to
Close  shall be  subject  to  satisfaction  of the  following  deliverables  and
conditions precedent on or prior to the Closing Date:

            (a)   PAYMENTS AND DELIVERY OF DOCUMENTS:
                  ----------------------------------

                  (i)   RECEIPT OF MEMBERSHIP INTEREST PAYMENT. MP shall receive
            the Membership Interest Payment from GRE at the Closing.

                  (ii)  RECEIPT OF THE RETAINED MP  CAPITAL  ACCOUNT.  MP  shall
            receive payment from SRE at the Closing of the  Retained MP  Capital
            Account and the Capital Vig.

                                       26


<PAGE>

                  (iii) GRE  OFFICER'S   CERTIFICATE.   MP   shall   receive   a
            certificate  from an officer of GRE, in form and content  reasonably
            satisfactory  to  MP,  certifying  (i) to the  incumbency  of  GRE's
            authorized  officers executing this Agreement and related documents,
            (ii) to the good  standing  of GRE in the state of its  organization
            and  attaching  a good  standing  certificate  for GRE issued by the
            Secretary of State of such state, (iii) that all necessary corporate
            authorizations  and  approvals  have  been  obtained  by GRE for the
            execution,  delivery  and  performance  of  this  Agreement  and the
            consummation of the transactions  contemplated  hereunder,  and (iv)
            that the execution of this Agreement by GRE and the  consummation of
            the  transactions   contemplated  hereunder  will  not  violate  the
            provisions  of the  Articles  of  Incorporation  of GRE or any other
            agreement  to  which  GRE is a party  or by  which  it is  bound.  A
            certificate  in  substantially  the same form  containing  the above
            information has been delivered to MP on the Execution Date

                  (iv)  CONSENT. The (A) FERC Order, and (B)  the  Consents  set
            forth in SCHEDULE 9.02, shall all have been obtained.

            (b)   CONDITIONS PRECEDENT TO CLOSING:
                  --------------------------------

                  (i)   REPRESENTATIONS, WARRANTIES AND COVENANTS. All covenants
            and  agreements  of GRE set forth  herein  required to be  performed
            prior  to the  Closing  shall  have  been  fully  performed  and the
            representations and warranties of GRE set forth herein shall be true
            and correct as of the Closing Date as though  those  representations
            and  warranties  have  been  made  at and as of  that  time.  At the
            Closing,  MP shall  have  received  a  certificate  signed by a duly
            authorized  officer  of GRE to the  foregoing  effect  in  form  and
            content reasonably satisfactory to MP.

                  (ii)  NO LITIGATION. There shall not have been  instituted  or
            threatened on or before the Closing Date any action or Proceeding to
            restrict  or  prohibit  the   transactions   contemplated   by  this
            Agreement.

     11.03  CONDITIONS TO GRE'S OBLIGATION TO CLOSE. The  obligation of  GRE  to
close  shall be  subject  to  satisfaction  of the  following  deliverables  and
conditions precedent on or prior to the Closing Date or at and upon the Closing:

            (a)   PAYMENTS AND DELIVERY OF DOCUMENTS:
                  ----------------------------------

                  (i)   PAYMENT OF UNPAID ADMINISTRATIVE FEE(S) AND GRE ATTORNEY
            FEES, SEVERANCE REIMBURSEMENT.  GRE shall receive payment from MP of
            any unpaid  Administrative  Fee(s),  unpaid severance  reimbursement
            pursuant  to  Section  4.03,  unpaid  CTU  payments  and  unpaid GRE
            Attorney Fees.

                  (ii)  MEMBERSHIP  INTEREST  RELINQUISHMENT  AND ASSIGNMENT. MP
            shall  have duly  executed  and  delivered  to GRE,  all in form and
            substance  reasonably  satisfactory  to GRE,  a  Relinquishment  and
            Assignment of Membership Interest in substantially the form attached
            hereto as EXHIBIT C.

                                       27


<PAGE>

                  (iii) CONSENTS. The FERC Order shall have  been  obtained  and
            any and all  notices or  Consents  listed or  required  to be listed
            under  SCHEDULE  11.03(a)(iii)  shall  have  been duly made by MP or
            executed and delivered by the person or entity  required to consent,
            in form and content  reasonably  satisfactory to GRE, and shall have
            been delivered to GRE by MP.

                  (iv)  MP  OFFICER'S  CERTIFICATE.  GRE shall  have  received a
            certificate  from an officer of MP, in form and  content  reasonably
            satisfactory  to  GRE,  certifying  (i) to the  incumbency  of  MP's
            authorized  officers executing this Agreement and related documents,
            (ii) to the good  standing  of MP in the state of its  incorporation
            and  attaching  a good  standing  certificate  for MP  issued by the
            Secretary  of  State  of  such  state,   (iii)  that  all  necessary
            authorizations  and  approvals  have  been  obtained  by MP for  the
            execution,  delivery  and  performance  of  this  Agreement  and the
            consummation of the transactions  contemplated  hereunder,  and (iv)
            that the execution, delivery and performance of this Agreement by MP
            and the consummation of the transactions contemplated hereunder will
            not violate the  provisions  of MP's  Articles of  Incorporation  or
            Bylaws or any other  agreement to which MP is a party or by which it
            is bound. A certificate in  substantially  the same form  containing
            the above  information  has been  delivered to GRE on the  Execution
            Date.

                  (v)   RESIGNATIONS.  GRE   shall  have  received  the  written
            resignations  of any MP  designated  members  of the  SRE  Board  of
            Governors.  MP  personnel  who were also SRE  officers  resigned  as
            officers of SRE on the Execution Date.

            (b)   CONDITIONS PRECEDENT TO CLOSING:
                  -------------------------------

                  (i)   REPRESENTATIONS, WARRANTIES AND COVENANTS. All covenants
            and agreements of MP set forth herein required to be performed prior
            to  the   Closing   shall   have  been  fully   performed   and  the
            representations  and warranties of MP set forth herein shall be true
            and correct as of the Closing Date as though  those  representations
            and warranties had been made at and as of that time. At the Closing,
            GRE shall have  received a certificate  signed by a duly  authorized
            officer of MP to the foregoing effect in form and content reasonably
            satisfactory to GRE.

                  (ii)  NO LITIGATION. There shall not have been  instituted  or
            threatened  any action or  Proceeding  to restrict  or prohibit  the
            transactions contemplated by this Agreement.

     11.04  EFFORTS TO SATISFY  CONDITIONS.  Each  party  shall  use  reasonable
commercial  efforts to secure  promptly the  satisfaction  of the  conditions to
Closing, to the extent the same is within their reasonable control.

                                       28


<PAGE>

                                   ARTICLE 12

                                   TERMINATION

     12.01  TERMINATION OF AGREEMENT.  This Agreement may be terminated  at  any
time prior to the Closing:

                  (i)   by mutual written agreement of GRE and MP; or

                  (ii)  by either MP or  GRE  if,  through  no  breach  of  this
            Agreement by the terminating  party, the Closing has not occurred on
            or before May 31, 2004.

No termination of this Agreement shall (i) affect the transactions  which become
effective on or entered into as a  consequence  of, the  Execution  Date,  which
transactions shall be legal, binding and enforceable with respect to the parties
thereto,  or (ii)  relieve  any party  from  liability  it may have  under  this
Agreement   or  the  Interim   Agreement   from   breaches  of  its   respective
representations, warranties or covenants occurring prior to termination.

     12.02  PROCEDURE UPON TERMINATION. In the event of termination by GRE or by
MP pursuant to Section 12.01(ii) hereof,  written notice thereof shall forthwith
be given to the other party and the transactions  contemplated by this Agreement
to be effected at the Closing shall be terminated  without further action by the
parties hereto. If such a termination takes place:

            (a)   The Interim Agreement and the transactions that took effect on
     the Execution Date shall be unaffected;

            (b)   MP shall continue to be bound by the Member Control Agreement,
     subject to the amendments set forth herein;

            (c)   No party  hereto  and  none  of  their  respective  directors,
     officers,  shareholders or controlling  persons shall have any liability or
     further  obligation  to any other party  pursuant to this  Agreement or the
     Interim  Agreement,  except as to any  breach of the  continuing  covenants
     hereof; and

            (d)   The provisions of  Articles 1, 2, 3, 4, 5, 7, 12  and  14  and
     Sections 6.02, 6.03, 6.04, 6.06, 9.01, 9.03, 9.04, 10.01,  13.01, 13.02 and
     13.03 shall survive any termination of this Agreement;  PROVIDED,  HOWEVER,
     Sections  12.02(a) and (c) above shall control and constitute the exclusive
     remedy of the parties  with  respect to any Losses that may be claimed by a
     party under this Agreement.

                                   ARTICLE 13

                                  OTHER MATTERS

     13.01  ANNOUNCEMENTS. No press releases, announcements, or other disclosure
related  to  the  specific   details  of  this  Agreement  or  the  transactions
contemplated herein shall be issued or made to the press, employees,  customers,
suppliers or any other person,  except to the extent  necessary for MP or GRE to
(i) comply with  applicable  securities  or other  regulatory  laws,  rules,

                                       29


<PAGE>

or regulations,  or other applicable authority, or (ii) obtain MP's release from
its credit support  obligations,  or (iii) as otherwise necessary to comply with
the  terms of this  Agreement.  GRE and MP agree to  cooperate  on any  external
communications regarding MP's withdrawal from SRE. The parties will cause SRE to
observe this provision.

     13.02  USE OF SRE NAME. As of the Closing Date  and  thereafter,  MP  shall
cease all use of the name  "Split  Rock  Energy"  and any other  similar  names,
except to the extent the name is used in connection with MP delivery of services
on behalf of SRE or GRE as directed by SRE or GRE.

     13.03  CONFIDENTIALITY. The parties may, for their mutual  benefit  in  the
course of negotiating and  implementing  the  transactions  contemplated by this
Agreement,  exchange  information  which  is  of  a  non-public  proprietary  or
confidential  nature to the  disclosing  party which,  by way of example but not
limitation,  may include information  related to Core Operations,  Power Trading
Transactions,  business practices,  strategies or approaches,  Capital Accounts,
Net Income and Net Losses (the  "CONFIDENTIAL  INFORMATION").  The  Confidential
Information  may  be  in  any  form  whatsoever,  including  writings,  computer
programs, logic diagrams,  drawings or other media. All information disclosed by
either  party  to the  other,  whether  orally,  in  writing  by  inspection  or
otherwise, shall be Confidential Information when it is so labeled or identified
by the party delivering the information.

     The Confidential Information (i) may be used by the receiving party  solely
in connection with the transactions  described in this Agreement,  and (ii) will
be kept  confidential  and not  disclosed  by the  receiving  party to any other
person, except that Confidential  Information may be disclosed to (i) the United
States  Securities  and Exchange  Commission and any  counterpart  agency of any
state,  whether  or not such  Confidential  Information  shall be made  publicly
available as a consequence of such filing, and (ii) any of the receiving party's
affiliates, directors, officers, employees, attorneys, accountants, consultants,
advisors and agents (collectively, its "AUTHORIZED REPRESENTATIVES") who require
access to such  information  and as required to comply with Section 13.04 below.
Each of the Parties  agrees that any of its Authorized  Representatives  to whom
Confidential  Information is disclosed will be informed of the  confidential  or
proprietary  nature thereof and of the receiving party's  obligations under this
Agreement, and that each party shall be responsible for any use or disclosure of
Confidential Information by any of its Authorized Representatives.

     Notwithstanding  anything to the  contrary set forth  herein,  Confidential
Information shall not include any information that (i) is, on the Effective Date
of this  Agreement,  available to the public  (including  in any publicly  filed
document),  or (ii) becomes  generally  known to the public after the  Effective
Date of this Agreement other than as a result of any improper act or omission of
MP or GRE or their Authorized  Representatives,  or (iii) was demonstrably known
to MP or GRE prior to the Effective  Date of this  Agreement,  or (iv) MP or GRE
lawfully  receive such  Confidential  Information from a Third Party, who is not
subject  to an  obligation  of  confidentiality  or  non-use at the time of such
transmittal.

     If MP or GRE is requested or required (by oral questions,  interrogatories,
requests for information or documents,  subpoena,  civil investigative demand or
similar process) to disclose any of the other party's Confidential  Information,
MP or GRE will provide the other party with

                                       30


<PAGE>

prompt notice of such request,  and the documents and/or  information  requested
thereby, so that the other party may seek an appropriate protective Order and/or
waive compliance with the provisions of this Agreement.  If, in the absence of a
protective  Order  or  the  receipt  of  a  waiver  hereunder,  MP  or  GRE  are
nonetheless,  in the opinion of MP or GRE's legal counsel, compelled to disclose
Confidential  Information to any tribunal or otherwise stand liable for contempt
or suffer other  censure or penalty,  MP or GRE may  disclose to such  tribunal,
without liability hereunder,  that portion of the Confidential Information which
MP or GRE's legal  counsel  advises  that MP or GRE are  compelled  to disclose;
PROVIDED,  HOWEVER,  that MP or GRE shall give the other party written notice of
the  information  to be  disclosed  as  far in  advance  of  its  disclosure  as
reasonably practicable.

     13.04  TAX MATTERS.  The following  provisions  shall govern the allocation
of  responsibility  as between MP and the GRE for certain Tax Matters  following
the Closing Date:

            (a)   TAX RETURNS.
                  -----------

                  (i)   MP shall  prepare,  execute on behalf of SRE and  timely
            file, or cause to be prepared and timely filed, all income/reporting
            Tax Returns of SRE that are due with  respect to any taxable year or
            other taxable  period ending prior to or ending on and including the
            Closing Date. Such authority  shall include,  but not be limited to,
            the determination of the manner in which any items of income,  gain,
            deduction,  loss or credit arising out of the income, properties and
            operations  of SRE  shall  be  reported  or  disclosed  in such  Tax
            Returns; PROVIDED,  HOWEVER, that such Tax Returns shall be prepared
            by treating  items on such Tax Returns in a manner  consistent  with
            the past  practices  with  respect  to such  items,  except  for the
            allocation  provisions of this Agreement which shall be an exception
            to such prior treatment.

                  (ii)  Except as provided in  Section  13.04(a)(i),  GRE  shall
            have the exclusive  authority  and  obligation to prepare and timely
            file, or cause to be prepared and timely filed, all income/reporting
            Tax Returns of SRE with respect to any taxable year or other taxable
            period  ending  after the  Closing  Date;  PROVIDED,  HOWEVER,  with
            respect to Tax Returns to be filed by GRE  pursuant to this  Section
            13.04(a) for taxable periods  beginning  before the Closing Date and
            ending after the Closing  Date,  items set forth on such Tax Returns
            shall be treated in a manner consistent with the past practices with
            respect to such items, except for the allocation  provisions of this
            Agreement which shall be an exception to such prior treatment.  Such
            authority shall include, but not be limited to, the determination of
            the manner in which any items of income,  gain,  deduction,  loss or
            credit  arising out of the income,  properties and operations of SRE
            shall be reported or disclosed on such Tax Returns.

            (b)   CONTROVERSIES.  GRE shall  promptly  notify MP in writing upon
     receipt  by GRE or SRE or any  affiliate  of GRE or SRE after  the  Closing
     Date) of written notice of any inquiries,  claims,  assessments,  audits or
     similar  events with respect to Taxes  relating to a taxable  period ending
     prior to or ending on and  including  the Closing Date for which SRE may be
     liable under this Agreement (any such inquiry, claim, assessment,  audit or

                                       31


<PAGE>

     similar event, a "TAX  MATTER").  MP, or its duly appointed  representative
     (the "MP REPRESENTATIVE"), at its sole expense, shall have the authority to
     represent  the  interests of SRE with respect to any Tax Matter  before the
     Internal  Revenue   Service,   any  other  taxing   authority,   any  other
     governmental agency or authority or any court and shall have the sole right
     to control the defense,  compromise or other  resolution of any Tax Matter,
     including  responding  to  inquiries,  filing Tax Returns  and  contesting,
     defending  against and resolving any  assessment  for  additional  Taxes or
     notice of Tax deficiency or other adjustment of Taxes of, or relating to, a
     Tax Matter;  PROVIDED,  HOWEVER,  that neither MP nor any of its affiliates
     shall enter into any  settlement of or otherwise  compromise any Tax Matter
     that  affects or may affect the Tax  liability of GRE or SRE for any period
     ending after the Closing Date,  including the portion of a period beginning
     before the Closing  Date and ending  after the Closing  Date (the  "OVERLAP
     PERIOD") that is after the Closing Date,  without the prior written consent
     of GRE. The MP Representative shall keep GRE fully and timely informed with
     respect to the  commencement,  status and nature of any Tax Matter.  The MP
     Representative  shall,  in good faith,  allow GRE, at its sole expense,  to
     make  comments  to the  MP  Representative,  regarding  the  conduct  of or
     positions taken in any such Proceeding.

            Except as otherwise  provided  in this  Section 13.04(b), GRE  shall
     have the sole  right to  control  any audit or  examination  by any  taxing
     authority,  initiate  any claim for  refund  or amend any Tax  Return,  and
     contest,  resolve and defend against any  assessment for additional  Taxes,
     notice of Tax  deficiency or other  adjustment of Taxes of, or relating to,
     the income, assets or operations of SRE for all taxable periods;  PROVIDED,
     HOWEVER, that GRE shall not, and shall cause its affiliates (including SRE)
     not to, enter into any  settlement  of any contest or otherwise  compromise
     any issue with  respect to the portion of the Overlap  Period  ending on or
     prior to the Closing  Date without the prior  written  consent of MP, which
     consent shall not be unreasonably withheld.

            (c)   AMENDED TAX RETURNS. Neither MP nor SRE shall file or cause to
     be filed any  amended  Tax Return or claims for  refund  without  the prior
     written consent of GRE, which consent shall not be  unreasonably  withheld,
     delayed or  conditioned,  except for such amended Tax Returns or claims for
     refund  filed  in  connection  with the  resolution  of any Tax  Matter  in
     accordance with Section 13.04(b).

            (d)   POST-CLOSING  ACCESS  AND  COOPERATION.  From  and  after  the
     Closing Date, GRE agrees,  and agrees to cause SRE, to permit MP and the MP
     Representative to have reasonable access,  during normal business hours, to
     the books and  records of SRE,  to the extent  that such books and  records
     relate to a period prior to or ending on the Closing Date,  and  personnel,
     for the purpose of enabling MP to: (i) prepare the Tax Returns specified in
     Section  13.04(a)(i),  and (ii) investigate or contest any Tax Matter which
     MP has the authority to conduct under Section 13.04(b).

                                       32


<PAGE>

                                   ARTICLE 14

                                  MISCELLANEOUS

     14.01  SURVIVAL OF REPRESENTATIONS, WARRANTIES  AND  COVENANTS.  Except  as
otherwise  provided in this  Agreement:  (a) all covenants and agreements of the
parties contained in this Agreement shall survive the Closing in accordance with
their terms, and (b) the  representations  and warranties of each of the parties
contained in this  Agreement or contained in any document or  certificate  given
under this  Agreement  as well as the right of the other  party to rely  thereon
shall  survive  the  Closing for a period of twelve (12) months from the Closing
Date;  PROVIDED,  that with  respect to any claim made in  writing  within  such
twelve (12) month period,  such  representations  and  warranties  shall survive
until a final and binding resolution of such claim has been determined. Further,
notwithstanding the foregoing,  (i) the representations and warranties contained
in Sections  9.05 and 10.02 shall  survive  until the  expiration of any and all
applicable  statutes  of  limitations  periods  on  the  subject  matter  of the
representation  or  warranty  (or in the  event of a claim or an  assessment  or
reassessment,  until a final and binding  resolution  of all matters in relation
thereto is made),  and (ii) the  representations  and  warranties  contained  in
Sections 9.01, 9.03 and 10.01 shall continue indefinitely.

     14.02  NO BROKER. GRE  represents to MP,  and MP  represents  to  GRE, that
neither has engaged, or incurred any unpaid liability to, any broker,  finder or
consultant in connection with this  transaction.  MP shall indemnify the GRE and
its directors, officers,  shareholders and employees and will hold them harmless
from and  against any claims by any broker,  finder or  consultant  deemed to be
engaged by MP for a brokerage fee, finder's fee or the like. GRE shall indemnify
MP and will hold it harmless  from and against any claims by any broker,  finder
or consultant  deemed to be engaged by GRE for a brokerage fee,  finder's fee or
the like.

     14.03  EXPENSES. Except  as  otherwise  provided herein,  the parties shall
each pay all of their respective  legal,  accounting and other expenses incurred
in connection with the transactions contemplated by this Agreement.

     14.04  NOTICES.  Any notice or other  communication  required or  permitted
hereunder  shall be in  writing  and  delivered  personally  or by a  recognized
international  overnight courier service,  addressed as follows or to such other
address as a party shall  specify for this purpose in a notice given in the same
manner:

            (a)   TO MP:
                  -----

                  Minnesota Power
                  30 West Superior Street
                  Duluth, MN  55802
                  Attn:  Mr. Donald J. Shippar, President
                  Facsimile:  (218) 723-3960

                                       33


<PAGE>

            with copies to:

                  Mr. Steven W. Tyacke
                  30 West Superior Street
                  Duluth, MN 55802
                  Facsimile:  (218) 723-3955

                  Briggs and Morgan, P.A.
                  2200 IDS Center
                  80 South Eighth Street
                  Minneapolis, MN  55402
                  Attn:  Michael J. Grimes
                  Facsimile:  (612) 977-8650

            (b)   TO GRE:
                  ------

                  Great River Energy
                  17845 East Highway 10
                  Elk River, MN  55330
                  Attn:  David J. Saggau, Vice President and General Counsel
                  Facsimile:  (763) 241-3732

            with copies to:

                  Moss & Barnett, P.A.
                  4800 Wells Fargo Center
                  Minneapolis, MN  55402
                  Attn:  Eric J. Olsen
                  Facsimile:  (612) 339-6686

Any notice given pursuant to this Section shall be deemed given when delivered.

     14.05  BINDING EFFECT; NO ASSIGNMENT WITHOUT PRIOR  WRITTEN  CONSENT.  This
Agreement  shall be binding  upon and shall  inure to the benefit of the parties
hereto and their respective  successors and assigns,  but may not be assigned or
otherwise  transferred  by any party  without the  written  consent of the other
party.

     14.06  ENTIRE AGREEMENT. This Agreement, the Ancillary  Documents  and  the
Binding  Provisions  of the Interim  Agreement,  and the Exhibits and  schedules
hereto or expressly  contemplated hereby contain the entire understanding of the
parties  relating to the withdrawal  transaction and supersede all prior written
or oral and all contemporaneous  oral agreements and understandings  relating to
the subject matter hereof,  including the non-binding  provisions of the Interim
Agreement.  All  statements of fact of the parties  contained in any schedule or
Ancillary  Document under this Agreement to be delivered in connection  with the
transactions contemplated hereby will constitute  representations and warranties
of the parties under this Agreement. The Exhibits, schedules and the Recitals to
this Agreement are hereby incorporated by reference into and made a part of this
Agreement for all purposes.

                                       34


<PAGE>

     14.07 CHOICE OF LAW. This Agreement shall be interpreted under the internal
laws of the State of Minnesota  without  regard to any  conflicts of law rule or
principle  that  might  result  in  the   application  of  the  law  of  another
jurisdiction.

     14.08  AMENDMENT; WAIVER. This Agreement may  be  amended,  supplemented or
modified,  and any provision  hereof may be waived,  only by written  instrument
making  specific  reference to this  Agreement  signed by the party against whom
enforcement  is sought.  No waiver of any of the  provisions  of this  Agreement
shall be deemed to or shall constitute a waiver of any other provision,  whether
or not similar,  nor shall any waiver  constitute a continuing  waiver unless so
specified in writing.

     14.09  PRE CLOSING AND POST CLOSING COOPERATION. Before and  after Closing,
each of the parties agree that, at the reasonable request of the other party, it
shall take such actions and furnish such additional documents and instruments as
may be necessary or  reasonably  desirable to  supplement  the schedules to this
Agreement  and/or  otherwise  effectuate the  transactions  contemplated by this
Agreement  and the smooth  transition  of the Business to the sole  ownership of
GRE.  In the event that the MPUC or other  regulatory  agency has  questions  or
inquiries about this Agreement or asserts  jurisdiction,  GRE, on its own behalf
and on behalf of SRE, will cooperate with MP to reasonably respond to the MPUC.

     14.10  COUNTERPARTS AND FACSIMILE/ELECTRONIC SIGNATURES. This Agreement and
any  Ancillary  Document may be executed in  counterparts  and will be effective
when at least one  counterpart  has been  executed  by each party  hereto.  This
Agreement may be executed in duplicate originals,  each of which shall be deemed
to be an original  instrument.  All such  counterparts  and duplicate  originals
together shall constitute but one Agreement.  The counterparts of this Agreement
and any  Ancillary  Document may be executed and  delivered by telecopy or other
electronic  transmission,  and the  receiving  party may rely on receipt of such
executed document as if the original had been received.

     14.11 INTERPRETATION. The article and  section  headings  contained in this
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and will not in any way affect the meaning or  interpretation  of
this Agreement.  Whenever the singular form of a word is used in this Agreement,
that word will  include the plural form of that word.  The term "or" will not be
interpreted as excluding any of the items  described.  The term "include" or any
derivative of such term does not mean that the items following such term are the
only types of such items.  Neither this Agreement nor any provision contained in
this  Agreement  will be  interpreted  in favor of or against  any party  hereto
because  such  party  or its  legal  counsel  drafted  this  Agreement  or  such
provision.  Whenever the plural form of a word is used in this  Agreement,  that
word will include the singular form of that word.

     14.12  PAYMENTS. Any  payments  to  be  made  by  one  party  to  the other
hereunder,  or by SRE to MP, shall be made in U.S. funds either by (i) certified
or bank official check, or (ii) wire transfer of immediately available funds, at
the remitting party's option.

     14.13  TERMINATION OF  WITHDRAWAL  AGREEMENT. The  Withdrawal  Agreement is
hereby  terminated  and  replaced  in  its  entirety  by  this  Agreement.  This
termination shall not be

                                       35


<PAGE>

interpreted,  and is  not,  a  termination  contemplated  by  Article  12 of the
Withdrawal  Agreement,  and no terms of the Withdrawal  Agreement  shall survive
this termination.


                            [SIGNATURE PAGE FOLLOWS]

                                       36


<PAGE>

     IN WITNESS WHEREOF, this Agreement has been executed the day and year first
above written.


                                        MINNESOTA POWER


                                        By: /s/ Donald Shippar
                                            ------------------------------
                                            Donald Shippar
                                            President



                                        GREAT RIVER ENERGY


                                        By: /s/ James Van Epps
                                            ------------------------------
                                            James Van Epps
                                            Chief Executive Officer





               [SIGNATURE PAGE TO AMENDED AND RESTATED WITHDRAWAL
                                   AGREEMENT]


<PAGE>
                                                                   EXHIBIT 10(s)

              THIRD AMENDED AND RESTATED COMMITTED FACILITY LETTER

                                December 23, 2003

ALLETE, Inc.
30 West Superior Street
Duluth, Minnesota 55802
Attn: Corporate Treasurer

Ladies and Gentlemen:
                  
             Reference  is  hereby  made  to that  certain  Second  Amended  and
Restated Committed Facility Letter among the banks party thereto,  ABN AMRO Bank
N.V., as agent for such banks and  yourselves  dated as of December 24, 2002, as
amended from time to time (together with all exhibits,  schedules,  attachments,
appendices and amendments  thereof,  the "EXISTING  COMMITTED FACILITY LETTER").
The parties to the Existing  Committed  Facility Letter desire that the Existing
Committed  Facility  Letter be amended  and  restated in its  entirety,  without
constituting  a  novation,  all on the terms and  conditions  contained  herein.
Accordingly, in consideration of the premises and the agreements, provisions and
covenants  contained herein,  the Existing  Committed  Facility Letter is hereby
amended and restated in its entirety to be and to read as follows:

             LaSalle  Bank  National   Association  (the  "Agent"  and,  in  its
individual  capacity,  a "Bank")  and the other  Banks (as  defined  below)  are
pleased to advise ALLETE,  Inc. (the  "Company")  that the Banks (defined
 below)
have severally  approved,  subject to the conditions  outlined in this letter, a
committed  credit  facility (the  "Facility").  The amount  available  under the
Facility  shall not  exceed  at any time the  aggregate  sum of the  Commitments
(defined  below).  This  Facility  shall  terminate  on  December  21, 2004 (the
"TERMINATION  DATE").  The Facility shall be available under the following terms
and conditions  (certain  capitalized terms being used and not otherwise defined
as set forth in SECTION 8):

      1.     LOANS.

             The  Company  may from time to time  before  the  Termination  Date
borrow  Eurodollar  Loans,  or if one or more  conditions  exist as set forth in
Section 3(b) or Section 3(c) hereof, Prime Rate Loans. The aggregate outstanding
amount  of the Loans  shall  not at any time  exceed  the  aggregate  sum of the
Commitments.  The Company may borrow,  repay and reborrow in accordance with the
terms hereof.

             a.   BORROWING PROCEDURES
             
                  i.  PRIME RATE  LOANS.  Each Prime Rate Loan shall be on prior
             telephonic   notice  (promptly   confirmed  in  writing)  from  any
             Authorized  Officer received by the Agent not later than 11:00 a.m.
             (Chicago,  Illinois time), on the day such Loan is to be made. Each
             such Notice of  Borrowing  shall  specify (i) the 


<PAGE>

ALLETE
December 23, 2003
Page 2

             borrowing  date, which shall be a Banking Day, and (ii) the  amount
             of the Loan.  Each  Prime  Rate Loan  shall  be  in  the  amount of
             $5,000,000 or a higher  integral  multiple of  $1,000,000.  A Prime
             Rate Loan shall only be  available  if the Agent has given  written
             notice  to the  Company  that one or more  conditions  exist as set
             forth in Section 3(b) or Section 3(c) hereof.

                  ii.  EURODOLLAR LOANS. Each Eurodollar Loan shall be made upon
             at least three Banking  Days' prior  written or  telephonic  notice
             from any  Authorized  Officer  received by the Agent not later than
             3:00 p.m.  (Chicago,  Illinois time). Each such Notice of Borrowing
             shall specify (i) the borrowing date, which shall be a Banking Day,
             (ii) the amount of such  Loan,  and (iii) the  Interest  Period for
             such  Loan.  Each  Eurodollar  Loan  shall  be  in  the  amount  of
             $5,000,000 or a higher integral multiple of $1,000,000.

                  iii. The Agent shall give prompt telephonic or telecopy notice
             to each Bank of the  contents  of each Notice of  Borrowing  and of
             such Bank's share of such Loan.

                  iv.  Not later than  11:00  a.m. (Chicago  time) (or 1:00 p.m.
             (Chicago  time) in the case of any Prime  Rate Loan) on the date of
             each borrowing,  each Bank  participating  therein shall (except as
             provided in  subsection  (v) of this  Section)  make  available its
             share of such Loan, in Federal or other funds immediately available
             in  Chicago,  to the Agent at its  address  set  forth  next to its
             signature  below.  Unless the Agent is  notified by a Bank that any
             applicable condition specified in Section 4 has not been satisfied,
             the Agent will make the funds so received from the Banks  available
             to the Company by depositing such funds in the manner  specified in
             the related Notice of Borrowing.

                  v.   Unless the Agent shall have  received  notice from a Bank
             prior to the date of any  borrowing  that  such  Bank will not make
             available  to the Agent such Bank's  share of such Loan,  the Agent
             may  assume  that such Bank has made such  share  available  to the
             Agent on the date of such borrowing in accordance  with  subsection
             (iv) of this Section 1(a), and the Agent may, in reliance upon such
             assumption  (but shall not be obligated  to), make available to the
             Company on such date a corresponding  amount.  If and to the extent
             that such Bank shall not have so made such share  available  to the
             Agent,  such Bank and the Company  severally  agree to repay to the
             Agent forthwith on demand such  corresponding  amount together with
             interest  thereon,  for each day from the date such  amount is made
             available  to the  Company  until the date such amount is repaid to
             the  Agent,  at (i) in the case of the  Company,  a rate per  annum
             equal to the higher of (x) the Prime Rate and (y) the interest rate
             applicable  thereto pursuant to Section  1(b)(ii),  and (ii) in the
             case of such Bank,  the Prime Rate. If such Bank shall repay to the



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December 23, 2003
Page 3

             Agent  such  corresponding  amount,  such  amount so  repaid  shall
             constitute  such Bank's Loan  included in such Loan for purposes of
             this Agreement.

             b.   INTEREST

                  i.   PRIME RATE LOANS. The unpaid   principal  of  each  Prime
             Rate Loan shall bear interest prior to maturity at a rate per annum
             equal  to the  Prime  Rate in  effect  from  time to time  plus the
             Applicable  Margin.  Accrued  interest on Prime Rate Loans shall be
             payable quarterly on the 30th day of each December, March, June and
             September and at maturity.

                  ii.  EURODOLLAR  LOANS.  The unpaid  principal  amount of each
             Eurodollar Loan shall bear interest prior to maturity at a rate per
             annum equal to LIBOR in effect for the Interest Period with respect
             to  such  Eurodollar  Loan  plus  the  Applicable  Margin.  Accrued
             interest on each  Eurodollar  Loan shall be payable on the last day
             of the  Interest  Period  applicable  to  such  Loan  and,  if such
             Interest Period shall exceed three months, at three month intervals
             after the date of the Eurodollar Loan.

                  iii. INTEREST AFTER MATURITY.  Any principal of any Loan which
             is not  paid  when  due,  whether  at  the  stated  maturity,  upon
             acceleration  or otherwise,  shall bear interest from and including
             the  date  such  principal  shall  have  become  due  to  (but  not
             including) the date of payment  thereof in full at a rate per annum
             equal  to the  Prime  Rate  from  time to time in  effect  plus the
             Applicable  Margin  plus 2% per  annum  (but  until  the end of any
             Interest  Period for a Eurodollar  Rate Loan,  not less than 2 % in
             excess  of the rate  otherwise  applicable  for such  Loan).  After
             maturity, accrued interest shall be payable on demand.

                  iv.  MAXIMUM  RATE.  In  no  event  shall  the  interest  rate
             applicable to any amount  outstanding  hereunder exceed the maximum
             rate of interest allowed by applicable law, as amended from time to
             time.  Any  payment of  interest  or in the nature of  interest  in
             excess  of such  limitation  shall  be  credited  as a  payment  of
             principal  unless  the  Company  shall  request  the return of such
             amount.

                  v.   METHOD OF CALCULATING INTEREST AND FEES. Interest on each
             Loan shall be  computed  on the basis of a year  consisting  of (i)
             365/366,  as  applicable,  days for Prime Rate Loans,  and (ii) 360
             days for Eurodollar  Loans, and paid for actual days elapsed.  Fees
             shall be computed on the basis of a year consisting of 360 days and
             paid for actual days elapsed.

             c.   DISBURSEMENTS AND PAYMENTS

             The  Agent shall transfer the proceeds of  each  Loan  as  directed
by an Authorized  Officer.  Each Eurodollar Loan shall be payable on the earlier
of the last day of the Interest  Period  



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December 23, 2003
Page 4


applicable  thereto  or the  Termination  Date.  Each  Prime  Rate Loan shall be
payable on the Termination  Date. All payments to the Banks shall be made to the
Agent at LaSalle  Bank  National  Association  ABA No. 071 000 505,  Account No.
1378018,  reference ALLETE not later than 2:00 p.m., Chicago,  Illinois time, on
the date  when due and  shall be made in lawful  money of the  United  States of
America (in freely  transferable  U.S.  dollars)  and in  immediately  available
funds. Any payment that shall be due on a day, which is not a Banking Day, shall
be payable on the next  Banking  Day,  subject to the  definition  of  "Interest
Period".

             d.   PREPAYMENT; COMMITMENT REDUCTIONS

             The Company may  prepay  any  Loan  in  whole  or in part from time
to time (but,  if in part,  in an amount not less than  $1,000,000  and integral
multiples of $1,000,000 in excess thereof)  without premium or penalty  (subject
to the following paragraph) upon (i) 3 Business Days prior written notice to the
Agent  with  respect  to any  Eurodollar  Loan and  (ii)  prior  written  notice
delivered to the Agent prior to 10:00 a.m. (Chicago,  Illinois time) on the date
of such prepayment with respect to any Prime Rate Loan.

             If the Company shall prepay any Loan, it shall pay to the  Agent at
the time of each prepayment,  or at such later time designated by the Agent, any
and all costs described in Section 3(g) hereof.

             The Company  may reduce the amount of Commitments from time to time
in amounts not less than  $1,000,000  and integral  multiples of  $1,000,000  in
excess thereof without premium or penalty upon (i) 3 Business Days prior written
notice to the Agent, provided that the aggregate amount of Commitments shall not
exceed  the  aggregate  principal  amount of Loans  then  outstanding.  Any such
reduction  shall be applied  ratably to the Commitments of the Banks and may not
be reinstated.

             e.   NOTE

             The Company's  obligations  with  respect  to  the Loans  shall  be
evidenced  by a note for each Bank in the form  attached  as EXHIBIT A (each,  a
"Note" and,  collectively,  the "Notes").  The amount,  the rate of interest for
each Loan and the  Interest  Period (if  applicable)  shall be  endorsed  by the
respective  Bank on the schedule  attached to its Note, or at any Bank's option,
in its records,  which schedule or records shall be conclusive,  absent manifest
error,  PROVIDED,  HOWEVER,  that the  failure  of any Bank to record any of the
foregoing or any error in any such record  shall not limit or  otherwise  affect
the  obligation of the Company to repay all Loans made to it hereunder  together
with accrued interest thereon.


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December 23, 2003
Page 5


      2.     FEES.

             a.   CERTAIN FEES

             The Company  shall  pay,  or cause to be paid, to the Agent certain
fees set  forth in  the  Fee Letter  at the time specified in the Fee Letter for
payment of such amounts.

             b.   FACILITY FEE

             The  Company  agrees  to pay to the Banks a facility fee at the Fee
Rate on the amount of the  Facility  (whether or not used).  Such  facility  fee
shall be  payable by the  Company  quarterly  on the 30th day of each  December,
March,  June and September after the date hereof and on the Termination  Date as
set forth in Section 1(c) hereof.

             c.   UTILIZATION FEE

             For each day the  aggregate amount of Loans outstanding exceeds 33%
of the  Commitments  as in effect on such day, the Company  agrees to pay to the
Banks, in addition to any other amounts payable hereunder,  a utilization fee on
the aggregate outstanding amount of Loans on such date at a rate per annum equal
to the  Utilization  Fee Rate.  Such  utilization  fee shall be  payable  by the
Company  on the date  when the next  interest  payment  on such  Loans is due in
accordance with Section 1(b) hereof and on the Termination  Date as set forth in
Section 1(c) hereof.

      3.     ADDITIONAL PROVISIONS RELATING TO LOANS.

             a.   INCREASED COST

             The Company  agrees to reimburse  each Bank for any increase in the
cost to such Bank of, or any  reduction in the amount of any sum  receivable  by
such Bank in respect of, making or maintaining any Eurodollar  Loans  (including
the imposition,  modification or deemed applicability of any reserves,  deposits
or similar requirements).  The additional amount required to compensate any Bank
for such  increased  cost or reduced  amount  shall be payable by the Company to
such Bank within five days of the Company's  receipt of written notice from such
Bank specifying such increased cost or reduced amount and the amount required to
compensate  such Bank therefor,  which notice shall,  in the absence of manifest
error, be conclusive and binding on the Company.  In determining such additional
amount, a Bank may use reasonable averaging, attribution and allocation methods.

             b.   DEPOSITS   UNAVAILABLE  OR   INTEREST  RATE   UNASCERTAINABLE;
                  IMPRACTICABILITY

             If the Company has notified the Agent of its  intention to borrow a
Eurodollar  Loan for an  Interest  Period  and the Agent or any Bank  determines
(which determination shall be conclusive and binding on the Company) that:


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December 23, 2003
Page 6

                     (1) deposits of  the  necessary amount  for  such  Interest
                  Period are not available to such Bank in the London  interbank
                  market or, by reason of circumstances affecting  such  market,
                  adequate and reasonable means do not  exist  for  ascertaining
                  the Eurodollar Rate for such Interest Period; or

                     (2) LIBOR will not adequately and fairly reflect  the  cost
                  to the Bank of making or funding a Eurodollar  Loan  for  such
                  Interest Period; or

                     (3) the making or funding of Eurodollar  Loans  has  become
                  impracticable as  a result of any event  occurring  after  the
                  date of this Agreement which,  in  the opinion  of  the  Bank,
                  materially and adversely  affects  such Loans or the interbank
                  eurodollar market;

then any notice of a Eurodollar Loan previously given by the Company and not yet
borrowed shall be deemed to be a notice to make a Prime Rate Loan.

             c.   CHANGES IN LAW RENDERING EURODOLLAR LOANS UNLAWFUL

             If at any time due to the adoption of, or change in, any law, rule,
regulation,  treaty or  directive  or in the  interpretation  or  administration
thereof by any court,  central  bank,  governmental  authority  or  governmental
agency charged with the  interpretation  or administration  thereof,  or for any
other reason arising  subsequent to the date hereof, it shall become (or, in the
good faith judgment of any Bank,  raise a substantial  question as to whether it
is) unlawful for such Bank to make or fund any Eurodollar Loan, Eurodollar Loans
shall not be made  hereunder  for the duration of such  illegality.  If any such
event  shall make it  unlawful  for any Bank to continue  any  Eurodollar  Loans
previously made by it hereunder, the Company shall, after being notified by such
Bank of the occurrence of such event, on such date as shall be specified in such
notice,  either convert such  Eurodollar  Loan to a Prime Rate Loan or prepay in
full such Eurodollar Loan,  together with accrued interest thereon,  without any
premium or penalty (except as provided in Section 3(g)).

             d.   DISCRETION OF THE BANKS AS TO MANNER OF FUNDING

             Each Bank shall be entitled to fund and maintain its funding of all
or any part of the  Loans  in any  manner  it sees  fit;  it  being  understood,
however,  that for purposes of this Note, all determinations  hereunder shall be
made as if such Bank had actually  funded and maintained  each  Eurodollar  Loan
during the  Interest  Period for such  Eurodollar  Loan  through the purchase of
deposits  having a term  corresponding  to such  Interest  Period and bearing an
interest rate equal to LIBOR for such Interest Period.

             e.   TAXES

             All payments by the Company of principal of, and  interest on,  the
Loans and all other amounts  payable  hereunder  shall be made free and clear of
and  without  deduction  for any  present  or future  income,  excise,  stamp or
franchise taxes and other taxes, fees, duties,  


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December 23, 2003
Page 7

withholdings  or other  charges of any nature  whatsoever  imposed by any taxing
authority,  but  excluding  franchise  taxes and taxes imposed on or measured by
each  respective  Bank's net income or receipts (such  non-excluded  items being
called "Taxes").  If any withholding or deduction from any payment to be made by
the  Company  hereunder  is  required  in respect of any Taxes  pursuant  to any
applicable law, rule or regulation, then the Company will

                  i.   pay  directly  to  the relevant authority the full amount
             required to be so withheld or deducted;

                  ii.  promptly  forward  to  each  Bank  an official receipt or
             other documentation  satisfactory  to  such  Bank  evidencing  such
             payment to such authority; and

                  iii.  pay to each Bank such additional amount or amounts as is
             necessary  to  ensure that the net amount actually received by such
             Bank will equal the full amount such Bank would have  received  had
             no such withholding or deduction been required.

Moreover,  if any Taxes are directly asserted against any Bank or on any payment
received  by such Bank  hereunder,  such Bank may pay such Taxes and the Company
will promptly pay such  additional  amount  (including any penalty,  interest or
expense)  as is  necessary  in order that the net amount  received  by such Bank
after the payment of such Taxes (including any Taxes on such additional  amount)
shall  equal the amount  such Bank would  have  received  had no such Taxes been
asserted.

             If  the Company fails to  pay any Taxes when due to the appropriate
taxing  authority or fails to remit to any Bank the  required  receipts or other
required  documentary  evidence,  the Company shall  indemnify such Bank for any
incremental  Tax,  interest,  penalty or expense that may become payable by such
Bank as a result of any such failure.

             f.   INCREASED CAPITAL COSTS

             If any change  in, or the  introduction,  adoption,  effectiveness,
interpretation,   reinterpretation  or  phase-in  of,  any  law  or  regulation,
directive,  guideline,  decision or request  (whether or not having the force of
law) of any court,  central  bank,  regulator  or other  governmental  authority
affects  or would  affect  the  amount of capital  required  or  expected  to be
maintained  by any Bank or any  entity  controlling  any  Bank,  and  such  Bank
determines (in its sole and absolute  discretion) that the rate of return on its
or such controlling  entity's capital as a consequence of the Loans made by such
Bank or the  commitment  hereunder  is reduced to a level  below that which such
Bank or such  controlling  entity could have achieved but for the  occurrence of
any such circumstance,  then, in any such case, upon notice from time to time by
any Bank to the Company, the Company shall immediately pay directly to such Bank
additional amounts sufficient to compensate such Bank or such controlling entity
for such reduction in rate


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December 23, 2003
Page 8


of return.  A statement of any Bank as to any such additional  amount or amounts
(including  calculations  thereof in reasonable detail) shall, in the absence of
manifest  error, be conclusive and binding on the Company.  In determining  such
amount,  each Bank may use  reasonable  averaging,  attribution  and  allocation
methods.

             g.   FUNDING LOSSES

             The Company will  indemnify the Banks upon demand  against any loss
or expense which any Bank may sustain or incur (including,  without  limitation,
any loss or expense sustained or incurred in obtaining, liquidating or employing
deposits or other  funds  acquired  to effect,  fund or maintain  any Loan) as a
consequence  of (i) any failure of the  Company to make any payment  when due of
any amount due hereunder,  (ii) any failure of the Company to borrow a Loan on a
date specified therefor in a notice thereof, or (iii) any payment (including any
payment  upon  any  Bank's  acceleration  of the  Loans)  or  prepayment  of any
Eurodollar  Loan on a date  other than the last day of the  Interest  Period for
such Loan.

      4.     CONDITIONS PRECEDENT.

             a.   INITIAL LOAN

             The  obligation  of each  Bank to make the  initial  Loan  shall be
subject  to the  prior  or  concurrent  satisfaction  of each  of the  following
conditions precedent:
             
                  i.   The  Company  shall   have  delivered  to  the   Agent  a
             certificate  dated the date of the initial Loan of its Secretary or
             Assistant Secretary as to (i) resolutions of its Board of Directors
             then in full force and effect  authorizing the execution,  delivery
             and performance of this Agreement, the Notes, and each of the other
             Loan Documents;  and (ii) the incumbency and signatures of those of
             its officers authorized to act with respect to this Agreement,  the
             Note and each of the Loan  Documents  executed  by it,  upon  which
             certificate  the Banks may  conclusively  rely  until it shall have
             received  a  further  certificate  of the  Secretary  or  Assistant
             Secretary  of  the  Company   canceling  or  amending   such  prior
             certificate.

                  ii.  Each Bank shall have received its  respective  Note  duly
             executed and delivered by the Company.

                  iii. The Agent shall have received  an  opinion dated the date
             of  the  initial   Loan  from   counsel  to  the  Company  in  form
             satisfactory to the Agent.

                  iv.  The Company shall have paid to the Agent, for the account
             of the Banks,  a renewal fee equal to 0.20% of the  Commitments  in
             effect on the date hereof,  such fee to be distributed to the Banks
             based upon their share of the Commitments on the date hereof.


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December 23, 2003
Page 9

             b.   EACH LOAN

             The obligation of each Bank to make any Loan (including the initial
Loan) shall be subject to the following statements being true and correct before
and after giving effect to such Loan: (i) the representations and warranties set
forth in  Section 5 shall be true and  correct  with the same  effect as if then
made  (unless  stated to relate  solely to an earlier  date,  in which case such
representations  and  warranties  shall be true and  correct as of such  earlier
date);  and (ii) no Event of Default or  Unmatured  Event of Default  shall have
occurred and be continuing.

             Each  request  for a Loan shall be deemed a  representation  by the
Company, as to the matters set forth in this Section.

      5.     REPRESENTATIONS.

             The Company represents and warrants to the Banks that:

             a.   ORGANIZATION

             It is a corporation duly organized and in good  standing  under the
laws of its state of  organization  and duly  qualified  to do  business in each
jurisdiction where such qualification is necessary.

             b.   AUTHORIZATION

             The  execution  and  delivery of this  Agreement,  the Note and the
other Loan  Documents  and the  performance  by the  Company of its  obligations
hereunder  and  thereunder  are within the  Company's  powers and have been duly
authorized by all necessary  action on the Company's  part,  and do not and will
not  contravene  or conflict  with the  Company's  organizational  documents  or
violate or constitute a default under any law, rule or regulation  any presently
existing  requirement  or  restriction  imposed by  judicial,  arbitral or other
governmental instrumentality or any agreement,  instrument or indenture by which
the Company is bound.

             c.   ENFORCEABILITY

             This   Agreement  is  the  Company's   legal,   valid  and  binding
obligation, enforceable in accordance with its terms.

             d.   FINANCIAL STATEMENTS

             The audited financial  statements of the Company as at December 31,
2002 and the interim  financial  statements  of the Company as at September  30,
2003,  copies of which have been  furnished to the Agent,  have been prepared in
accordance with generally accepted accounting  principles  consistently applied,
and present fairly the financial condition of the


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December 23, 2003
Page 10

Company at the date  thereof  and the results of its  operations  for the period
then ended. Since the date of such interim financial statements,  there has been
no Material Adverse Change.

             e.   USE OF PROCEEDS

             The Company  agrees that  proceeds of any Loan shall be used solely
for the purpose of providing  liquidity support with respect to commercial paper
borrowings of the Company or for other valid general corporate purposes.

      6.     COVENANTS.

             From   the  date  of  this  Agreement  and  thereafter  until   the
termination  of the Facility  and until the  Obligations  are paid in full,  the
Company agrees that it will:

             a.   FINANCIAL INFORMATION. Furnish to the Agent:

                  i.   As soon as available and in  any  event  within  60  days
             after the end of each of the first  three  fiscal  quarters of each
             fiscal  year of the  Company,  consolidated  balance  sheets of the
             Company,  and internally prepared unaudited  consolidating  balance
             sheets of the Company and its  subsidiaries,  each as at the end of
             such fiscal  quarter,  and  statements of earnings and cash flow of
             the  Company,  and  internally  prepared  unaudited   consolidating
             statements  of earnings of the Company and its  subsidiaries,  each
             for such quarter and for the period  commencing at the beginning of
             such fiscal year and ending with the end of such quarter, certified
             by the chief financial officer of the Company;

                  ii.  as soon  as  available  and  in any event within 120 days
             after the end of each  fiscal  year of the  Company,  a copy of the
             annual audit report for such fiscal year for the Company, including
             balance sheets of the Company as of the end of such fiscal year and
             statements  of earnings and cash flow for such fiscal year, in each
             case  certified in a manner  acceptable to the Agent by independent
             public  accountants  acceptable  to the  Agent  together  with  the
             internally  prepared unaudited (a) consolidating  balance sheets as
             of the end of such fiscal year,  and (b) statements of earnings for
             the period  commencing  at the  beginning  of such  fiscal year and
             ending  with the end of such  fiscal  year,  of the Company and its
             subsidiaries;

                  iii. upon the occurrence of a Unmatured  Event  of  Default or
             Event of  Default,  notice of such  Unmatured  Event of  Default or
             Event of Default; and

                  iv.  such other information with respect  to  the condition or
             operations,  financial or otherwise, of the Company as any Bank may
             from time to time reasonably request.


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December 23, 2003
Page 11

             b.   FURTHER RESTRICTIONS ON USE OF PROCEEDS

             Not, and not permit  any  Subsidiary  or  affiliate  of the Company
to, use the proceeds of any Loan, directly or indirectly, for the purpose of (i)
purchasing  any  securities   underwritten  or  privately  placed  by  ABN  AMRO
Incorporated  ("AAI"),  an affiliate of the Agent,  (ii) purchasing from AAI any
securities in which AAI makes a market or (iii)  refinancing or making  payments
of principal,  interest or dividends on any securities issued by the Company, or
any Subsidiary or affiliate of the Company,  and underwritten,  privately placed
or dealt in by AAI.

             c.   PROHIBITION OF FUNDAMENTAL CHANGES. The Company shall not:

                  i.   Enter into any transaction of merger of  consolidation or
             amalgamation,  or liquidate,  wind up or dissolve itself (or suffer
             any liquidation or dissolution); or

                  ii.  Convey, sell, lease, transfer or otherwise dispose of, in
             one transaction or a series of  transactions,  all or a substantial
             portion of its  business  or  property  without  the prior  written
             consent  of  the  Required  Banks,   which  consent  shall  not  be
             unreasonably withheld.

Notwithstanding the foregoing provisions of this subsection (c), the Company may
(x) merge or  consolidate  with any other Person if the Company is the surviving
corporation or the surviving  corporation assumes the liabilities of the Company
by  operation  of law or  otherwise,  and (y) so long as no  Unmatured  Event of
Default or Event of Default has  occurred  and is  continuing,  or would  result
therefrom,  the Company may spin-off its  automotive  services  division  into a
publicly traded company.

             d.   MAXIMUM RATIO OF FUNDED DEBT TO TOTAL CAPITAL

             The Company shall  at  all  times,   measured as of the end of each
fiscal  quarter  of the  Company  and  immediately  after  the  spin-off  of its
automotive  division,,  maintain a maximum ratio of Funded Debt to Total Capital
of .60 to 1.0.

             e.   INTEREST COVERAGE RATIO

             The Company shall  maintain at all times an Interest Coverage Ratio
of not less than 3.00 to 1.00, as  determined at the end of each fiscal  quarter
of the Company.


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December 23, 2003
Page 12

      7.     EVENTS OF DEFAULT.

             a.   EVENTS. Each  of  the  following  shall constitute an Event of
Default:

                  i.   The Company fails to pay when due any  principal  of,  or
             interest  on, any Loan or any other  amount  payable  hereunder  or
             under any Note;

                  ii.  Any material representation or warranty  of  the  Company
             made or  deemed  made  hereunder  or under  any  other  writing  or
             certificate  furnished  by or on behalf of the Company to the Agent
             for the  purposes of or in  connection  with this  Agreement  shall
             prove to have been false or misleading in any material respect when
             made or deemed made;

                  iii. The Company defaults in the due performance or observance
             of Section  6(b)  hereof or the Company  defaults  in any  material
             respect in the due performance or observance of any other agreement
             contained  herein or in any other Loan  Document  and such  default
             shall  continue  for 30 days after notice  thereof  shall have been
             given to the Company from the Agent;

                  iv.  The maturity of any indebtedness of the Company under any
             agreement or obligation in an aggregate  principal amount exceeding
             $5,000,000  shall be accelerated,  or any default shall occur under
             one or more agreements or instruments under which such indebtedness
             may be issued or created  and such  default  shall  continue  for a
             period of time  sufficient to permit the holder or  beneficiary  of
             such  indebtedness or a trustee  therefor to cause the acceleration
             of the maturity of such  indebtedness or any mandatory  unscheduled
             prepayment, purchase or funding thereof;

                  v.   Judgments or orders for the payment of money in excess of
             $5,000,000 shall be rendered against the Company and such judgments
             or orders shall continue  unsatisfied  and unstayed for a period of
             30 days:

                  vi.  The Company or any Subsidiary shall

                       (1) become insolvent or generally fail  to  pay, or admit
                  in writing its inability or  unwillingness  to  pay, debts  as
                  they become due;
                  
                       (2) apply for, consent to or acquiesce in the appointment
                  of a trustee,  receiver,  sequestrator  or other custodian for
                  the Company or any Subsidiary or any property thereof, or make
                  a general assignment for the benefit of creditors;

                       (3) in  the  absence  of  such  application,  consent  or
                  acquiescence,  permit or suffer to exist the  appointment of a
                  trustee,  receiver,  sequestrator  or other  custodian for the
                  Company or any  Subsidiary  or for a  substantial  


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ALLETE
December 23, 2003
Page 13

                  part of the  property  thereof,  and such  trustee,  receiver,
                  sequestrator or other custodian shall not be discharged within
                  30 days;

                       (4) permit  or  suffer  to  exist the commencement of any
                  bankruptcy,  reorganization, debt arrangement or other case or
                  proceeding  under any  bankruptcy  or  insolvency  law, or any
                  dissolution,  winding up or liquidation proceeding, in respect
                  of the  Company  or any  Subsidiary  and,  if any such case or
                  proceeding is not commenced by the Company or such Subsidiary,
                  such case or proceeding shall be consented to or acquiesced in
                  by the Company or such Subsidiary or shall result in the entry
                  of  an  order  for   relief  or  shall   remain  for  60  days
                  undismissed; or

                       (5) take any action authorizing, or  in  furtherance  of,
                  any of the foregoing; or

                  vii. any Material Adverse Change shall have occurred.

             b.   REMEDIES

             Upon the occurrence of an Event of Default under Section  7(a)(vi),
the  commitment of the Banks to make Loans shall be terminated and the Notes and
all other  obligations  hereunder  shall become  immediately  due and payable in
full; and upon the  occurrence of any other Event of Default,  the commitment of
the Banks to make  Loans  may be  terminated  by the  Banks  and the Agent  tray
declare the Notes and the  principal of and accrued  interest on each Loan,  and
all other amounts payable hereunder, to be forthwith due and payable in full.

      8.     DEFINITIONS.

             As used in this Agreement:
     
             "AGENT" means LaSalle Bank National Association, in its capacity as
Agent for the Banks hereunder, and its successors in such capacity.

             "APPLICABLE MARGIN" means (i) with respect to Eurodollar Loans, (a)
0.525% per annum for any day Level I Status exists; (b) 0.750% per annum for any
day Level II Status  exists;  (c)  0.850% per annum for any day Level III Status
exists;  (d) 1.300% per annum for any day Level IV Status exists; and (e) 2.000%
per annum for any day Level V Status exists; and (ii) with respect to Prime Rate
Loans,  (a) 0.000% per annum for any day Level I Status  exists;  (b) 0.000% per
annum for any day Level II Status exists; (c) 0.000% per annum for any day Level
III Status exists;  (d) 0.500% per annum for any day Level IV Status exists; and
(e) 1.500% per annum for any day Level V Status exists.

             "AUTHORIZED  OFFICER" means each officer or employee of the Company
who is authorized to request  Loans,  to confirm in writing any such request and
to agree to  rates of  


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ALLETE
December 23, 2003
Page 14

interest,  as set forth on the schedule of  Authorized  Officers  most  recently
delivered by the Company to the Agent.

             "BANK"  means each bank listed on the  signature  page  hereof,  or
which  subsequently  becomes a party hereto by execution of a Joinder Agreement,
and its successors and assigns.

             "BANKING DAY" means any day other than a Saturday,  Sunday or other
day on which the Banks are required or  permitted to close in Chicago and,  with
respect to Eurodollar  Loans on which  dealings in Dollars are carried on in the
London interbank market.

             "COMMITMENT" means, with respect to each Bank, the amount set forth
opposite the name of such Bank on the signature  pages  hereof,  or on a Joinder
Agreement, as applicable.

             "CONSOLIDATED  EBITDA" means,  for any period,  for the Company and
its  subsidiaries  (which for  purposes  of this  definition  shall  include any
subsidiary  consolidated into the financial statements of the Company other than
ALLETE Water Services,  Inc. and any other subsidiary of the Company as to which
the  Company  has  announced  on or  prior to  December  15,  2002  that it will
discontinue the operations of such subsidiary) on a consolidated  basis, (A) the
sum of the amounts for such period of (i) Consolidated  Net Income,  (ii) to the
extent deducted in arriving at Consolidated Net Income,  net federal,  state and
local income taxes in respect of such  period,  (iii) to the extent  deducted in
arriving at Consolidated Net Income,  Consolidated Interest Expense, (iv) to the
extent deducted in arriving at Consolidated  Net Income,  the amount charged for
the amortization of intangible assets, (v) to the extent deducted in arriving at
Consolidated Net Income,  the amount charged for the depreciation of assets, and
(vi)  to  the  extent   deducted  in  arriving  at   Consolidated   Net  Income,
extraordinary  losses,  less (B) the  amount  for such  period of, to the extent
added in  arriving  at  Consolidated  Net Income,  extraordinary  gains,  all as
determined on a consolidated basis in accordance with GAAP.

             "CONSOLIDATED INTEREST EXPENSE" means, with reference to any period
of the Company and its subsidiaries (which for purposes of this definition shall
include any subsidiary consolidated into the financial statements of the Company
other than ALLETE Water Services,  Inc. and any other  subsidiary of the Company
as to which the Company has  announced  on or prior to December 15, 2002 that it
will discontinue the operations of such subsidiary), the sum of (i) all interest
charges (including  capitalized interest,  imputed interest charges with respect
to  capitalized  leases and all  amortization  of debt  discount and expense and
other  deferred  financing  charges) of the Company  and its  subsidiaries  on a
consolidated  basis, and (ii) all commitment or other fees payable in respect of
the  issuance of standby  letters of credit or other credit  facilities  for the
account of the Company or its subsidiaries,  all as determined on a consolidated
basis in accordance with GAAP.

             "CONSOLIDATED  NET INCOME" means, for any period of the Company and
its  subsidiaries  (which for  purposes  of this  definition  shall  include any
subsidiary  consolidated into 


<PAGE>
ALLETE
December 23, 2003
Page 15

the financial  statements of the Company other than ALLETE Water Services,  Inc.
and any other subsidiary of the Company as to which the Company has announced on
or prior to December 15, 2002 that it will  discontinue  the  operations of such
subsidiary), the amount for such period of consolidated net income (or net loss)
of the Company and its  subsidiaries,  as determined on a consolidated  basis in
accordance with GAAP.

             "EURODOLLAR  LOAN"  means any Loan which  bears  interest at a rate
determined with reference to LIBOR (plus the Applicable Margin).

             "EVENT OF DEFAULT" means an event described in Section 7(a).

             "FACILITY"  has the meaning set forth in the initial  paragraph  of
this Agreement.

             "FEDERAL FUNDS RATE" means,  the per annum rate at which  overnight
federal  funds  are from  time to time  offered  to the Agent by any bank in the
interbank market, as stated by the Agent.

             "FEE  LETTER"  means that certain  letter  between the Borrower and
LaSalle Bank National Association and its affiliates relating to certain fees to
be paid by the Borrower to, and solely for the account of, LaSalle Bank National
Association and its affiliates, as such letter may from time to time be amended.

             "FEE RATE" means a rate per annum equal to (i) 0.100% per annum for
any day Level I Status exists; (ii) 0.125% per annum for any day Level II Status
exists;  (iii) 0.150% per annum for any day Level III Status exists; (iv) 0.200%
per annum for any day Level IV Status  exists;  and (v) 0.500% per annum for any
day Level V Status exists.

             "FUNDED  DEBT"  means,  for  any  entity  on a  consolidated  basis
(without  duplication):  (i) all indebtedness of such entity for borrowed money;
(ii) the deferred and unpaid  balance of the purchase price owing by such entity
on account of any assets or services  purchased  (other than trade  payables and
other accrued  liabilities  incurred in the ordinary course of business that are
not overdue by more than 180 days unless being  contested in good faith) if such
purchase  price is (A) due more than nine months from the date of  incurrence of
the  obligation  in  respect  thereof  or (B)  evidenced  by a note or a similar
written   instrument;   (iii)  all  capitalized  lease  obligations;   (iv)  all
indebtedness secured by a Lien on any property owned by such entity,  whether or
not such  indebtedness has been assumed by such entity or is nonrecourse to such
entity; (v) notes payable and drafts accepted representing  extensions of credit
whether or not  representing  obligations  for  borrowed  money (other than such
notes or drafts from the  deferred  purchase  price of assets or services to the
extent  such  purchase   price  is  excluded  from  clause  (ii)  above);   (vi)
indebtedness evidenced by bonds, notes or similar written instrument;  (vii) the
face amount of all  letters of credit and  bankers'  acceptances  issued for the
account of such entity,  and without  duplication,  all drafts drawn  thereunder
(other  than such  letters of credit,  bankers'  acceptances  and drafts for the
deferred  purchase price of assets or services to the extent 


<PAGE>
ALLETE
December 23, 2003
Page 16

such purchase price is under interest rate  agreements or currency  agreements);
(viii)  guaranty  obligations  of such entity with respect to  indebtedness  for
borrowed money of another entity (including affiliates) in excess of $25,000,000
in the aggregate;  provided,  however, that in no event shall any calculation of
Funded Debt include (a) deferred taxes, (b) securitized trade  receivables,  (c)
deferred  credits  including  regulatory  assets  and  contributions  in  aid of
construction,  (d) the lease  obligations for Lake Superior Paper, Inc. relating
to paper mill  equipment as provided for under an operating  lease  extending to
2012 or (e) 75% of the indebtedness associated with Square Butte.

             "GAAP" means generally accepted accounting  principles as in effect
in the  United  States  from  time  to  time,  applied  by the  Company  and any
subsidiary on a basis consistent with the preparation of the Company's financial
statements furnished to the Agent.

             "INTEREST COVERAGE RATIO" means, for any period of four consecutive
fiscal  quarters of the Company  ending with the most  recently  completed  such
fiscal  quarter,  the  ratio  of (A)  Consolidated  EBITDA  to (B)  Consolidated
Interest Expense for such period.

             "INTEREST  PERIOD" means for any Eurodollar  Loan, a period of one,
two, three or six months, as designated by the Company,  in each case commencing
on the date of such Loan. Each Interest Period that would otherwise end on a day
which is not a Banking Day shall end on the next  succeeding  Banking Day unless
such next Banking Day would be the first Banking Day in the next calendar month,
in which case such Interest  Period shall end on the preceding  Banking Day. Any
Interest  Period for a Eurodollar Loan which begins on the last Banking Day of a
calendar month (or on a day for which there is no numerically  corresponding day
in the calendar month at the end of such Interest  Period) shall end on the last
Banking  Day of the  calendar  month  at the end of  such  Interest  Period.  No
Interest Period shall extend beyond the Termination  Date, and in such case, the
Termination Date shall be deemed the end of the Interest Period.

             "JOINDER  AGREEMENT" means a joinder agreement in the form attached
hereto as Exhibit "B."

             "LEVEL I STATUS"  means,  subject to Section 9(r)  hereof,  the S&P
Rating is A- or higher and the Moody's Rating is A3 or higher.

             "LEVEL II STATUS"  means,  subject to Section 9(r) hereof,  Level I
Status  does not exist,  but the S&P  Rating is BBB+ or higher  and the  Moody's
Rating is Baa1 or higher.

             "LEVEL III STATUS" means,  subject to Section 9(r) hereof,  neither
Level I Status nor Level II Status  exists,  but the S&P Rating is BBB or higher
and the Moody's rating is Baa2 or higher.


<PAGE>
ALLETE
December 23, 2003
Page 17


             "LEVEL IV STATUS"  means,  subject to Section 9(r) hereof,  none of
Level I Status,  Level II Status nor Level III Status exists, but the S&P Rating
is BBB- or higher and the Moody's Rating is Baa3 or higher.

             "LEVEL V STATUS"  means,  subject to Section 9(r)  hereof,  none of
Level I Status, Level II Status, Level III Status nor Level IV Status exists.

             "LIBOR"  means a rate of  interest  equal to the per annum  rate of
interest at which United States dollar  deposits in an amount  comparable to the
principal balance of the Eurodollar Loan to be made by the Agent in its capacity
as a Bank and for a period equal to the relevant  Interest Period are offered in
the London Interbank  Eurodollar market at 11:00 a.m. (London time) two Business
Days prior to the  commencement  of each  Interest  Period,  as displayed in the
Bloomberg  Financial Markets system, or other  authoritative  source selected by
the  Agent in its  reasonable  discretion,  divided  by a number  determined  by
subtracting from 1.00 the maximum reserve percentage for determining reserves to
be maintained  by member banks of the Federal  Reserve  System for  Eurocurrency
liabilities,  such rate to remain fixed for such  Interest  Period.  The Agent's
determination of LIBOR shall be conclusive, absent manifest error

             "LOAN" means a loan made pursuant to Section 1.

             "LOAN  DOCUMENTS"  means this  Agreement,  the Notes and each other
agreement, document or instrument delivered in connection with this Agreement.

             "MATERIAL  ADVERSE  CHANGE"  means  any  change  in  the  business,
organization,  assets,  properties  or  condition  (financial  or  other) of the
Company which could  materially  and adversely  affect the Company's  ability to
perform hereunder including,  without limitation,  representations,  warranties,
covenants  and  payment  of  Obligations,  it being  agreed  that the  Company's
spin-off its  automotive  services  division into a publicly  traded  company in
accordance  with  Sections  6(c) and (d) hereof shall not  constitute a Material
Adverse Change.

             "MOODY'S  RATING"  means the rating  assigned by Moody's  Investors
Service,  Inc. and any successor thereto that is a nationally  recognized rating
agency  to  the  outstanding  senior  unsecured  non-credit  enhanced  long-term
indebtedness of the Company (or if neither Moody's Investors  Service,  Inc. nor
any such successor shall be in the business of rating long-term indebtedness,  a
nationally  recognized  rating agency in the U.S. as mutually agreed between the
Agent and the Company).  Any reference in this Agreement to any specific  rating
is a reference to such rating as currently defined by Moody's Investors Service,
Inc. (or such a successor) and shall be deemed to refer to the equivalent rating
if such rating system changes.

             "NOTE" has the meaning set forth in SECTION 1.5.

             "NOTICE OF BORROWING"  means a notice from the Company to the Agent
requesting  the  making of a Loan and which is  delivered  pursuant  to  Section
1(a)(i) or Section 1(a)(ii) hereof.


<PAGE>
ALLETE
December 23, 2003
Page 18


             "OBLIGATIONS" means all obligations  (monetary or otherwise) of the
Company arising under or in connection  with this Agreement,  the Notes and each
of the other Loan Documents.

             "PRIME RATE" means a floating rate of interest  equal to the higher
(redetermined  daily) of (i) the per annum  rate of  interest  announced  by the
Agent from time to time at its principal office in Chicago as its prime rate for
Dollar loans or (ii) the Federal Funds Rate plus 0.5%.  (The "prime rate" is set
by the Agent based upon  various  factors  and is used as a reference  point for
pricing some loans. It is not necessarily the best rate available to the Agent's
customers at any point in time.)

             "PRIME  RATE LOAN"  means any Loan which  bears  interest at a rate
determined by reference to the Prime Rate.

             "REQUIRED  BANKS" means, at any time, Banks having at least 66-2/3%
of the aggregate amount of the Commitments.

             "S&P RATING" means the rating assigned by Standard & Poor's Ratings
Group, a division of The McGraw-Hill  Companies,  Inc. and any successor thereto
that  is a  nationally  recognized  rating  agency  to  the  outstanding  senior
unsecured  non-credit  enhanced  long-term  indebtedness  of the Company (or, if
neither  such  division  nor any  successor  shall be in the  business of rating
long-term  indebtedness,  a nationally  recognized  rating agency in the U.S. as
mutually  agreed  between  the Agent and the  Company).  Any  reference  in this
Agreement  to any  specific  rating is a reference  to such rating as  currently
defined by  Standard & Poor's  Ratings  Group,  a  division  of The  McGraw-Hill
Companies,  Inc.  (or such a  successor)  and  shall be  deemed  to refer to the
equivalent rating if such rating system changes.

             "SUBSIDIARY" means ALLETE Automotive Services, Inc.

             "TAXES" has the meaning set forth in Section 3(e).

             "TOTAL CAPITAL" means the sum of retained  earnings,  stockholders'
equity (including preferred stock and QUIPs), all determined with respect to the
Company and its  subsidiaries  on a consolidated  basis in accordance  with GAAP
consistently applied, and Funded Debt.

             "UNMATURED EVENT OF DEFAULT" means an event which with notice,  the
lapse of time or both would constitute an Event of Default.

             "UTILIZATION  FEE RATE"  means a rate equal to (i) 0.125% per annum
for any day Level I Status  exists;  (ii)  0.125% per annum for any day Level II
Status exists;  (iii) 0.125% per annum for any day Level III Status exists; (iv)
0.250%  per annum for any day Level IV Status  exists;  and (v) 0.500% per annum
for any day Level V Status exists.


<PAGE>
ALLETE
December 23, 2003
Page 19


      9.     GENERAL.

             a.   INSTRUCTIONS
             
             The Company hereby  authorizes the Agent and each Bank to rely upon
telephonic,  written or facsimile instructions of any person identifying himself
or herself as an Authorized  Officer and upon any  signature  which the Agent or
such Bank believes to be genuine,  and the Company shall be bound thereby in the
same manner as if such person were  authorized or such  signature  were genuine.
The  Company  agrees to  indemnify  the Agent and each Bank from and against all
losses and expenses  arising out of the Agent's or such Bank's  reliance on said
instructions or signatures.

             b.   PAYMENTS

             Payments  hereunder and under the Note shall be made in immediately
available funds in Dollars without off-set, counter-claim or other deduction.

             c.   COSTS

             The  Company  shall pay all costs of the Agent with  respect to the
negotiation, preparation, execution and delivery of this Agreement and the other
Loan Documents, any amendments,  waivers, consents or modifications with respect
thereto  and all  costs of the Agent  and each  Bank in  connection  with the of
enforcement  or  collection  of every  kind,  including  but not  limited to all
reasonable  attorneys' fees,  court costs and expenses  incurred by the Agent or
any Bank in connection  with  collection or  protection  or  enforcement  of any
rights hereunder whether or not any lawsuit is ever filed.

             d.   INDEMNIFICATION

             In consideration of the execution and delivery of this Agreement by
the Agent and each Bank and the  extension  of  credit  hereunder,  the  Company
hereby indemnifies, exonerates and holds the Agent and each Bank and each of its
respective  officers,  directors,   employees  and  agents  (collectively,   the
"Indemnified  Parties")  free and harmless from and against any and all actions,
causes of action,  suits, losses,  costs,  liabilities and damages, and expenses
incurred in connection therewith (irrespective of whether such Indemnified Party
is a party  to the  action  for  which  indemnification  hereunder  is  sought),
including  reasonable  attorneys'  fees  and  disbursements  (collectively,  the
"Indemnified  Liabilities"),  incurred by the Indemnified Parties or any of them
as a result of, or arising out of, or relating to any transaction financed or to
be financed in whole or in part,  directly or  indirectly,  with the proceeds of
any  Loan  or  any  investigation,  litigation  or  proceeding  related  to  any
environmental  cleanup,  audit,  compliance  or  other  matter  relating  to the
protection  of the  environment  or the release by the Company of any  hazardous
material, except for any such Indemnified Liabilities arising for the account of
a particular  Indemnified  Party by reason of the relevant  Indemnified  Party's
gross negligence or willful misconduct.  If and to the extent that the foregoing
undertaking may be  unenforceable  for 


<PAGE>
ALLETE
December 23, 2003
Page 20

any reason,  the Company hereby agrees to make the maximum  contribution  to the
payment  in  satisfaction  of  each  of the  Indemnified  Liabilities  which  is
permissible under applicable law.

             e.   NOTICES

             All notices and other  communications  provided to any party hereto
under  this  Agreement  or any other  Loan  Document  shall be in  writing or by
facsimile and  addressed,  delivered or transmitted to such party at its address
or  facsimile  number  set forth  below its  signature  hereto or at such  other
address or facsimile  number as may be  designated  by such party in a notice to
the other  parties.  Any notice,  if mailed and properly  addressed with postage
prepaid shall be deemed given five days after mailed. Any notice sent by courier
service  shall be deemed given when  received.  Any notice,  if  transmitted  by
facsimile, shall be deemed given when transmitted.

             f.   SURVIVAL

             The  Obligations of the Company under Sections  2(b),  3(a),  3(e),
3(f),  3(g),  9(c),  9(d) and 10(g)  hereof  shall  survive  any  payment of the
principal of and interest on the Loans and the termination of this Agreement.

             g.   COUNTERPARTS

             This   Agreement   may  be  executed  in  any  number  of  separate
counterparts, each of which when so executed and delivered shall be an original,
and all such counterparts shall together constitute one and the same instrument.
Delivery of an executed  counterpart  via  facsimile or other method shall be as
effective as delivery of an original executed counterpart.

             h.   AMENDMENT AND WAIVER

             Any  provision of this  Agreement or any other Loan Document may be
amended or waived if, but only if, such amendment or waiver is in writing and is
signed by the Company and the  Required  Banks (and,  if the rights or duties of
the Agent are affected thereby, by the Agent);  PROVIDED that no such amendment,
waiver or  modification  shall,  unless signed by all the Banks,  (i) change the
Commitment of any Bank (except for a ratable  decrease in the Commitments of all
Banks)  or  subject  any Bank to any  additional  obligation,  (ii)  reduce  the
principal  of or rate of  interest  on any  Loan or any  fees  hereunder,  (iii)
postpone  the date fixed for any payment of principal of or interest on any Loan
or any fees hereunder or (iv) change the percentage of the Commitments or of the
aggregate unpaid  principal  amount of the Notes, or the number of Banks,  which
shall be  required  for the Banks or any of them to take any  action  under this
Section or any other provision of this Agreement. Any waiver by the Agent or any
Bank of any  rights  hereunder  or under  any  other  Loan  Document  shall  not
constitute  a waiver of any other rights of the Agent and the Banks from time to
time.


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ALLETE
December 23, 2003
Page 21

             i.   JURISDICTION

             ANY  LITIGATION  BASED  HEREON,  OR ARISING  OUT OF,  UNDER,  OR IN
CONNECTION  WITH,  THIS  AGREEMENT OR THE NOTE OR ANY OTHER LOAN DOCUMENT OR ANY
COURSE OF CONDUCT, COURSE OF DEALING,  STATEMENTS (WHETHER VERBAL OR WRITTEN) OR
ACTIONS OF THE AGENT,  ANY BANK OR THE COMPANY  SHALL BE BROUGHT AND  MAINTAINED
EXCLUSIVELY  IN THE  COURTS OF THE STATE OF  ILLINOIS  OR IN THE  UNITED  STATES
DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS;  PROVIDED,  HOWEVER,  THAT
ANY SUIT SEEKING  ENFORCEMENT  AGAINST ANY  COLLATERAL OR OTHER  PROPERTY MAY BE
BROUGHT,  AT THE AGENT'S OPTION,  IN THE COURTS OF ANY  JURISDICTION  WHERE SUCH
COLLATERAL  OR OTHER  PROPERTY MAY BE FOUND.  THE COMPANY  HEREBY  EXPRESSLY AND
IRREVOCABLY  SUBMITS TO THE  JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS
AND OF THE UNITED STATES  DISTRICT  COURT FOR THE NORTHERN  DISTRICT OF ILLINOIS
FOR THE  PURPOSE  OF ANY SUCH  LITIGATION  AS SET FORTH  ABOVE  AND  IRREVOCABLY
CONSENTS  TO  PERSONAL  SERVICE  WITHIN OR WITHOUT  THE STATE OF  ILLINOIS.  THE
COMPANY HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED
BY LAW, ANY  OBJECTION  WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF
VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY
CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE
EXTENT  THAT  THE  COMPANY  HAS OR  HEREAFTER  MAY  ACQUIRE  ANY  IMMUNITY  FROM
JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS  (WHETHER THROUGH SERVICE OR
NOTICE,  ATTACHMENT  PRIOR  TO  JUDGMENT,  ATTACHMENT  IN  AID OF  EXECUTION  OR
OTHERWISE)  WITH  RESPECT  TO  ITSELF  OR  ITS  PROPERTY,   THE  COMPANY  HEREBY
IRREVOCABLY  WAIVES  SUCH  IMMUNITY  IN  RESPECT OF ITS  OBLIGATIONS  UNDER THIS
AGREEMENT, THE NOTE AND EACH OTHER LOAN DOCUMENT.

             j.   WAIVER OF JURY TRIAL

             THE COMPANY,  THE AGENT AND THE BANKS WAIVE ANY RIGHT TO A TRIAL BY
JURY IN ANY ACTION OR  PROCEEDING  TO  ENFORCE  OR DEFEND ANY RIGHTS  UNDER THIS
AGREEMENT,  THE NOTE OR ANY OTHER LOAN DOCUMENT,  AND THE COMPANY, THE AGENT AND
THE BANKS AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT
AND NOT A JURY.

             k.   CONFIDENTIALITY

             The Company,  the Agent and the Banks hereby agree and  acknowledge
that all  information  relating to the Company or any  subsidiary,  which is (i)
furnished  by the  Company to the Agent and the Banks  pursuant  hereto and (ii)
non-public, confidential or proprietary in 


<PAGE>
ALLETE
December 23, 2003
Page 22


nature, shall be kept confidential by the Agent and the Banks in accordance with
applicable law, PROVIDED that such information and other information relating to
the Company and its  subsidiaries  may be distributed by the Agent and each Bank
to  the  Agent  and  such  Bank's  respective  directors,  officers,  employees,
attorneys, affiliates, auditors and regulators (and, upon the order of any court
or other governmental  agency having jurisdiction over the Agent or any Bank, to
any other person or entity).  The  provisions of this Section 9(k) shall survive
the termination of this Agreement.

             Notwithstanding  anything  herein  to  the  contrary,  confidential
"information" shall not include, and the Agent and each Bank may disclose to any
and all persons, without limitation of any kind, any information with respect to
the U.S.  federal income tax treatment and U.S.  federal income tax structure of
the  transactions  contemplated  hereby and all materials of any kind (including
opinions  or other tax  analyses)  that are  provided  to the Agent or such Bank
relating to such tax treatment and tax structure.

             l.   APPLICABLE LAW

             This  Agreement,  the Notes and each other Loan  Document  shall be
governed by the internal  laws of the State of Illinois  applicable to contracts
made and to be performed entirely within such State.

             m.   SHARING OF SET-OFFS

             Each Bank  agrees  that if it  shall,  by  exercising  any right of
set-off or  counterclaim  or otherwise,  receive  payment of a proportion of the
aggregate  amount of principal and interest due with respect to any Note held by
it which is greater than the proportion received by any other Bank in respect of
the aggregate amount of principal and interest due with respect to any Note held
by such other Bank,  the Bank  receiving such  proportionately  greater  payment
shall  purchase such  participations  in the Notes held by the other Banks,  and
such  other  adjustments  shall be  made,  as may be  required  so that all such
payments of principal  and interest  with respect to the Notes held by the Banks
shall be shared by the Banks pro rata;  PROVIDED  that  nothing in this  Section
shall  impair  the  right of any  Bank to  exercise  any  right  of  set-off  or
counterclaim it may have and to apply the amount subject to such exercise to the
payment of  indebtedness  of the Company other than its  indebtedness  under the
Notes. The Company agrees,  to the fullest extent it may effectively do so under
applicable  law,  that each Bank and any  holder of a  participation  in a Note,
whether or not acquired  pursuant to the  foregoing  arrangements,  may exercise
rights of set-off or  counterclaim  and other rights under  applicable  law, and
with respect to such holder of such a  participation  as fully as if such holder
of a  participation  were a direct creditor of the Company in the amount of such
participation.


<PAGE>
ALLETE
December 23, 2003
Page 23


             n.   PARTICIPATIONS

             Any  Bank  may  at  any  time  grant  to one or more banks or other
institutions (each a "PARTICIPANT") participating interests in its Commitment or
any or all of  its  Loans.  In the  event  of  any  such  grant  by a Bank  of a
participating  interest  to a  Participant,  whether  or not upon  notice to the
Company  and the  Agent,  such Bank  shall  remain  solely  responsible  for the
performance of its  obligations  hereunder,  and the Company and the Agent shall
continue  to deal solely and  directly  with such Bank in  connection  with such
Bank's rights and obligations  under this Agreement.  Any agreement  pursuant to
which any Bank may grant such a  participating  interest shall provide that such
Bank shall retain the sole right and  responsibility  to enforce the obligations
of the Company hereunder including, without limitation, the right to approve any
amendment,  modification  or  waiver of any  provision  of this  Agreement.  The
Company  agrees  that each  Participant  shall,  to the extent  provided  in its
participation  agreement,  be entitled to the benefits of Section 3 with respect
to its participating interest.

             o.   ASSIGNMENTS

             Any Bank  may at  any  time  assign  to  one or more banks or other
financial institutions (each an "ASSIGNEE") all, or a proportionate part of all,
of its  rights and  obligations  under this  Agreement  and the Notes,  and such
Assignee  shall  assume  such  rights  and  obligations,  pursuant  to a Joinder
Agreement  in  substantially  the  form of  Exhibit  B hereto  executed  by such
Assignee and such transferor Bank, with (and subject to) the subscribed  consent
of the Company,  which shall not be unreasonably  withheld, and the Agent, which
shall not be unreasonably withheld; PROVIDED that if an Assignee is an affiliate
of such transferor Bank or was a Bank immediately  prior to such assignment,  no
such consent of the Company  shall be required;  and PROVIDED  FURTHER  that, if
such assignment is in respect of a proportionate  part of the transferor  Bank's
rights and obligations  hereunder and under the Notes, the amount of such Bank's
Commitment  (together with the Commitment of any affiliate of such Bank),  after
taking into account such assignment,  is at least an amount equal to $5,000,000.
Upon  execution and delivery of such  instrument and payment by such Assignee to
such  transferor  Bank of an amount equal to the purchase  price agreed  between
such transferor  Bank and such Assignee,  such Assignee shall be a Bank party to
this  Agreement and shall have all the rights and  obligations  of a Bank with a
Commitment as set forth in such  instrument of  assumption,  and the  transferor
Bank shall be released from its obligations hereunder to a corresponding extent,
and no  further  consent  or  action by any party  shall be  required.  Upon the
consummation of any assignment  pursuant to this Subsection 9(o), the transferor
Bank, the Agent and the Company shall make appropriate  arrangements so that, if
required,  a new Note is issued to the  Assignee.  In  connection  with any such
assignment, the transferor Bank shall pay to the Agent an administrative fee for
processing such assignment in the amount of $3,500.


<PAGE>
ALLETE
December 23, 2003
Page 24

             p.   FEDERAL RESERVE BANKS

             Any  Bank  may  at any time assign all or any portion of its rights
under this  Agreement  and its Note to one or more of the Federal  Reserve Banks
which comprise the Federal Reserve System.  No such assignment shall release the
transferor Bank from its obligations hereunder.

             q.   IDENTITY OF HOLDERS

             The  Agent   and   the  Company  may,  for  all  purposes  of  this
Agreement,  treat  any Bank as the  holder of any Note  drawn to its order  (and
owner of the Loans  evidenced  thereby)  until  written  notice  of  assignment,
participation or other transfer shall have been received by them.

             r.   SPLIT-RATINGS

             In  the  event  the  Company's S&P Rating and Moody's Rating do not
fall within the same Level Status, then (1) if the S&P Rating's Level Status and
the Moody's  Rating's Level Status are in consecutive  Level Status  categories,
the lower Level Status  shall be deemed to apply for purposes of this  Agreement
or (2) if the S&P Rating's  Level Status and the Moody's  Rating's  Level Status
are  not  in  consecutive  Level  Status  categories,   then  the  Level  Status
immediately  above the lower of the S&P  Rating's  Level  Status and the Moody's
Rating's  Level Status shall be deemed to apply for purposes of this  Agreement.
For purposes of this  Agreement,  Level I Status shall be deemed the highest and
Level V Status shall be deemed the lowest.

             s.   CONTINUED EFFECT; NO NOVATION

             Notwithstanding  anything  contained  herein, this Agreement is not
intended to and does not serve to effect a novation of the Obligations. Instead,
it is the express  intention of the parties hereto to reaffirm the  indebtedness
which is outstanding as of the date hereof created under the Existing  Committed
Facility Letter which is evidenced by the notes provided for therein.

             t.   ADDITIONAL LENDERS

             The Company may, upon the approval  of  the  Agent, add  additional
lenders as Banks hereto (each a "NEW BANK"), PROVIDED that if as a result of the
addition  of any New Bank the  aggregate  amount of  Commitments  then in effect
would exceed  $200,000,000,  the  approval of the  Required  Banks shall also be
required  prior to adding  any such New  Bank.  Costs  incurred  by the Agent in
connection with adding any New Bank shall be paid by the Company,  and the legal
documentation  pursuant  to which  any New  Bank is  added  shall be in form and
substance reasonably satisfactory to the Agent.

             u.   RESIGNATION OF ABN AMRO


<PAGE>
ALLETE
December 23, 2003
Page 25

             The parties acknowledge that effective as of the  date  hereof  ABN
AMRO Bank N.V. is no longer the Agent under the Facility and its  Commitment has
terminated.

      10.    THE AGENT.

             a.   APPOINTMENT AND AUTHORIZATION

             Each Bank  irrevocably  appoints  and  authorizes the Agent to take
such  action as agent on its  behalf  and to  exercise  such  powers  under this
Agreement  and the Notes as are  delegated  to the Agent by the terms  hereof or
thereof, together with all such powers as are reasonably incidental thereto.

             b.   AGENTS FEE

             The  Company shall pay to the Agent for its own account fees in the
amounts  and at the times  previously  agreed  upon  between the Company and the
Agent.

             c.   AGENT AND AFFILIATES

             LaSalle Bank  National  Association  shall have the same rights and
powers  under this  Agreement as any other Bank and may exercise or refrain from
exercising  the same as though it were not the Agent,  and LaSalle Bank National
Association  and its  affiliates may accept  deposits  from,  lend money to, and
generally  engage in any kind of business  with the Company or  affiliate of the
Company as if it were not the Agent hereunder.

             d.   ACTION BY AGENT

             The obligations of the Agent hereunder are only those expressly set
forth herein. Without limiting the generality of the foregoing,  the Agent shall
not be required to take any action with respect to any Event of Default,  except
as expressly  provided in Section 7(b). The Agent's  duties  hereunder and under
the other Loan  Documents are only those  expressly set forth herein and therein
and  nothing  herein  or  therein  shall be  deemed  to  impose on the Agent any
fiduciary obligation to any Bank or the Company.

             e.   CONSULTATION WITH EXPERTS

             The Agent may consult  with legal  counsel  (who may be counsel for
the Company),  independent  public  accountants and other experts selected by it
and shall not be liable  for any  action  taken or  omitted to be taken by it in
good  faith in  accordance  with the  advice  of such  counsel,  accountants  or
experts.


<PAGE>
ALLETE
December 23, 2003
Page 26

             f.   LIABILITY OF AGENT

             Neither the Agent nor any of its directors,  officers,  agents,  or
employees shall be liable to any Bank for any action taken or not taken by it in
connection herewith (i) with the consent or at the request of the Required Banks
or (ii) in the  absence  of its own  gross  negligence  or  willful  misconduct.
Neither the Agent nor any of its directors,  officers, agents or employees shall
be  responsible  to any Bank  for or have  any  duty to any  Bank to  ascertain,
inquire into or verify (i) any  statement,  warranty or  representation  made in
connection with this Agreement or any borrowing hereunder;  (ii) the performance
or observance  of any of the  covenants or agreements of the Company;  (iii) the
satisfaction of any condition  specified in Article III, except receipt of items
required to be delivered to the Agent;  (iv) the existence or  continuance of an
Event of Default;  or (iv) the validity,  effectiveness  or  genuineness of this
Agreement,  the  Notes,  the other Loan  Documents  or any other  instrument  or
writing  furnished  in  connection  herewith.  The  Agent  shall  not  incur any
liability  by  acting  in  reliance  upon  any  notice,  consent,   certificate,
statement, or other writing (which may be a bank wire, telex or similar writing)
believed  by it in good faith to be genuine or to be signed by the proper  party
or parties.

             g.   INDEMNIFICATION

             Each  Bank  shall,  ratably  in  accordance  with  its  Commitment,
indemnify the Agent (to the extent not  reimbursed  by the Company)  against any
cost, expense (including counsel fees and disbursements), claim, demand, action,
loss or liability  (except such as result from the Agent's  gross  negligence or
willful  misconduct)  that the Agent may suffer or incur in connection with this
Agreement or any action taken or omitted by the Agent hereunder.

             h.   CREDIT DECISION

             Each  Bank  acknowledges  that it has,  independently  and  without
reliance  upon the Agent or any other  Bank,  and  based on such  documents  and
information  as it has  deemed  appropriate,  made its own credit  analysis  and
decision to enter into this Agreement. Each Bank also acknowledges that it will,
independently  and without  reliance upon the Agent or any other Bank, and based
on such  documents and  information  as it shall deem  appropriate  at the time,
continue  to make its own  credit  decisions  in taking or not taking any action
under this Agreement.

             i.   SUCCESSOR AGENT

             The Agent may resign at any time by giving  written  notice thereof
to the Banks and the Company.  Upon any such  resignation,  the  Required  Banks
shall have the right to appoint a successor  Agent,  which successor Agent shall
be  satisfactory  to the  Company.  If no  successor  Agent  shall  have been so
appointed by the  Required  Banks,  and shall have  accepted  such  appointment,
within 30 days after the retiring  Agent gives notice of  resignation,  then the
retiring  Agent may, on behalf of the Banks,  appoint a successor  Agent,  which
shall be a commercial  


<PAGE>
ALLETE
December 23, 2003
Page 27

bank  organized or licensed under the laws of the United States of America or of
any  State  thereof  and  having a  combined  capital  and  surplus  of at least
$100,000,000 and shall otherwise be subject to the consent of the Company, which
consent  shall  not  be  unreasonably  withheld.  Upon  the  acceptance  of  its
appointment as Agent hereunder by a successor Agent,  such successor Agent shall
thereupon  succeed  to and become  vested  with all the rights and duties of the
retiring  Agent,  and the retiring Agent shall be discharged from its duties and
obligations  hereunder.  After any  retiring  Agent's  resignation  hereunder as
Agent,  the  provisions  of this  Article  shall  inure to its benefit as to any
actions taken or omitted to be taken by it while it was Agent.



<PAGE>

                  Please  acknowledge your agreement to the foregoing by signing
and returning a copy of this letter.


Commitment:  $35,000,000                  LASALLE BANK NATIONAL 
                                          ASSOCIATION, individually as a 
                                          Bank and as Agent.

                                          By: /s/ Denis J. Campbell  
                                             -----------------------------------
                                              Denis J. Campbell

                                          Title: Senior Vice President       
                                                --------------------------------


                                          By: /s/ Matthew D. Rodgers
                                             -----------------------------------
                                              Matthew D. Rodgers

                                          Title: Loan Officer
                                                --------------------------------


                             Address:     LaSalle Bank National Association
                                          Syndications Unit
                                          135 South LaSalle Street, Suite 1425
                                          Chicago, Illinois 60603
                                          Attention: Damatria Gilbert
                                          Facsimile: (312) 904-4448
                                          Telephone: (312) 904-8277

                                          With copies to:

                                          LaSalle Bank National Association
                                          135 South LaSalle Street
                                          Chicago, Illinois 60603
                                          Attention: Chip Campbell
                                          Facsimile: (312) 904-1994
                                          Telephone: (312) 904-4497






<PAGE>



Commitment:  $25,000,000                  U.S. BANK NATIONAL ASSOCIATION
              



                                          By: /s/ Andrew Gaspard      
                                             -----------------------------------
                                          Name:  Andrew Gaspard      
                                               ---------------------------------
                                          Title: Assistant Vice President     
                                                --------------------------------



<PAGE>



Commitment:  $25,000,000                  WELLS FARGO BANK,
                                          NATIONAL ASSOCIATION        



                                          By:       /s/ Mark Halldorson        
                                             -----------------------------------
                                          Name:      Mark H. Halldorson    
                                               ---------------------------------
                                          Title:      Vice President   
                                                --------------------------------

                                          By: /s/ Douglas A. Lindstrom  
                                             -----------------------------------
                                          Name: Douglas A. Lindstrom  
                                               ---------------------------------
                                          Title: Vice President   
                                                --------------------------------
                                                 Wells Fargo Bank, National 
                                                 Association



<PAGE>


Commitment:  $35,000,000                  SUNTRUST BANK
             

                                          By:       /s/ Mary B. Smith     
                                             -----------------------------------
                                          Name:       MARY B. SMITH   
                                               ---------------------------------
                                          Title:         DIRECTOR
                                                --------------------------------

<PAGE>




Commitment:  $35,000,000                  BANK ONE
               


                                          By: /s/ Jane Bek Keil  
                                             -----------------------------------
                                          Name: Jane Bek Keil 
                                               ---------------------------------
                                          Title: Director   
                                                --------------------------------


<PAGE>




Commitment:  $20,000,000                  THE BANK OF TOKYO - MITSUBISHI, LTD.,
                                               CHICAGO BRANCH
               



                                          By:       /s/ Patrick McCue  
                                             -----------------------------------
                                          Name:  Patrick McCue 
                                          Title: Vice President & Manager   


                                          


<PAGE>



Agreed to this 23rd day of December, 2003



ALLETE, INC.

By:  /s/ James K. Vizanko       
   --------------------------------------

Title:                                               
      -----------------------------------


Address:  30 West Superior Street
          Duluth, Minnesota 55802
          Attention: Corporate Treasurer

Facsimile No.: (218) 723-3912




<PAGE>

                                                                  EXHIBIT 10(t)2


                                AMENDMENT TO THE
                     ALLETE EXECUTIVE ANNUAL INCENTIVE PLAN

    The ALLETE Executive Annual Incentive Plan  (the  "Plan") dated  January  1,
1999, is amended as follows:

    A new Article 20 is added to provide as follows:

20.    Amendment.  The Company reserves the right to cancel,  amend,  terminate,
suspend or otherwise change the Plan or outstanding Awards for any reason at any
time before,  during or after the  Performance  Year to which an Award  relates,
upon  authorization  of its  Board  of  Directors.  The  Executive  Compensation
Committee of the Board of Directors may expand,  reduce or otherwise  change any
and all opportunities,  Awards, and any and all financial factors,  or financial
measures  used in the Plan or  outstanding  Awards  for any  reason  at any time
before,  during or after the  Performance  Year to which an Award  relates.  All
changes  described in this paragraph are at the sole  discretion of the Board of
Directors and/or the Executive Compensation Committee,  may be made at any time,
and may have a retroactive effective date.



                                         ALLETE, Inc.,


                                    By:  /s/ Philip R. Halverson
                                         ---------------------------------------
                                         Philip R. Halverson
                                         Vice President, General Counsel
                                         and Secretary






<PAGE>
                                                                   EXHIBIT 10(u)









                         ALLETE AND AFFILIATED COMPANIES


                     SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN



                            (AS AMENDED AND RESTATED
                           EFFECTIVE JANUARY 1, 2004)






<PAGE>

                                TABLE OF CONTENTS


                                                                            Page

SECTION 1.         ESTABLISHMENT AND PURPOSE...................................1

     1.1           Establishment of Plan.......................................1
     1.2           Purpose of the Plan.........................................4

SECTION 2.         DEFINITIONS.................................................4

     2.1           Definitions.................................................4
     2.2           Gender and Number...........................................6

SECTION 3.         ELIGIBILITY AND PARTICIPATION...............................7

     3.1           Eligibility.................................................7
     3.2           Participation...............................................8
     3.3           No Guarantee of Employment..................................9

SECTION 4.         BENEFITS....................................................9

     4.1           Annual Makeup Award.........................................9
     4.2           Salary Deferral............................................10
     4.3           Bonus Deferral.............................................10
     4.4           Severance Deferral.........................................10
     4.5           Non-Qualified Stock Option Gain Deferral...................11
     4.6           Retirement Benefit.........................................11
     4.7           Benefit Allocations and Maintenance of Accounts............12
     4.8           Date of Benefit Commencement...............................13
     4.9           Form of Benefit Payment - Executive Deferral Account.......14
     4.10          Form of Payment - Retirement Benefits......................15
     4.11          Benefit Payments Upon Participant's Death..................16
     4.12          Benefit Payment Upon Disability............................17
     4.13          Benefit Payment Upon Termination Other Than Retirement,
                   Death or Disability........................................17

                                       i


<PAGE>

     4.14          Hardship and Unscheduled Benefit Payments..................17
     4.15          Supplemental Tax Benefit...................................18

SECTION 5.         ADMINISTRATION.............................................18

     5.1           Committee..................................................18
     5.2           Uniform Rules..............................................18
     5.3           Notice of Address..........................................19
     5.4           Records....................................................19
     5.5           Correction of Errors.......................................19
     5.6           Claims
 Procedure...........................................19
     5.7           Change of Law..............................................20
     5.8           Tax Withholding............................................20
     5.9           Generation-Skipping Tax....................................20

SECTION 6.         GENERAL PROVISIONS.........................................21

     6.1           Nonassignability...........................................21
     6.2           Incompetency...............................................21
     6.3           Employment Rights..........................................22
     6.4           No Individual Liability....................................22
     6.5           Illegality of Particular Provision.........................22
     6.6           Contractual Obligations....................................22
     6.7           Counterparts...............................................23
     6.8           Evidence...................................................23
     6.9           Action by Company..........................................23

SECTION 7.         AMENDMENT AND TERMINATION..................................23

     7.1           Amendment and Termination..................................23
     7.2           Reorganization of the Company..............................23

SECTION 8.         APPLICABLE LAWS............................................24

     8.1           Applicable Laws ...........................................24

                                       ii


<PAGE>

                         ALLETE AND AFFILIATED COMPANIES
                     SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
                            (As Amended and Restated
                           Effective January 1, 2004)



                      SECTION 1. ESTABLISHMENT AND PURPOSE

     1.1  ESTABLISHMENT OF PLAN

          ALLETE, Inc., formerly  MINNESOTA POWER & LIGHT COMPANY (the "Company"
          and also  sometimes  "ALLETE")  established,  effective  as of July 1,
          1980, a Supplemental  Retirement  Plan for eligible  executives of the
          Company,  such  Plan  to  be  known  as  the  SUPPLEMENTAL   EXECUTIVE
          RETIREMENT  PLAN (THE "PLAN").  The Plan was  established  in order to
          provide   supplemental  current  or  retirement  benefits  payable  as
          provided hereafter solely from the general assets of the Company.  The
          Plan  is  intended  to be  exempt  from  the  participation,  vesting,
          funding,  and  fiduciary  requirements  of  Title  1 of  the  Employee
          Retirement Income Security Act of 1974.

          Effective  as of  January  1,  1981,  the Plan was  amended to include
          compensation attributable to the Company's Incentive Compensation Plan
          in determining benefits under this Plan.

          Effective  as of January 1, 1982,  the Plan was  amended to change the
          manner in which  Incentive  Awards are accounted for when  determining
          benefits payable at retirement under Section 4.6.

          Effective  December  1,  1982,  the Plan was  amended  to  change  the
          deferral and cash payment options of the Plan.

          The Plan was amended including revisions through and including May 10,
          1983,  and  restated  in its  entirety  as of  January  1,  1983.  The
          revisions  included a provision to provide benefits that are above the
          limitations under Section 415 of the Internal Revenue Code.

                                      -1-


<PAGE>

          Effective  January 1,  1984,  the Plan was  amended  to provide  for a
          predetermined  interest  rate of 10.5% to be used in  determining  the
          value of certain benefits under the Plan.

          Effective  January 1, 1987,  the Plan was  amended to provide  for two
          additional  investment  choices for monies deferred under the Plan and
          to make other minor changes to the Plan.

          Effective  August 1, 1987,  the Plan has been amended to provide for a
          fixed rate of return of 8% under  Section 4.15 for deferral  elections
          made after that date rather than a return that is the greater of 10.5%
          or the Company's actual overall  percentage return on capital,  and to
          make a minor change in the Plan name.

          Effective  May 1, 1988,  the Plan was amended so that  benefits  under
          Subsections  4.1(c) and (d) of the 1988 Plan  document  are  available
          only to active Participants who were age 60 or older as of said date.

          Effective  November  1,  1988,  the  Plan  has  been  amended  to make
          revisions  in certain  discretions  available  to the  Company  and to
          eligible Participants.

          Effective  January  1,  1990,  the  Plan has been  amended  to  remove
          Participant  choice  with  respect to the  payment of  benefits  under
          Subsection  4.1(b).  The Plan has also been amended to  eliminate  the
          makeup  of the 2% CORE  benefits,  which  were  eliminated  under  the
          Supplemental  Retirement  Plan (SRP) to account for the Employee Stock
          Ownership  Plan  (ESOP),  and to provide for a makeup of the  Employee
          Stock Ownership Plan Partnership account allocation contribution.  The
          Plan was also amended to eliminate the benefits  previously  described
          in Subsections 4.1(c) and (d) of the 1988 legal plan document.

          Effective  August 1,  1992,  the Plan was  amended  to change the date
          Retirement Benefits are due and payable from the last day of the month
          to the first day of the month.

          Effective March 1, 1994, the Plan was amended to calculate the monthly
          benefit  provided  under  Section 4.6 using a final  average  earnings
          calculation    which   combines   Results   Sharing   with   Incentive
          Compensation.

          Effective  August 1, 1994,  the Plan was  amended  at  Section  3.1 to
          eliminate the eligibility  option of annual  compensation in excess of
          $100,000,  to increase voluntary  deferrals,  to

                                      -2-


<PAGE>

          provide for a present  value  calculation  at  Subsection  4.1(d),  to
          change  options for measuring  indexes for monies  deferred  under the
          Plan, and to make other minor administrative changes.

          Effective  January 1, 1995,  the Plan was  amended to suspend  benefit
          payments  when  a  Participant  is  re-employed  by the  Company  in a
          regular, full-time position.

          Effective  January  1,  1997,  the  Plan  was  amended  to  allow  for
          Participants to change the duration of the distribution period.

          Effective  June 17,  1997,  the Plan was  amended  to credit  accounts
          during  distribution of benefits with the Company's  return on capital
          fixed rate of 8%.

          Effective  July 1, 1998,  the Plan was  amended  to  combine  deferred
          amounts into a single Executive Deferral Account.

          Effective January 1, 1999, the Plan was amended to allow participation
          by those employees who receive a management salary.

          Effective  January 1, 2001,  the Plan was amended to provide  that the
          Executive   Deferral   Account   be   distributed   pursuant   to  the
          Participant's  election in the event of death,  to distribute  account
          balances of less than $10,000 in a lump sum, and to change the name of
          the Plan to the ALLETE Supplemental Executive Retirement Plan.

          Effective  January 1, 2002 the Plan was amended to allow the choice of
          a life or joint and  survivor  annuity  for  Retirement  Benefits,  to
          eliminate deferrals which exceeded limitations imposed by Code Section
          415,  to allow  unscheduled  in-service  withdrawals,  to  remove  the
          limitation   on  deferrals  of  annual   salary,   and  to  provide  a
          supplemental  tax benefit for  participants in the event that they are
          terminated  due to a change in  control,  and to reflect the merger of
          the Supplemental Retirement Plan and the Employee Stock Ownership Plan
          into the Retirement Savings and Stock Ownership Plan.

          Effective  January 20,  2003,  deferrals  of stock  option  gains were
          eliminated.

                                      -3-

<PAGE>

          Effective  December  1, 2003,  the  termination  of a  Participant  is
          clarified to include the sale of a Participant's employer, but not the
          separation  of a  Participant's  employer  from the Company  through a
          stock dividend.

     1.2  PURPOSE OF THE PLAN

          It is the  purpose of this Plan to provide  eligible  executives  with
          benefits that will compensate them for limitations  which apply to the
          Minnesota Power and Affiliated  Companies Flexible  Compensation Plan,
          Minnesota Power and Affiliated  Companies Retirement Savings and Stock
          Ownership Plan  (sometimes  hereinafter  the  "Retirement  Savings and
          Stock  Ownership  Plan" or  "RSOP"),  Minnesota  Power and  Affiliated
          Companies  Retirement  Plan A and to provide a benefit which  includes
          compensation  attributable to the ALLETE  Executive  Annual  Incentive
          Plan  (sometimes  hereinafter the "Annual  Incentive  Plan") and Other
          Awards as though such awards were eligible for benefit plans which are
          qualified  under  Section  401(a)  and (k) of the Code.  The Plan also
          provides  for  deferral of salary and annual and  long-term  incentive
          compensation awards.


                             SECTION 2. DEFINITIONS

     2.1  DEFINITIONS

          Whenever  used  in the  Plan,  the  following  terms  shall  have  the
          respective  meanings  set  forth  below,  unless  otherwise  expressly
          provided herein, and when the defined meaning is intended, the term is
          capitalized:

          (A)  "ANNUAL  INCENTIVE  AWARD" means the annual  award  received by a
               Participant  under the ALLETE  Executive Annual Incentive Plan or
               any predecessor plan.

          (B)  "CHANGE IN CONTROL"  means  change of control of ALLETE,  Inc. as
               defined in the ALLETE Executive Long Term Incentive  Compensation
               Plan.

          (C)  "COMMITTEE"  means the committee with authority to administer the
               Plan as provided under Section 5.1.

                                      -4-


<PAGE>

          (D)  "COMPANY" means ALLETE,  Inc., and any other  affiliated  company
               which adopts this Plan by action of its Board of Directors and is
               consented to by the Compensation Committee of the ALLETE Board of
               Directors.  A list of  such  companies  shall  be  maintained  by
               ALLETE.

          (E)  "COMPENSATION" means the Participant's earnings during a calendar
               year,  before  any  reduction   pursuant  to  Code  Sections 125,
               132(f)(4),  or 401(k). It does not include overtime compensation,
               if any,  bonuses,  Annual  Incentive  Awards  and  Other  Awards,
               expenses,  allowances,  commission  payments (except when regular
               compensation consists wholly or in part of commissions,  in which
               case commission payments are included), employer contributions or
               awards under this Plan or other employee  benefit plans,  imputed
               income  (whether  such imputed  income is from vehicle use,  life
               insurance  premiums,  or any other source) payments made pursuant
               to the  Results  Sharing  Program,  payment of stock  options and
               performance  shares  under the Long Term  Incentive  Compensation
               Plan, and any other payments of a similar nature.  In the case of
               a  Participant  who is  employed  jointly by the  Company  and an
               affiliated  company  (as  defined in the RSOP),  Compensation  as
               defined  herein  shall  include  amounts  received  from all such
               companies.

          (F)  "DEFERRED  STOCK UNIT" means the units  credited to a Participant
               which correspond to the number of shares the Participant deferred
               in accordance with Section 4.5.

          (G)  "ELIGIBLE  SURVIVING SPOUSE" means surviving spouse as defined in
               the Company's Retirement Plan A.

          (H)  "EXECUTIVE  DEFERRAL  ACCOUNT"  OR "EDA" OR  "ACCOUNT"  means the
               account where  deferrals  pursuant to Sections 4.1, 4.2, 4.3, 4.4
               and 4.5 are credited.

          (I)  "OTHER AWARD" means an annual award  received by the  Participant
               as  approved  by  the  Committee  and  which  is not  the  Annual
               Incentive  Award  described in  Subsection  2.1(A),  and does not
               include a severance benefit.

          (J)  "PAY"  means the annual  salary as of October 1 of the year prior
               to the year for  which  the  allocation  is  attributed  to under
               Section 4.1 of this Plan.

                                      -5-

<PAGE>

          (K)  "PARTICIPANT" is defined in Section 3.

          (L)  "RETIRE" OR  "RETIREMENT"  means a  Participant's  termination of
               employment  after  attaining  "Early  Retirement  Age" or "Normal
               Retirement  Age" defined as the earliest date under any qualified
               retirement plan of the Participant's employer.

          (M)  "RETIREMENT  BENEFIT" means the benefit  payable to a Participant
               pursuant  to the Plan by reason of the  Participant's  Retirement
               with the Company described in Section 4.6.

          (N)  "RETIREMENT  PLAN A" means the  Minnesota  Power  and  Affiliated
               Companies Retirement Plan A.

          (O)  "RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN" OR "RSOP" means the
               Minnesota Power and Affiliated  Companies  Retirement Savings and
               Stock Ownership Plan.

          (P)  "STOCK  OPTION GAIN SHARES  DEFERRAL  ELECTION"  means the annual
               election made by the Participant in accordance with Section 4.5.

          (Q)  "SUPPLEMENTAL  SALARY  REDUCTION  AGREEMENT"  means an  agreement
               entered  into by a  Participant  and the Company in December of a
               fiscal year under  which the  Participant  irrevocably  agrees to
               forego   compensation   that  would  otherwise  be  paid  to  the
               Participant during the next fiscal year.

          (R)  "VALUATION DATE" means each date on which the Accounts are valued
               as provided in Subsection 4.7(C).

     2.2  GENDER AND NUMBER

          Except  when  otherwise  indicated  by  the  context,   any  masculine
          terminology  used herein shall also include the feminine,  and the use
          of any term herein in the singular may also include the plural.

                                      -6-


<PAGE>

                    SECTION 3. ELIGIBILITY AND PARTICIPATION

     3.1  ELIGIBILITY

          Any employee of the Company shall become a Participant as follows:

          (A)  For benefits  under Section 4.1, 4.2, 4.3 and 4.4, an employee in
               management  salary  grade or other  employees  as approved by the
               Committee,  who  participates  in  the  ALLETE  Executive  Annual
               Incentive Plan or is eligible to receive an Other Award, shall be
               eligible to  participate  in this Plan  beginning  with the first
               calendar year in which such employee  becomes eligible to receive
               Annual Incentive Awards or Other Awards.

               The  following conditions must also be satisfied:

               i.   The  Participant  is in the employment of the Company on the
                    last day of the calendar year;

               ii.  The  Participant  died while  employed by the Company during
                    such calendar year;

               iii. The Participant Retired during such calendar year;

               iv.  The  Participant  is  disabled  and  is  receiving   benefit
                    payments under the Company's  Long-Term  Disability  Benefit
                    Plan during such calendar year; or

               v.   The Participant was on leave of absence at the close of such
                    calendar  year and  received  Compensation  from the Company
                    during such year.

          (B)  For benefits under Section 4.5,  senior  executive  employees are
               eligible  as  approved  by  the  Company's  Board  of  Directors.
               Effective January 20, 2003, no additional  employees are eligible
               for the benefits provided under Section 4.5.

          (C)  For benefits under Section 4.6,  employees who received an Annual
               Incentive Award or Other Awards while in ALLETE management salary
               grades SA - SM.

                                   -7-


<PAGE>

     3.2  PARTICIPATION

          An employee who becomes a Participant shall remain eligible to have an
          account  in the Plan as a  Participant  hereunder,  without  regard to
          Compensation  and Annual  Incentive Awards or Other Awards received in
          subsequent  years,  until  the  last to  occur  of (i) the  employee's
          Retirement or termination from service for any reason or (ii) the date
          all benefits,  if any, to which he or she is entitled  hereunder  have
          been distributed.  Employees, who were former Participants, who become
          employed by an ALLETE wholly or partially owned company,  shall not be
          considered  as retired or  terminated  until such time as they  become
          retired  or  terminated  from the new  company.  If a  Participant  is
          employed by a subsidiary  of the Company,  and such  subsidiary  is no
          longer at least 50% owned by the Company,  then such  Participant will
          be  considered  to be  terminated  or Retired  (as  defined in Section
          2.1(L)) on such date. Distribution of the Participant's benefits under
          Sections  4.9,   4.10  or  4.13  shall  occur  as  provided   therein.
          Notwithstanding the preceding sentence of this Paragraph, in the event
          that a Participant is employed by a subisidary of the Company which is
          distributed to  shareholders  through a stock spin off to shareholders
          of  ALLETE,  then  the  Participant  will  not  be  considered  to  be
          terminated  or Retired (as defined in Section  2.1(L)) for purposes of
          Section 4.9, 4.10 or 4.13 until their  employment at such  distributed
          company terminates for any reason, including Retirement.  For purposes
          of Section 4.6, the  Participant  will be  considered  Retired (as set
          forth in Section  2.1(L)) if the Participant  continues  employment at
          such distributed  company until the Participant's  50th birthday.  Any
          employment  period,  salary or other amount  earned while  employed at
          such  distributed  company,  however,  will  not  be  included  in the
          calculation of the benefit provided under Section 4.6.

          An employee who was a Participant,  but is not currently  eligible for
          benefits  under Sections 4.1, 4.2, 4.3, 4.4, and 4.5, will not receive
          account  additions as described herein.  However,  the employee may be
          eligible for  benefits  under  Section 4.6 if they  qualify  under the
          terms provided in that Section.

          An employee who is a  Participant  who dies prior to  Retirement is no
          longer entitled to the benefit described under Section 4.6.

                                      -8-


<PAGE>

     3.3  NO GUARANTEE OF EMPLOYMENT

          Participation  in the Plan does not constitute a guarantee or contract
          of employment  with the Company.  Such  participation  shall in no way
          interfere  with any rights the  Company  would have in the  absence of
          such  participation  to  determine  the  duration  of  the  employee's
          employment with the Company.


                               SECTION 4. BENEFITS

     4.1  ANNUAL MAKEUP AWARD

          For each  calendar  year ending on or after  December  31,  1980,  and
          except as  hereinafter  specifically  provided in this  Section 4, the
          Company shall credit each Participant who qualifies:

               (A)  FLEXIBLE DOLLAR MAKEUP. An amount equal to the sum of (a) 2%
                    plus (b) the Participant's  life insurance  percentage under
                    the  Minnesota  Power  and  Affiliated   Companies  Flexible
                    Compensation  Program for nonunion employees,  multiplied by
                    the  following:  (i) the total of the  Participant's  Annual
                    Incentive  Award and Other  Awards for such year,  plus (ii)
                    any amount of the  Participant's  annual Pay not included in
                    calculating   benefits   under  the   Minnesota   Power  and
                    Affiliated  Companies  Flexible   Compensation  Program  for
                    nonunion  employees for such year due to  limitations  under
                    Internal Revenue Service (IRS) Code Section 404(l).

               (B)  RSOP  ALLOCATION  MAKEUP.  An amount equal to the applicable
                    Partnership   allocation  percent  being  contributed  under
                    Section 4.4(c) of the RSOP of the following:

                    (a)  the total of the  Participant's  Annual Incentive Award
                         and Other Award for such year, plus

                    (b)  the  amount  of  the  Participant's   Compensation  not
                         included in calculating  benefits under the RSOP due to
                         limitations under IRS Code Section 404(l).

                                      -9-


<PAGE>

          If a Participant  transfers to an ineligible  status,  dies or Retires
          during the year,  this  calculation  will be based on the full  Annual
          Incentive Award and Other Award. If a Participant's annual Pay exceeds
          that amount allowed under IRS qualified plan's compensation limit, the
          amount of Participant's  annual Pay will be prorated for the number of
          months in an eligible status.

               (C)  RSOP MATCH ALLOCATION  MAKEUP. An amount equal to 50% of the
                    amount deferred by the Participant under Section 4.2 of this
                    Plan plus any amount deferred under Section 5.1 of the RSOP,
                    provided,  however,  that for any calendar year,  such match
                    shall not apply to any amount  deferred by a Participant  in
                    excess of the amount  specified in Subsection  4.4(e) of the
                    RSOP of the Participant's Compensation plus Annual Incentive
                    Award and Other  Award.  Such amount shall be reduced by any
                    amount being  contributed  by the Company  under  Subsection
                    4.4(e) of the RSOP.

     4.2  SALARY DEFERRAL

          Effective  through  December 31, 2002,  the Company  shall credit each
          Participant  who  qualifies  an amount equal to the amount for which a
          Participant has elected to reduce his or her annual salary pursuant to
          a Supplemental  Salary Reduction  Agreement,  not to exceed 25% of the
          Participant's  annual salary less the amount  allowable to be deferred
          under the RSOP.  Effective  January 1, 2003,  the Company shall credit
          each Participant who qualifies an amount equal to the amount for which
          a Participant  has elected to reduce his or her annual salary pursuant
          to a Supplemental Salary Reduction Agreement.

     4.3  BONUS DEFERRAL

          The Company  shall  credit each  Participant  who  qualifies an amount
          equal to the amount for which a  Participant  has elected to defer his
          or her Annual Incentive Award or Other Award.

     4.4  SEVERANCE DEFERRAL

          The Company  shall  credit each  Participant  who  qualifies an amount
          equal to the amount for which a  Participant  has elected to defer his
          or her severance benefit as approved for deferral by the Committee.

                                  -10-


<PAGE>

     4.5  NON-QUALIFIED STOCK OPTION GAIN DEFERRAL

          Effective  July 1, 1999 through  January 20, 2003,  the Company  shall
          credit each  Participant who qualifies an amount,  equal to the amount
          for which a  Participant  has  elected to defer  receipt of his or her
          shares of ALLETE stock acquired through an Ownership  Retention Option
          Program  provided  in the Long Term  Incentive  Compensation  Plan and
          pursuant to the Stock Option Gain Shares Deferral Election.

     4.6  RETIREMENT BENEFIT

          At the  Retirement  of a  Participant,  the Company  shall credit each
          Participant  who qualifies under  Subsection  3.1(C) with a Retirement
          Benefit. The Retirement Benefit shall be calculated as follows:

          (A)  The  monthly   Retirement  Benefit  that  would  be  provided  by
               Retirement Plan A if:

               (1)  any annual salary  limitation in calculating  benefits under
                    Retirement  Plan  A due  to the  limitation  imposed  by any
                    provision of the Code Section 404(l) did not exist,  and the
                    limitation on annual benefits  contained in Code Section 415
                    did not exist.

               (2)  Effective through December 31, 2003, the largest sum of four
                    Annual  Incentive  Awards  and  Other  Awards  plus  Results
                    Sharing (if any) during any  consecutive  48-month period in
                    the most recent  15-year  period had been added to the final
                    average   earning   calculation  in  Subsection   2.1(q)  of
                    Retirement  Plan A and such  calculation was then reduced by
                    any  Results  Sharing  and  Other  Awards  included  in  the
                    calculation of final average  earnings in Subsection  2.1(q)
                    of  Retirement  Plan A. The periods  covering  final average
                    earnings and the four  consecutive  Annual  Incentive Awards
                    and Other  Awards plus  Results  Sharing  need not cover the
                    same 48-month period.

                    Effective  January 1, 2004,  the  largest sum of four Annual
                    Incentive  Awards  or  Other  Awards  (if  any)  during  any
                    consecutive  48-month  period  in the  most  recent  15-year
                    period  had been  added to the  total of the  final  average

                                      -11-


<PAGE>

                    earning  computation in Subsection 2.1(q) of Retirement Plan
                    A. The periods  covering final average earnings and the four
                    consecutive Annual Incentive Awards and/or Other Awards need
                    not  cover the same  48-month  period.  Notwithstanding  the
                    foregoing,  any Other Award(s) included in Retirement Plan A
                    final  average  earnings,  shall be reduced  from the amount
                    herein.

          (B)  Less the actual monthly retirement benefit provided by Retirement
               Plan A.

          (C)  To determine the amount to be credited to the  Participants,  the
               resulting  difference of (A) less (B) (provided the difference is
               greater  than  zero)  is  multiplied  by 12,  and the  result  is
               multiplied  by a  factor.  Such  factor  is  calculated  by first
               determining a 60% joint and survivor benefit using the respective
               employee and spouse ages; second, by adjusting for cost of living
               as described in Section 4.8 of Retirement  Plan A and each of the
               components  is  multiplied  by 50%  and  the  results  are  added
               together. The change in the consumer price index shall be assumed
               to change after the Participant's  Retirement at the same average
               annual  rate as the change in the  consumer  price  index for the
               five-year  period  ending  on the  later  of the  June  30 or the
               December 31 immediately preceding  Retirement.  The interest rate
               to be used in  determining  the  present  value  and the  monthly
               annuity  shall be an annual  percentage  rate of 8% or such other
               rate as determined by the Committee.


     4.7  BENEFIT ALLOCATIONS AND MAINTENANCE OF ACCOUNTS

          (A)  The amounts  specified in Sections 4.1 and 4.3 shall be allocated
               to the Participant as soon as administratively  practicable after
               the end of the Plan Year.

          (B)  The  amounts  specified  in  Sections  4.2,  4.4 and 4.5 shall be
               allocated as soon as administratively  practicable,  but no later
               than the  month  following  the end of the  month  in  which  the
               benefit was earned by the Participant.

          (C)  The Company shall  establish  and  maintain,  in the name of each
               Participant,  an individual  account to be known as the Executive
               Deferral Account (herein re