United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
Form
10-K
(Mark
One)
|
|
R
|
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For the
fiscal year ended December 31,
2007
|
|
£
|
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 incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
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:
|
Title
of Each Class
|
Name
of Each Stock Exchange
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 if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes R No
£
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes £ No
R
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 R 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. R
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company (as
defined in Rule 12b-2 of the Act).
|
Large
Accelerated Filer R
|
Accelerated
Filer £
|
Non-Accelerated
Filer £
|
Smaller
Reporting Company £
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes £ No
R
The
aggregate market value of voting stock held by nonaffiliates on June 29, 2007,
was $1,437,610,992.
As of
February 1, 2008, there were 30,829,791 shares of ALLETE Common Stock, without
par value, outstanding.
Documents
Incorporated By Reference
Portions
of the Proxy Statement for the 2008 Annual Meeting of Shareholders are
incorporated by reference in Part III.
Index
|
Definitions
|
3
|
||
|
Safe Harbor Statement Under the
Private Securities Litigation Reform Act of 1995
|
5
|
||
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Part
I
|
|||
|
Item
1.
|
Business
|
6
|
|
|
Energy
– Regulated Utility
|
6
|
||
|
Electric
Sales / Customers
|
6
|
||
|
Power
Supply
|
10
|
||
|
Transmission
& Distribution
|
11
|
||
|
Properties
|
11
|
||
|
Regulatory
Matters
|
12
|
||
|
Minnesota
Legislation
|
14
|
||
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Competition
|
15
|
||
|
Franchises
|
15
|
||
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Energy
– Nonregulated Energy Operations
|
15
|
||
|
Energy
– Investment in ATC
|
16
|
||
|
Real
Estate
|
16
|
||
|
Seller
Financing
|
17
|
||
|
Regulation
|
18
|
||
|
Competition
|
18
|
||
|
Other
|
18
|
||
|
Environmental
Matters
|
18
|
||
|
Employees
|
20
|
||
|
Executive
Officers of the Registrant
|
21
|
||
|
Item
1A.
|
Risk
Factors
|
22
|
|
|
Item
1B.
|
Unresolved
Staff Comments
|
26
|
|
|
Item
2.
|
Properties
|
26
|
|
|
Item
3.
|
Legal
Proceedings
|
26
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
26
|
|
|
Part
II
|
|||
|
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters
and
Issuer
Purchases of Equity Securities
|
26
|
|
|
Item
6.
|
Selected
Financial Data
|
27
|
|
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
28
|
|
|
Overview
|
28
|
||
|
2007
Compared to 2006
|
30
|
||
|
2006
Compared to 2005
|
32
|
||
|
Critical
Accounting Estimates
|
34
|
||
|
Outlook
|
36
|
||
|
Liquidity
and Capital Resources
|
44
|
||
|
Capital
Requirements
|
48
|
||
|
Environmental
and Other Matters
|
48
|
||
|
Market
Risk
|
48
|
||
|
New
Accounting Standards
|
49
|
||
|
Item
7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
50
|
|
|
Item
8.
|
Financial
Statements and Supplementary Data
|
50
|
|
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
50
|
|
|
Item
9A.
|
Controls
and Procedures
|
50
|
|
|
Item
9B.
|
Other
Information
|
51
|
|
|
Part
III
|
|||
|
Item
10.
|
Directors,
Executive Officers and Corporate Governance
|
52
|
|
|
Item
11.
|
Executive
Compensation
|
52
|
|
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
52
|
|
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
52
|
|
|
Item
14.
|
Principal
Accountant Fees and Services
|
52
|
|
|
Part
IV
|
|||
|
Item
15.
|
Exhibits
and Financial Statement Schedules
|
53
|
|
|
Signatures
|
57
|
||
|
Consolidated Financial
Statements
|
59
|
||
ALLETE
2007 Form 10-K
2
Definitions
The
following abbreviations or acronyms are used in the text. References in this
report to “we,” “us” and “our” are to ALLETE, Inc. and its subsidiaries,
collectively.
|
Abbreviation
or Acronym
|
Term
|
|
AICPA
|
American
Institute of Certified Public Accountants
|
|
ALLETE
|
ALLETE,
Inc.
|
|
ALLETE
Properties
|
ALLETE
Properties, LLC and its subsidiaries
|
|
AFUDC
|
Allowance
for Funds Used During Construction - the cost of both the debt and equity
funds used to finance utility plant additions during construction
periods
|
|
AREA
|
Arrowhead
Regional Emission Abatement
|
|
ATC
|
American
Transmission Company LLC
|
|
Blandin
Paper
|
UPM,
Blandin Paper Mill
|
|
BNI
Coal
|
BNI
Coal, Ltd.
|
|
Boswell
|
Boswell
Energy Center
|
|
Company
|
ALLETE,
Inc. and its subsidiaries
|
|
Constellation
Energy Commodities
|
Constellation
Energy Commodities Group, Inc.
|
|
DOC
|
Minnesota
Department of Commerce
|
|
DRI
|
Development
of Regional Impact
|
|
EITF
|
Emerging
Issues Task Force
|
|
Enventis
Telecom
|
Enventis
Telecom, Inc.
|
|
EPA
|
Environmental
Protection Agency
|
|
ESA
|
Electric
Service Agreement
|
|
ESOP
|
Employee
Stock Ownership Plan
|
|
FASB
|
Financial
Accounting Standards Board
|
|
FERC
|
Federal
Energy Regulatory Commission
|
|
Florida
Landmark
|
Florida
Landmark Communities, Inc.
|
|
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
|
|
FPL
Energy
|
FPL
Energy, LLC
|
|
FPSC
|
Florida
Public Service Commission
|
|
FSP
|
Financial
Accounting Standards Board Staff Position
|
|
GAAP
|
Accounting
Principles Generally Accepted in the United States
|
|
Heating
Degree Days
|
Measure
of the extent to which the average daily temperature is below 65 degrees
Fahrenheit, increasing demand for heating
|
|
Invest
Direct
|
ALLETE’s
Direct Stock Purchase and Dividend Reinvestment Plan
|
|
IPO
|
Initial
Public Offering
|
|
kV
|
Kilovolt(s)
|
|
Laskin
|
Laskin
Energy Center
|
|
Manitoba
Hydro
|
Manitoba
Hydro Board
|
|
MBtu
|
Million
British thermal units
|
|
Mesabi
Nugget
|
Mesabi
Nugget Delaware, LLC
|
|
Minnesota
Power
|
An
operating division of ALLETE, Inc.
|
|
Minnkota
Power
|
Minnkota
Power Cooperative, Inc.
|
|
MISO
|
Midwest
Independent Transmission System Operator, Inc.
|
|
Moody’s
|
Moody’s
Investors Service, Inc.
|
|
MPCA
|
Minnesota
Pollution Control Agency
|
|
MPUC
|
Minnesota
Public Utilities Commission
|
ALLETE
2007 Form 10-K
3
Definitions
(Continued)
|
Abbreviation
or Acronym
|
Term
|
|
MW
/ MWh
|
Megawatt(s)
/ Megawatthour(s)
|
|
Non-residential
|
Retail
commercial, non-retail commercial, office, industrial, warehouse, storage
and institutional
|
|
NOX
|
Nitrogen
Oxide
|
|
Northwest
Airlines
|
Northwest
Airlines, Inc.
|
|
Note
___
|
Note
___ to the consolidated financial statements in this Form
10-K
|
|
NPDES
|
National
Pollutant Discharge Elimination System
|
|
NYSE
|
New
York Stock Exchange
|
|
OAG
|
Office
of the Attorney General
|
|
Oliver
Wind I
|
Oliver
Wind I Energy Center
|
|
Oliver
Wind II
|
Oliver
Wind II Energy Center
|
|
Palm
Coast Park
|
Palm
Coast Park development project in Florida
|
|
Palm
Coast Park District
|
Palm
Coast Park Community Development District
|
|
PolyMet
Mining
|
PolyMet
Mining, Inc.
|
|
PSCW
|
Public
Service Commission of Wisconsin
|
|
PUHCA
1935
|
Public
Utility Holding Company Act of 1935
|
|
PUHCA
2005
|
Public
Utility Holding Company Act of 2005
|
|
Rainy
River Energy
|
Rainy
River Energy Corporation
|
|
SEC
|
Securities
and Exchange Commission
|
|
SFAS
|
Statement
of Financial Accounting Standards No.
|
|
SO2
|
Sulfur
Dioxide
|
|
Square
Butte
|
Square
Butte Electric Cooperative
|
|
Standard
& Poor’s
|
Standard
& Poor’s Ratings Services, a division of The McGraw-Hill Companies,
Inc.
|
|
SWL&P
|
Superior
Water, Light and Power Company
|
|
Taconite
Harbor
|
Taconite
Harbor Energy Center
|
|
Town
Center
|
Town
Center at Palm Coast development project in Florida
|
|
Town
Center District
|
Town
Center at Palm Coast Community Development District
|
|
WDNR
|
Wisconsin
Department of Natural Resources
|
ALLETE
2007 Form 10-K
4
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 the 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,” “could,” “may,” “potential,”
“target,” “outlook” or similar expressions) are not statements of historical
facts and may be forward-looking.
Forward-looking
statements involve estimates, assumptions, risks and uncertainties, which are
beyond our control and may cause actual results or outcomes to differ materially
from those that may be projected. These statements are qualified in their
entirety by reference to, and are accompanied by, the following important
factors, in addition to any assumptions and other factors referred to
specifically:
|
·
|
our
ability to successfully implement our strategic
objectives;
|
|
·
|
our
ability to manage expansion and integrate acquisitions;
|
|
·
|
prevailing
governmental policies, regulatory actions, and legislation including those
of the United States Congress, state legislatures, the FERC, the MPUC, the
PSCW, and various local and county regulators, and city administrators,
allowed rates of return, financings, industry and rate structure,
acquisition and disposal of assets and facilities, real estate
development, operation and construction of plant facilities, recovery of
purchased power, capital investments and other expenses, present or
prospective wholesale and retail competition (including but not limited to
transmission costs), zoning and permitting of land held for resale and
environmental matters;
|
|
·
|
the
potential impacts of climate change on our Regulated Utility
operations;
|
|
·
|
effects
of restructuring initiatives in the electric industry;
|
|
·
|
economic
and geographic factors, including political and economic
risks;
|
|
·
|
changes
in and compliance with laws and policies;
|
|
·
|
weather
conditions;
|
|
·
|
natural
disasters and pandemic diseases;
|
|
·
|
war
and acts of terrorism;
|
|
·
|
wholesale
power market conditions;
|
|
·
|
population
growth rates and demographic patterns;
|
|
·
|
effects
of competition, including competition for retail and wholesale
customers;
|
|
·
|
changes
in the real estate market;
|
|
·
|
pricing
and transportation of commodities;
|
|
·
|
changes
in tax rates or policies or in rates of inflation;
|
|
·
|
unanticipated
project delays or changes in project costs;
|
|
·
|
availability
and management of construction
materials and skilled construction labor for capital
projects;
|
|
·
|
unanticipated
changes in operating expenses, capital and land
development expenditures;
|
|
·
|
global
and domestic economic conditions;
|
|
·
|
our
ability to access capital markets and
bank financing;
|
|
·
|
changes
in interest rates and the performance of the financial
markets;
|
|
·
|
our
ability to replace a mature workforce and retain qualified, skilled and
experienced personnel; and
|
|
·
|
the
outcome of legal and administrative proceedings (whether civil or
criminal) and settlements that affect the business and profitability of
ALLETE.
|
Additional
disclosures regarding factors that could cause our results and performance to
differ from results or performance anticipated by this report are discussed in
Item 1A under the heading “Risk Factors” beginning on page 22 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.
ALLETE
2007 Form 10-K
5
Part
I
|
Item
1.
|
Business
|
ALLETE is
a diversified company that has provided fundamental products and services since
1906. These include our former operations in the water, paper,
telecommunications and automotive industries and the core Energy and Real Estate businesses we
operate today.
Energy is comprised of
Regulated Utility, Nonregulated Energy Operations and Investment in
ATC.
|
|
·
|
Regulated Utility
includes retail and wholesale rate regulated electric, natural gas and
water services in northeastern Minnesota and northwestern
Wisconsin under the jurisdiction of state and federal regulatory
authorities.
|
|
|
·
|
Nonregulated Energy
Operations includes our coal mining activities in North Dakota,
approximately 50 MW of nonregulated generation and Minnesota land
sales.
|
|
|
·
|
Investment in ATC
includes our equity ownership interest in
ATC.
|
Real Estate includes our
Florida real estate operations.
Other includes our investments
in emerging technologies, and earnings on cash and short-term
investments.
ALLETE is
incorporated under the laws of Minnesota. Our corporate headquarters are in
Duluth, Minnesota. Statistical information is presented as of December 31, 2007,
unless otherwise indicated. All subsidiaries are wholly owned unless otherwise
specifically indicated. References in this report to “we,” “us” and “our” are to
ALLETE and its subsidiaries, collectively.
|
Year
Ended December 31
|
2007
|
2006
|
2005
|
|
Consolidated
Operating Revenue – Millions
|
$841.7
|
$767.1
|
$737.4
|
|
Percentage
of Consolidated Operating Revenue
|
|||
|
Regulated
Utility
|
86
|
83
|
78
|
|
Nonregulated
Energy Operations
|
8
|
9
|
16
|
|
Real
Estate
|
6
|
8
|
6
|
|
100%
|
100%
|
100%
|
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.
Energy
– Regulated Utility
Electric
Sales / Customers
Minnesota
Power provides regulated utility electric service in northeastern Minnesota to
141,000 retail customers and wholesale electric service to 16 municipalities.
SWL&P provides regulated electric service, natural gas and water service in
northwestern Wisconsin to 15,000 electric customers, 12,000 natural gas
customers and 10,000 water customers. Our regulated utility operations
include retail and wholesale activities under the jurisdiction of state and
federal regulatory authorities. (see Item 1 - Regulatory Matters.) In addition
to serving residential, commercial and municipal electric needs, a high
proportion of our electric sales are to large industrial customers.
|
Regulated Utility Electric Sales
Year Ended December 31
|
2007
|
%
|
2006
|
%
|
2005
|
%
|
|
Millions
of Kilowatthours
|
||||||
|
Retail
and Municipals
|
||||||
|
Residential
|
1,141
|
9
|
1,100
|
9
|
1,102
|
10
|
|
Commercial
|
1,373
|
11
|
1,335
|
10
|
1,327
|
11
|
|
Industrial
|
7,054
|
55
|
7,206
|
56
|
7,130
|
61
|
|
Municipals
and Other
|
1,092
|
8
|
990
|
8
|
956
|
8
|
|
10,660
|
83
|
10,631
|
83
|
10,515
|
90
|
|
|
Other
Power Suppliers (a)
|
2,157
|
17
|
2,153
|
17
|
1,142
|
10
|
|
12,817
|
100
|
12,784
|
100
|
11,657
|
100
|
|
(a)
|
Effective
January 1, 2006, Taconite Harbor was redirected from Nonregulated Energy
Operations to Regulated
Utility.
|
ALLETE
2007 Form 10-K
6
Energy-Regulated
Utility (Continued)
Industrial
Customers
In 2007,
our industrial customers represented 55 percent of total regulated utility
kilowatthour sales. Our industrial customers are primarily in the taconite,
paper, pulp, wood products and pipeline industries.
|
Industrial
Customer Electric Sales
Year
Ended December 31
|
2007
|
%
|
2006
|
%
|
2005
|
%
|
||
|
Millions
of Kilowatthours
|
||||||||
|
Taconite
Producers
|
4,408
|
62
|
4,517
|
63
|
4,558
|
64
|
||
|
Paper,
Pulp and Wood Products
|
1,613
|
23
|
1,689
|
23
|
1,623
|
23
|
||
|
Pipelines
|
562
|
8
|
550
|
8
|
480
|
7
|
||
|
Other
Industrial
|
471
|
7
|
450
|
6
|
469
|
6
|
||
|
7,054
|
100
|
7,206
|
100
|
7,130
|
100
|
|||
Approximately
60 percent 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 iron-bearing rock, and agglomerate and pelletize the iron particles
into taconite pellets. Strong worldwide steel demand, driven largely by
extensive infrastructure development in China, has resulted in very robust world
iron ore demand and steel pricing. This globalization of demand has positively
impacted Minnesota taconite producers. With the exception of short-term
production curtailments at two taconite plants, our taconite customers operated
at maximum production levels in 2007. Annual taconite production in Minnesota
was 39 million tons in 2007 (40 million tons in 2006 and 41 million tons in
2005) and it is estimated that it will be 41.5 million tons in 2008. An 800,000
ton per year expansion at Cleveland Cliffs’ Northshore taconite facility is
expected to be completed in April 2008, contributing to the expected increased
production. It is expected that throughout 2008, Minnesota taconite producers
will remain in a strong competitive position due to the strength of the world
steel industry and their efficiency of production.
In
addition to serving the taconite industry, Minnesota Power also serves a number
of customers in the paper, pulp and wood products industry. In total, we serve
four major paper and pulp mills directly and one paper mill indirectly by
providing wholesale service to the retail provider of the mill. Minnesota Power
also serves four wood products manufacturers. In 2007, approximately 90 percent
of our revenue from this industry sector came from the paper and pulp producers,
and 10 percent came from the wood products customers.
Minnesota
Power’s paper and pulp customers ran at, or very near, full capacity in 2007
despite the fact that the industry continued to face high fiber, chemical and
energy costs as well as competition from exports in certain grades of paper
products. Minnesota Power’s customers benefited from the temporary or permanent
idling of capacity both in North America at mills other than those served by
Minnesota Power and the idling of capacity in Europe, as well as from the
strength of the Canadian dollar and the Euro which has reduced imports both from
Canada and Europe. Our wood products customers ran at reduced capacity levels,
and two facilities were indefinitely idled due to the decreased number of new
housing starts, a resultant declining demand and pricing for their products. One
of the idled facilities was down for all of 2007 while another was idled during
the last quarter of 2007.
The
pipeline industry is the third key industrial segment served by Minnesota Power
with services provided to two crude oil pipelines and one refinery. These
customers have a common reliance on the importation of Canadian crude oil. After
near capacity operation in 2006 and 2007, both pipeline operators are executing
expansion plans to transport newly developed Western Canadian crude oil reserves
(Alberta Oil Sands) to United States markets. Access to traditional Midwest
markets is being expanded to Southern markets as the Canadian supply is
displacing domestic production and deliveries imported from the Gulf
Coast.
ALLETE
2007 Form 10-K
7
Energy-Regulated
Utility (Continued)
Large Power Customer
Contracts. Minnesota Power has large power customer contracts with 12
customers (Large Power Customers), 11 of which require 10 MW or more of
generating capacity and one that requires at least 8 MW of generating capacity.
Large Power Customers consist of five taconite producers, four paper and pulp
mills, two pipeline companies and one manufacturer.
Large
Power Customer contracts require Minnesota Power to have a certain amount of
generating capacity available. (See Minimum Revenue and Demand Under Contract
table below.) 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) or four-month 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
contractual 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.
All
contracts with Large Power Customers 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
take all of their purchased 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 Matters – Electric Rates.)
Minnesota
Power, as permitted by the MPUC, requires its taconite-producing Large Power
Customers to pay weekly for electric usage based on monthly energy usage
estimates. The customers receive estimated bills based on Minnesota Power’s
prediction of the customer’s energy usage, forecasted energy prices and fuel
clause adjustment estimates. Minnesota Power’s five taconite-producing Large
Power Customers have generally predictable energy usage on a week-to-week basis,
which makes the variance between the estimated usage and actual usage small.
Taconite-producing Large Power Customers subject to weekly billings receive
interest on the money paid to Minnesota Power within the billing
cycle.
|
Minimum
Revenue and Demand Under Contract
As
of February 1, 2008
|
Minimum
Annual
Demand
Revenue (a,b)
|
Monthly
Megawatts
|
|
2008
|
$64.1
million
|
401
|
|
2009
|
$27.5
million
|
154
|
|
2010
|
$25.5
million
|
148
|
|
2011
|
$25.3
million
|
148
|
|
2012
|
$15.6
million
|
88
|
|
(a)
|
Based
on past experience, we believe revenue from our Large Power Customers will
be substantially in excess of the minimum contract amounts. For example,
in our 2006 Form 10-K we stated that 2007 minimum annual revenue demand
from these Large Power Customers would be $62.5 million. Actual 2007
demand revenue from these Large Power Customers was
$118.7 million.
|
|
(b)
|
Although
several contracts have a feature that allows demand to go to zero after a
two-year advance notice of a permanent closure, this minimum revenue
summary does not reflect this occurrence happening in the forecasted
period because we believe it is
unlikely.
|
ALLETE
2007 Form 10-K
8
Energy–Regulated
Utility (Continued)
Contract
Status for Minnesota Power Large Power Customers
As
of February 1, 2008
|
Customer
|
Industry
|
Location
|
Ownership
|
Earliest
Termination
Date
|
|
Hibbing
Taconite Co. (a)
|
Taconite
|
Hibbing,
MN
|
62.3%
Mittal Steel USA Inc.
23%
Cleveland-Cliffs Inc
14.7%
United States Steel (USS)
|
February
29, 2012
|
|
ArcelorMittal
USA – Minorca Mine
|
Taconite
|
Virginia,
MN
|
ArcelorMittal
USA Inc.
|
December
31, 2013
|
|
United
States Steel Corporation
(USS)
Minntac
|
Taconite
|
Mt.
Iron, MN
|
USS
|
October
31, 2014
|
|
USS
Keewatin Taconite
|
Taconite
|
Keewatin,
MN
|
USS
|
October
31, 2014
|
|
United
Taconite LLC (a)
|
Taconite
|
Eveleth,
MN
|
70%
Cleveland-Cliffs Inc
30%
Laiwu Steel Group
|
February
29, 2012
|
|
UPM,
Blandin Paper Mill (a)
|
Paper
|
Grand
Rapids, MN
|
UPM-Kymmene
Corporation
|
February
29, 2012
|
|
Boise
White Paper, LLC (b)
|
Paper
|
International
Falls, MN
|
Madison Dearborn Partnership
|
February
28, 2009
|
|
Sappi
Cloquet LLC (a)
|
Paper
|
Cloquet,
MN
|
Sappi
Limited
|
February
29, 2012
|
|
NewPage
Corporation – Duluth Mills
|
Paper
and Pulp
|
Duluth,
MN
|
NewPage
Corporation
|
August
31, 2013
|
|
USG
Interiors, Inc. (b)
|
Manufacturer
|
Cloquet,
MN
|
USG
Corporation
|
February
28, 2009
|
|
Enbridge
Energy Company,
Limited
Partnership (b)
|
Pipeline
|
Deer
River, MN
Floodwood,
MN
|
Enbridge
Energy Company,
Limited
Partnership
|
February
28, 2009
|
|
Minnesota
Pipeline Company (b)
|
Pipeline
|
Staples,
MN
Little
Falls, MN
Park
Rapids, MN
|
60%
Koch Pipeline Co. L.P.
40%
Marathon Ashland
Petroleum
LLC
|
February
28, 2009
|
|
(a)
|
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
February 29, 2012.
|
|
(b)
|
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
February 28, 2009.
|
ALLETE
2007 Form 10-K
9
Energy–Regulated
Utility (Continued)
Power
Supply
In order
to meet our customer’s electric requirements, we utilize a mix of Company
generation and purchased power. The Company’s generation is primarily coal
fired, but also includes approximately 115 MWs of hydro generation from ten
hydro stations in Minnesota. Purchased power is made up of long–term power
purchase agreements and market purchases. The following table reflects the
Company’s generating capabilities and total electrical requirements as of
December 31, 2007. Minnesota Power had an annual net peak load of 1,614 MW on
July 30, 2007.
|
Regulated
Utility
Power
Supply
|
Unit
No.
|
Year
Installed
|
Net
Winter
Capability
|
For the Year Ended
December 31,
2007
Electric Requirements
|
|
|
MW
|
MWh
|
%
|
|||
|
Coal-Fired
|
|||||
|
Boswell
Energy Center
|
1
|
1958
|
69
|
||
|
in
Cohasset, MN
|
2
|
1960
|
69
|
||
|
3
|
1973
|
350
|
|||
|
4
|
1980
|
429
|
|||
|
917
|
6,005,520
|
45.7%
|
|||
|
Laskin
Energy Center
|
1
|
1953
|
55
|
||
|
in
Hoyt Lakes, MN
|
2
|
1953
|
54
|
||
|
109
|
591,499
|
4.5
|
|||
|
Taconite
Harbor Energy Center
|
1,
2 & 3
|
1957,
1957
|
|||
|
in
Taconite Harbor, MN
|
1967
|
220
|
1,491,457
|
11.4
|
|
|
Total
Coal
|
1,246
|
8,088,476
|
61.6
|
||
|
Purchased
Steam
|
|||||
|
Hibbard
Energy Center in Duluth, MN
|
3
& 4
|
1949,
1951
|
47
|
53,354
|
0.4
|
|
Hydro
|
|||||
|
Group
consisting of ten stations in MN
|
Various
|
115
|
428,153
|
3.3
|
|
|
Total
Company Generation
|
1,408
|
8,569,983
|
65.3
|
||
|
Long
Term Purchased Power
|
|||||
|
Square
Butte burns lignite coal near Center, ND
|
273
|
1,533,186
|
11.7
|
||
|
Wind
– Oliver County, ND (a)
|
20
|
203,675
|
1.5
|
||
|
Total
Long Term Purchased Power
|
293
|
1,736,861
|
13.2
|
||
|
Other
Purchased Power – Net (b)
|
–
|
2,819,715
|
21.5
|
||
|
Total
Purchased Power
|
293
|
4,556,576
|
34.7
|
||
|
Total
|
1,701
|
13,126,559
|
100.0%
|
||
|
(a)
|
The
nameplate capacity of Oliver Wind I Energy Center is 50-MWs and 48-MWs for
the Oliver Wind II Energy Center. The capacity reflected in the table is
actual accredited capacity of the facility. Accredited capacity is the
amount of net generating capability associated with the facility for which
capacity credit may be obtained under applicable Mid-Continent Area Power
Pool (MAPP) rules.
|
|
(b)
|
Includes
short term market purchases in the MISO market and from other power
suppliers.
|
Fuel. Minnesota Power
purchases low-sulfur, sub-bituminous coal from the Powder River Basin coal
region located in Montana and Wyoming. Coal consumption in 2007 for electric
generation at Minnesota Power’s coal-fired generating stations was
approximately 4.9 million tons. As of December 31, 2007, Minnesota
Power had a coal inventory of about 922,000 tons. Of Minnesota Power’s primary
coal supply agreements, one agreement extends through 2011, one extends
through 2009, and one has an initial term expiring at the end of 2008. Under
these agreements, Minnesota Power has the tonnage flexibility to procure 70
percent to 100 percent of its total coal requirements. In 2008, Minnesota Power
expects to 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 continues to explore future coal supply options. We
believe that adequate supplies of low-sulfur, sub-bituminous coal will continue
to be available.
In 2001,
Minnesota Power and Burlington Northern Santa Fe Railway Company (BNSF) entered
into a long-term agreement under which BNSF 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 an affiliate of the Canadian National Railway and
Midwest Energy Resources Company to transport coal from the BNSF interconnection
point to certain Minnesota Power facilities.
ALLETE
2007 Form 10-K
10
Energy–Regulated
Utility (Continued)
Power
Supply (Continued)
On
January 24, 2008, we received a letter from BNSF alleging the Company defaulted
on a material obligation under the Company’s Coal Transportation Agreement
(CTA). In the notice, BNSF claimed Minnesota Power underpaid approximately $1.6
million for coal transportation services in 2006 and that failure to pay such
amount plus interest within 60 days may result in BNSF’s termination of the CTA.
We believe we do not owe the amount claimed, and that BNSF’s claims are wholly
without merit. We intend to vigorously defend our position in this
dispute.
|
Coal
Delivered to Minnesota Power
Year
Ended December 31
|
2007
|
2006
|
2005
|
|
Average
Price per Ton
|
$21.78
|
$20.19
|
$19.76
|
|
Average
Price per MBtu
|
$1.20
|
$1.10
|
$1.08
|
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
that extends through 2026. Square Butte’s cost of lignite burned in 2007 was
approximately $1.09 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 fuel for the anticipated useful life of the generating
unit.
Long Term 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 55 percent (50 percent in 2009 and thereafter) of the
output of a 455-MW coal-fired generating unit located near Center, North Dakota.
(See Note 8.)
In
December 2006, we began purchasing the output from a 50-MW wind facility, Oliver
Wind I, located in North Dakota, under a 25-year power purchase agreement with
an affiliate of FPL Energy.
In May
2007, the MPUC approved a second 25-year wind power purchase agreement to
purchase an additional 48 MW of wind energy from Oliver Wind II, an
expansion of Oliver Wind I located in North Dakota. The MPUC also allowed
immediate cost recovery for associated transmission upgrades. In November 2007,
Oliver Wind II became operational and we began purchasing the output from the
48-MW wind facility.
On May
11, 2007, the MPUC approved a 50-MW power purchase agreement between Minnesota
Power and Manitoba Hydro from May 2009 through April 2015.
Transmission
and Distribution
We have
electric transmission and distribution lines of 500 kV (8 miles), 230 kV (605
miles), 161 kV (43 miles), 138 kV (129 miles), 115 kV (1,203 miles) and
less than 115 kV (6,347 miles). We own and operate 170 substations with a total
capacity of 9,586 megavoltamperes. Some of our transmission and
distribution lines interconnect with other utilities.
Properties
We own
office and service buildings, an energy control center, 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 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. Wisconsin Public Power, Inc. (WPPI) owns 20 percent of Boswell Unit
4. WPPI has the right to use our transmission line facilities to transport its
share of Boswell generation. (See Note 4.)
ALLETE
2007 Form 10-K
11
Energy–Regulated
Utility (Continued)
Regulatory
Matters
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 SWL&P’s retail sales of
electricity, natural gas and water by SWL&P. The MPUC, FERC and PSCW had
regulatory authority over 58 percent, 10 percent and 8 percent, respectively, of
our 2007 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, recovery of current and deferred conservation improvement program expenditures and
recovery of certain environmental and renewable expenditures.
Information
published by the Edison Electric Institute (“Typical Bills and Average Rates
Report – Summer 2007” and “Rankings – July 1, 2007”) ranked Minnesota Power as
having the ninth lowest average retail rates out of 177 investor-owned utilities
in the United States. We had the lowest rates in Minnesota and in the region
consisting of Iowa, Kansas, Minnesota, Missouri, North Dakota, South Dakota and
Wisconsin.
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 also licensed by the FERC.
In August
2005, the Energy Policy Act of 2005 (EPAct 2005) was signed into law, which
repealed PUHCA 1935 and enacted PUHCA 2005. PUHCA 2005 gives FERC certain
authority over books and records of public utility holding companies and their
affiliates. It also addresses FERC review and authorization of the allocation of
costs for non-power goods, or administrative or management services when
requested by a holding company system or state commission. In addition, EPAct
2005 directs the FERC to issue certain rules addressing electricity reliability,
investment in energy infrastructure, fuel diversity for electric generation,
promotion of energy efficiency and wise energy use. The FERC is currently in the
process of implementing EPAct 2005. These include (among others):
|
|
·
|
rulemaking
for long-term transmission rights;
|
|
|
·
|
dockets
pertaining to the development and certification of electric reliability
organizations, including delegated authority to regional entities for
proposing and enforcing reliability
standards;
|
|
|
·
|
rules
specifying the form of applications for federal construction permits to be
issued in the exercise of federal backstop siting authority for
transmission projects;
|
|
|
·
|
rulemaking
requiring unregulated transmitting utilities to provide open access to
their transmission systems;
|
|
|
·
|
various
rulemakings regarding the consideration of merger applications under the
revised Federal Power Act Section
203;
|
|
|
·
|
a
U.S. Department of Energy study/report on the benefits of economic
dispatch and a report on recommendations of regional joint boards that
considered economic dispatch;
|
|
|
·
|
rulemaking
to facilitate transmission market transparency;
and
|
|
|
·
|
the
energy market manipulation
rulemaking.
|
We
continue to monitor FERC activity in these and other proceedings.
On
December 28, 2007, we submitted a filing with the FERC seeking to increase
electric rates for our wholesale customers. On February 8, 2008, the FERC
approved our wholesale rate filing. Our wholesale customers consist of 16
municipalities in Minnesota and two private utilities in Wisconsin, including
SWL&P. The FERC authorized an average 10 percent increase for wholesale
municipal customers, a 12.5 percent increase for SWL&P, and an overall
return on equity of 11.25 percent. The rate increase will go into effect on
March 1, 2008, and on an annualized basis, the filing will generate
approximately $7.5 million in additional revenue.
Municipal and Wholesale
Customers. Minnesota Power has contracts with 16 Minnesota municipalities
receiving wholesale electric service. One contract expires April 2008 (31,000
MWh purchased in 2007), while the other 15 are for service through at least
January 2011. In 2007, these municipal customers purchased 893,000 MWh from
Minnesota Power. Minnesota Power also has a contract for wholesale service with
Dahlberg Light & Power Company (Dahlberg) in Wisconsin. Dahlberg purchased
115,000 MWh in 2007.
ALLETE
2007 Form 10-K
12
Energy–Regulated
Utility (Continued)
Federal
Energy Regulatory Commission (Continued)
Midwest Independent Transmission
System Operator, Inc. (MISO). Minnesota Power and SWL&P are members
of 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 MISO, and they take and provide
transmission service under MISO open access transmission tariff. MISO continues
its efforts to standardize rates, terms and conditions of transmission service
over its broad region, encompassing all or parts of 15 states and one Canadian
province, and over 100,000 MW of generating capacity.
Mid-Continent Area Power Pool
(MAPP). Minnesota Power also participates in MAPP, a power pool operating
in parts of eight states in the Upper Midwest and in two Canadian provinces.
MAPP functions include a regional transmission committee and a generation
reserve-sharing pool. Minnesota Power is also a member of the Midwest
Reliability Organization that was established as a regional reliability council
within the North American Electric Reliability Council on January 1,
2005.
Minnesota Public Utilities Commission.
Minnesota Power’s retail rates are based on a 1994 MPUC retail rate order that
allows for an 11.6 percent return on common equity dedicated to utility plant.
Minnesota Power may file a request to increase rates for its retail utility
operations in mid-2008. Retail rates are being adjusted without a rate
proceeding to reflect recovery of costs related to the AREA Plan, the
Boswell 3 Environmental Improvement Plan (see AREA and Boswell Unit 3 Emission
Reduction Plans), transmission investments and renewable
investments.
Integrated Resource Plan. On October
31, 2007, Minnesota Power filed its Integrated Resource Plan (IRP), a
comprehensive estimate of future capacity needs within the Minnesota Power
service territory. Minnesota Power believes it can meet the estimated future
customer demand for the next decade while achieving real reductions in the
emission of greenhouse gases (primarily carbon dioxide).
Minnesota
Power plans to meet expected loads through approximately 2020 by adding a
significant amount of renewable generation and some supporting peaking
generation. We do not plan to add new coal generation or enter into long-term
power purchase agreements from coal-based generation resources without a
greenhouse gas solution. We plan to add 300 to 500 megawatts of
carbon-minimizing renewable energy to our generation mix. Besides the
additional generation from renewable sources, Minnesota Power anticipates future
supply will come from a combination of sources, including:
|
|
·
|
"As-needed"
peaking and intermediate generation
facilities;
|
|
|
·
|
Expiration
of wholesale contracts presently in
place;
|
|
|
·
|
Short-term
market purchases;
|
|
|
·
|
Improved
efficiency of existing generation and power delivery assets;
and
|
|
|
·
|
Expanded
conservation and demand-side management
initiatives.
|
We do not
anticipate the need for new base load system generation within the
Minnesota Power service territory through approximately 2020, and we project a
one percent average annual growth in electric usage from our existing customers
over that time frame.
Large Power Contracts. In 2006, a
contract for approximately 70 MW was executed with PolyMet Mining, a new
customer planning to start a copper, nickel and precious metals (non-ferrous)
mining operation in late 2008. If PolyMet Mining receives all necessary
environmental permits and achieves start-up, the contract will be fully
implemented and would run through at least 2018. In April 2007, the MPUC
approved our contract with PolyMet Mining.
In June
2007, a contract was executed with Mesabi Nugget, a company currently
constructing an iron nugget facility near Hoyt Lakes, Minnesota. Iron nuggets,
which typically consist of more than 94 percent iron (compared to taconite
pellets at 63-65 percent iron), are ideal in meeting the requirements of
electric-arc furnaces producing steel. On February 7, 2008, the MPUC held a
hearing on the contract and adopted a motion approving the contract, subject to
the issuance of a written order. Mesabi Nugget has received all necessary
permits to begin construction and operations in 2008 and would be a 15 MW
customer with the potential for further load growth. The Mesabi Nugget contract
would run through at least 2017.
A new
contract with Blandin Paper was approved by the MPUC on February 4, 2008. The
new contract carries forward the same contract term, cancellation provision and
take-or-pay provisions of the prior contract and only changed the demand
nomination feature.
In
February 2008, United States Steel announced its intent to restart a pellet line
at its Keewatin Taconite processing facility. This pellet line, which has been
idled since 1980, would be restarted and updated as part of a $300 million
investment. It is anticipated that this will bring approximately 3.6 million
tons of additional pellet making capability to Northeastern Minnesota by 2011,
pending successful approval of environmental permitting.
ALLETE
2007 Form 10-K
13
Energy–Regulated
Utility (Continued)
Minnesota
Public Utilities Commission (Continued)
AREA and Boswell Unit 3 Emission
Reduction Plans. In May 2006, the MPUC approved our filing for current
cost recovery of expenditures to reduce emissions to meet pending federal
requirements at Taconite Harbor and Laskin under the AREA Plan. The AREA Plan
approval allows Minnesota Power to recover Minnesota jurisdictional costs for
SO2,
NOX
and mercury emission reductions made at these facilities without a rate
proceeding. Current cost recovery from retail customers which include a return
on investment and recovery of incremental expense. The AREA Plan is expected to
significantly reduce emissions from Taconite Harbor and Laskin, while
maintaining a reliable and reasonably-priced energy supply to meet the needs of
our customers. We believe that control and abatement technologies applicable to
these plants have matured to the point where further significant air emission
reductions can be attained in a relatively cost-effective manner. Cost recovery
filings are required to be made 90 days prior to the anticipated in-service date
for the equipment at each unit, with rate recovery beginning the month following
the in-service date.
Minnesota
Power has completed installation of new equipment at Laskin and current cost
recovery of AREA Plan costs has begun. The first of three Taconite Harbor unit
installations was completed and placed back in-service in June 2007, with
current cost recovery began in July 2007. We anticipate cost recovery on the
other Taconite Harbor units once work is completed and the units have been
placed back in service, which is expected in late 2008. As of December 31, 2007,
we have spent $36 million of the anticipated $60 million in AREA Plan
expenditures.
In May
2006, Minnesota Power announced plans to make emission reduction investments at
our Boswell Unit 3 generating unit. Plans include reductions of particulate,
SO2,
NOX
and mercury emissions to meet pending federal and state requirements. In late
March 2007, the Boswell Unit 3 project received the necessary construction
permits. On October 26, 2007, the MPUC issued a written order approving
Minnesota Power’s petition for current cost recovery for the Boswell Unit 3
emission reduction plan with some minor modifications and additional reporting
requirements. MPUC approval authorized a cash return on construction work in
progress during the construction phase in lieu of AFUDC-Equity and allows for a
return on investment and current cost recovery of incremental expenses once the
unit is placed into service in late 2009. On December 26, 2007, the MPUC
approved Boswell Unit 3’s rate adjustment for 2008. As of December 31, 2007, we
have spent $89 million of the anticipated $200 million in Boswell Unit 3
emission reduction plan expenditures.
Conservation Improvement Program
(CIP). Minnesota requires electric utilities to spend a minimum of 1.5
percent of gross operating revenues from service provided in the state on energy
CIP’s 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 cost recovery,
all CIP expenditures, as well as a carrying charge on the deferred account
balance. The Next Generation Energy Act of 2007 introduced, in addition to
minimum spending requirements, an energy-saving goal of 1.5 percent of gross
annual retail electric energy sales by 2010. In May 2007, an abbreviated filing
was submitted and subsequently approved by the MPUC, allowing the continuation
of Minnesota Power’s 2006-2007 CIP biennial and related goals for one additional
year, through 2008. For future program years, Minnesota Power will build upon
current successful CIP’s in an effort to meet the newly established 1.5 percent
energy-saving goal. Minnesota Power’s CIP investment goal was $3.2 million for
2007 ($3.2 million for 2006 and 2005), with actual spending of $3.9 million in
2007 ($3.8 million in 2006; $3.6 million in 2005).
Public Service Commission of
Wisconsin. SWL&P’s current retail
rates are based on a December 2006 PSCW retail rate order that became effective
January 1, 2007, and allows for an 11.1 percent return on common equity. Current
rates reflect a 2.8 percent average increase in retail utility rates for
SWL&P customers (a 2.8 percent increase in electric rates, a 1.4 percent
increase in natural gas rates and an 8.6 percent increase in water rates).
SWL&P originally requested an average increase in retail utility rates of
5.2 percent in its 2006 application. The approved rates were lower than
originally requested due to the subsequent removal of costs for a new water
tower and electric substation from the original request. Both of these projects
are now estimated to be in service in late 2008 because of delays in obtaining
all the necessary construction approvals. SWL&P anticipates filing for
another rate increase request in 2008 that would go into effect in
2009. Previously, SWL&P’s retail rates were based on a 2005 PSCW retail
order that allowed for an 11.7 percent return on common equity.
Minnesota
Legislation
Renewable Energy. In February
2007, Minnesota enacted a law requiring Minnesota Power to generate or procure
25 percent of our energy through renewable energy sources by 2025. The
legislation also requires Minnesota Power to meet interim milestones of 12
percent by 2012, 17 percent by 2016, and 20 percent by 2020. The legislation
allows the MPUC to modify or delay a standard obligation if implementation will
cause significant ratepayer cost or technical reliability issues. If a utility
is not in compliance with a standard, the MPUC may order the utility to
construct facilities, purchase renewable energy or purchase renewable energy
credits. Minnesota Power was developing and making renewable supply additions as
part of its generation planning strategy prior to this legislation and this
activity continues. Minnesota Power believes
it will meet the requirements of this legislation.
ALLETE
2007 Form 10-K
14
Energy–Regulated
Utility (Continued)
Minnesota
Legislation (Continued)
Greenhouse Gas Reduction. In 2007,
Minnesota passed legislation establishing non-binding targets for carbon dioxide
reductions. This legislation establishes a goal of reducing statewide greenhouse
gas (GHG) emissions across all sectors reducing those emissions to a level
at least 15 percent below 2005 levels by 2015, at least 30 percent below 2005
levels by 2025, and at least 80 percent below 2005 levels by 2050. Minnesota is
also participating in the Midwestern Greenhouse Gas Accord, a regional effort to
develop a multi-state approach to GHG emission reductions.
We cannot
predict the nature or timing of any additional GHG legislation or
regulation. Although we are unable to predict the compliance costs we might
incur, the costs could have a material impact on our financial
results.
Competition
We
believe the overall impact of the EPAct 2005 on the electric utility industry
has been positive and are continuing to evaluate the effects on our business as
this legislation is being implemented. This federal legislation is designed to
bring more certainty to energy markets in which ALLETE participates, as well as
to provide investment incentives for energy efficiency, energy infrastructure
(such as electric transmission lines) and energy production. The FERC has the
responsibility of implementing numerous new standards as a result of the
promulgation of the EPAct 2005. To date the FERC’s regulatory efforts under the
EPAct 2005 appear to be generally positive for the utility industry. The
PUHCA 1935 repeal may also allow an acceleration of merger activity, as well as
spawn moves by state regulators to adopt PUHCA-like regulations, although both
events are speculative and difficult to predict. 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 91 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.
Energy
– Nonregulated Energy Operations
ALLETE’s
nonregulated energy operations include our coal mining activities in North
Dakota, approximately 50 MW of nonregulated generation and Minnesota land
sales.
BNI Coal operates a lignite
mine in North Dakota. BNI Coal is a low-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 a fixed-fee coal supply
agreements extending through 2026. (See Item 1 - Fuel and Note 8.) The mining
process disturbs and reclaims approximately 210 acres per year. Laws require
that the reclaimed land be at least as productive as it was prior to mining. The
average cost to reclaim one acre of land is about $15,000, however, it could be
as high as $30,000. Reclamation costs are included in the cost of coal passed
through to customers. With lignite reserves of an estimated 600 million
tons, BNI Coal has ample capacity to expand production.
Nonregulated generation
consists of approximately 50 MW of generation. In 2007, we sold 0.2
million MWh of nonregulated generation (0.2 million in 2006; 1.5 million in
2005). Effective January 1, 2006, Taconite Harbor was redirected from our
Nonregulated Energy Operations segment to our Regulated Utility segment in
accordance with an update to the Company’s 2004 Resource Plan, as approved by
the MPUC.
|
Nonregulated
Power Supply
|
Unit
No.
|
Year
Installed
|
Year
Acquired
|
Net
Capability
|
|
MW
|
||||
|
Steam
|
||||
|
Wood-Fired
(a)
|
||||
|
Cloquet
Energy Center
|
5
|
2001
|
2001
|
22
|
|
in
Cloquet, MN
|
||||
|
Rapids
Energy Center (b)
|
6
& 7
|
1969,
1980
|
2000
|
29
|
|
in
Grand Rapids, MN
|
||||
|
Hydro
|
||||
|
Conventional
Run-of-River
|
||||
|
Rapids
Energy Center (b)
|
4
& 5
|
1917
|
2000
|
1
|
|
in
Grand Rapids, MN
|
|
(a)
|
Supplemented
by coal.
|
|
(b)
|
The
net generation is primarily dedicated to the needs of one
customer.
|
ALLETE
2007 Form 10-K
15
Energy
– Nonregulated Energy Operations (Continued)
Taconite Harbor. Taconite Harbor
facility has operated as a rate-based asset within the Minnesota retail
jurisdiction since January 1, 2006. Prior to January 1, 2006, the Taconite
Harbor facility was operated as nonregulated generation facility. (See Energy –
Regulated Utility – Minnesota Public Utilities Commission.)
Rainy River Energy has been
engaged in the acquisition and development of nonregulated generation and
wholesale power marketing. (See Note 10.)
Rainy River Energy Corporation -
Wisconsin continues to study the feasibility of the construction of a
natural gas-fired electric generating facility in northwestern
Wisconsin.
Minnesota Land. We have about 15,000 acres
of land in northern Minnesota, available for sale. We acquired the land in 2001
when we purchased Taconite Harbor from LTV Steel Mining Co.
Energy
– Investment in ATC
At
December 31, 2007, we had an approximate 8 percent ownership interest in ATC.
ATC is a Wisconsin-based public utility that owns and maintains electric
transmission assets in parts of Wisconsin, Michigan, Minnesota and Illinois. ATC
provides transmission service under rates regulated by the FERC that are set in
accordance with the FERC’s policy of establishing the independent operation and
ownership of, and investment in, transmission facilities. (See Note 6.) Our
Wisconsin subsidiary, Rainy River Energy Corporation - Wisconsin, has invested
$60 million in ATC.
Real
Estate
ALLETE
Properties is our real estate business that has operated in Florida since 1991.
ALLETE Properties acquires real estate portfolios and large land tracts at bulk
prices, adds value through entitlements and/or infrastructure improvements, and
resells the property over time to developers, end-users and investors. ALLETE
Properties is focused on acquiring vacant land in Florida and other parts of the
southeast United States. Management at ALLETE Properties uses their business
relationships, understanding of real estate markets and expertise in the land
development and sales processes to provide revenue and earnings growth
opportunities to ALLETE.
ALLETE
Properties is headquartered in Fort Myers, Florida, the location of its
southwest Florida regional office. We also have a regional office in Palm Coast,
Florida, which oversees northeast Florida operations.
Southwest
Florida operations consist of land sales and a third-party brokerage business,
with limited land development activities. Inventory includes residential and
non-residential land located in Lehigh Acres and Cape Coral. The inventory
represents the remaining properties acquired in 1991 from the Resolution Trust
Corporation and in 1999 from Avatar Properties, Inc. The operation also
generates rental income from a 186,000 square foot retail shopping center
located in Winter Haven, Florida. The center is anchored by Macy’s and Belk’s
department stores, along with Staples.
Northeast
Florida operations focus on land sales and development activities. Development
activities involve mainly zoning, permitting, platting and master infrastructure
construction. Development costs are financed through a combination of community
development district bonds, bank loans and internally-generated funds. Our three
major development projects include Town Center at Palm Coast, Palm Coast Park
and Ormond Crossings.
Town Center. Town Center, which is
located in the city of Palm Coast, is a mixed-use development with a
neo-traditional downtown core area. Surrounded by major arterial roads,
including Interstate 95, Town Center is adjacent to the Florida
Hospital-Flagler, the Flagler County Airport and the Flagler Palm Coast High
School. Sites have also been set aside for a new city hall, a community center,
an arts and entertainment center, and other public uses. At build-out, Town
Center is expected to include approximately 3,200 residential units including
lodging rooms and assisted living units, and 3.8 million square feet of various
types of non-residential space. Market conditions will determine how quickly
Town Center builds out.
Construction
of the major infrastructure improvements at Town Center was substantially
complete at the end of 2006. Improvements include 3.6 miles of roads, a master
storm water management system, underground utilities, street lights, sidewalks,
bike paths, and extensive landscaping. To date, our marketing program has
targeted a blend of office, retail commercial, residential, mixed-use and
institutional project developers. In April 2007, Palm Coast Center, LLC and
Target Corporation closed on a 52 acre commercial site and immediately began
construction of a 424,000 square foot retail power center. An 85,000 square
foot retail center anchored by a Publix grocery store opened in
2007.
ALLETE
2007 Form 10-K
16
Real
Estate (Continued)
Pending
land sales under contract for properties at Town Center totaled $18.9 million at
December 31, 2007. We have the opportunity to receive participation revenue as
part of one of these sales contracts.
In March
2005, the Town Center District issued $26.4 million of tax-exempt, 6%
Capital Improvement Revenue Bonds, Series 2005, which are payable through
property tax assessments on the land owners over 31 years (by May 1, 2036). The
bonds were primarily used to pay for the construction of a portion of the major
infrastructure improvements at Town Center. (See Note
8.)
Palm Coast Park. Palm Coast Park, which is
located in the city of Palm Coast, is a 4,700-acre mixed-use development
bisected by a six-mile segment of U.S. Highway 1 about one mile from an existing
Interstate 95 interchange and bounded on the west by a Florida East Coast
Railroad line. Major infrastructure construction at Palm Coast Park was
substantially complete by the end of 2007. At build-out, Palm Coast Park is
expected to include approximately 4,000 residential units, 3.2 million square
feet of various types of non-residential space and certain public facilities.
Market conditions will determine how quickly Palm Coast Park builds out. Land
sales at Palm Coast Park commenced in August 2006, and in June 2007, LRCF Palm
Coast, LLC (a subsidiary of Lowe Enterprises) closed on the first phase of its
Sawmill Creek project.
Pending
land sales under contract for properties at Palm Coast Park totaled
$31.9 million at December 31, 2007. We have the opportunity to receive
participation revenue as part of these sales contracts.
In May
2006, the Palm Coast Park District issued $31.8 million of tax-exempt, 5.7%
Special Assessment Bonds, Series 2006, which are payable through property tax
assessments on the land owners over 31 years (by May 1, 2037). The bonds were
primarily used to pay for the construction of the major infrastructure
improvements at Palm Coast Park and to mitigate traffic and environmental
impacts. (See Note 8.)
ALLETE
Properties is funding certain platting and permitting costs; however, the
majority of ongoing and future development costs may be funded by Palm Coast
Park District bond proceeds. We anticipate that the Palm Coast Park District
will need to issue additional bonds to pay for the development of retail
commercial, office and industrial lots.
Ormond Crossings. Ormond
Crossings is an approximately 6,000-acre mixed-use development that is located
in both the city of Ormond Beach in Volusia County and unincorporated Flagler
County. The site is bisected by Interstate 95 and a Florida East Coast Railroad
line and is adjacent to the city of Ormond Beach airport. Ormond Crossings has
three miles of frontage on the east and west sides of Interstate 95 and will
have two main entrances each within a mile from an existing U.S. Highway 1 and
Interstate 95 interchange.
Planning,
engineering design and permitting of the master infrastructure are ongoing.
Density of the residential and non-residential components of the project will be
determined based on market and traffic mitigation cost considerations. We
estimate the first two phases of Ormond Crossings will include 2,500–3,200
residential units and 2.5–3.5 million square feet of various types of
non-residential space.
Ormond
Crossings will also include an approximately 2,000 acre regionally significant
wetlands mitigation bank that is expected to be fully permitted by the St. Johns
River Water Management District and the U.S. Army Corps of Engineers by
mid-2009. Wetland mitigation credits will be used at Ormond Crossings and will
be available for sale to other developers. Market conditions will determine how
quickly Ormond Crossings builds out.
Other Land. In addition to the major
development projects, land inventories in Florida include approximately 1,600
acres of other property. Several smaller development projects are under way to
plat these properties, add infrastructure, modify and enhance existing
entitlements.
Property
sale prices may vary depending on location; physical characteristics; parcel
size; whether parcels are sold as raw land, partially developed land or
individually developed lots; degree and status of entitlement; and whether the
land is ultimately purchased for residential or non-residential development.
Certain contracts allow us to receive participation revenue from land sales to
third parties if various formula-based criteria are achieved.
Seller
Financing
ALLETE
Properties sometimes provides seller financing. At December 31, 2007,
outstanding finance receivables were $15.3 million, with maturities up to 5
years. These finance receivables accrue interest at market-based rates and are
collateralized by the financed properties.
ALLETE
2007 Form 10-K
17
Real
Estate (Continued)
Regulation
A
substantial portion of our development properties in Florida are subject to
federal, state and local regulations, and restrictions that may impose
significant costs or limitations on our ability to develop the properties. Much
of our property is vacant land and some is located in areas where development
may affect the natural habitats of various protected wildlife species or in
sensitive environmental areas such as wetlands.
Development
of real property in Florida entails an extensive approval process involving
overlapping regulatory jurisdictions. Real estate projects must generally comply
with the provisions of the Local Government Comprehensive Planning and Land
Development Regulation Act (Growth Management Act), which requires counties and
cities to adopt comprehensive plans guiding and controlling future real property
development in their respective jurisdictions. In addition, development projects
that exceed certain specified regulatory thresholds require approval of a
comprehensive DRI application. The DRI review process includes an evaluation of
a project’s impact on the environment, infrastructure and government services,
and requires the involvement of numerous state and local environmental, zoning
and community development agencies. Compliance with the Growth Management Act
and the DRI process is usually lengthy and costly.
Competition
The real
estate industry is very competitive. Our properties are located in Florida. We
are focused on acquiring additional vacant land in Florida and other parts of
the southeast United States. This region continues to attract competitive real
estate operations at many different levels in the land development pipeline.
Competitors include local and out-of-state institutional investors, real estate
investment trusts and real estate operators, among others. These competitors,
both public and private, compete with us in seeking real estate for acquisition,
resources for development and sales to prospective buyers. Consequently,
competitive market conditions may influence the timing and profitability of our
real estate transactions.
Other
Our Other
segment consists of investments in emerging technologies related to the electric
utility industry, and earnings on cash and short-term investments.
Emerging Technology Portfolio.
As part of our emerging technology portfolio, we have several minority
investments in venture capital funds and direct investments in privately-held,
start-up companies. Since 1985, we have invested in start-up companies,
developing technologies that may be utilized by the electric utility industry.
We are committed to invest up to an additional $1.0 million in 2008 and do not
have plans to make any additional investments. The investments were first made
through emerging technology funds (Funds) initiated by other electric utilities
and us. Due to the distribution of investments from matured venture capital
funds, we also have direct investments in privately-held companies.
Companies in the Funds’ portfolios may complete 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. (See Note 6.)
Discontinued Operations. In
the past three years, we also had business operations in the water
and telecommunications industries. (See Note 13.)
Sale of Water Services
Businesses. In early 2005, we completed the exit from our Water Services
businesses with the sale of our wastewater assets in Georgia.
Sale of Enventis Telecom. In
December 2005, we sold all the stock of our telecommunications subsidiary,
Enventis Telecom for $35.5 million. The transaction resulted in an after-tax
loss of $3.6 million, which was reported in our 2005 loss from discontinued
operations. Net cash proceeds realized from the sale were approximately
$29 million after transaction costs, repayment of debt and payment of
income taxes.
Environmental
Matters
Our
businesses are subject to regulation of environmental matters by various
federal, state and local authorities. We consider our businesses to be in
substantial compliance with currently applicable environmental regulations and
believe all necessary permits to conduct such operations have been obtained. Due
to future stricter environmental requirements through legislation and/or
rulemaking, we anticipate that potential expenditures for environmental matters
will be material and will require significant capital investments. (See Item 7 –
Capital Requirements.) We are unable to predict if and when any such stricter
environmental requirements will be imposed and the impact they will have on the
Company. We review environmental matters on a quarterly basis. Accruals for
environmental matters are recorded when it is probable that a liability has been
incurred and the amount of the liability can be reasonably estimated, based on
current law and existing technologies. These accruals are adjusted periodically
as assessment and remediation efforts progress or as additional technical or
legal information becomes available. Accruals for environmental liabilities are
included in the balance sheet at undiscounted amounts and exclude claims for
recoveries from insurance or other third parties. Costs related to environmental
contamination treatment and cleanup are charged to expense unless recoverable in
rates from customers.
ALLETE
2007 Form 10-K
18
Environmental
Matters (Continued)
Air. Clean Air Act. Minnesota Power’s
generating facilities mainly burn low-sulfur western sub-bituminous coal. Square
Butte, located in North Dakota, burns lignite coal. All of these facilities are
equipped with pollution control equipment such as scrubbers, bag houses or
electrostatic precipitators. Permitted emission requirements are currently being
met. The federal Clean Air Act Amendments of 1990 (Clean Air Act) established
the acid rain program which created emission allowances for SO2 and
system wide averaging NOX limits.
Each allowance is currently an authorization to emit one ton of SO2, and each
utility must have sufficient allowances to cover its annual emissions. Minnesota
Power has adequate SO2 allowances
for its operations and is in compliance with applicable NOX limits.
Square Butte is meeting its SO2 emission
allowance requirements through increased use of its existing
scrubber.
EPA Clean Air Interstate
Rule. In March 2005, the EPA announced the final Clean Air Interstate
Rule (CAIR) that reduces and permanently caps emissions of SO2, NOX and
particulates in the eastern United States. The CAIR includes Minnesota as one of
the 28 states it considers as “significantly contributing” to air quality
standards non-attainment in other downwind states. The CAIR has been challenged
in the court system, which may delay implementation or modify provisions in the
rules. Minnesota Power is participating in the legal challenge to the CAIR.
However, if the CAIR does go into effect, Minnesota Power expects to be required
to:
|
(1)
|
make
emissions reductions (See AREA and Boswell Unit 3 Emission Reduction Plans
for discussion of current emission reduction
initiatives);
|
|
(2)
|
purchase SO2 and
NOX
allowances through the EPA’s cap-and-trade system (See CAIR Phase I
NOX
Allowance Purchases below); and/or
|
|
(3)
|
use
a combination of both (1) and (2).
|
CAIR will
be implemented over two phases. Phase I begins in 2009 and Phase II in 2015. The
EPA will allocate an emissions budget to each CAIR-affected state for SO2 and
NOX
that will result in significant emission reductions. The emissions budgets are
reduced from Phase I to Phase II. States can choose to implement the EPA’s
proposed model program or develop their own subject to EPA approval. The MPCA
has indicated that it plans to adopt the EPA’s Federal Implementation Plan.
Minnesota Power is implementing a balanced environmental plan making significant
capital investments with the AREA and Boswell Unit 3 emission reduction
retrofits in efforts to comply with CAIR Phase I and purchasing emission
allowances as necessary. In spite of these efforts, Minnesota Power expects to
be in a short position relative to NOX allowances
beginning in 2009, and is anticipating purchasing NOX allowances
as needed during Phase I of CAIR.
EPA Clean Air Mercury Rule.
In March 2005, the EPA also announced the final Clean Air Mercury Rule (CAMR)
that would have reduced and permanently capped emissions of electric utility
mercury emissions in the continental United States. On February 8, 2008 the
United States Court of Appeals for the District of Columbia Circuit overturned
the CAMR and remanded the rulemaking to the EPA for reconsideration. The Court’s
decision is subject to appeal. It is uncertain how the EPA will respond; and
therefore it is also uncertain whether mercury emission reductions expected as a
result of implementing AREA Plan expenditures at Taconite Harbor, and
implementation of the 2006 Minnesota Mercury Emission Reduction Law which
applies to Boswell Units 3 and 4, will meet the EPA’s reformed mercury
regulations. (See Minnesota Mercury Emission Law.) Cost estimates for complying
with future mercury regulations under the Clean Air Act are therefore premature
at this time.
Minnesota Mercury Emission Law. This
legislation requires Minnesota Power to file mercury emission reduction plans
for its Boswell Units 3 and 4. The Boswell Unit 3 emission reduction plan was
filed with the MPCA in October 2006. Minnesota Power is required to install
mercury emission reduction technology and equipment by
December 31, 2010. (See AREA and Boswell Unit 3 Emission Reduction
Plans in Item 1 Energy – Regulated Utility.) The next step will be to file a
mercury emissions reduction plan for Boswell Unit 4 by July 1, 2011, with
implementation no later than December 31, 2014.
Water. The Federal Water
Pollution Control Act 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. We have obtained all necessary
NPDES permits, including NPDES storm water permits for applicable facilities, to
conduct our operations. We are in material compliance with these
permits.
Solid and Hazardous Waste. The
Resource Conservation and Recovery Act of 1976 regulates the management and
disposal of solid wastes and hazardous wastes. We are required to notify the EPA
of hazardous waste activity and, consequently, routinely submit the necessary
reports to the EPA. The Toxic Substances Control Act regulates the management
and disposal of materials containing polychlorinated biphenyl (PCB). In response
to the EPA Region V’s request for utilities to participate in the Great Lakes
Initiative by voluntarily removing remaining PCB inventories, Minnesota
Power replaced its PCB capacitor banks by 2005. PCB-contaminated oil in
substation equipment was replaced by June 2007. We are in material compliance
with these rules.
ALLETE
2007 Form 10-K
19
Environmental
Matters (Continued)
SWL&P Manufactured Gas
Plant. In May 2001, SWL&P received notice from the WDNR that the City
of Superior had found soil contamination on property adjoining a former
Manufactured Gas Plant (MGP) site owned and operated by SWL&P from 1889 to
1904. A report submitted in 2003 identified some MGP-like chemicals that were
found in the soil near the former plant site. The final Phase II report was
issued on June 7, 2007, confirming our understanding of the issues involved. The
final Phase II Report and Risk Assessment were sent to the WDNR for review on
June 18, 2007. A remediation plan was developed during the last quarter of 2007
and will be submitted to the WDNR during the first quarter of 2008. Although it
is not possible to fully quantify the potential clean-up cost until the WDNR’s
review is completed, a $0.5 million liability was recorded in December 2003
to address the known areas of contamination. The Company has recorded a
corresponding dollar amount as a regulatory asset to offset this liability. The
PSCW approved the collection through rates of $0.3 million of site investigation
costs that had been incurred through 2005. ALLETE maintains pollution liability
insurance coverage that includes coverage for SWL&P. A claim has been filed
with respect to this matter. The insurance carrier has issued a reservation of
rights letter and the Company continues to work with the insurer to determine
the availability of insurance coverage.
Employees
At
December 31, 2007, ALLETE had approximately 1,500 employees, of which 1,400 were
full-time.
Minnesota
Power and SWL&P have an aggregate 622 employees who are members of the
International Brotherhood of Electrical Workers (IBEW) Local 31. The labor
agreement with IBEW Local 31 expires on January 31, 2009.
BNI Coal
has 97 employees who are members of the IBEW Local 1593. BNI Coal and IBEW Local
1593 have a labor agreement which expires on March 31, 2008. BNI expects to
have a new labor agreement in place on, or before, the expiration of the
existing contract.
Availability
of Information
ALLETE
makes its SEC filings, including its annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and any amendments to those
reports, available free of charge on ALLETE’s Website www.allete.com, as soon as
reasonably practicable after they are electronically filed with or furnished to
the SEC.
ALLETE
2007 Form 10-K
20
Executive
Officers of the Registrant
|
Executive Officers
|
Initial Effective Date
|
|
Donald J. Shippar, Age
58
|
|
|
Chairman,
President and Chief Executive Officer
|
January
1, 2006
|
|
President
and Chief Executive Officer
|
January
21, 2004
|
|
Executive
Vice President – ALLETE and President – Minnesota Power
|
May
13, 2003
|
|
President
and Chief Operating Officer – Minnesota Power
|
January
1, 2002
|
|
Deborah A. Amberg, Age
42
|
|
|
Senior
Vice President, General Counsel and Secretary
|
January
1, 2006
|
|
Vice
President, General Counsel and Secretary
|
March
8, 2004
|
|
Steven Q. DeVinck, Age
48
|
|
|
Controller
|
July
12, 2006
|
|
Laura A. Holquist, Age
46
|
|
|
President
– ALLETE Properties, LLC
|
September
6, 2001
|
|
Mark A. Schober, Age
52
|
|
|
Senior
Vice President and Chief Financial Officer
|
July
1, 2006
|
|
Senior
Vice President and Controller
|
February
1, 2004
|
|
Vice
President and Controller
|
April
18, 2001
|
|
Donald W. Stellmaker,
Age 50
|
|
|
Treasurer
|
July
24, 2004
|
|
Claudia Scott Welty, Age
55
|
|
|
Senior
Vice President and Chief Administrative Officer
|
February
1, 2004
|
All of
the executive officers have been employed by us for more than five years in
executive or management positions. Prior to election to the positions shown
above, the following executives held other positions with the Company during the
past five years.
|
|
Ms. Amberg was a Senior
Attorney.
|
|
|
Mr. DeVinck was
Director of Nonutility Business Development, and Assistant Controller.
|
|
|
Mr. Stellmaker was
Director of Financial Planning.
|
|
|
Ms. Welty was Vice
President Strategy and Technology
Development.
|
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 above extends to the
first meeting of our Board of Directors after the next annual meeting of
shareholders. Both meetings are scheduled for May 13, 2008.
ALLETE
2007 Form 10-K
21
Item
1A. Risk
Factors
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 5 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.
Our
Regulated Utility results of operations could be negatively impacted if our
Large Power Customers experience an economic down cycle or fail to compete
effectively in the global economy.
Our 12
Large Power Customers accounted for approximately 34 percent of our 2007
consolidated operating revenue (one of these customers accounted for 12 percent
of consolidated revenue). These customers are involved in cyclical industries
that by their nature are adversely impacted by economic downturns and are
subject to strong competition in the global marketplace. An economic downturn or
failure to compete effectively in the global economy could have a material
adverse effect on their operations and, consequently, could negatively impact
our results of operations.
Our
Regulated Utility is 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, state legislatures, the FERC, the MPUC and
the PSCW. These governmental regulations relate to 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). 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 our 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.
Our
ability to obtain rate adjustments to maintain current rates of return depends
upon regulatory action under applicable statues and regulations, and we cannot
assure that rate adjustments will be obtained or current authorized rates of
return on capital will be earned. Minnesota Power and SWL&P from time to
time file rate cases with federal and state regulatory authorities. In
future rate cases, if Minnesota Power and SWL&P do not receive an adequate
amount of rate relief, rates are reduced, increased rates are not approved on a
timely basis or costs are otherwise unable to be recovered through rates, we may
experience an adverse impact on our financial condition, results of operations
and cash flows. We are unable to predict the impact on our business and
operations results from future regulatory activities of any of these
agencies.
Our
Regulated Utility could be significantly impacted by initiatives designed to
reduce the impact of greenhouse gas (GHG) emissions such as carbon dioxide from
our generating facilities.
Proposals
for voluntary initiatives and mandatory controls are being discussed within
Minnesota, among a group of midwestern states that includes Minnesota, in the
United States Congress and worldwide to reduce GHGs such as carbon dioxide, a
by-product of burning fossil fuels. We currently use coal as the primary fuel in
94 percent of the energy produced by our generating facilities.
We cannot
be certain whether new laws or regulations will be adopted to reduce GHGs and
what affect any such laws or regulations would have on us. If any new laws or
regulations are implemented, they could have a material effect on our results of
operations, particularly if implementation costs are not fully recoverable from
customers.
Our
Regulated Utility has established a goal to reduce overall GHG emissions
associated with electric generation and delivery. We plan to expand our
renewable energy production, expand customer conservation and process efficiency
improvements, select low GHG emitting resources to meet new generation needs,
and expand the use of renewable generation resources through dispatching those
units based on their environmental performance.
We are
participating in research and study initiatives to mitigate the potential impact
carbon emissions regulation to our business. There is no assurance that our
current reduction efforts will mitigate the impact of any new
regulations.
ALLETE
2007 Form 10-K
22
Risk
Factors (Continued)
The
cost of environmental emission allowances could have a negative financial impact
on our Regulated Utility Operations.
Minnesota
Power is subject to numerous environmental laws and regulations which require us
to purchase environmental emissions allowances which could increase our cost of
operations and expose us to emission price fluctuations. We are unable to
predict emission allowance pricing or regulatory recovery of these costs. We
will be pursuing a current cost recovery mechanism with the MPUC and
FERC.
Our
Regulated Utility and Nonregulated Energy 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, reclamation 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 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 such costs.
There is also uncertainty in quantifying liabilities under environmental laws
that impose joint and several liability on all potentially responsible
parties.
The
operation and maintenance of our generating facilities in our Regulated Utility
and Nonregulated Energy Operations involve 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, 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,
increased expenses or both. A significant portion of Minnesota Power’s
facilities were 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 operating at peak efficiency.
This equipment is also likely to require periodic upgrading and improvements due
to changing environmental standards and technological advances. (See Item I
– Environmental Matters.) 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.
Our
Regulated Utility and Nonregulated Energy Operations must have adequate and
reliable transmission and distribution facilities to deliver electricity to its
customers.
Minnesota
Power depends on transmission and distribution facilities owned by other
utilities, and transmission facilities primarily operated by MISO, as well as
its own such facilities, to deliver the electricity we produce and sell to our
customers, and to other energy suppliers. If transmission capacity is
inadequate, our ability to sell and deliver electricity may be hindered, we may
have to forego sales or we may have to buy more expensive wholesale electricity
that is available in the capacity-constrained area. The cost to acquire or
provide service may exceed the cost to serve 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.
ALLETE
2007 Form 10-K
23
Risk
Factors (Continued)
In
our Regulated Utility and Nonregulated Energy Operations the price of
electricity and fuel may be volatile.
Volatility
in market prices for electricity and fuel may result from:
|
|
·
|
severe
or unexpected weather conditions;
|
|
|
·
|
seasonality;
|
|
|
·
|
changes
in electricity usage;
|
|
|
·
|
transmission
or transportation constraints, inoperability or
inefficiencies;
|
|
|
·
|
availability
of competitively priced alternative energy
sources;
|
|
|
·
|
changes
in supply and demand for energy;
|
|
|
·
|
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, crude oil
and refined products;
|
|
|
·
|
natural
disasters, wars, sabotage, terrorist acts or other catastrophic events;
and
|
|
|
·
|
federal,
state, local and foreign energy, environmental, or 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.
We
are dependent on good labor relations.
We
believe our relations to be good with our approximately 1,500 employees. Failure
to successfully renegotiate labor agreements could adversely affect the services
we provide and our results of operations. Approximately 600 of our employees are
members of either the International Brotherhood of Electrical Workers Local 31
or Local 1593. The labor agreement with Local 31 at Minnesota Power and
SWL&P expires on January 31, 2009, and the labor agreement with Local 1593
at BNI Coal expires on March 31, 2008.
A
downturn in economic conditions could adversely affect our real estate
business.
The
ability of our real estate business to generate revenue is directly related to
the Florida real estate market, the national and local economy in general and
changes in interest rates. While conditions in the Florida real estate market
may fluctuate over time, continued demand for land is dependent on long-term
prospects for strong, in-migration population expansion.
We
are exposed to risks associated with real estate development.
Our real
estate development activities entail risks that include construction delays or
cost overruns, which may increase project development costs. In addition, the
effects of the rebuilding efforts due to destructive weather, including
hurricanes, could cause increased prices for construction materials and create
labor shortages which could increase our development costs.
Our real
estate development activities require significant expenditures. We obtain funds
for our expenditures through cash flow from operations and financings, including
the financings of the community development districts in which our development
projects are located. We cannot be certain that the funds available from these
sources will be sufficient to fund our required or desired expenditures for
development. If we are unable to obtain sufficient funds, we may have to defer
or otherwise limit our development activities.
ALLETE
2007 Form 10-K
24
Risk
Factors (Continued)
Our
real estate business is subject to extensive regulation through Florida laws
regulating planning and land development which makes it difficult and expensive
for us to conduct our operations.
Development
of real property in Florida entails an extensive approval process involving
overlapping regulatory jurisdictions. Real estate projects must generally comply
with the provisions of the Local Government Comprehensive Planning and Land
Development Regulation Act (Growth Management Act). In addition,
development projects that exceed certain specified regulatory thresholds require
approval of a comprehensive DRI application.
The
Growth Management Act requires counties and cities to adopt comprehensive plans
guiding and controlling future real property development in their respective
jurisdictions. After a local government adopts its comprehensive plan, all
development orders and development permits must be consistent with the plan.
Each plan must address such topics as future land use, capital improvements,
traffic circulation, sanitation, sewage, potable water, drainage and solid waste
disposal.
The
Growth Management Act, in some instances, can significantly affect the ability
of developers to obtain local government approval in Florida. In many areas,
infrastructure funding has not kept pace with growth. As a result, substandard
facilities and services can delay or prevent the issuance of permits.
Consequently, the Growth Management Act could adversely affect the cost and our
ability to develop future real estate projects.
The DRI
review process includes an evaluation of a project’s impact on the environment,
infrastructure and government services, and requires the involvement of numerous
state and local environmental, zoning and community development agencies. The
DRI approval process is usually lengthy and costly, and conditions, standards or
requirements may be imposed on a developer with respect to a particular project,
which may materially increase the cost of the project.
Changes
in the Growth Management Act or DRI review process or the enactment of new laws
regarding the development of real property could adversely affect our ability to
develop future real estate projects.
Competition
could adversely affect our real estate business.
Over the
past few years, we have experienced an increase in competition for suitable land
in the southeast United States real estate market. The availability of
undeveloped land for purchase that meets our internal criteria depends on a
number of factors outside our control, including land availability in general,
competition with other developers and land buyers for desirable property,
inflation in land prices, zoning, allowable development density and other
regulatory requirements. Our long-term ability to acquire land suitable for
development at reasonable prices in locations where we feel there is a viable
market is crucial in maintaining our business success.
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.
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
may have difficulty in retaining and attracting customers, developing new
services, negotiating favorable agreements with customers and providing
acceptable levels of customer service.
ALLETE
2007 Form 10-K
25
|
Item
1B.
|
Unresolved
Staff Comments
|
None.
|
Item
2.
|
Properties
|
Properties
are included in the discussion of our businesses 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
businesses 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. We do not expect the outcome of
these matters to have a material effect on our financial position, results of
operations or cash flows.
|
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 2007.
Part
II
|
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
Our
common stock is listed on the NYSE under the symbol ALE. We have paid dividends
without interruption on our common stock since 1948. A quarterly dividend of
$0.43 per share on our common stock will be paid on March 1, 2008, to the
holders of record on February 15, 2008.
The
following table shows dividends declared per share, and the high and low prices
for our common stock for the periods indicated as reported by the
NYSE:
|
2007
|
2006
|
|||||
|
Price
Range
|
Dividends
|
Price
Range
|
Dividends
|
|||
|
Quarter
|
High
|
Low
|
Declared
|
High
|
Low
|
Declared
|
|
First
|
$49.69
|
$44.93
|
$0.4100
|
$47.81
|
$42.99
|
$0.3625
|
|
Second
|
51.30
|
45.39
|
0.4100
|
48.55
|
44.34
|
0.3625
|
|
Third
|
50.05
|
38.60
|
0.4100
|
49.30
|
43.26
|
0.3625
|
|
Fourth
|
46.48
|
38.17
|
0.4100
|
47.84
|
42.55
|
0.3625
|
|
Annual
Total
|
$1.640
|
$1.450
|
||||
|
Dividend
Payout Ratio
|
53%
|
53%
|
||||
At
February 1, 2008, there were approximately 31,000 common stock shareholders of
record.
Common Stock Repurchases. We
did not repurchase any ALLETE common stock during the fourth quarter of
2007.
ALLETE
2007 Form 10-K
26
Item
6. Selected
Financial Data
Financial
results by segment for the periods presented were impacted by the integration of
our Taconite Harbor facility into the Regulated Utility segment effective
January 1, 2006. We have operated the Taconite Harbor facility as a rate-based
asset within the Minnesota retail jurisdiction since January 1, 2006. Prior to
January 1, 2006, we operated our Taconite Harbor facility as nonregulated
generation (non-rate base generation sold at market-based rates primarily to the
wholesale market). Historical financial results of Taconite Harbor for periods
prior to the 2006 redirection are included in our Nonregulated Energy Operations
segment.
Operating
results of our Water Services businesses and our telecommunications business are
included in discontinued operations, and accordingly, amounts have been restated
for all periods presented. (See Note 13.) Common share and per share amounts
have also been adjusted for all periods to reflect our September 20, 2004,
one-for-three common stock reverse split.
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||
|
Operating
Revenue
|
$841.7
|
$767.1
|
$737.4
|
$704.1
|
$659.6
|
|||||
|
Operating
Expenses
|
708.0
|
626.4
|
692.3
|
(d)
|
603.2
|
561.9
|
||||
|
Income
from Continuing Operations Before Change in Accounting
Principle
|
87.6
|
77.3
|
17.6
|
(d)
|
38.5
|
29.2
|
||||
|
Income
(Loss) from Discontinued Operations – Net of Tax
|
–
|
(0.9)
|
(4.3)
|
73.7
|
207.2
|
(f)
|
||||
|
Change
in Accounting Principle – Net of Tax
|
–
|
–
|
–
|
(7.8)
|
(b)
|
–
|
||||
|
Net
Income
|
87.6
|
76.4
|
13.3
|
104.4
|
236.4
|
|||||
|
Common
Stock Dividends
|
44.3
|
40.7
|
34.4
|
79.7
|
93.2
|
|||||
|
Earnings
Retained in (Distributed from) Business
|
$43.3
|
$35.7
|
$(21.1)
|
$24.7
|
$143.2
|
|||||
|
Shares
Outstanding – Millions
|
||||||||||
|
Year-End
|
30.8
|
30.4
|
30.1
|
29.7
|
29.1
|
|||||
|
Average (c)
|
||||||||||
|
Basic
|
28.3
|
27.8
|
27.3
|
28.3
|
27.6
|
|||||
|
Diluted
|
28.4
|
27.9
|
27.4
|
28.4
|
27.8
|
|||||
|
Diluted
Earnings (Loss) Per Share
|
||||||||||
|
Continuing
Operations
|
$3.08
|
$2.77
|
$0.64
|
(d)
|
$1.35
|
(e)
|
$1.05
|
|||
|
Discontinued
Operations
|
–
|
(0.03)
|
(0.16)
|
2.59
|
7.47
|
(f)
|
||||
|
Change
in Accounting Principle
|
–
|
–
|
–
|
(0.27)
|
–
|
|||||
|
$3.08
|
$2.74
|
$0.48
|
$3.67
|
$8.52
|
||||||
|
Total
Assets
|
$1,644.2
|
$1,533.4
|
(a)
|
$1,398.8
|
$1,431.4
|
$3,101.3
|
||||
|
Long-Term
Debt
|
410.9
|
359.8
|
387.8
|
389.4
|
513.9
|
|||||
|
Return
on Common Equity
|
12.4%
|
12.1%
|
2.2%
|
(d)
|
8.3%
|
17.7%
|
||||
|
Common
Equity Ratio
|
63.7%
|
63.1%
|
60.7%
|
61.7%
|
64.4%
|
|||||
|
Dividends
Declared per Common Share
|
$1.6400
|
$1.4500
|
$1.2450
|
$2.8425
|
$3.3900
|
|||||
|
Dividend
Payout Ratio
|
53%
|
53%
|
259%
|
(d)
|
77%
|
40%
|
||||
|
Book
Value Per Share at Year-End
|
$24.11
|
$21.90
|
$20.03
|
$21.23
|
$50.18
|
|||||
|
Capital
Expenditures by Segment
|
||||||||||
|
Regulated
Utility Operations
|
$220.6
|
$107.5
|
$46.5
|
$41.7
|
$42.2
|
|||||
|
Non
Regulated Utility
|
3.3
|
1.9
|
12.1
|
15.7
|
26.5
|
|||||
|
Real
Estate
(h)
|
–
|
–
|
–
|
–
|
–
|
|||||
|
Other
|
–
|
–
|
–
|
0.4
|
–
|
|||||
|
Discontinued
Operations
|
–
|
–
|
4.5
|
21.4
|
67.6
|
|||||
|
Total
Capital Expenditures
|
$223.9
|
$109.4
|
$63.1
|
$79.2
|
$136.3
|
|||||
|
Current
Cost Recovery (g)
|
$145
|
$27
|
–
|
–
|
–
|
|
(a)
|
Included
$86.1 million of assets and $107.6 million of liabilities reflecting the
adoption of SFAS 158 “Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans.” (See Notes 2 and
16.)
|
|
(b)
|
Reflected
the cumulative effect on prior years (to December 2003) of changing to the
equity method of accounting for investments in limited liability companies
included in our emerging technology portfolio. (See Note
6.)
|
|
(c)
|
Excludes
unallocated ESOP shares.
|
|
(d)
|
Impacted
by a $50.4 million, or $1.84 per share, charge related to the assignment
of the Kendall County power purchase agreement (See Note 10.), a $2.5
million, or $0.09 per share, deferred tax benefit due to comprehensive
state tax planning initiatives, and a $3.7 million, or $0.13 per
share, current tax benefit due to a positive resolution of income tax
audit issues.
|
|
(e)
|
Included
a $10.9 million, or $0.38 per share, after-tax debt prepayment cost
incurred as part of ALLETE’s financial restructuring in preparation for
the spin-off of the Automotive Services business and an $11.5 million, or
$0.41 per share, gain on the sale of ADESA shares related to the Company’s
ESOP (see Note 16).
|
|
(f)
|
Included
a $71.6 million, or $2.59 per share, gain on the sale of the Water
Services businesses.
|
|
(g)
|
Estimated
current capital expenditures recoverable outside of a rate
case.
|
|
(h)
|
Excludes
capitalized improvements on our development projects, which are included
in inventory. (See Note 6.)
|
ALLETE
2007 Form 10-K
27
Item
7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion should be read in conjunction with our consolidated
financial statements and notes to those statements and the other financial
information appearing elsewhere in this report. In addition to historical
information, the following discussion and other parts of this report contain
forward-looking information that involves risks and uncertainties. Readers are
cautioned that forward-looking statements should be read in conjunction with our
disclosures in this Form 10-K under the headings: “Safe Harbor Statement
Under the Private Securities Litigation Reform Act of 1995” located on page 5
and “Risk Factors” located in Item 1A. 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 in
this Form 10-K are realized.
Overview
ALLETE is
a diversified company that has provided fundamental products and services since
1906. These include our former operations in the water, paper,
telecommunications and automotive industries and the core Energy and Real Estate businesses we
operate today.
Energy is comprised of
Regulated Utility, Nonregulated Energy Operations and Investment in
ATC.
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|
·
|
Regulated Utility
includes retail and wholesale rate regulated electric, natural gas and
water services in northeastern Minnesota and northwestern
Wisconsin under the jurisdiction of state and federal regulatory
authorities.
|
|
|
·
|
Nonregulated Energy
Operations includes our coal mining activities in North Dakota,
approximately 50 MW of nonregulated generation and Minnesota land
sales.
|
|
|
·
|
Investment in ATC
includes our equity ownership interest in
ATC.
|
Real Estate includes our
Florida real estate operations.
Other includes our investments
in emerging technologies, and earnings on cash and short-term
investments.
We are
committed to earning a financial return that rewards our shareholders, allows
for reinvestment in our businesses, and sustains our growth. We strive to grow
earnings and dividends that will result in a total shareholder return that is
superior to that of similar companies. Our goal is to earn a financial return
that will allow us to provide dividend increases while at the same time fund our
growth initiatives.
2007
Financial Overview
(See Note
1. Business Segments for financial results by segment.)
Net
income for 2007 was $87.6 million, or $3.08 per diluted share ($76.4 million, or
$2.74 per diluted share for 2006; $13.3 million, or $0.48 per diluted share
for 2005). Net income for 2007 was up $11.2 million from 2006
reflecting:
Regulated Utility contributed
income of $54.9 million in 2007 ($46.8 million in 2006; $45.7 million in 2005).
The increase in earnings for 2007 reflects:
|
|
·
|
increased
electric sales to residential, commercial and municipal
customers;
|
|
|
·
|
continued
strong demand from our industrial
customers;
|
|
|
·
|
rate
increases, effective January 1, 2007, at
SWL&P;
|
|
|
·
|
commencement
of current cost recovery on AREA project environmental capital
expenditures;
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|
|
·
|
higher
AFUDC related to increased capital
expenditures;
|
|
|
·
|
increased
operations and maintenance expense, relating to outages and salary and
wage increases; and
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|
|
·
|
a
lower effective tax rate.
|
Nonregulated Energy Operations
reported income of $3.5 million in 2007 ($3.7 million in 2006; a loss of $48.5
million in 2005), reflecting a $1.2 million after tax gain on land
sold that was part of our purchase of Taconite Harbor and higher lease lot
revenue due to newly developed lots. The increases were partially offset by
lower income from BNI Coal, reflecting lower coal sales in 2007.
Investment in ATC contributed
income of $7.5 million in 2007 ($1.9 million in 2006). Our initial investment in
ATC began in May 2006. We reached our approximate 8 percent ownership in
February 2007.
Real Estate contributed income
of $17.7 million in 2007 ($22.8 million in 2006; $17.5 million in 2005). Income
was lower in 2007 than in 2006 due to a weaker real estate market in
2007.
Other reflected net income of
$4.0 million in 2007 ($2.1 million in 2006; $2.9 million in 2005). The increase
in 2007 included a state tax audit settlement for $1.5 million and the release
from a loan guarantee for Northwest Airlines of $0.6 million after
tax.
ALLETE
2007 Form 10-K
28
Overview
(Continued)
Financial
results for continuing operations in 2005 were significantly impacted by a
$77.9 million ($50.4 million after tax, or $1.84 per share) charge due
to the assignment of the Kendall County power purchase agreement to
Constellation Energy Commodities (Kendall County Charge). (See Note
10.)
Financial
results by segment from 2005 and 2006 presented and discussed in this Form 10-K
were impacted by the integration of our Taconite Harbor facility into the
Regulated Utility segment effective January 1, 2006. We have operated the
Taconite Harbor facility as a rate-based asset within the Minnesota retail
jurisdiction since January 1, 2006. Prior to January 1, 2006, we operated our
Taconite Harbor facility as nonregulated generation. Historical financial
results of Taconite Harbor for periods prior to the 2006 redirection are
included in our Nonregulated Energy Operations segment.
|
Kilowatthours
Sold
|
2007
|
2006
|
2005
|
|
Millions
|
|||
|
Regulated
Utility
|
|||
|
Retail
and Municipals
|
|||
|
Residential
|
1,141
|
1,100
|
1,102
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|
Commercial
|
1,373
|
1,335
|
1,327
|
|
Industrial
|
7,054
|
7,206
|
7,130
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|
Municipals
|
1,008
|
911
|
877
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|
Other
|
84
|
79
|
79
|
|
Total
Retail and Municipals
|
10,660
|
10,631
|
10,515
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|
Other
Power Suppliers
|
2,157
|
2,153
|
1,142
|
|
Total
Regulated Utility
|
12,817
|
12,784
|
11,657
|
|
Nonregulated
Energy Operations
|
249
|
240
|
1,521
|
|
Total
Kilowatthours Sold
|
13,066
|
13,024
|
13,178
|
|
Real
Estate
|
2007
|
2006
|
2005
|
|||
|
Revenue
and Sales Activity (a)
|
Quantity
|
Amount
|
Quantity
|
Amount
|
Quantity
|
Amount
|
|
Dollars
in Millions
|
||||||
|
Revenue
from Land Sales
|
||||||
|
Town
Center Sales
|
||||||
|
Non-residential
Sq. Ft.
|
540,059
|
$15.0
|
401,971
|
$10.8
|
643,000
|
$15.2
|
|
Residential
Units
|
130
|
1.6
|
773
|
12.9
|
–
|
–
|
|
Palm
Coast Park
|
||||||
|
Non-residential
Sq. Ft.
|
40,000
|
2.0
|
–
|
–
|
–
|
–
|
|
Residential
Unit
|
606
|
13.2
|
200
|
3.0
|
–
|
–
|
|
Other
Land Sales
|
||||||
|
Acres (b)
|
483
|
10.6
|
732
|
24.4
|
1,102
|
38.1
|
|
Lots
|
–
|
–
|
–
|
–
|
7
|
0.4
|
|
Contract
Sales Price (c)
|
42.4
|
51.1
|
53.7
|
|||
|
Revenue
Recognized from
|
||||||
|
Previously
Deferred Sales
|
3.1
|
9.7
|
–
|
|||
|
Deferred
Revenue
|
(1.2)
|
(3.8)
|
(10.0)
|
|||
|
Adjustments
(d)
|
–
|
(0.9)
|
(1.7)
|
|||
|
Revenue
from Land Sales
|
44.3
|
56.1
|
42.0
|
|||
|
Other
Revenue
|
6.2
|
6.5
|
5.5
|
|||
|
$50.5
|
$62.6
|
$47.5
|
||||
|
(a)
|
Quantity
amounts are approximate until final
build-out.
|
|
(b)
|
Acreage
amounts are shown on a gross basis, including wetlands and minority
interest.
|
|
(c)
|
Reflected
total contract sales price on closed land transactions. Land sales are
recorded using a percentage-of-completion method. (See Critical Accounting
Estimates and Note 2.)
|
|
(d)
|
Contributed
development dollars, which are credited to cost of real estate
sold.
|
ALLETE
2007 Form 10-K
29
2007
Compared to 2006
(See Note
1. Business Segments for financial results by segment.)
Regulated
Utility
Operating
revenue increased $84.6 million, or 13.2 percent, from 2006,
primarily due to increased fuel clause recoveries, increased kilowatthour sales
to residential, commercial and municipal customers, increased power marketing
prices, and rate increases at SWL&P.
Fuel
clause recoveries increased $63.3 million in 2007 as a result of increased
purchased power expenses (see Fuel and Purchased Power Expense discussion
below).
Revenue
recovered through current cost recovery related to AREA Plan expenditures
represented $3.2 million in 2007 ($0.1 million in 2006).
Revenue
from sales to other power suppliers increased $3.6 million, or 3.8 percent, from
2006, primarily due to a 3.6 percent increase in the price per
kilowatthour.
New rates
at SWL&P, which became effective January 1, 2007, reflect a 2.8 percent
increase in electric rates, a 1.4 percent increase in gas rates and an
8.6 percent increase in water rates. These rate increases resulted in a
$1.7 million increase in operating revenue.
Revenue
from electric sales to taconite customers accounted for 24 percent of
consolidated operating revenue in each 2007 and 2006. Revenue from electric
sales to paper and pulp mills accounted for 9 percent of consolidated
operating revenue in each of 2007 and 2006. Revenue from electric sales to
pipelines accounted for 7 percent of consolidated operating revenue in 2007
(6 percent in 2006).
Overall,
kilowatthour sales were flat in 2007. Combined residential, commercial and
municipal kilowatthour sales increased 181.0 million, or 5.3 percent, from 2006,
while industrial kilowatthour sales decreased by 152.1 million, or 2.1 percent.
The increase in residential, commercial and municipal kilowatthour sales was
primarily because of two existing municipal customers converting to full-energy
requirements and a 9.2 percent increase in Heating Degree Days (primarily in
February). The reduction in industrial kilowatthour sales was primarily due to
an idle production line and production delays at one of our taconite customers.
In September 2007, the affected taconite customer resumed production on the idle
line. Minor fluctuations in industrial kilowatthour sales generally do not have
a large impact on revenue due to a fixed demand component of revenue that is
less sensitive to changes in kilowatthours sales.
Operating
expenses increased $76.9 million, or 14.1 percent, from
2006.
Fuel and Purchased Power
Expense increased $65.9 million, or 23.4 percent, from 2006 primarily due
to a $61.4 million increase in purchased power reflecting a 45.1 percent
increase in market purchases and an 11.0 percent increase in market prices. The
increase in purchased power was primarily due to the following outages at our
generating facilities:
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|
·
|
scheduled
outage at Boswell Unit 3;
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|
|
·
|
scheduled
outages at Laskin Unit 1 and Taconite Harbor Unit 2 relating to AREA Plan
environmental upgrades; and
|
|
|
·
|
unscheduled
outages at Boswell Unit 4.
|
Boswell
Unit 4 completed generator repairs and returned to service in May 2007.
Substantially all of the costs of the replacement coils were covered under the
original manufacturer’s warranty.
Lower
Square Butte entitlement (See Note 8) and output contributed to higher
purchased power expense. Square Butte generation was lower in the fourth quarter
of 2007 reflecting a major scheduled outage.
Replacement
purchased power costs are recovered through the fuel adjustment clause in
Minnesota.
Operating and Maintenance
Expense increased $11.4 million, or 5.2 percent, from 2006, due to a $9.0
million increase in plant maintenance primarily due to planned and unscheduled
outages and salary and wage increases.
Depreciation Expense decreased $0.4 million
from 2006, primarily due to the life extension of Boswell Unit 3, mostly offset
by higher depreciable asset balances.
Interest Expense
increased $0.8 million, or 4.0 percent, from 2006, primarily due to
higher debt balances reflecting increased construction activity. The increase
was partially offset by the capitalization of more AFUDC-Debt.
Other income
increased $3.2 million from 2006, primarily due to higher earnings from
the capitalization of AFUDC-Equity reflecting increased construction
activity.
ALLETE
2007 Form 10-K
30
2007
Compared to 2006 (Continued)
Nonregulated
Energy Operations
Operating
revenue increased $2.0 million, or 3.1 percent, from 2006, primarily
due to higher coal revenue realized under a cost-plus contract. This increase
reflects a 12.2 percent increase in the delivered price per ton due to higher
coal production expenses (see Operating expenses below), partially offset by
lower sales volume.
Operating
expenses increased $4.3 million, or 7.0 percent, from 2006, reflecting
higher coal production expense and higher property taxes. The increase in
property taxes is primarily due to higher assessed market values on our
Minnesota land, while the increase in coal operating expenses is due to higher
fuel costs, tire and dragline repairs.
Interest Expense
decreased $1.3 million from 2006, reflecting lower interest on income tax
accruals.
Other income
increased $1.7 million from 2006, reflecting higher gains on Minnesota
land sales and higher lease lot revenue due to leasing newly developed
lots.
Investment
in ATC
Equity
Earnings increased $9.6 million in 2007, resulting from our pro-rata
share of ATC’s earnings as discussed in Note 3. Our initial investment in ATC
began in May 2006. We reached our approximate 8 percent ownership in February
2007.
Real
Estate
Operating
revenue
decreased $12.1 million, or 19.3 percent, from 2006, due to a weaker real estate
market in 2007, and less recognition of deferred revenue, accounted for under
the percentage-of-completion method, as major infrastructure reached substantial
completion at Town Center in 2006 and at Palm Coast Park in 2007. Revenue from
land sales in 2007 was $44.3 million, which included $3.1 million in
previously deferred revenue. In 2006, revenue from land sales was $56.1 million
which included $9.7 million in previously deferred revenue. At December 31,
2007, revenue of $3.7 million ($5.6 million at December 31, 2006) was deferred
and will be recognized on a percentage-of-completion basis.
Sales at
Town Center consisted of 540,059 non-residential square feet (401,971
square feet in 2006), and 130 residential units (773 units in 2006). Palm Coast
Park sales included 40,000 non-residential square feet (none in 2006) and 606
residential units (200 units in 2006). In 2007, 483 acres of other land were
sold (732 acres in 2006).
Operating
expenses increased $0.6 million, or 3.1 percent from 2006,
reflecting community development district property tax assessments previously
capitalized at Town Center during major infrastructure construction partially
offset by lower cost of sales due to the decrease in land sales.
Interest
expense increased $0.5 million from 2006. Interest capitalization was
reduced in 2007 as the major infrastructure construction at Town Center was
substantially completed at the end of 2006.
Minority Interest
participation was down due to lower earnings.
Other
Interest
expense decreased $2.8 million from 2006, primarily due to more interest
charged to the regulated utility in 2007 as a result of increased capital
expenditures and interest on additional taxes owed on the gain on sale of our
Florida Water assets in 2006.
Other income
decreased $1.4 million from 2006, reflecting lower investment income
as a result of lower average balances in 2007, partially offset by the release
from a loan guarantee for Northwest Airlines of $1.0 million.
Income
Taxes
For the
year ended December 31, 2007, the effective tax rate on income from continuing
operations before minority interest was 34.8 percent (36.1 percent for December
31, 2006). The decrease in the effective rate compared to last year was
primarily due to a tax benefit realized as a result of a state income tax audit
settlement ($1.5 million), higher AFUDC-Equity, and a larger domestic
manufacturing deduction taken in 2007 compared to 2006. The effective rate of
34.8 percent for the year ended December 31, 2007, deviated from the statutory
rate (approximately 40 percent) due to the state income tax audit settlement,
deductions for Medicare health subsidies and domestic manufacturing production,
AFUDC-Equity and investment tax credits.
ALLETE
2007 Form 10-K
31
2006
Compared to 2005
Regulated
Utility
Operating
revenue was up $63.6 million, or 11 percent, from 2005, reflecting
increased kilowatthour sales and increased fuel clause recoveries. Electric
sales increased 1,127 million kilowatthours, or 10 percent, mostly due to
the addition of Taconite Harbor wholesale power obligations to the
Regulated Utility segment effective January 1, 2006. In 2006, the majority of
Taconite Harbor sales are reflected in sales to other power suppliers. Sales to
other power suppliers were 2,153 million kilowatthours and $94.3 million (1,142
million kilowatthours and $52.8 million in 2005). Absent the inclusion of
pre-existing Taconite Harbor wholesale energy sales obligations, sales to other
power suppliers were down reflecting less excess energy available for sale due
to more planned outages at Company generating facilities in 2006 than 2005.
Electric sales to retail and municipal customers increased 116 million
kilowatthours, or 1 percent, and $23.5 million, mainly due to strong demand
from industrial customers. Fuel clause recoveries were higher in 2006 as a
result of increased fuel and purchased power expenses in 2006. Natural gas
revenue was down $2.8 million from 2005 reflecting decreased usage due to warmer
weather in 2006.
Operating
expenses were up $57.8 million, or 12 percent, from 2005.
Fuel and Purchased Power
Expense. Fuel and purchased power expense was up $38.0 million from 2005,
reflecting the inclusion of Taconite Harbor operations beginning in 2006 ($22.8
million) and increased purchased power expense due to higher prices paid for
purchased power, less Company hydro generation available as a result of below
normal precipitation levels, and planned maintenance at Company generating
facilities in 2006.
Other Operating
Expenses. Other operating expenses were up $19.8 million from 2005.
Employee compensation was up $7.3 million primarily due to the inclusion of
Taconite Harbor, annual wage increases and the inclusion of union employees in
our results sharing compensation awards program. Depreciation expense increased
$4.8 million primarily due to the inclusion of Taconite Harbor and a full year
of depreciation of projects capitalized in 2005. Plant maintenance expense
increased $4.7 million reflecting the inclusion of Taconite Harbor
maintenance in 2006 ($4.0 million), increased planned maintenance expense
at Boswell Unit 4 ($1.6 million) and increased equipment fuel expenses ($0.9
million) partially offset by a decrease in maintenance expense at Boswell
Unit 3 ($1.8 million). In 2005, planned maintenance was performed at
Boswell Unit 3 while the unit was down due to a cooling tower failure.
Pension expense increased $2.2 million primarily due to a reduction in the
discount rate (5.50 percent in 2006; 5.75 percent in 2005). Insurance expense
was up $1.0 million due to increased premiums. Vegetation management
expense was up $0.7 million due to more completed in 2006. Property taxes
were up $0.7 million due to higher mill rates in 2006. Purchased natural gas
expense was down $2.7 million due to decreased natural gas sales.
Interest expense
was up $2.8 million, or 16 percent, from 2005, reflecting the inclusion
of Taconite Harbor in 2006 partially offset by lower effective interest rates
(5.92 percent in 2006; 6.07 percent in 2005).
Nonregulated
Energy Operations
Operating
revenue was down $48.9 million, or 43 percent, from 2005 due to the
absence of revenue from Taconite Harbor ($55.1 million in 2005) and Kendall
County ($3.1 million in 2005). Effective January 1, 2006, Taconite Harbor is
reported as part of Regulated Utility. Kendall County operations ceased to be
included with our operations effective April 1, 2005, when the Company
assigned the power purchase agreement to Constellation Energy Commodities. Coal
revenue, realized under cost plus a fixed fee agreements, was up $3.7 million
from 2005 reflecting a 16 percent increase in the delivery price per ton due to
higher reimbursable coal production expenses (see Operating expenses below). In
2006, tons of coal sold were down 7 percent from 2005 in part due to an outage
at Minnkota Power’s Unit 1 in 2006.
Operating
expenses were down $125.2 million, or 67 percent, from 2005 reflecting
the absence of a $77.9 million charge related to the assignment of the
Kendall County power purchase agreement to Constellation Energy Commodities on
April 1, 2005, expenses related to Taconite Harbor ($49.3 million in 2005)
and other expenses related to Kendall County ($6.3 million in 2005) that
were incurred prior to April 1, 2005. Expenses related to coal operations were
up $3.4 million reflecting increased equipment lease costs ($1.3 million),
higher fuel expenses ($0.6 million) and increased parts and supplies ($0.9
million).
Interest
expense was down $3.3 million, or 50 percent, primarily due to the
absence of Taconite Harbor in 2006.
Other income
(expense) reflected $0.5 million more income in 2006 due to increased
Minnesota land sales.
Investment
in ATC
Other income
(expense) reflected $3.0 million of income in 2006 from our equity
investment in ATC, resulting from our share of ATC’s earnings.
ALLETE
2007 Form 10-K
32
2006
Compared to 2005 (Continued)
Real
Estate
Operating
revenue was up $15.1 million, or 32 percent, from 2005, due to the
recognition of revenue from prior land sales at our Town Center development
project, which are accounted for under the percentage-of-completion method.
Revenue from land sales was $56.1 million in 2006 which included
$9.7 million of previously deferred revenue. In 2005, revenue from land
sales was $42.0 million. Sales at Town Center represented 773 residential units
and the rights to build up to 401,971 square feet of non-residential space in
2006 (643,000 non-residential square feet in 2005). Sales at Palm Coast Park
represented 200 residential units in 2006. In 2006, 732 acres of other land were
sold (1,102 acres and 7 lots in 2005). The first land sales for Town Center were
recorded in June 2005 and the first land sales at Palm Coast Park were recorded
in August 2006. At December 31, 2006, revenue of $5.6 million
($11.5 million at December 31, 2005) was deferred and will be recognized on
a percentage-of-completion basis as development obligations are
completed.
Operating
expenses were up $2.9 million, or 17 percent, from 2005 reflecting a $1.6
million increase in the cost of real estate sold ($10.2 million in 2006; $8.6
million in 2005) due to the recognition of the cost of real estate sold at our
Town Center development project which were previously deferred under the
percentage-of-completion method. Selling expenses increased $0.6 million due to
higher broker commission in 2006 and recognition of prior year’s selling
expenses at our Town Center development project which were previously deferred
under the percentage-of-completion method. Property tax expense was $0.2 million
higher in 2006 due to increased assessment values and higher rates. At December
31, 2006, cost of real estate sold totaling $1.3 million ($2.2 million at
December 31, 2005) and selling expenses of $0.2 million ($0.3 million at
December 31, 2005), primarily related to Town Center land sales, were
deferred until development obligations are completed.
Other
Operating
expenses were down $1.4 million, or 29 percent, from 2005, reflecting
lower general and administrative expenses in 2006.
Interest expense
was up $1.6 million, or 70 percent, from 2005, reflecting interest on
additional taxes owed on the gain on the sale of our Florida Water assets and
state tax audits, and higher variable rates in 2006.
Other income
(expense) reflected $9.9 million more income in 2006 due to a $4.4
million increase in earnings on cash and short-term investments due to higher
rates and higher average balances in 2006, the absence of $5.1 million of
impairments related to certain investments in our emerging technology portfolio
recorded in 2005 and the absence of a $1.0 million charge recognized in 2005 for
the probable payment under our guarantee of Northwest Airlines
debt.
Discontinued
Operations
Discontinued
operations includes our Water Services businesses that we sold over a three-year
period from 2003 to 2005 and our telecommunications business, which we sold in
December 2005. There were no losses recognized in discontinued operations in
2007 (a $0.9 million loss in 2006; $4.3 million loss in 2005).
In 2006,
discontinued operations reflected a $0.9 million loss resulting from additional
legal and administrative expenses related to exiting the Water Services
businesses (a $2.5 million loss in 2005). In 2005, administrative and other
expenses were incurred to support Florida Water transfer proceedings. A
$1.0 million rate-base settlement charge related to the sale of 63 of
Florida Water systems to Aqua Utilities Florida, Inc. was also recorded in 2005.
Our wastewater assets in Georgia were sold in February 2005.
Financial
results for our telecommunications business reflected a loss of $1.8 million in
2005. In 2005, we recorded a $3.6 million loss on the sale of this
business.
Income
Taxes
For the
year ended December 31, 2006, the effective tax rate from continuing operations
before minority interest was 36.1 percent (2.5 percent benefit for the year
ended December 31, 2005). The increase in the effective rate compared to 2005
was primarily due to the lower income from continuing operations in 2005 as a
result of the Kendall County Charge, and one-time tax benefits realized in 2005
for adjustments to our deferred tax assets and liabilities as a result of
comprehensive state tax planning initiatives, and positive resolution of audit
issues. The effective rate of 36.1 percent for the year ended December 31, 2006,
was less than the combined state and federal statutory rate because of
investment tax credits, deductions for Medicare health subsidies, depletion and
the expected use of state capital loss carryforwards.
ALLETE
2007 Form 10-K
33
Critical
Accounting Estimates
The
preparation of financial statements and related disclosures in conformity with
GAAP requires management to make various estimates and assumptions that affect
amounts reported in the consolidated financial statements. These estimates and
assumptions may be revised, which may have a material effect on the consolidated
financial statements. Actual results may differ from these estimates and
assumptions. These policies are discussed with the Audit Committee of our Board
of Directors on a regular basis. The following represent the policies we believe
are most critical to our business and the understanding of our results of
operations.
Real Estate Revenue and Expense
Recognition. We account for sales of real estate in accordance with SFAS
66, “Accounting for Sales of Real Estate.” Revenue from residential and
non-residential properties is recorded at the time of closing using the full
profit recognition method, provided that cash collections are at least 20
percent of the contract price and the other requirements of SFAS 66 are met.
However, if we are obligated to perform significant development activities
subsequent to the date of the sale, we recognize revenue using the
percentage-of-completion method. This method of accounting requires that we
recognize gross profit based upon the relationship of development costs incurred
to the total estimated development costs of the parcels. During each reporting
period, we must estimate the total costs to be incurred until project
completion, including development overhead and interest capitalization costs.
These total cost estimates will impact the recognition of profit on sales. The
costs are allocated to each lot or parcel based on the relative sales value
method. These estimates affect the amount of costs relieved as each lot is sold
and incorrect estimates may result in a misstatement of the cost of real estate
sold. Additionally, we must estimate the selling price of each individual lot or
parcel that is included in inventory for inclusion in the inventory cost model.
If the estimated selling prices of the lots are inaccurate, a material
difference in the timing of recording cost of real estate sold for the lots sold
could occur.
We record
land held for sale at the lower of cost or fair value, which is determined by
the evaluation of individual land parcels. Real estate costs include the cost of
land acquired, subsequent development costs and costs of improvements,
capitalized development period interest, real estate taxes and payroll costs of
certain employees devoted directly to the development effort. Based on the
relative sales value of the parcels within each development project, we
capitalize the real estate costs incurred to the cost of real estate parcels in
accordance with SFAS 67, “Accounting for Costs and Initial Rental Operations of
Real Estate Projects.” When real estate is sold, we include the actual costs
incurred and the estimate of future completion costs allocated to the parcel(s)
sold, based upon the relative sales value method in the cost of real estate
sold. We include land held for sale in Investments on our consolidated balance
sheet (See Note 6). In certain cases, we pay fees or construct improvements
to mitigate offsite traffic impacts. In return, we receive traffic impact fee
credits as a result of some of these expenditures. We recognize revenue from the
sale of traffic impact fee credits when payment is received. Certain contracts
allow us to receive participation revenue from land sales to third parties if
various formula-based criteria are achieved. We recognize participation revenue
when there is a contractual obligation to receive this revenue.
Pension and Postretirement Health and
Life Actuarial Assumptions. We account for our pension and postretirement
benefit obligations in accordance with the provisions of SFAS 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans,” 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 our obligations and annual cost of our pension and
postretirement benefits. 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 61 percent
equity, 25 percent debt, 9 percent private equity, 2 percent real estate
and 3 percent other securities. Equity securities consist of a mix of market
capitalization sizes and both domestic and international securities. We
currently use an expected long-term rate of return of 9 percent in our actuarial
determination of our pension and other postretirement expense. We annually
review our expected long-term rate of return assumption and will adjust it to
respond to any changing market conditions. A one-quarter percent decrease in the
expected long-term rate of return would increase the annual expense for pension
and other postretirement benefits by approximately $1.5 million, pre-tax;
conversely, a one-quarter percent increase in the expected long-term rate of
return would decrease the annual expense by approximately $1.5 million,
pre-tax.
For plan
valuation purposes, we currently use a discount rate of 6.25 percent. The
discount rate is determined considering high-quality long-term corporate bond
rates at the valuation date. The discount rate is compared to the Citigroup
Pension Discount Curve adjusted for ALLETE’s specific cash flows. We believe the
adjusted discount curve used in this comparison does not materially differ in
duration and cash flows for our pension obligation. The Audit Committee of the
Board of Directors annually reviews and approves the rate of return and discount
rate estimates used for pension valuation and accounting purposes. (See Note
15.)
ALLETE
2007 Form 10-K
34
Critical
Accounting Estimates (Continued)
Regulatory Accounting. Our
regulated utility operations are subject to the provisions of SFAS 71,
“Accounting for the Effects of Certain Types of Regulation”. SFAS 71 requires us
to reflect the effect of regulatory decisions in our financial statements.
Regulatory assets or liabilities arise as a result of a difference between GAAP.
and the accounting principles imposed by the regulatory agencies. Regulatory
assets represent incurred costs that have been deferred as they are probable for
recovery in customer rates. Regulatory liabilities represent obligations to make
refunds to customers and amounts collected in rates for which the related costs
have not yet been incurred.
We
recognize regulatory assets and liabilities in accordance with applicable state
and federal regulatory rulings. The recoverability of regulatory assets is
periodically assessed by considering factors such as, but not limited to,
changes in regulatory rules and rate orders issued by applicable regulatory
agencies. The assumptions and judgments used by regulatory authorities may have
an impact on the recovery of costs, the rate of return on invested capital, and the
timing and amount of assets to be recovered by rates. A change in these
assumptions may result in a material impact on our results of operations. (See
Note 5.)
Valuation of Investments. As
part of our emerging technology portfolio, we have several minority investments
in venture capital funds and direct investments in privately-held, start-up
companies. We account for our investment in venture capital funds under the
equity method and account for our direct investments in privately-held companies
under the cost method because of our ownership percentage. These investments are
included in Investments on our consolidated balance sheet. Our policy is to
review these investments for impairment on a quarterly basis 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. In 2007, we recorded an impairment loss on these
investments of $0.5 million pretax (none in 2006). (See Note 6.)
Taxation. We are required to
make judgments regarding the potential tax effects of various financial
transactions and our ongoing operations to estimate our obligations to taxing
authorities. These tax obligations include income, real estate and use taxes.
Judgments related to income taxes require the recognition in our financial
statements of the largest tax benefit of a tax position that is
“more-likely-than-not” to be sustained on audit. Tax positions that do not
meet the “more-likely-than-not” criteria are reflected as a tax liability. These
judgments include reserves for potential adverse outcomes regarding tax
positions that we have taken. We must also assess our ability to generate
capital gains to realize tax benefits associated with capital losses expected to
be generated in future periods. Capital losses may be deducted only to the
extent of capital gains realized during the year of the loss or during the three
prior or five succeeding years for federal purposes, and fifteen succeeding
years for Minnesota purposes. As of December 31, 2007, we have, where
appropriate, recorded a valuation allowance against our deferred tax assets
associated with realized capital losses and impairments to reduce the deferred
tax assets to the amount we estimate is more likely than not to be realized in
accordance with FIN 48, “Accounting for Uncertainty in Income Taxes – an
Interpretation of FASB Statement No. 109”. While we believe the resulting tax
reserve balances as of December 31, 2007, reflect the most likely outcome of
these tax matters in accordance with SFAS 109, “Accounting for Income Taxes,”
the ultimate amount of capital losses resulting in tax benefits could differ
from the net amount of deferred tax assets at December 31,
2007.
ALLETE
2007 Form 10-K
35
Outlook
ALLETE is
committed to earning a financial return that rewards our shareholders, allows
for reinvestment in our businesses and sustains growth. New opportunities have
arisen which we believe will allow us to achieve our long term earnings growth
goals through our existing businesses. Our Regulated Utility expects to make
significant investments to comply with renewable and environmental requirements,
maintain its existing low-cost generation fleet and strengthen and enhance the
regional transmission grid. In addition, we expect kilowatt-hour sales growth
from existing and potential new customers. Earnings from our ATC investment are
expected to grow as we anticipate making additional investments to fund our
pro-rata share of ATC’s capital expansion program. We expect net income from
Real Estate to be approximately 10 percent to 20 percent of total ALLETE
consolidated net income over the next several years.
We will
focus our business development activities on growth opportunities in, or
complementary to, our core businesses. We believe that current weak market
conditions will present an opportunity to add to our portfolio of properties for
sale at our Real Estate operations. We anticipate that we will have ready access
to sufficient funds for capital investments and acquisitions.
Earnings Guidance. In 2008, we
expect ALLETE’s diluted earnings per share from continuing operations to be in
the range of $2.70 to $2.90. This guidance reflects:
Regulated
Utility
|
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·
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New
FERC-approved wholesale rates effective March 1,
2008;
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·
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Minnesota
Power’s intention to file a retail rate case with the MPUC in mid-2008,
with interim rates in effect 60 days
later;
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·
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Minnesota
Power’s expectation that electricity sales to industrial customers will
continue at the current high levels during
2008;
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·
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increased
revenue from current cost recovery riders related to the Company’s
investments in environmental and renewable energy
initiatives;
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·
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increased
operation and maintenance expenses, including labor and benefit
costs;
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·
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increased
financing costs associated with the 2008 capital expenditure
program;
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·
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anticipation
of approximately $316 million in capital expenditures in 2008, about half
of which will be invested in environmental and renewable energy
initiatives;
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Investment
in ATC
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·
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the
expectation of ALLETE investing an additional $5 to $7 million in ATC in
2008;
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Real
Estate
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a
continuation of the difficult market conditions;
and
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an
expectation that net income in 2008 will be less than in
2007.
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Energy. As part of our
strategy, we will leverage the strengths of our Regulated Utility business to
improve our strategic and financial outlook and seek growth opportunities in
close proximity to existing operations in the Midwest. We believe electric
industry deregulation is unlikely in Minnesota and Wisconsin in the next five
years.
Minnesota
Power expects significant rate base growth over the next several years as it
makes capital expenditures to comply with renewable energy requirements and
environmental mandates. In addition, significant investment will be made in our
existing low-cost generation fleet to provide for continued future operations as
we continue to believe ownership of low-cost generation is a competitive
advantage. Minnesota Power will also look for transmission opportunities which
strengthen and enhance the regional transmission grid and take advantage of our
geographic location between sources of renewable energy and growing energy
markets. Our capital investments will be recovered through a combination of
current cost recovery riders and anticipated increased base electric rates. We
also expect an average annual kilowatt-hour growth of approximately one percent
from our existing customers, as well as up to 400 MW of additional growth from
several potential new industrial customers planning projects in our service
territory.
Our
energy strategy is to be a leader in the movement toward renewable energy and
cleaner power plants. We believe we can meet our customers’ electric energy
needs for the next decade while achieving real reductions in total carbon
emissions. We intend to aggressively pursue renewable energy resources and
expect to comply with Minnesota’s 25 percent renewable energy mandate prior to
the 2025 deadline.
ALLETE
2007 Form 10-K
36
Outlook
(Continued)
Energy
(Continued)
Integrated Resource Plan. On October
31, 2007, Minnesota Power filed its Integrated Resource Plan (IRP), a
comprehensive estimate of future capacity needs within the Minnesota Power
service territory. Minnesota Power believes it can meet the estimated future
customer demand for the next decade while achieving real reductions in the
emission of GHGs (primarily carbon dioxide).
Minnesota
Power plans to meet expected loads through approximately 2020 by adding a
significant amount of renewable generation and some supporting peaking
generation. We do not plan to add new coal generation or enter into long-term
power purchase agreements from coal-based generation resources without a GHG
solution. We plan to add 300 to 500 megawatts of carbon-minimizing renewable
energy to our generation mix. Besides the additional generation from
renewable sources, Minnesota Power anticipates future supply will come from a
combination of sources, including:
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"As-needed"
peaking and intermediate generation
facilities;
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Expiration
of wholesale contracts presently in
place;
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Short-term
market purchases;
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Improved
efficiency of existing generation and power delivery assets;
and
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Expanded
conservation and demand-side management
initiatives.
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We do not
anticipate the need for new base load system generation within the
Minnesota Power service territory through approximately 2020, and we project a
one percent average annual growth in electric usage from our existing customers
over that time frame.
Mesaba Energy Project. On
August 30, 2007, the MPUC issued an order denying Excelsior Energy Inc.’s
request for a power purchase agreement with Xcel Energy to sell power from the
Mesaba Energy Project (Mesaba Project). We participated in the MPUC proceeding
to demonstrate the unnecessary costs the Mesaba Project would cause for our
ratepayers and the negative energy policy impacts of a forced resource
addition. The MPUC’s August 30, 2007, order states that the MPUC will
explore in IRPs and resource acquisition proceedings whether all Minnesota
utilities should participate in the Mesaba Project. Beyond the fact that we
forecast no need for base load energy supply additions until late in the next
decade, we object to the Mesaba Project because it does not include a GHG
solution.
Climate Change. A key
component of our energy strategy is a goal to reduce overall GHG emissions.
While there continues to be debate about the causes and extent of global
warming, certain scientific evidence suggests that emissions from fossil fuel
generation facilities are a contributing factor. Minnesota Power has a long
history of environmental stewardship.
We
believe that future regulations may restrict the emissions of
GHGs from our generation facilities. Several proposals on the Federal level
to “cap” the amount of GHG emissions have been made. Other proposals consider
establishing emissions allowances or taxes as economic incentives to address the
GHG emission issue.
In 2007,
Minnesota passed legislation establishing non-binding targets for GHG
reductions. This legislation establishes a goal of reducing statewide
GHG emissions across all sectors producing those emissions to a level at
least 15 percent below 2005 levels by 2015, at least 30 percent below 2005
levels by 2025, and at least 80 percent below 2005 levels by 2050. Minnesota is
also participating in the Midwestern Greenhouse Gas Accord, a regional effort to
develop a multi-state approach to GHG emission reductions. We are proactively
taking steps to strategically engage the GHG emission issue and the impact of
climate change regulation on our business.
Minnesota
Power is addressing this challenge by taking the following steps that also
ensure reliable and environmentally compliant generation resources to meet our
customer’s requirements.
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We
will consider only carbon minimizing resources to supply power to our
customers. We will not consider a new coal resource without a carbon
emission solution.
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We
will aggressively pursue Minnesota’s Renewable Energy Standard by adding
significant renewable resources to our portfolio of generation facilities
and power supply agreements.
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We
will continue to improve the efficiency of coal-based generation
facilities.
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We
plan to implement aggressive demand side conservation
efforts.
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We
will continue to support research of technologies to reduce carbon
emissions from generation facilities and support carbon sequestration
efforts.
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We
plan to achieve overall carbon emission reductions while maintaining
competitively priced electric service to our
customers.
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ALLETE
2007 Form 10-K
37
Outlook
(Continued)
Energy
(Continued)
Renewable Generation Sources.
The areas in which we operate have strong wind, water and biomass
resources, and provide us with opportunities to develop a number of renewable
forms of generation. Our electric service area in Northeastern Minnesota is
well situated for delivery of renewable energy that is generated here and in
adjoining regions. We intend to secure the most cost competitive and
geographically advantageous renewable energy resources available. We believe
that the demand for these resources is likely to grow, and the costs of the
resources to generate renewable energy will continue to escalate. While we
intend to maintain our disciplined approach to developing generation assets, we
also believe that by acting sooner rather than later we can deliver lower cost
power to our customers and maintain or improve our cost competitiveness among
regional utilities. We will continue to work cooperatively with our customers,
our regulators and the communities we serve to develop generation options that
reflect the needs of our customers as well as the environment. We believe that
our location and our proactive leadership in developing renewable generation
provide us with a competitive advantage.
We have
already begun executing this strategy. For more than a century, we have been
Minnesota’s leading producer of renewable hydroelectric energy. By the second
quarter of this year, we will have doubled our renewable generation capacity
with wind additions in North Dakota and Minnesota. We will also continue to
support research and development activity in carbon capture and storage
technologies that will enable our industry to better manage GHG emissions
associated with existing and future coal based generating assets.
Renewable Energy. In February
2007, Minnesota enacted a law requiring Minnesota Power to generate or
procure 25 percent of our energy through renewable energy sources by 2025. The
legislation also requires Minnesota Power to meet interim milestones of 12
percent by 2012, 17 percent by 2016, and 20 percent by 2020. The legislation
allows the MPUC to modify or delay a standard obligation if implementation
will cause significant ratepayer cost or technical reliability issues. If a
utility is not in compliance with a standard, the MPUC may order the utility to
construct facilities, purchase renewable energy or purchase renewable energy
credits. Minnesota Power was developing and making renewable supply additions as
part of its generation planning strategy prior to this legislation and this
activity continues. Minnesota Power believes it will meet the requirements of
this legislation.
In
December 2006, we began purchasing the output from a 50-MW wind facility, Oliver
Wind I, located in North Dakota, under a 25-year power purchase agreement with
an affiliate of FPL Energy.
In May
2007, the MPUC approved a second 25-year wind power purchase agreement to
purchase an additional 48-MW of wind energy from Oliver Wind II, an expansion of
Oliver Wind I located in North Dakota. The MPUC also allowed current cost
recovery for associated transmission upgrades. In November 2007, Oliver Wind II
became operational and we began purchasing the output from the wind
facility.
In
May 2007, the MPUC approved a 20-year Community-Based Energy Development
Project power purchase agreement. The 2.5-MW Wing River Wind project, with Wing
River Wind, LLC, became operational July 2007.
In
September 2007, the MPUC approved our site permit application and we began
construction of the $50 million, 25-MW Taconite Ridge Wind I Facility, located
in northeastern Minnesota. Minnesota Power filed a petition for current cost
recovery on the Taconite Ridge Wind I Facility with the MPUC in August 2007. In
October 2007, the DOC recommended approval of Minnesota Power’s current cost
recovery filing. The MPUC hearing regarding Minnesota Power’s current cost
recovery filing is currently waiting scheduling. The Taconite Ridge Wind I
Facility is expected to become operational in mid-2008.
We
continue to investigate additional renewable energy resources including biomass,
hydroelectric and wind generation that will help us meet the Minnesota 25
percent renewable energy standard. In particular, we are conducting a
feasibility study for construction of a 25-MW biomass generating unit at Laskin,
as well as looking at opportunities to expand biomass energy production at
existing facilities. Additionally, we are pursuing a potential 10-MW expansion
of our Fond du Lac hydroelectric station. We will make specific renewable
project filings for regulatory approval as needed.
ALLETE
2007 Form 10-K
38
Outlook
(Continued)
Energy
(Continued)
In
January 2008, Minnesota Power and Manitoba Hydro executed a term sheet for the
purchase of surplus energy beginning in 2008 and an anticipated 250-MW capacity
purchase to begin in about 2020. Minnesota Power anticipates the initial
purchase of surplus energy will be about 100 MWs during high hydro production
periods in the spring and fall. The 250-MW long-term purchase will require
construction of hydroelectric facilities in Manitoba and major new transmission
facilities between Canada and the United States. Minnesota Power and Manitoba
Hydro have one year to complete negotiations and sign a definitive agreement.
Each purchase is expected to require MPUC approval.
CapX 2020. Minnesota Power is a
participant in the CapX 2020 project which represents an effort to ensure the
electricity reliability of Minnesota and the surrounding region for the future.
CapX 2020 started with the state's largest transmission owners, including
electric cooperatives, municipals and investor-owned utilities, assessing the
transmission system and projected growth in customer demand for electricity
through 2020. Studies show that the region's transmission system will require
major upgrades and expansion to accommodate increased electricity demand as well
as support renewable energy expansion through 2020.
The CapX
2020 participants filed a Certificate of Need for three 345 kV lines and
associated system interconnections with the MPUC in August 2007. Following a
public process, the MPUC is expected to decide on the need for these 345 kV
lines by early 2009. If the MPUC certifies need, it will then determine routes
for the new lines in subsequent proceedings. Portions of the 345 kV lines will
also require approvals by federal officials and by regulators in North Dakota,
South Dakota and Wisconsin. A fourth line, a 230 kV line in north central
Minnesota, is also among the CapX 2020 projects. A request for a Certificate of
Need/Site Permit for this line is expected to be filed by mid-2008, with the
MPUC decision on need and routing expected approximately one year
later.
Minnesota
Power may invest capital in two of the lines, a 250-mile 345 kV line between
Fargo, North Dakota and Monticello, Minnesota, and a 70-mile 230 kV line between
Bemidji and Grand Rapids, Minnesota. Our investment in these two lines
would entail an estimated $60 million and $90 million, respectively.
Upon receipt of the required Certificates of Need, we intend to file with the
MPUC for current cost recovery of the expenditures related to our investment in
the lines under a Minnesota Power transmission cost recovery tariff rider
mechanism authorized by Minnesota legislation. For the utilities involved, the
first four projects represent a combined investment of approximately $1.4 to
$1.7 billion. Construction of the lines is targeted to begin in 2009 or 2010 and
last approximately three to four years, but depends on the timing and outcome of
regulatory need and routing decisions.
AREA and Boswell Unit 3 Emission
Reduction Plans. In May 2006, the MPUC approved our filing for current
cost recovery of expenditures to reduce emissions to meet pending federal
requirements at Taconite Harbor and Laskin under the AREA Plan. The AREA Plan
approval allows Minnesota Power to recover Minnesota jurisdictional costs for
SO2,
NOX
and mercury emission reductions made at these facilities without a rate
proceeding. Current cost recovery from retail customers will include a return on
investment and recovery of incremental expense. The AREA Plan is expected to
significantly reduce emissions from Taconite Harbor and Laskin, while
maintaining a reliable and reasonably-priced energy supply to meet the needs of
our customers. We believe that control and abatement technologies applicable to
these plants have matured to the point where further significant air emission
reductions can be attained in a relatively cost-effective manner. Current cost
recovery filings are required to be made 90 days prior to the anticipated
in-service date for the equipment at each unit, with rate recovery beginning the
month following the in-service date.
Minnesota
Power has completed installation of new equipment at Laskin and current cost
recovery of AREA Plan costs has begun. The first of three Taconite Harbor unit
installations was completed and placed back in-service in June 2007, with
current cost-recovery began in July 2007. We anticipate cost recovery on the
other Taconite Harbor units once work is completed and the units have been
placed back in-service, which is expected in late 2008. As of December 31, 2007,
we have spent $36 million of the anticipated $60 million in AREA Plan
expenditures.
In May
2006, we announced plans to make emission reduction investments at our Boswell
Unit 3 generating unit. Plans include reductions of particulate, SO2, NOX and
mercury emissions to meet pending federal and state requirements. In late March
2007, the Boswell Unit 3 project received the necessary construction permits. On
October 26, 2007, the MPUC issued a written order approving Minnesota Power’s
petition for current cost recovery for the Boswell Unit 3 emission reduction
plan with some minor modifications and additional reporting requirements. MPUC
approval authorized a cash return on construction work in progress during the
construction phase in lieu of AFUDC-Equity and allows for a return on investment
and current cost recovery of incremental operations and maintenance expenses
once the unit is placed into service in late 2009. On December 26, 2007, the
MPUC approved Boswell Unit 3’s rate adjustment for 2008. As of December 31,
2007, we have spent $89 million of the anticipated $200 million in Boswell Unit
3 emission reduction plan expenditures.
ALLETE
2007 Form 10-K
39
Outlook
(Continued)
Energy
(Continued)
Rate Cases. We have and will
continue to significantly increase our rate base. On December 28, 2007, we
submitted a filing with the FERC seeking to increase electric rates for our
wholesale customers. On February 8, 2008, the FERC approved our wholesale rate.
Our wholesale customers consist of 16 municipalities in Minnesota and two
private utilities in Wisconsin, including SWL&P. The FERC authorized an
average 10 percent increase for wholesale municipal customers, a 12.5 percent
increase for SWL&P, and an overall return on equity of 11.25 percent. The
rate increase will go into effect on March 1, 2008, and on an annualized basis,
the filing will generate approximately $7.5 million in additional revenue. We
also anticipate filing a retail rate case with the MPUC in mid-2008. SWL&P
also anticipates filing a retail rate case with the PSCW in 2008.
Industrial
Customers. Electric power is a key component in the mining, paper
production and pipeline industries. Approximately 50 percent of our Regulated
Utility kilowatthour sales are made to our Large Power Customers in the
taconite, paper and pulp, and pipeline industries.
Based on
our research of the taconite industry, Minnesota taconite production for 2008 is
anticipated to be about 41.5 million tons (production was 39 million tons
in 2007; 40 million tons in 2006 and 41 million tons in 2005).
The pulp
and paper customers are projected to run near capacity in 2008. Capacity
closures in North America and Europe, along with the strength of the Euro
and Canadian dollar, should benefit Minnesota Power’s customers.
Our
pipeline customers continued to operate at or above historic pumping levels
during 2007 and forecast operating at record pumping levels in 2008. As Western
Canadian oil sands reserves continue to develop and expand, pipeline operators
served by the Company are executing expansion plans to transport additional
crude oil supply to United States markets. We believe we are strategically
positioned to serve these expanding pipeline facilities as Canadian supply
continues to grow and displace domestic and imported Gulf Coast
production.
Several
natural resource-based companies have been making significant progress
developing new projects in northeastern Minnesota. These potential projects are
in the ferrous and non-ferrous mining, paper, oil and steel related industries.
They include the Polymet Mining, Mesabi Nugget and Minnesota Steel Industry
projects, as well as the Keewatin Taconite expansion. If some or all of these
projects are completed, Minnesota Power could serve between 100 MW and 400 MW of
new load.
In 2006,
a contract for approximately 70 MW was executed with PolyMet Mining, a new
customer planning to start a copper, nickel and precious metals (non-ferrous)
mining operation in late 2008. If PolyMet Mining receives all necessary
environmental permits and achieves start-up, the contract will be fully
implemented and would run through at least 2018. In April 2007, the MPUC
approved our contract with PolyMet Mining.
In June
2007, a contract was executed with Mesabi Nugget, a company currently
constructing an iron nugget facility near Hoyt Lakes, Minnesota. Iron nuggets,
which typically consist of more than 94 percent iron (compared to taconite
pellets at 63-65 percent iron), are ideal in meeting the requirements of
electric-arc furnaces producing steel. On February 7, 2008, the MPUC held a
hearing on the contract and adopted a motion approving the contract, subject to
the issuance of a written order. Mesabi Nugget has received all necessary
permits to begin construction and operations in 2008 and would be a 15-MW
customer with the potential for further load growth. The Mesabi Nugget contract
would run through at least 2017.
In
February 2008, United States Steel announced its intent to restart a pellet line
at its Keewatin Taconite processing facility. This pellet line, which has been
idled since 1980, would be restarted and updated as part of a $300 million
investment. It is anticipated to bring about 3.6 million tons of additional
pellet making capability to Northeastern Minnesota by 2011, pending successful
approval of environmental permitting.
A new
contract with Blandin Paper was approved by the MPUC on February 4, 2008. The
new contract carries forward the same contract term, cancellation provision and
take-or-pay provisions of the prior contract and only changed the demand
nomination feature.
ALLETE
2007 Form 10-K
40
Outlook
(Continued)
Energy.
(Continued)
Minnesota Fuel Clause. In
June 2003, the MPUC initiated an investigation into the continuing usefulness of
the fuel clause as a regulatory tool for electric utilities. Our 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. Subsequent comments were filed during 2004. The fuel
clause docket then became dormant while the MISO Day 2 docket, which held many
fuel clause considerations, became active. In March 2007, the MPUC solicited
comments on whether the original fuel clause investigation should continue and,
if so, what issues should be pursued. We filed comments in April 2007,
suggesting that if the investigation continued, it should focus on remaining key
elements of the fuel clause, beyond the purchased power transactions examined in
the MISO Day 2 proceeding, such as fuel purchases and outages. Additionally, we
suggested that more specialized fuel clause issues be addressed in separate
dockets on an as needed basis. The DOC filed a letter requesting that the
parties to the docket update the record in this proceeding by the end of
September 2007. Minnesota Power complied by filing additional comments, updating
our previous filings in the fuel clause investigation docket to account for
changes occurring since the investigation began in July 2003. Reply comments
were filed in October 2007. The fuel clause investigation docket is awaiting
further action by the MPUC.
Fuel Clause Recovery of MISO Day 2
Costs. We filed a petition with the MPUC in February 2005 to amend
our fuel clause to accommodate costs and revenue related to the day-ahead and
real-time markets through which we engage in wholesale energy transactions in
MISO (MISO Day 2). In December 2006, the MPUC issued an order allowing us and
the other utilities involved in the MISO Day 2 proceeding to continue recovering
MISO Day 2 charges through the Minnesota retail fuel clause except for MISO Day
2 administrative charges. On January 8, 2007, this order was challenged by the
Minnesota OAG, through a request for reconsideration. The request was
opposed by Minnesota Power and the other utilities, as well as MISO. The
reconsideration request was denied by the MPUC. Upon denial of the
reconsideration request, the OAG appealed the MPUC Order in a filing with the
Minnesota Court of Appeals. Oral argument in the case will be held on February
27, 2008, and a decision would be expected approximately 90 days thereafter. The
Company is unable to predict the outcome of this matter.
The
December 2006 MPUC order, subject to appeal, granted deferred accounting
treatment for three MISO Day 2 charge types that were determined to be
administrative charges. Under the order, Minnesota Power refunded, through
customer bills, approximately $2 million of administrative charges
previously collected through the fuel clause between April 1, 2005, and December
31, 2006, and recorded these administrative charges as a regulatory asset. We
were permitted to continue accumulating MISO Day 2 administrative charges after
December 31, 2006, as a regulatory asset until we file our next rate case,
at which time recovery for such charges will be determined. The balance of this
regulatory asset was $3.7 million on December 31, 2007, and we consider
regulatory recovery to be probable. This order removed the subject to refund
requirement of the two interim orders, and included extensive fuel clause
reporting requirements impacting our monthly and annual fuel clause filings with
the MPUC. There was no impact on earnings as a result of this ruling. As a
result of the MPUC’s December 2006 order allowing recovery of nearly all MISO
Day 2 charges through the fuel clause, we rescinded our December 2005 Letter of
Intent to Withdraw from MISO in December 2006.
Investment in ATC. Our
Wisconsin subsidiary, Rainy River Energy Corporation – Wisconsin, has
invested $60 million in ATC. As of December 31, 2007, our equity investment
balance in ATC was $65.7 million, representing approximately an 8 percent
ownership interest. (See Note 6.) We will have the opportunity to make
additional investments in ATC through general capital calls based upon our
pro-rata investment level in ATC. We expect to invest an additional $5 to $7
million in 2008.
Real Estate. Conditions in the Florida
real estate market were very difficult in 2007. Market demand worsened
throughout the year, consistent with conditions experienced throughout most of
the rest of the country. While we are unable to predict when the Florida real
estate market will improve, we believe the long-term growth indicators for
Florida real estate remain strong.
Substantially
all of our properties have key entitlements in place. With minimal leverage, low
on-going carrying costs and a low inventory book basis, we expect that our Real
Estate business will continue to be profitable, and an important contributor to
ALLETE’s on-going earnings stream. We expect net income from Real Estate to be
approximately 10 percent to 20 percent of total ALLETE consolidated net income
over the next several years. We believe the northeastern Florida market area
where a large portion of our real estate inventory is located will continue to
experience above average long-term population growth, and our inventory of
mixed-use land in those areas will remain attractive to buyers.
ALLETE
Properties plans to maximize the value of the property it currently owns through
entitlement, infrastructure improvements and orderly sales of properties. In
addition to managing its current real estate inventory, ALLETE Properties is
focused on identifying, acquiring, entitling and developing infrastructure on
vacant land in Florida and other parts of the southeast United
States.
ALLETE
2007 Form 10-K
41
Outlook
(Continued)
Real
Estate (Continued)
Progress
continues on our three major planned development projects in Florida—Town
Center, a new downtown for Palm Coast; Palm Coast Park, located in
northwest Palm Coast; and Ormond Crossings, located in Ormond Beach along
Interstate 95. (See Item 1 – Business - Real Estate.) Other ongoing land
sales and rental income at the retail shopping center in Winter Haven provide us
with additional revenue.
|
Summary
of Development Projects
For
the Year Ended
December
31, 2007
|
Ownership
|
Total
Acres
(a)
|
Residential
Units
(b)
|
Non-residential
Sq.
Ft. (b, c)
|
|
Town
Center
|
80%
|
|||
|
At
December 31, 2006
|
1,356
|
2,222
|
2,705,310
|
|
|
Property
Sold
|
(99)
|
(130)
|
(540,059)
|
|
|
Change
in Estimate (a)
|
(266)
|
197
|
62,949
|
|
|
991
|
2,289
|
2,228,200
|
||
|
Palm
Coast Park
|
100%
|
|||
|
At
December 31, 2006
|
4,337
|
3,760
|
3,156,800
|
|
|
Property
Sold
|
(888)
|
(606)
|
(40,000)
|
|
|
Change
in Estimate (a)
|
(13)
|
–
|
–
|
|
|
3,436
|
3,154
|
3,116,800
|
||
|
Ormond
Crossings
|
100%
|
|||
|
At
December 31, 2006
|
5,960
|
(d)
|
(d)
|
|
|
Change
in Estimate (a)
|
8
|
|||
|
5,968
|
||||
|
10,395
|
5,443
|
5,345,000
|
|
(a)
|
Acreage
amounts are approximate and shown on a gross basis, including wetlands and
minority interest.
|
|
(b)
|
Estimated
and includes minority interest. Density at build out may differ from these
estimates.
|
|
(c)
|
Depending
on the project, non-residential includes retail commercial, non-retail
commercial, office, industrial, warehouse, storage and
institutional.
|
|
(d)
|
A development order approved
by the City of Ormond Beach includes up to 3,700 residential units and 5
million square feet of non-residential space. We estimate the first two
phases of Ormond Crossings will include 2,500-3,200 residential units
and 2.5-3.5 million square feet of various types of non-residential
space. Density of the residential and
non-residential components of the project will be determined based upon
market and traffic mitigation cost considerations.
Approximately
2,000 acres will be devoted to a regionally significant wetlands
mitigation bank.
|
|
Summary
of Other Land Inventories
For
the Year Ended
December
31, 2007
|
Ownership
|
Total
|
Mixed
Use
|
Residential
|
Non-residential
|
Agricultural
|
|
Acres
(a)
|
||||||
|
Palm
Coast Holdings
|
80%
|
|||||
|
At
December 31, 2006
|
2,136
|
1,404
|
346
|
247
|
139
|
|
|
Property
Sold
|
(111)
|
(78)
|
–
|
(14)
|
(19)
|
|
|
Change
in Estimate (a)
|
(1,160)
|
(964)
|
(239)
|
96
|
(53)
|
|
|
865
|
362
|
107
|
329
|
67
|
||
|
Lehigh
|
80%
|
|||||
|
At
December 31, 2006
|
223
|
–
|
140
|
74
|
9
|
|
|
Change
in Estimate (a)
|
6
|
–
|
–
|
–
|
6
|
|
|
229
|
–
|
140
|
74
|
15
|
||
|
Cape
Coral
|
100%
|
|||||
|
At
December 31, 2006
|
30
|
–
|
1
|
29
|
–
|
|
|
Property
Sold
|
(8)
|
–
|
–
|
(8)
|
–
|
|
|
22
|
–
|
1
|
21
|
–
|
||
|
Other
(b)
|
100%
|
|||||
|
At
December 31, 2006
|
934
|
–
|
–
|
–
|
934
|
|
|
Property
Sold
|
(364)
|
–
|
–
|
–
|
(364)
|
|
|
Change
in Estimate
(a)
|
(113)
|
–
|
–
|
–
|
(113)
|
|
|
457
|
–
|
–
|
–
|
457
|
||
|
1,573
|
362
|
248
|
424
|
539
|
|
(a)
|
Acreage
amounts are approximate and shown on a gross basis, including wetlands
and minority interest.
|
|
(b)
|
Includes
land located in Palm Coast, Florida not included in development
projects.
|
ALLETE
2007 Form 10-K
42
Outlook
(Continued)
Real
Estate (Continued)
Town Center. Major construction
continues at Town Center. In April 2007, Palm Coast Center, LLC and Target
Corporation closed on a 52 acre commercial site and immediately began
construction on a 424,000 square foot retail power center. An 85,000 square foot
Publix grocery store anchored retail center opened in 2007, and an 84,000 square
foot medical center is under construction along with a Hilton Garden Inn and a
residential condominium project. Several other projects are in the permitting
stage including a charter school, independent living facility, movie theater,
office buildings and banks.
At
build-out, Town Center is expected to include approximately 3,200 residential
units including lodging rooms and assisted living units, and 3.8 million square
feet of various types of non-residential space. Market conditions will determine
how quickly Town Center builds out.
Palm Coast Park. Major infrastructure
construction at Palm Coast Park was substantially complete by the end of 2007.
At build-out, Palm Coast Park is expected to include approximately 4,000
residential units, 3.2 million square feet of various types of non-residential
space and certain public facilities. Market conditions will determine how
quickly Palm Coast Park builds out.
Ormond Crossings. Planning,
engineering design and permitting of the master infrastructure are ongoing.
Density of the residential and non-residential components of the project will be
determined based upon market and traffic mitigation cost considerations. We
estimate the first two phases of Ormond Crossing will include 2,500-3,200
residential units and 2.5–3.5 million square feet of various types of
non-residential space.
Ormond
Crossings will also include an approximately 2,000 acre regionally significant
wetlands mitigation bank that is expected to be fully permitted by the St. Johns
River Water Management District and the U.S. Army Corps of Engineers by
mid-2009. Wetland mitigation credits will be used at Ormond Crossings and will
be available for sale to other developers. Market conditions will determine how
quickly Ormond Crossings builds out.
We have a
diversified mix of residential and non-residential property under contract and
available for sale. At December 31, 2007, total pending land sales under
contract were $55.2 million ($113.8 million at December 31, 2006) and are
anticipated to close at various times through 2012. Prices on these contracts
range from $20 to $42 per non-residential square foot, $15,000 to $27,200
per residential unit and $11,200 to $660,000 per acre for all other properties.
Prices per acre are stated on a gross acreage basis and are dependent on the
type and location of the properties sold. The majority of the other properties
under contract are zoned non-residential or mixed use. Certain contracts allow
us to receive participation revenue from land sales to third parties if various
formula-based criteria are achieved.
|
Real
Estate
|
||
|
Pending
Contracts (a,
b)
|
Contract
|
|
|
At
December 31, 2007
|
Quantity
(c)
|
Sales
Price
|
|
Dollars
in Millions
|
||
|
Town
Center
|
||
|
Non-residential
Sq. Ft.
|
304,000
|
$9.6
|
|
Residential
Units
|
490
|
9.3
|
|
Palm
Coast Park
|
||
|
Non-residential
Sq. Ft.
|
–
|
–
|
|
Residential
Units
|
1,263
|
31.9
|
|
Other
Land
|
||
|
Acres
|
123
|
4.4
|
|
Total
Pending Land Sales Under Contract
|
$55.2
|
|
(a)
|
For
the year ended December 31, 2007, we had contract cancellations totaling
$22.1 million.
|
|
(b)
|
Pending
contracts are contracts for which the due diligence period has ended, and
the contract deposit is non-refundable subject to performance by the
seller.
|
|
(c)
|
Acreage
amounts are approximate and shown on a gross basis, including wetlands
and minority interest. Non-residential square feet and residential
units are estimated and include minority interest. The actual property
densities at build-out may differ from these
estimates.
|
Decreases
in pending land sales under contract during 2007 are primarily due to
closing two large sales during the second quarter of 2007 and contract
cancellations totaling $22.1 million. In April 2007, Palm Coast Center, LLC and
Target Corporation closed on a tract at Town Center for $12.6 million and in
June 2007, LRCF Palm Coast, LLC (Lowe Enterprises) closed on the first phase of
its Sawmill Creek project at Palm Coast Park for $13.1 million pursuant to
revised contract terms.
ALLETE
2007 Form 10-K
43
Outlook
(Continued)
Real
Estate. (Continued)
If a
purchaser defaults on a sales contract, the legal remedy is limited to
terminating the contract and retaining the purchaser’s deposit. The property is
then available for resale. In many cases, contract purchasers incur significant
costs during due diligence, planning, designing and marketing the property
before the contract closes, therefore they have substantially more at risk than
the deposit.
As of
December 31, 2007, we had $2.7 million of deferred profit on sales of real
estate, before taxes and minority interest, on our balance sheet. All of
the deferred profit relates to Town Center and is expected to be recognized in
2008 as the remaining development obligations are completed.
Other. 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 periods that typically extend
for 180 days following an initial public offering. We have committed to make up
to $1.0 million in additional investments in certain emerging technology
holdings. We do not have plans to make any additional investments beyond this
commitment.
Income Taxes. ALLETE’s
aggregate federal and multi-state statutory tax rate is expected to be
approximately 40 percent for 2008. On an ongoing basis, ALLETE has certain tax
credits and other tax adjustments that will reduce the statutory rate to the
expected effective tax rate. These tax credits and adjustments historically have
included items such as investment tax credits, AFUDC-Equity, domestic
manufacturer’s deduction, depletion, Medicare prescription reimbursement, as
well as other items. The annual effective rate can also be impacted by such
items as changes in income from operations before minority interest and income
taxes, state and federal tax law changes that become effective during the year,
business combinations and configuration changes, tax planning initiatives and
resolution of prior years’ tax matters. We expect our effective tax rate to be
approximately 35 percent for 2008.
Liquidity
and Capital Resources
Cash
Flow Activities
We
believe our financial condition is strong, as evidenced by a debt to total
capital ratio of 36 percent at December 31, 2007. Our cash and cash
equivalents and short-term investments were $46.4 million at December 31,
2007.
Operating Activities. Cash
flow from operating activities was $123.1 million for 2007 ($142.5 million for
2006; $53.5 million for 2005). Cash flow from operating activities was
lower in 2007 than 2006 primarily due to a decrease in cash flow from operating
assets and liabilities. Colder weather in December 2007 resulted in an increase
in customer receivables of $14.7 million. Cash used for prepayments and other is
higher in 2007 due to an $11.5 million change in deferred fuel costs yet to be
recovered through future billings. The increase in deferred fuel costs are a
result of higher purchased power expenses due to generation
outages relating to the AREA Plan environmental retrofits, lower hydro
generation, lower Square Butte entitlement and Square Butte’s major scheduled
outage. Other current liabilities decreased primarily due to a reduction in
accrued taxes of $8.9 million. The decrease in cash flow from operating
activities was partially offset by increased earnings from continuing operations
of $11.2 million and a decrease in cash used for discontinued operations of
$13.5 million.
Cash flow
from operating activities was higher in 2006 than 2005, primarily due to the
$77.9 million Kendall County Charge in 2005 and related $24.3 million federal
tax refund received in 2006. Cash also increased $4.4 million in 2006 due to the
collection of customer receivables which were up as a result of colder weather
in December 2005. Other differences between 2006 and 2005 include an additional
$9 million cash used for inventories in 2006 and the payment of approximately
$13 million of 2005 accrued liabilities. Additional inventories primarily
reflect coal purchases in anticipation of maintenance on coal handling
equipment.
Investing Activities. Cash
flow used for investing activities was $154.1 million for 2007 (cash flow used
for investing activities of $154.7 million for 2006; cash flow from investing
activities of $3.9 million for 2005). Activity within our short-term
investment portfolio reflected increased net sales of short-term investments of
$81.4 million compared to $12.4 million in 2006. The net proceeds from the sale
of short-term investments were used to fund increased additions to property,
plant and equipment. Additions to property, plant and equipment were higher in
2007 than 2006 by $111.7 million primarily due to increased spending on major
environmental construction projects. Cash invested in ATC decreased from $51.4
million in 2006 to $8.7 million in 2007.
Cash used
for investing activities was higher in 2006 than 2005, primarily due to $51.4
million invested in ATC and a $43.7 million increase in expenditures for
property, plant and equipment due to major environmental construction projects.
Activity within our short-term investment portfolio reflected net sales of
short-term investments of $12.4 million compared to $32.3 million in
2005.
ALLETE
2007 Form 10-K
44
Liquidity
and Capital Resources (Continued)
Cash
Flow Activities (Continued)
Financing Activities. Cash
flow from financing activities was $9.5 million for 2007 (cash used for
financing activities was $32.6 million for 2006; cash used for financing
activities was $13.9 million for 2005). The increase in cash flows from
financing activities resulted from additional long-term debt issued in 2007,
which included $50.0 million of Senior unsecured notes and $6.0 million in tax
exempt bonds at SWL&P. The increase in new long-term debt was offset
partially by the retirement of $20.0 in first mortgage bonds and $2.5 million in
variable demand revenue refunding bonds. In 2007, $66.5 million in long-term
debt was refinanced at lower rates.
Cash used
for financing activities was higher in 2006 than 2005 primarily due to an
additional $7.2 million in dividends paid as a result of more shares
outstanding, a higher dividend rate and fewer shares of common stock issued
under our long-term incentive compensation plan. In 2006, we refinanced $77.8
million of long-term debt at lower rates.
In 2006,
our Town Center development project was financed with tax-exempt bonds issued by
the Town Center District and a revolving development loan. In March 2005, the
Town Center District issued $26.4 million of tax-exempt, 6% Capital
Improvement Revenue Bonds, Series 2005, which are payable through property tax
assessments on the land owners over 31 years (by May 1, 2036). The bond proceeds
(less capitalized interest, a debt service reserve fund and cost of issuance)
were used to pay for the construction of a portion of the major infrastructure
improvements at Town Center. The bonds are payable from and collateralized by
the revenue derived from assessments imposed, levied and collected by the Town
Center District. The assessments represent an allocation of the costs of the
improvements, including bond financing costs, to the lands within the Town
Center District benefiting from the improvements. The assessments were billed to
Town Center landowners effective November 2006. To the extent that we still own
land at the time of the assessment, we will incur the cost of our portion of
these assessments, based upon our ownership of benefited property. At December
31, 2007, we owned approximately 69 percent of the assessable land in the Town
Center District (73 percent at December 31, 2006). As we sell property, the
obligation to pay special assessments passes to the new landowners. Under
current accounting rules, these bonds are not reflected as debt on our
consolidated balance sheet.
Our Palm
Coast Park development project in Florida is being financed with tax-exempt
bonds issued by the Palm Coast Park District. In May 2006, Palm Coast Park
District issued $31.8 million of tax-exempt, 5.7% Special Assessment Bonds,
Series 2006 which are payable through property tax assessments on the land
owners over 31 years (by May 1, 2037). The bond proceeds (less capitalized
interest, a debt service reserve fund and cost of issuance) were used to fund
the construction of the major infrastructure improvements at Palm Coast Park,
and to mitigate traffic and environmental impacts. The bonds are payable from
and collateralized by the revenue derived from assessments imposed, levied and
collected by the Palm Coast Park District. The assessments represent an
allocation of the costs of the improvements, including bond financing costs, to
the lands within the Palm Coast Park District benefiting from the improvements.
The assessments will be billed to Palm Coast Park landowners effective November
2007. To the extent that we still own land at the time of the assessment, we
will incur the cost of our portion of these assessments, based upon our
ownership of benefited property. At December 31, 2007, we owned 86 percent
of the assessable land in the Palm Coast Park District (97 percent at December
31, 2006). As we sell property, the obligation to pay special assessments passes
to the new landowners. Under current accounting rules, these bonds are not
reflected as debt on our consolidated balance sheet.
Working Capital. Additional working capital,
if and when needed, generally is provided by the sale of commercial paper. We
have 0.2 million original issue shares of our common stock available for
issuance through Invest
Direct, our direct stock purchase and dividend reinvestment plan. We have
bank lines of credit aggregating $170.0 million, the majority of which expire in
January 2012. In January 2006, we renewed, increased and extended a committed,
syndicated, unsecured revolving credit facility with LaSalle Bank National
Association, as Agent, for $150 million (Line) with a maturity date of
January 11, 2011. The Line was subsequently extended for an additional year in
December 2006 and currently matures on January 11, 2012. At our request and
subject to certain conditions, the Line may be increased to $200 million and
extended for two additional 12-month periods. We may prepay amounts outstanding
under the Line in whole or in part at our discretion. Additionally, we may
irrevocably terminate or reduce the size of the Line prior to maturity. The Line
may be used for general corporate purposes, working capital and to provide
liquidity in support of 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.
ALLETE
2007 Form 10-K
45
Liquidity
and Capital Resources (Continued)
Securities
On
December 10, 2007, ALLETE filed a registration statement with the SEC, pursuant
to Rule 415 under the Securities Act of 1933, relating to the possible issuance
from time to time of ALLETE common stock or first mortgage bonds. The amount of
securities issuable by ALLETE is established from time to time by its board of
directors. We may sell all or a portion of the above-described 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 there under.
On
February 1, 2007, we issued $60 million in principal amount of First Mortgage
Bonds (Bonds), 5.99% Series due February 1, 2027, in the private placement
market. We have the option to prepay all or a portion of the Bonds at our
discretion, subject to a make-whole provision. Proceeds were used to retire $60
million in principal amount of First Mortgage Bonds, 7% Series on
February 15, 2007.
On June
8, 2007, we issued $50 million of senior unsecured notes (Notes) in the
private placement market. The Notes bear an interest rate of 5.99 percent and
will mature on June 1, 2017. We have the option to prepay all or a portion of
the Notes at our discretion, subject to a make-whole provision. We used the
proceeds from the sale of the Notes to fund utility capital projects and for
general corporate purposes.
On behalf
of SWL&P, the City of Superior, Wisconsin, issued $6.4 million in principal
amount of Collateralized Utility Revenue Refunding Bonds (Series A Bonds) and
$6.1 million of Collateralized Utility Revenue Bonds (Series B Bonds) on October
3, 2007. The Series A Bonds bear an interest rate of 5.375% and will mature on
November 1, 2021. The proceeds, together with other funds, were used to redeem
$6.5 million of existing 6.125% bonds. The Series B Bonds bear an interest rate
of 5.75% and will mature on November 1, 2037. The proceeds will be used to fund
qualifying electric and gas projects.
On
January 11, 2008, we accepted an offer from certain institutional buyers in the
private placement market to purchase $60 million of First Mortgage Bonds
(Bonds). The Bonds were issued on February 1, 2008, carry an interest rate of
4.86% and will mature on April 1, 2013. We have the option to prepay all or
a portion of the Bonds at our discretion, subject to a make-whole provision. We
intend to use the proceeds from the sale of the Bonds to fund utility capital
expenditures and for general corporate purposes.
Financial
Covenants
Our
long-term debt arrangements contain customary covenants. In addition, our lines
of credit and letters of credit supporting certain long-term debt arrangements
contain financial covenants. The most restrictive covenant requires
ALLETE to maintain a quarterly ratio of its Funded Debt to Total Capital of
less than or equal to 0.65 to 1.00. Failure to meet this covenant 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. Some of
ALLETE’s 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. As of December 31, 2007, ALLETE was in compliance
with its financial covenants.
Off-Balance
Sheet Arrangements
Off-balance
sheet arrangements are discussed in Note 8.
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. The table below assumes the
interest rate in effect at December 31, 2007, remains constant through the
remaining term. (See Note 7.)
Unconditional
purchase obligations represent our Square Butte power purchase agreements,
minimum purchase commitments under coal and rail contracts, additional
investment commitments in emerging technology funds and purchase obligations for
capital expenditures related to the Taconite Ridge Wind Facility, AREA and
Boswell Unit 3 environmental upgrade projects. (See Note 8.)
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 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
following table reflects our share of future debt service based on our output
entitlement of approximately 55 percent in 2008 and 50 percent thereafter.
(See Note 8.)
ALLETE
2007 Form 10-K
46
Liquidity
and Capital Resources (Continued)
Contractual
Obligations and Commercial Commitments (Continued)
We have
two wind power purchase agreements with an affiliate of FPL Energy to purchase
the output from two wind facilities, Oliver Wind I and II located near Center,
North Dakota. We began purchasing the output from Oliver Wind I, a 50-MW
facility, in December 2006 and the output from Oliver Wind II, a 48-MW facility
in November 2007. Each agreement is for 25 years and provides for the purchase
of all output from the facilities. There are no fixed capacity charges, and we
only pay for energy as it is delivered to us.
|
Payments
Due by Period
|
|||||
|
Contractual
Obligations
|
Less
than
|
1
to 3
|
4
to 5
|
After
|
|
|
As
of December 31, 2007
|
Total
|
1
Year
|
Years
|
Years
|
5
Years
|
|
Millions
|
|||||
|
Long-Term
Debt (a)
|
$760.2
|
$33.7
|
$79.6
|
$47.7
|
$599.2
|
|
Operating
Lease Obligations
|
86.4
|
8.1
|
23.0
|
12.4
|
42.9
|
|
FIN
48 – Uncertain Tax Positions
|
4.5
|
2.0
|
2.5
|
–
|
–
|
|
Unconditional
Purchase Obligations
|
407.7
|
114.2
|
64.7
|
28.8
|
200.0
|
|
$1,258.8
|
$158.0
|
$169.8
|
$88.9
|
$842.1
|
|
(a) Includes
interest and assumes variable interest rates in effect at December 31, 2007,
remains constant through remaining term.
We expect
to contribute approximately $11 million to our defined benefit pension plans and
$6 million to our postretirement health and life plans in 2008. We are unable to
predict contribution levels to our defined benefit pension or postretirement
health and life plans after 2008.
Credit
Ratings
Our
securities have been rated by Standard & Poor’s and by Moody’s. Rating
agencies use both quantitative and qualitative measures in determining a
company’s credit rating. 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.
|
Credit
Ratings
|
Standard
& Poor’s
|
Moody’s
|
|
Issuer
Credit Rating
|
BBB+
|
Baa2
|
|
Commercial
Paper
|
A-2
|
P-2
|
|
Senior
Secured
|
||
|
First
Mortgage Bonds
|
A–
|
Baa1
|
|
Pollution
Control Bonds
|
A–
|
Baa1
|
|
Unsecured
Debt
|
||
|
Collier
County Industrial Development Revenue Bonds – Fixed Rate
|
BBB
|
–
|
Payout
Ratio
In 2007,
we paid out 53 percent (53 percent in 2006; 259 percent in 2005) of our per
share earnings in dividends. The payout ratio in 2005 was impacted by a $1.84
per diluted share charge resulting from our assignment of the Kendall County
power purchase agreement to Constellation Energy Commodities in April 2005. (See
Note 10.)
On
January 24, 2008, our Board of Directors increased the dividend on ALLETE common
stock by 5 percent, declaring a dividend of $0.43 per share payable on March 1,
2008, to shareholders of record at the close of business on February 15,
2008.
ALLETE
2007 Form 10-K
47
Capital
Requirements
Continuing
Operations. ALLETE’s projected capital expenditures for the years
2008 through 2012 are presented in the table below. In addition
to non-regulated energy and real estate estimated capital expenditures
(other), the table includes the estimated amount of capital expenditures related
to the regulated utility for which we anticipate receiving current cost
recovery. Actual capital expenditures may vary from the estimates due to changes
in forecasted plant maintenance, regulatory decisions or approvals, future
environmental requirements and base load growth. A significant portion of the
environmental capital expenditures and current cost recovery reflected in
2008 include expenditures for the Boswell Unit 3 emission reduction and AREA
Plan projects. (See Item 1 - AREA and Boswell Unit 3 Emission Reduction
Plans.)
|
Capital
Expenditures (a)
|
2008
|
2009
|
2010
|
2011
|
2012
|
Total
|
||
|
Regulated
Utility Operations
|
||||||||
|
Base
and Other
|
$121
|
$136
|
$173
|
$158
|
$151
|
$739
|
||
|
Current
Cost Recovery (b)
|
||||||||
|
Environmental
|
130
|
68
|
12
|
–
|
23
|
233
|
||
|
Renewable
|
54
|
158
|
97
|
108
|
64
|
481
|
||
|
Transmission
|
11
|
17
|
15
|
20
|
15
|
78
|
||
|
Total
Current Cost Recovery
|
195
|
243
|
124
|
128
|
102
|
792
|
||
|
Regulated
Utility Capital Expenditures
|
316
|
379
|
297
|
286
|
253
|
1,531
|
||
|
Other
(c)
|
7
|
1
|
5
|
4
|
4
|
21
|
||
|
Total
Capital Expenditures
|
$323
|
$380
|
$302
|
$290
|
$257
|
$1,552
|
||
|
|
(a)
|
Actual
and expected results will vary with time, regulatory requirements and
company direction.
|
|
|
(b)
|
Estimated
current capital expenditures recoverable outside of a rate
case.
|
|
|
(c)
|
Excludes
capitalized improvements on our real estate development projects, which
are included in inventory. (See Note
6.)
|
We intend
to finance about one-half of this capital expenditure program from internally
generated funds, about one-third with incremental debt and the remainder with
additional equity.
Discontinued Operations. There were no capital
additions for discontinued operations in 2007 (none in 2006; $4.5 million
in 2005).
Environmental
and Other Matters
As
previously mentioned in our Critical Accounting Estimates section, our
businesses are subject to regulation of environmental matters by various
federal, state and local authorities. Due to future restrictive environmental
requirements through legislation and/or rulemaking, we anticipate that potential
expenditures for environmental matters will be material and will require
significant capital investments. We are unable to predict the outcome of the
issues discussed in Note 8. (See Item 1 – Environmental Matters.)
Market
Risk
Securities
Investments
Available-for-Sale Securities.
At December 31, 2007, our available-for-sale securities portfolio consisted of
securities in a grantor trust established to fund certain employee benefits
included in Investments, and various auction rate bonds and variable rate demand
notes included as Short-Term Investments. (See Note 6.)
Emerging Technology
Portfolio. As part of our emerging
technology portfolio, we have several minority investments in venture capital
funds and direct investments in privately-held, start-up companies. (See Note
6.)
ALLETE
2007 Form 10-K
48
Capital
Requirements (Continued)
Interest
Rate Risk
We are
exposed to risks resulting from changes in interest rates as a result of our
issuance of variable rate debt. We manage our interest rate risk by varying the
issuance and maturity dates of our fixed rate debt, limiting the amount of
variable rate debt, and continually monitoring the effects of market changes in
interest rates. The table below presents the long-term debt obligations and the
corresponding weighted average interest rate at December 31, 2007.
|
Principal
Cash Flow by Expected Maturity Date
|
||||||||
|
Interest
Rate Sensitive
|
Fair
|
|||||||
|
Financial
Instruments
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
Total
|
Value
|
|
Dollars
in Millions
|
||||||||
|
Long-Term
Debt
|
||||||||
|
Fixed
Rate
|
$7.5
|
$2.5
|
$1.4
|
$1.4
|
$1.4
|
$330.9
|
$345.1
|
$333.2
|
|
Average
Interest Rate – %
|
7.1
|
5.6
|
6.3
|
6.3
|
6.3
|
5.5
|
5.6
|
|
|
Variable
Rate
|
$4.3
|
$8.2
|
$3.6
|
–
|
$1.7
|
$59.8
|
$77.6
|
$77.7
|
|
Average
Interest Rate – % (a)
|
7.3
|
3.5
|
3.5
|
–
|
3.9
|
3.5
|
3.7
|
|
|
(a)
|
Assumes
rate in effect at December 31, 2007, remains constant through remaining
term.
|
The
interest rate on variable rate long-term debt is reset on a periodic basis
reflecting current market conditions. Based on the variable rate debt
outstanding at December 31, 2007, and assuming no other changes to our financial
structure, an increase or decrease of 100 basis points in interest rates would
impact the amount of pretax interest expense by $0.8 million. This amount was
determined by considering the impact of a hypothetical 100 basis point change to
the average variable interest rate on the variable rate debt held as of December
31, 2007.
Commodity
Price Risk
Our
regulated utility operations in Minnesota and Wisconsin incur costs for fuel
(primarily coal), power and natural gas purchased for resale in our regulated
service territories, and related transportation. Our regulated utilities’
exposure to price risk for these commodities is significantly mitigated by the
current ratemaking process and regulatory environment, which generally allows a
fuel clause surcharge if costs are in excess of those in our last rate filing.
Conversely, costs below those in our last rate filing result in a rate credit.
We seek to prudently manage our customers’ exposure to price risk by entering
into contracts of various durations and terms for the purchase of coal and power
(in Minnesota), power and natural gas (in Wisconsin), and related transportation
costs.
Power
Marketing
Our power
marketing activities consist of (1) purchasing energy in the wholesale market
for resale in our regulated service territories when retail energy requirements
exceed generation output, and (2) selling excess available generation and
purchased power.
From time
to time, our utility operations may have excess generation that is temporarily
not required by retail and municipal customers in our regulated service
territory. We actively sell this generation to the wholesale market to optimize
the value of our generating facilities. This generation is generally sold in the
MISO market at market prices.
Approximately
200 MW of generation from our Taconite Harbor facility in northern Minnesota has
been sold through various long-term capacity and energy contracts. Long-term, we
have entered into two capacity and energy sales contracts totaling 175-MW
(201-MW including a 15 percent reserve), which were effective May 1, 2005,
and expire on April 30, 2010. Both contracts contain fixed monthly capacity
charges and fixed minimum energy charges. One contract provides for an annual
escalator to the energy charge based on increases in our cost of coal, subject
to a small minimum annual escalation. The other contract provides that the
energy charge will be the greater of a fixed minimum charge or an amount based
on the variable production cost of a combined-cycle, natural gas unit. Our
exposure in the event of a full or partial outage at our Taconite Harbor
facility is significantly limited under both contracts. When the buyer is
notified at least two months prior to an outage, there is no exposure. Outages
with less than two months’ notice are subject to an annual duration limitation
typical of this type of contract. We also have a 50-MW capacity and energy sales
contract that extends through April 2008, with formula pricing based on variable
production cost of a combustion-turbine, natural gas unit.
New
Accounting Standards
New
accounting standards are discussed in Note 2.
ALLETE
2007 Form 10-K
49
|
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, 2007 and 2006, and for each
of the three years in the period ended December 31, 2007, 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
|
Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures
Under the
supervision and with the participation of management, including our principal
executive officer and principal financial officer, we conducted an evaluation of
the effectiveness of the design and operation of ALLETE’s disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934 (“Exchange Act”)). Based upon those evaluations, our
principal executive officer and principal financial officer have concluded that
such disclosure controls and procedures are effective to provide assurance that
information required to be disclosed in ALLETE’s reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms and such information is
accumulated and communicated to our management, including our principal
executive and principal financial officer, to allow timely decisions regarding
required disclosure.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. 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. Based on our evaluation under the framework in
Internal Control—Integrated Framework, our management concluded that our
internal control over financial reporting was effective as of December 31,
2007.
The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2007, has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which
is included herein.
ALLETE
2007 Form 10-K
50
|
Item
9B.
|
Other
Information
|
Severance
Pay Plan
On
February 13, 2008, the Board of Directors approved the ALLETE and Affiliated
Companies Change in Control Severance Plan, (the Plan) which provides certain
key employees with severance benefits in connection with a change in control of
ALLETE. The purpose of the Plan is to enable and encourage the continued
dedication and objectivity of members of the Company's management. The Plan will
allow the affected individuals to focus their attention on obtaining the best
possible transaction and to make an independent evaluation of all possible
transactions without being diverted by concerns regarding the impact various
transactions may have on the security of their jobs and benefits. A change in
control generally includes: (i) acquisition by any person, entity or group
acting together of more than 50 percent of the total fair market value or total
voting power of the Company’s common stock, (ii) acquisition in any twelve month
period of 40 percent or more of the Company’s assets by any person, entity or
group acting together, (iii) acquisition in any twelve month period by any
person, entity or group acting together of 30 percent or more of the securities
entitled to vote in the election of Directors, or (iv) a majority of members of
the Board of Directors is replaced during any twelve month
period. All of our named executive officers and four of our senior
managers were selected by the Executive Compensation Committee of the Board of
Directors to participate in the Plan.
A
participant in the Plan is entitled to receive specified benefits in the event
of certain involuntary terminations of employment (including terminations by the
employee following specified changes in duties, benefits, etc., that are treated
as involuntary terminations) occurring during the period that begins six months
before and ends two years after a change in control. Under the Plan,
Mr. Shippar, Mr. Schober, Ms. Welty, and Ms. Amberg would be entitled to receive
a benefit of 2.5 times their annual compensation. Annual compensation includes
base salary, and an amount representing a “target” award under the Annual
Incentive Plan and the Results Sharing program, and certain retirement and
welfare benefit make up costs. Ms. Holquist and four other members of senior
management would receive 1.5 times their annual compensation. Participants are
also entitled to receive outplacement benefits up to a value of $25,000.
Payments to participants are to be paid in a lump sum generally within 30 days
of termination. As a condition of receiving said payment, participants will be
required to sign a waiver of potential claims against the Company, and agree to
restrictions on recruiting employees, competing with the Company, and
confidentiality. If the total payments to any individual would trigger an excise
tax under the Internal Revenue Code Section 4999, payments will be reduced to an
amount that would result in no portion of such payment being subject to the
excise tax, unless the payment would have to be reduced to an amount less than
85 percent of the amount the participant would otherwise have received, absent
the imposition of the excise tax. If payments to a participant would need to be
reduced to an amount that is less than 85 percent of the amount the participant
would otherwise have received, total payments would not be reduced and the
participant would instead receive an additional gross-up payment that would
provide the participant with the same net after-tax payment the participant
would have received if the excise tax had not applied to any of the
payments.
The
summary description of the Plan set forth above does not purport to be complete
and is qualified in its entirety by the ALLETE and Affiliated Companies Change
in Control Severance Plan which is filed as Exhibit 10(q).
The
ALLETE and Affiliated Companies Supplemental Executive Retirement Plan (SERP)
was also amended on February 13, 2008 to provide that in the event of certain
involuntary terminations of employment (including terminations by the employee
following specified changes in duties, benefits, etc., that are treated as
involuntary terminations) occurring during the period that begins six months
before and ends two years after a change in control, as such term is defined in
the SERP, a participant in SERP will receive vested amounts in the participant’s
deferral account and retirement benefits, if any, in a single lump
sum.
ALLETE
2007 Form 10-K
51
Part
III
|
Item
10.
|
Directors,
Executive Officers and Corporate
Governance
|
Unless
otherwise stated, the information required for this Item is incorporated by
reference herein from our Proxy Statement for the 2008 Annual Meeting of
Shareholders (2008 Proxy Statement) under the following headings:
|
|
·
|
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 “Audit Committee Report”
section;
|
|
|
·
|
Audit Committee Members.
The identity of the Audit Committee members is included in the “Audit
Committee Report” section;
|
|
|
·
|
Executive Officers. The
information regarding executive officers is included in Part I of this
Form 10-K; and
|
|
|
·
|
Section 16(a)
Compliance. The information regarding Section 16(a) compliance will
be included in the “Section 16(a) Beneficial Ownership Reporting
Compliance” section.
|
Our 2008
Proxy Statement will be filed with the SEC within 120 days after the end of our
2007 fiscal year.
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 without charge upon request to ALLETE, Inc., Attention:
Secretary, 30 West Superior St. Duluth, Minnesota 55802. 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.
Corporate Governance. The
following documents are available on our Website at www.allete.com and print
copies are available upon request:
|
|
·
|
Corporate
Governance Guidelines;
|
|
|
·
|
Audit
Committee Charter;
|
|
|
·
|
Executive
Compensation Committee Charter; and
|
|
|
·
|
Corporate
Governance and Nominating Committee
Charter.
|
Any
amendment to these documents will be disclosed on our Website at www.allete.com
promptly following the date of such amendment.
|
Item
11.
|
Executive
Compensation
|
The
information required for this Item is incorporated by reference herein from the
“Compensation of Executive Officers,” the “Compensation Discussion
and Analysis”, the “Executive Compensation Committee Report” and the “Director
Compensation – 2007” sections in our 2008 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 Certain Beneficial Owners,” the “Security Ownership of
Management” and the “Equity Compensation Plan Information” sections in our 2008
Proxy Statement.
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The
information required for this Item is incorporated by reference herein from the
“Corporate Governance” section in our 2008 Proxy Statement.
We have
adopted a Related Person Transaction Policy which is available on our Website at
www.allete.com. Print copies are available, free of charge, upon request. Any
amendment to this policy will be disclosed on our Website at www.allete.com
promptly following the date of such amendment.
|
Item
14.
|
Principal
Accountant Fees and Services
|
The
information required by this Item is incorporated by reference herein from the
“Audit Committee Report” section in our 2008 Proxy Statement.
ALLETE
2007 Form 10-K
52
Part
IV
Item
15. Exhibits
and Financial Statement Schedules
|
(a)
|
Certain
Documents Filed as Part of this Form 10-K.
|
|||
|
(1)
|
Financial
Statements
|
Page
|
||
|
ALLETE
|
||||
|
Report
of Independent Registered Public Accounting
Firm………………………………………………….........
|
58
|
|||
|
Consolidated
Balance Sheet at December 31, 2007 and
2006……………………………………………..........
|
59
|
|||
|
For
the Three Years Ended December 31, 2007
|
||||
|
Consolidated
Statement of Income……………………………………………………………………………….
|
60
|
|||
|
Consolidated
Statement of Cash Flows………………………………………………………………………….
|
61
|
|||
|
Consolidated
Statement of Shareholders’ Equity……………………………………………………………….
|
62
|
|||
|
Notes
to Consolidated Financial
Statements………………………………………………………………………..
|
63
|
|||
|
(2)
|
Financial
Statement Schedules
|
|||
|
Schedule
II – ALLETE Valuation and Qualifying Accounts and
Reserves……………………………………….
|
95
|
|||
|
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
|
*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 Articles of Incorporation, effective 12:00 p.m. Eastern Time on
September 20, 2004 (filed as Exhibit 3 to the September 21, 2004,
Form 8-K, File No. 1-3548).
|
||||
|
*3(a)3
|
-
|
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 August 24, 2004 (filed as Exhibit 3 to the August 25,
2004, Form 8-K, 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
|
|||
|
Twenty-third
|
August
1, 2004
|
1-3548
(Sept. 30, 2004 Form 10-Q)
|
4(a)
|
|||
|
Twenty-fourth
|
March
1, 2005
|
1-3548
(March 31, 2005 Form 10-Q)
|
4
|
|||
|
Twenty-fifth
|
December
1, 2005
|
1-3548
(March 31, 2006 Form 10-Q)
|
4
|
|||
|
Twenty-sixth
|
October
1, 2006
|
1-3548
(2006 Form 10-K)
|
4
|
|||
ALLETE
2007 Form 10-K
53
Exhibit
Number
|
4(a)3
|
-
|
Twenty-Seventh
Supplemental Indenture, dated as of February 1, 2008, between ALLETE and
The Bank of New York and Douglas J. MacInnes, as
Trustees.
|
||||
|
*4(b)1
|
-
|
Indenture
of Trust, dated as of August 1, 2004, between the City of Cohasset,
Minnesota and U.S. Bank National Association, as Trustee relating to $111
Million Collateralized Pollution Control Refunding Revenue Bonds (filed as
Exhibit 4(b) to the September 30, 2004, Form 10-Q, File No.
1-3548).
|
||||
|
*4(b)2
|
-
|
Loan
Agreement, dated as of August 1, 2004, between the City of Cohasset,
Minnesota and ALLETE relating to $111 Million Collateralized Pollution
Control Refunding Revenue Bonds (filed as Exhibit 4(c) to the September
30, 2004, Form 10-Q, File No. 1-3548).
|
||||
|
*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).
|
||||
|
*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(c)3
|
-
|
Ninth
Supplemental Indenture, dated as of October 1, 2007, between Superior
Water, Light and Power Company and U.S. Bank National Association, as
Trustees.
|
||||
|
4(c)4
|
-
|
Tenth
Supplemental Indenture, dated as of October 1, 2007, between Superior
Water, Light and Power Company and U.S. Bank National Association, as
Trustees.
|
||||
|
*4(d)
|
-
|
Amended
and Restated Rights Agreement, dated as of July 12, 2006, between ALLETE
and the Corporate Secretary of ALLETE, as Rights Agent (filed as Exhibit 4
to the July 14, 2006, Form 8-K, File No. 1-3548).
|
||||
|
*10(a)
|
-
|
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(c)
|
-
|
Master
Agreement (without Appendices and Exhibits), dated December 28, 2004, by
and between Rainy River Energy Corporation and Constellation Energy
Commodities Group, Inc. (filed as Exhibit 10(c) to the 2004 Form 10-K,
File No. 1-3548).
|
||||
|
*10(d)1
|
-
|
Fourth
Amended and Restated Committed Facility Letter (without Exhibits), dated
January 11, 2006, by and among ALLETE and LaSalle Bank National
Association, as Agent (filed as Exhibit 10 to the January 17, 2006, Form
8-K, File No. 1-3548).
|
||||
|
*10(d)2
|
-
|
First
Amendment to Fourth Amended and Restated Committed Facility Letter dated
June 19, 2006, by and among ALLETE and LaSalle Bank National Association,
as Agent (filed as Exhibit 10(a) to the June 30, 2006, Form 10-Q,
File No. 1-3548).
|
||||
|
10(d)3
|
-
|
Second
Amendment to Fourth Amended and Restated Committed Facility Letter dated
December 14, 2006, by and among ALLETE and LaSalle Bank National
Association, as Agent.
|
||||
|
*10(e)1
|
-
|
Financing
Agreement between Collier County Industrial Development Authority and
ALLETE dated as of July 1, 2006 (filed as Exhibit 10(b)1 to the
June 30, 2006, Form 10-Q, File No. 1-3548).
|
||||
|
*10(e)2
|
-
|
Letter
of Credit Agreement, dated as of July 5, 2006, among ALLETE, the
Participating Banks and Wells Fargo Bank, National Association, as
Administrative Agent and Issuing Bank (filed as Exhibit 10(b)2 to the
June 30, 2006, Form 10-Q, File No. 1-3548).
|
||||
|
*10(g)
|
-
|
Agreement
(without Exhibit) dated December 16, 2005, among ALLETE, Wisconsin Public
Service Corporation and WPS Investments, LLC (filed as Exhibit 10 to the
December 21, 2005 Form 8-K, File No. 1-3548).
|
||||
|
+*10(h)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(h)2
|
-
|
November
2003 Amendment to the ALLETE Executive Annual Incentive Plan (filed as
Exhibit 10(t)2 to the 2003 Form 10-K, File No. 1-3548).
|
||||
|
+*10(h)3
|
-
|
July
2004 Amendment to the ALLETE Executive Annual Incentive Plan (filed as
Exhibit 10(a) to the June 30, 2004, Form 10-Q, File No.
1-3548).
|
||||
ALLETE
2007 Form 10-K
54
Exhibit
Number
|
+10(h)4
|
-
|
January
2007 Amendment to the ALLETE Executive Annual Incentive
Plan.
|
||
|
+*10(h)5
|
-
|
Form
of ALLETE Executive Annual Incentive Plan 2006 Award – President of ALLETE
Properties (filed as Exhibit 10(b) to the January 30, 2006, Form 8-K,
File No. 1-3548).
|
||
|
+*10(h)6
|
-
|
Form
of ALLETE Executive Annual Incentive Plan 2006 Award (filed as Exhibit 10
to the February 17, 2006, Form 8-K, File No. 1-3548).
|
||
|
+10(h)7
|
-
|
Form
of ALLETE Executive Annual Incentive Plan Awards Effective
2007.
|
||
|
+*10(i)1
|
-
|
ALLETE
and Affiliated Companies Supplemental Executive Retirement Plan, as
amended and restated, effective January 1, 2004 (filed as Exhibit 10(u) to
the 2003 Form 10-K, File No. 1-3548).
|
||
|
+*10(i)2
|
-
|
January
2005 Amendment to the ALLETE and Affiliated Companies Supplemental
Executive Retirement Plan (filed as Exhibit 10(b) to the March 31, 2005,
Form 10-Q, File No. 1-3548).
|
||
|
+*10(i)3
|
-
|
August
2006 Amendments to the ALLETE and Affiliated Companies Supplemental
Executive Retirement Plan (filed as Exhibit 10(a) to the September 30,
2006, Form 10-Q, File No. 1-3548).
|
||
|
+10(i)4
|
-
|
December
2006 Amendments to the ALLETE and Affiliated Companies Supplemental
Executive Retirement Plan.
|
||
|
+*10(j)1
|
-
|
Minnesota
Power and Affiliated Companies 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(j)2
|
-
|
Amendments
through December 2003 to the Minnesota Power and Affiliated Companies
Executive Investment Plan I (filed as Exhibit 10(v)2 to the 2003 Form
10-K, File No. 1-3548).
|
||
|
+*10(j)3
|
-
|
July
2004 Amendment to the Minnesota Power and Affiliated Companies Executive
Investment Plan I (filed as Exhibit 10(b) to the June 30, 2004, Form 10-Q,
File No. 1-3548).
|
||
|
+*10(j)4
|
-
|
August
2006 Amendment to the Minnesota Power and Affiliated Companies Executive
Investment Plan I (filed as Exhibit 10(b) to the September 30, 2006,
Form 10-Q, File No. 1-3548).
|
||
|
+*10(k)1
|
-
|
Minnesota
Power and Affiliated Companies 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).
|
||
|
+*10(k)2
|
-
|
Amendments
through December 2003 to the Minnesota Power and Affiliated Companies
Executive Investment Plan II (filed as Exhibit 10(w)2 to the 2003 Form
10-K, File No. 1-3548).
|
||
|
+*10(k)3
|
-
|
July
2004 Amendment to the Minnesota Power and Affiliated Companies Executive
Investment Plan II (filed as Exhibit 10(c) to the June 30, 2004, Form
10-Q, File No. 1-3548).
|
||
|
+*10(k)4
|
-
|
August
2006 Amendment to the Minnesota Power and Affiliated Companies Executive
Investment Plan II (filed as Exhibit 10(c) to the September 30, 2006,
Form 10-Q, File No. 1-3548).
|
||
|
+*10(l)
|
-
|
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(m)1
|
-
|
ALLETE
Executive Long-Term Incentive Compensation Plan as amended and restated
effective January 1, 2006 (filed as Exhibit 10 to the May 16,
2005, Form 8-K, File No. 1-3548).
|
||
|
+*10(m)2
|
-
|
Form
of ALLETE Executive Long-Term Incentive Compensation Plan 2006
Nonqualified Stock Option Grant (filed as Exhibit 10(a)1 to the January
30, 2006, Form 8-K, File No. 1-3548).
|
||
|
+*10(m)3
|
-
|
Form
of ALLETE Executive Long-Term Incentive Compensation Plan 2006 Performance
Share Grant (filed as Exhibit 10(a)2 to the January 30, 2006, Form 8-K,
File No. 1-3548).
|
||
|
+*10(m)4
|
-
|
Form
of ALLETE Executive Long-Term Incentive Compensation Plan 2006 Long-Term
Cash Incentive Award – President of ALLETE Properties (filed as Exhibit
10(a)3 to the January 30, 2006, Form 8-K, File No.
1-3548).
|
||
|
+*10(m)5
|
-
|
Form
of ALLETE Executive Long-Term Incentive Compensation Plan 2006 Stock Grant
– President of ALLETE Properties (filed as Exhibit 10(a)4 to the January
30, 2006, Form 8-K, File No. 1-3548).
|
||
|
+10(m)6
|
-
|
Form
of ALLETE Executive Long-Term Incentive Compensation Plan Nonqualified
Stock Option Grant Effective 2007.
|
||
|
+10(m)7
|
-
|
Form
of ALLETE Executive Long-Term Incentive Compensation Plan Performance
Share Grant Effective 2007.
|
||
|
+10(m)8
|
-
|
Form
of ALLETE Executive Long-Term Incentive Compensation Plan Long-Term Cash
Incentive Award Effective 2007.
|
||
|
+10(m)9
|
-
|
Form
of ALLETE Executive Long-Term Incentive Compensation Plan Stock Grant
Effective 2007.
|
||
|
+10(m)10
|
-
|
Form
of ALLETE Executive Long-Term Incentive Compensation Plan Performance
Share Grant Effective 2008.
|
||
|
+*10(n)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).
|
ALLETE
2007 Form 10-K
55
Exhibit
Number
|
+*10(n)2
|
-
|
Amendments
through December 2003 to the Minnesota Power (now ALLETE) Director Stock
Plan (filed as Exhibit 10(z)2 to the 2003 Form 10-K, File No.
1-3548).
|
||
|
+*10(n)3
|
-
|
July
2004 Amendment to the ALLETE Director Stock Plan (filed as Exhibit 10(e)
to the June 30, 2004, Form 10-Q, File No. 1-3548).
|
||
|
+10(n)4
|
-
|
January
2007 Amendment to the ALLETE Director Stock Plan.
|
||
|
+*10(n)5
|
-
|
ALLETE
Director Compensation Summary Effective May 1, 2005 (filed as Exhibit 10
to the June 30, 2005, Form 10-Q, File No. 1-3548).
|
||
|
+10(n)6
|
-
|
ALLETE
Non-Management Director Compensation Summary Effective February 15,
2007.
|
||
|
+*10(o)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(o)2
|
-
|
October
2003 Amendment to the Minnesota Power (now ALLETE) Director Compensation
Deferral Plan (filed as Exhibit 10(aa)2 to the 2003 Form 10-K, File No.
1-3548).
|
||
|
+*10(o)3
|
-
|
January
2005 Amendment to the ALLETE Director Compensation Deferral Plan (filed as
Exhibit 10(c) to the March 31, 2005, Form 10-Q, File No.
1-3548).
|
||
|
+*10(o)4
|
-
|
August
2006 Amendment to the ALLETE Director Compensation Deferral Plan (filed as
Exhibit 10(d) to the September 30, 2006, Form 10-Q, File No.
1-3548).
|
||
|
+*10(p)
|
-
|
ALLETE
Director Compensation Trust Agreement, effective October 11, 2004 (filed
as Exhibit 10(a) to the September 30, 2004, Form 10-Q, File No.
1-3548).
|
||
|
+10(q)
|
-
|
ALLETE
Change of Control Severance Pay Plan Effective February 13,
2008.
|
||
|
12
|
-
|
Computation
of Ratios of Earnings to Fixed Charges.
|
||
|
21
|
-
|
Subsidiaries
of the Registrant.
|
||
|
23(a)
|
-
|
Consent
of Independent Registered Public Accounting Firm.
|
||
|
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.
|
||
|
99
|
-
|
ALLETE
News Release dated February 15, 2008, announcing earnings for the year
ended December 31, 2007.
(This exhibit has been furnished and shall not be deemed “filed” for
purposes of Section 18 of the Securities Exchange Act of 1934, nor
shall it be deemed incorporated by reference in any filing under the
Securities Act of 1933, except as shall be expressly set forth by specific
reference in such filing.)
|
SWL&P
is a party to other long-term debt instruments, $6,370,000 of City of Superior,
Wisconsin, Collateralized Utility Revenue Refunding Bonds Series 2007A and
$6,130,000 of City of Superior, Wisconsin, Collateralized Utility Revenue Bonds
Series 2007B, that, pursuant to Regulation S-K, Item 601(b)(4)(iii), are
not filed as exhibits since the total amount of debt authorized under each of
these omitted instruments does not exceed 10 percent of our total consolidated
assets. We will furnish copies of these instruments to the SEC upon its
request.
We are a
party to another long-term debt instrument, $38,995,000 of City of Cohasset,
Minnesota, Variable Rate Demand Revenue Refunding Bonds (ALLETE, formerly
Minnesota Power & Light Company, Project) Series 1997A, Series 1997B, Series
1997C and Series 1997D that, pursuant to Regulation S-K,
Item 601(b)(4)(iii), is not filed as an exhibit since the total amount of
debt authorized under this omitted instrument does not exceed 10 percent of our
total consolidated assets. We will furnish copies of this instrument to the SEC
upon its request.
|
*
|
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.
|
ALLETE
2007 Form 10-K
56
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:
February 15, 2008
|
By
|
/s/
Donald J. Shippar
|
|
Donald
J. Shippar
|
||
|
Chairman,
President and Chief Executive
Officer
|
||
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.
|
Signature
|
Title
|
Date
|
||
|
/s/
Donald J. Shippar
|
Chairman,
President, Chief Executive Officer
|
February
15, 2008
|
||
|
Donald
J. Shippar
|
and
Director
(Principal
Executive Officer)
|
|||
|
/s/
Mark A. Schober
|
Senior
Vice President and Chief Financial Officer
|
February
15, 2008
|
||
|
Mark
A. Schober
|
(Principal
Financial Officer)
|
|||
|
/s/
Steven Q. DeVinck
|
Controller
|
February
15, 2008
|
||
|
Steven
Q. DeVinck
|
(Principal
Accounting Officer)
|
|||
|
/s/
Kathleen A. Brekken
|
Director
|
February
15, 2008
|
||
|
Kathleen
A. Brekken
|
||||
|
/s/
Heidi J. Eddins
|
Director
|
February
15, 2008
|
||
|
Heidi
J. Eddins
|
||||
|
/s/
Sidney W. Emery, Jr
|
Director
|
February
15, 2008
|
||
|
Sidney
W. Emery, Jr
|
||||
|
/s/
James J. Hoolihan
|
Director
|
February
15, 2008
|
||
|
James
J. Hoolihan
|
||||
|
/s/
Madeleine W. Ludlow
|
Director
|
February
15, 2008
|
||
|
Madeleine
W. Ludlow
|
||||
|
/s/
George L. Mayer
|
Director
|
February
15, 2008
|
||
|
George
L. Mayer
|
||||
|
/s/
Douglas C. Neve
|
Director
|
February
15, 2008
|
||
|
Douglas
C. Neve
|
||||
|
/s/
Roger D. Peirce
|
Director
|
February
15, 2008
|
||
|
Roger
D. Peirce
|
||||
|
/s/
Jack I. Rajala
|
Director
|
February
15, 2008
|
||
|
Jack
I. Rajala
|
||||
|
/s/
Bruce W. Stender
|
Director
|
February
15, 2008
|
||
|
Bruce
W. Stender
|
ALLETE
2007 Form 10-K
57
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Shareholders of ALLETE, Inc.
In our
opinion, the consolidated financial statements listed in the index appearing
under Item 15(a)(1) present fairly, in all material respects, the financial
position of ALLETE, Inc. and its subsidiaries (the Company) at December 31, 2007
and 2006, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2007, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as
of December 31, 2007, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible for these
financial statements and financial statement schedule, for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in
Management’s Report on Internal Control Over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the Company’s
internal control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our
audits of the financial statements included 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. Our audit of internal
control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinion.
As
discussed in Note 12 to the consolidated financial statements, in 2007, the
Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109.” As discussed in Note 15 to
the consolidated financial statements, in 2006 the Company adopted SFAS 158,
“Employer’s Accounting for Defined Benefit Pension and Other Postretirement
Plans.” As discussed in Note 16 to the consolidated financial statements, in
2006 the Company changed the manner in which it accounts for share-based
compensation.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
PricewaterhouseCoopers
LLP
Minneapolis,
Minnesota
February
11, 2008
ALLETE
2007 Form 10-K
58
Consolidated
Financial Statements
ALLETE
Consolidated Balance Sheet
|
December
31
|
2007
|
2006
|
|
Millions
|
||
|
Assets
|
||
|
Current
Assets
|
||
|
Cash
and Cash Equivalents
|
$23.3
|
$44.8
|
|
Short-Term
Investments
|
23.1
|
104.5
|
|
Accounts
Receivable (Less Allowance of $1.0 and $1.1)
|
79.5
|
70.9
|
|
Inventories
|
49.5
|
43.4
|
|
Prepayments
and Other
|
39.1
|
23.8
|
|
Deferred
Income Taxes
|
–
|
0.3
|
|
Total
Current Assets
|
214.5
|
287.7
|
|
Property,
Plant and Equipment – Net
|
1,104.5
|
921.6
|
|
Investments
|
213.8
|
189.1
|
|
Other
Assets
|
111.4
|
135.0
|
|
Total
Assets
|
$1,644.2
|
$1,533.4
|
|
Liabilities
and Shareholders’ Equity
|
||
|
Liabilities
|
||
|
Current
Liabilities
|
||
|
Accounts
Payable
|
$72.7
|
$53.5
|
|
Accrued
Taxes
|
14.8
|
23.3
|
|
Accrued
Interest
|
7.8
|
8.6
|
|
Long-Term
Debt Due Within One Year
|
11.8
|
29.7
|
|
Deferred
Profit on Sales of Real Estate
|
2.7
|
4.1
|
|
Other
|
27.3
|
24.3
|
|
Total
Current Liabilities
|
137.1
|
143.5
|
|
Long-Term
Debt
|
410.9
|
359.8
|
|
Deferred
Income Taxes
|
144.2
|
130.8
|
|
Other
Liabilities
|
200.1
|
226.1
|
|
Minority
Interest
|
9.3
|
7.4
|
|
Total
Liabilities
|
901.6
|
867.6
|
|
Commitments
and Contingencies
|
||
|
Shareholders’
Equity
|
||
|
Common
Stock Without Par Value, 43.3 Shares Authorized
|
||
|
30.8
and 30.4 Shares Outstanding
|
461.2
|
438.7
|
|
Unearned
ESOP Shares
|
(64.5)
|
(71.9)
|
|
Accumulated
Other Comprehensive Loss
|
(4.5)
|
(8.8)
|
|
Retained
Earnings
|
350.4
|
307.8
|
|
Total
Shareholders’ Equity
|
742.6
|
665.8
|
|
Total
Liabilities and Shareholders’ Equity
|
$1,644.2
|
$1,533.4
|
The
accompanying notes are an integral part of these statements.
ALLETE
2007 Form 10-K
59
ALLETE
Consolidated Statement of Income
|
For
the Year Ended December 31
|
2007
|
2006
|
2005
|
|
Millions
Except Per Share Amounts
|
|||
|
Operating
Revenue
|
$841.7
|
$767.1
|
$737.4
|
|
Operating
Expenses
|
|||
|
Fuel
and Purchased Power
|
347.6
|
281.7
|
273.1
|
|
Operating
and Maintenance
|
311.9
|
296.0
|
293.5
|
|
Kendall
County Charge
|
–
|
–
|
77.9
|
|
Depreciation
|
48.5
|
48.7
|
47.8
|
|
Total
Operating Expenses
|
708.0
|
626.4
|
692.3
|
|
Operating
Income from Continuing Operations
|
133.7
|
140.7
|
45.1
|
|
Other
Income (Expense)
|
|||
|
Interest
Expense
|
(24.6)
|
(27.4)
|
(26.4)
|
|
Equity
Earnings in ATC
|
12.6
|
3.0
|
–
|
|
Other
|
15.5
|
11.9
|
1.1
|
|
Total
Other Income (Expense)
|
3.5
|
(12.5)
|
(25.3)
|
|
Income
from Continuing Operations Before Minority
|
|||
|
Interest
and Income Taxes
|
137.2
|
128.2
|
19.8
|
|
Income
Tax Expense (Benefit)
|
47.7
|
46.3
|
(0.5)
|
|
Minority
Interest
|
1.9
|
4.6
|
2.7
|
|
Income
from Continuing Operations
|
87.6
|
77.3
|
17.6
|
|
Loss
from Discontinued Operations – Net of Tax
|
–
|
(0.9)
|
(4.3)
|
|
Net
Income
|
$87.6
|
$76.4
|
$13.3
|
|
Average
Shares of Common Stock
|
|||
|
Basic
|
28.3
|
27.8
|
27.3
|
|
Diluted
|
28.4
|
27.9
|
27.4
|
|
Basic
Earnings (Loss) Per Share of Common Stock
|
|||
|
Continuing
Operations
|
$3.09
|
$2.78
|
$0.65
|
|
Discontinued
Operations
|
–
|
(0.03)
|
(0.16)
|
|
$3.09
|
$2.75
|
$0.49
|
|
|
Diluted
Earnings (Loss) Per Share of Common Stock
|
|||
|
Continuing
Operations
|
$3.08
|
$2.77
|
$0.64
|
|
Discontinued
Operations
|
–
|
(0.03)
|
(0.16)
|
|
$3.08
|
$2.74
|
$0.48
|
|
|
Dividends
Per Share of Common Stock
|
$1.640
|
$1.450
|
$1.245
|
The
accompanying notes are an integral part of these statements.
ALLETE
2007 Form 10-K
60
ALLETE
Consolidated Statement of Cash Flows
|
For
the Year Ended December 31
|
2007
|
2006
|
2005
|
|
Millions
|
|||
|
Operating
Activities
|
|||
|
Net
Income
|
$87.6
|
$76.4
|
$13.3
|
|
Loss
from Discontinued Operations
|
–
|
0.9
|
4.3
|
|
AFUDC
- Equity
|
(3.8)
|
–
|
–
|
|
Income
from Equity Investments, Net of Dividends
|
(2.7)
|
(1.8)
|
–
|
|
Gain
on Sale of Assets
|
(2.2)
|
–
|
–
|
|
Loss
on Impairment of Investments
|
0.3
|
–
|
5.1
|
|
Depreciation
|
48.5
|
48.7
|
47.8
|
|
Deferred
Income Taxes (Benefit)
|
14.0
|
27.8
|
(34.2)
|
|
Minority
Interest
|
1.9
|
4.6
|
2.7
|
|
Stock
Compensation Expense
|
2.0
|
1.8
|
1.5
|
|
Bad
Debt Expense
|
1.0
|
0.7
|
1.1
|
|
Changes
in Operating Assets and Liabilities
|
|||
|
Accounts
Receivable
|
(6.6)
|
7.5
|
(1.4)
|
|
Inventories
|
(6.1)
|
(10.3)
|
(1.3)
|
|
Prepayments
and Other
|
(11.7)
|
(2.3)
|
(2.5)
|
|
Accounts
Payable
|
9.4
|
5.1
|
4.9
|
|
Other
Current Liabilities
|
(10.0)
|
0.2
|
5.8
|
|
Other
Assets
|
0.8
|
(4.3)
|
8.2
|
|
Other
Liabilities
|
0.7
|
1.0
|
(4.1)
|
|
Net
Operating Activities from (for) Discontinued Operations
|
–
|
(13.5)
|
2.3
|
|
Cash
from Operating Activities
|
123.1
|
142.5
|
53.5
|
|
Investing
Activities
|
|||
|
Proceeds
from Sale of Available-For-Sale Securities
|
449.7
|
608.8
|
376.0
|
|
Payments
for Purchase of Available-For-Sale Securities
|
(368.3)
|
(596.4)
|
(343.7)
|
|
Changes
to Investments
|
(19.6)
|
(52.0)
|
(1.1)
|
|
Additions
to Property, Plant and Equipment
|
(210.2)
|
(102.3)
|
(58.6)
|
|
Proceeds
from Sale of Assets
|
1.5
|
–
|
–
|
|
Other
|
(7.2)
|
(15.0)
|
0.6
|
|
Net
Investing Activities from Discontinued Operations
|
–
|
2.2
|
30.7
|
|
Cash
from (for) Investing Activities
|
(154.1)
|
(154.7)
|
3.9
|
|
Financing
Activities
|
|||
|
Issuance
of Common Stock
|
20.6
|
15.8
|
21.0
|
|
Issuance
of Long-Term Debt
|
123.9
|
77.8
|
35.0
|
|
Reductions
of Long-Term Debt
|
(90.7)
|
(78.9)
|
(35.7)
|
|
Dividends
on Common Stock and Distributions to Minority Shareholders
|
(44.3)
|
(43.9)
|
(36.7)
|
|
Net
Increase (Decrease) in Book Overdrafts
|
–
|
(3.4)
|
3.4
|
|
Net
Financing Activities for Discontinued Operations
|
–
|
–
|
(0.9)
|
|
Cash
from (for) Financing Activities
|
9.5
|
(32.6)
|
(13.9)
|
|
Change
in Cash and Cash Equivalents
|
(21.5)
|
(44.8)
|
43.5
|
|
Cash
and Cash Equivalents at Beginning of Period
|
44.8
|
89.6
|
46.1
|
|
Cash
and Cash Equivalents at End of Period
|
$23.3
|
$44.8
|
$89.6
|
The
accompanying notes are an integral part of these statements.
ALLETE
2007 Form 10-K
61
ALLETE
Consolidated Statement of Shareholders’ Equity
|
Accumulated
|
|||||
|
Total
|
Other
|
Unearned
|
|||
|
Shareholders’
|
Retained
|
Comprehensive
|
ESOP
|
Common
|
|
|
Equity
|
Earnings
|
Income
(Loss)
|
Shares
|
Stock
|
|
|
Millions
|
|||||
|
Balance
at December 31, 2004
|
$630.5
|
$293.2
|
$(11.4)
|
$(51.4)
|
$400.1
|
|
Comprehensive
Income
|
|||||
|
Net
Income
|
13.3
|
13.3
|
|||
|
Other
Comprehensive Income – Net of Tax
|
|||||
|
Unrealized
Gains on Securities – Net
|
0.6
|
0.6
|
|||
|
Additional
Pension Liability
|
(2.0)
|
(2.0)
|
|||
|
Total
Comprehensive Income
|
11.9
|
||||
|
Common
Stock Issued – Net
|
21.0
|
21.0
|
|||
|
Dividends
Declared
|
(34.4)
|
(34.4)
|
|||
|
Purchase
of ALLETE Shares by ESOP
|
(30.3)
|
(30.3)
|
|||
|
ESOP
Shares Earned
|
4.1
|
4.1
|
|||
|
Balance
at December 31, 2005
|
602.8
|
272.1
|
(12.8)
|
(77.6)
|
421.1
|
|
Comprehensive
Income
|
|||||
|
Net
Income
|
76.4
|
76.4
|
|||
|
Other
Comprehensive Income – Net of Tax
|
|||||
|
Unrealized
Gains on Securities – Net
|
1.9
|
1.9
|
|||
|
Additional
Pension Liability
|
6.4
|
6.4
|
|||
|
Total
Comprehensive Income
|
84.7
|
||||
|
Adjustment
to initially apply SFAS 158 – Net of Tax
|
(4.3)
|
(4.3)
|
|||
|
Common
Stock Issued – Net
|
17.6
|
17.6
|
|||
|
Dividends
Declared
|
(40.7)
|
(40.7)
|
|||
|
ESOP
Shares Earned
|
5.7
|
5.7
|
|||
|
Balance
at December 31, 2006
|
665.8
|
307.8
|
(8.8)
|
(71.9)
|
438.7
|
|
Comprehensive
Income
|
|||||
|
Net
Income
|
87.6
|
87.6
|
|||
|
Other
Comprehensive Income – Net of Tax
|
|||||
|
Unrealized
Gains on Securities – Net
|
1.1
|
1.1
|
|||
|
Defined
Benefit Pension and Other Postretirement Plans
|
3.2
|
3.2
|
|||
|
Total
Comprehensive Income
|
91.9
|
||||
|
Adjustment
to initially apply FIN 48
|
(0.7)
|
(0.7)
|
|||
|
Common
Stock Issued – Net
|
22.5
|
22.5
|
|||
|
Dividends
Declared
|
(44.3)
|
(44.3)
|
|||
|
ESOP
Shares Earned
|
7.4
|
7.4
|
|||
|
Balance
at December 31, 2007
|
$742.6
|
$350.4
|
$(4.5)
|
$(64.5)
|
$461.2
|
The
accompanying notes are an integral part of these statements.
ALLETE
2007 Form 10-K
62
Notes
to Consolidated Financial Statements
|
Note
1.
|
Business
Segments
|
Presented
below are the operating results and other financial information related to our
reporting segments. For a description of our reporting segments, see Note
2.
Financial
results by segment for the periods presented were impacted by the integration of
our Taconite Harbor facility into the Regulated Utility segment, effective
January 1, 2006. We have operated the Taconite Harbor facility as a rate-based
asset within the Minnesota retail jurisdiction since January 1, 2006. Prior to
January 1, 2006, we operated our Taconite Harbor facility as nonregulated
generation (non-rate base generation sold at market-based rates primarily to the
wholesale market). Historical financial results of Taconite Harbor for periods
prior to the 2006 redirection are included in our Nonregulated Energy Operations
segment.
|
Energy
|
||||||
|
Nonregulated
|
||||||
|
Regulated
|
Energy
|
Investment
|
Real
|
|||
|
Consolidated
|
Utility
|
Operations
|
In
ATC
|
Estate
|
Other
|
|
|
Millions
|
||||||
|
2007
|
||||||
|
Operating
Revenue
|
$841.7
|
$723.8
|
$67.0
|
–
|
$50.5
|
$0.4
|
|
Fuel
and Purchased Power
|
347.6
|
347.6
|
–
|
–
|
–
|
–
|
|
Operating
and Maintenance
|
311.9
|
229.3
|
61.2
|
–
|
20.1
|
1.3
|
|
Depreciation
Expense
|
48.5
|
43.8
|
4.5
|
–
|
0.1
|
0.1
|
|
Operating
Income (Loss) from Continuing Operations
|
133.7
|
103.1
|
1.3
|
–
|
30.3
|
(1.0)
|
|
Interest
Expense
|
(24.6)
|
(21.0)
|
(2.0)
|
–
|
(0.5)
|
(1.1)
|
|
Equity
Earnings in ATC
|
12.6
|
–
|
–
|
$12.6
|
–
|
–
|
|
Other
Income
|
15.5
|
4.1
|
3.9
|
–
|
1.4
|
6.1
|
|
Income
from Continuing Operations Before Minority Interest and Income
Taxes
|
137.2
|
86.2
|
3.2
|
12.6
|
31.2
|
4.0
|
|
Income
Tax Expense (Benefit)
|
47.7
|
31.3
|
(0.3)
|
5.1
|
11.6
|
–
|
|
Minority
Interest
|
1.9
|
–
|
–
|
–
|
1.9
|
–
|
|
Income
from Continuing Operations
|
87.6
|
$54.9
|
$3.5
|
$7.5
|
$17.7
|
$4.0
|
|
Loss
from Discontinued Operations – Net of Tax
|
–
|
|||||
|
Net
Income
|
$87.6
|
|||||
|
Total
Assets
|
$1,644.2
|
$1,330.9
|
$84.2
|
$65.7
|
$91.3
|
$72.1
|
|
Capital
Additions
|
$223.9
|
$220.6
|
$3.3
|
–
|
–
|
–
|
ALLETE
2007 Form 10-K
63
Note
1. Business
Segments (Continued)
|
Energy
|
||||||
|
Nonregulated
|
||||||
|
Regulated
|
Energy
|
Investment
|
Real
|
|||
|
Consolidated
|
Utility
|
Operations
|
in ATC
|
Estate
|
Other
|
|
|
Millions
|
||||||
|
2006
|
||||||
|
Operating
Revenue
|
$767.1
|
$639.2
|
$65.0
|
–
|
$62.6
|
$0.3
|
|
Fuel
and Purchased Power
|
281.7
|
281.7
|
–
|
–
|
–
|
–
|
|
Operating
and Maintenance
|
296.0
|
217.9
|
57.1
|
–
|
19.5
|
1.5
|
|
Depreciation
Expense
|
48.7
|
44.2
|
4.3
|
–
|
0.1
|
0.1
|
|
Operating
Income (Loss) from Continuing
Operations
|
140.7
|
95.4
|
3.6
|
–
|
43.0
|
(1.3)
|
|
Interest
Expense
|
(27.4)
|
(20.2)
|
(3.3)
|
–
|
–
|
(3.9)
|
|
Equity
Earnings in ATC
|
3.0
|
–
|
–
|
$3.0
|
–
|
–
|
|
Other
Income
|
11.9
|
0.9
|
2.2
|
–
|
1.3
|
7.5
|
|
Income
from Continuing Operations Before Minority Interest and Income
Taxes
|
128.2
|
76.1
|
2.5
|
3.0
|
44.3
|
2.3
|
|
Income
Tax Expense (Benefit)
|
46.3
|
29.3
|
(1.2)
|
1.1
|
16.9
|
0.2
|
|
Minority
Interest
|
4.6
|
–
|
–
|
–
|
4.6
|
–
|
|
Income
from Continuing Operations
|
77.3
|
$46.8
|
$3.7
|
$1.9
|
$22.8
|
$2.1
|
|
Loss
from Discontinued Operations – Net of Tax
|
(0.9)
|
|||||
|
Net
Income
|
$76.4
|
|||||
|
Total
Assets
|
$1,533.4
|
$1,143.3
|
$81.3
|
$53.7
|
$89.8
|
$165.3
|
|
Capital
Additions
|
$109.4
|
$107.5
|
$1.9
|
–
|
–
|
–
|
|
2005
|
||||||
|
Operating
Revenue
|
$737.4
|
$575.6
|
$113.9
|
–
|
$47.5
|
$0.4
|
|
Fuel
and Purchased Power
|
273.1
|
243.7
|
29.4
|
–
|
–
|
–
|
|
Operating
and Maintenance
|
293.5
|
202.9
|
71.2
|
–
|
16.6
|
2.8
|
|
Kendall
County Charge
|
77.9
|
–
|
77.9
|
–
|
–
|
–
|
|
Depreciation
Expense
|
47.8
|
39.4
|
8.1
|
–
|
0.1
|
0.2
|
|
Operating
Income (Loss) from Continuing
Operations
|
45.1
|
89.6
|
(72.7)
|
–
|
30.8
|
(2.6)
|
|
Interest
Expense
|
(26.4)
|
(17.4)
|
(6.6)
|
–
|
(0.1)
|
(2.3)
|
|
Other
Income (Expense)
|
1.1
|
0.7
|
1.7
|
–
|
1.1
|
(2.4)
|
|
Income
(Loss) from Continuing Operations Before Minority Interest and Income
Taxes
|
19.8
|
72.9
|
(77.6)
|
–
|
31.8
|
(7.3)
|
|
Income
Tax Expense (Benefit)
|
(0.5)
|
27.2
|
(29.1)
|
–
|
11.6
|
(10.2)
|
|
Minority
Interest
|
2.7
|
–
|
–
|
–
|
2.7
|
–
|
|
Income
(Loss) from Continuing Operations
|
17.6
|
$45.7
|
$(48.5)
|
–
|
$17.5
|
$2.9
|
|
Loss
from Discontinued Operations – Net of Tax
|
(4.3)
|
|||||
|
Net
Income
|
$13.3
|
|||||
|
Total
Assets
|
$1,398.8
(a)
|
$909.5
|
$185.2
|
–
|
$73.7
|
$227.8
|
|
Capital
Additions
|
$63.1
(a)
|
$46.5
|
$12.1
|
–
|
–
|
–
|
|
(a)
|
Discontinued
Operations represented $2.6 million of total assets in 2005 and $4.5
million of capital additions in
2005.
|
ALLETE
2007 Form 10-K
64
Note
2. Operations
and Significant Accounting 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 accounting principles generally accepted in the United States
of America. 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.
Business Segments. Our
Regulated Utility, Nonregulated Energy Operations, Real Estate, Investment in
ATC and Other segments were determined in accordance with SFAS 131, “Disclosures
about Segments of an Enterprise and Related Information.” Segmentation is based
on the manner in which we operate, assess, and allocate resources to the
business. We measure performance of our operations through budgeting and
monitoring of contributions to consolidated net income by each business segment.
Discontinued Operations includes our telecommunications business, which we sold
in December 2005, and our Water Services businesses, the majority of which were
sold in 2003 (See Note 13.)
Regulated Utility includes
retail and wholesale rate-regulated electric, natural gas and water services in
northeastern Minnesota and northwestern Wisconsin. Minnesota Power provides
regulated utility electric service to 141,000 retail customers in northeastern
Minnesota. SWL&P, a wholly-owned subsidiary, provides regulated utility
electric, natural gas and water service in northwestern Wisconsin to 15,000
electric customers, 12,000 natural gas customers and 10,000 water customers.
Approximately 39 percent of regulated utility electric revenue is from
Large Power Customers (34 percent of consolidated revenue). Large Power
Customers consist of five taconite producers, four paper and pulp mills, two
pipeline companies and one manufacturer under all-requirements contracts with
expiration dates extending from February 2009 through October 2014. Revenue of
$100.6 million (12.0 percent of consolidated revenue) was received from one
taconite producer in 2007 (11.6 percent in 2006; 11.3 percent in 2005).
Regulated utility rates are under the jurisdiction of Minnesota and Wisconsin,
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: (1) bill or credit customers for
fuel and purchased energy costs above or below the base levels in rate
schedules; (2) bill retail customers for the recovery of conservation
improvement program expenditures not collected in base rates; and (3) bill
customers for the recovery of certain environmental expenditures. Fuel and
purchased power expense is deferred to match the period in which the revenue for
fuel and purchased power expense is collected from customers pursuant to the
fuel adjustment clause.
Nonregulated Energy Operations
includes our coal mining activities in North Dakota, approximately 50 MW of
nonregulated generation and Minnesota land sales. 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. In 2007, Square Butte supplied
approximately 60 percent (273 MW) of its output to Minnesota Power under a
long-term contract. (See Note 8.) Coal sales are recognized when delivered at
the cost of production plus a specified profit per ton of coal
delivered.
In 2005,
Nonregulated Energy Operations included nonregulated generation (non-rate base
generation sold at market-based rates to the wholesale market) from our Taconite
Harbor facility in northern Minnesota and generation secured through the Kendall
County power purchase agreement. To help meet forecasted base load energy
requirements effective January 1, 2006, Taconite Harbor was integrated into
our Regulated Utility, as approved by the MPUC. The Kendall County power
purchase agreement was assigned to Constellation Energy Commodities in April
2005. (See Note 10.)
Investment in ATC includes our
approximate 8 percent equity ownership interest in ATC, a Wisconsin-based public
utility that owns and maintains electric transmission assets in parts of
Wisconsin, Michigan, Minnesota and Illinois. ATC provides transmission service
under rates regulated by the FERC that are set in accordance with the FERC’s
policy of establishing the independent operation and ownership of, and
investment in, transmission facilities. (See Note 6.)
ALLETE
2007 Form 10-K
65
Note
2. Operations
and Significant Accounting Policies (Continued)
Real Estate includes our
Florida real estate operations. Our real estate operations include several
wholly-owned subsidiaries and an 80 percent ownership in Lehigh Acquisition
Corporation, which are consolidated in ALLETE’s financial statements. Our
Florida real estate companies are principally engaged in real estate
acquisitions, development and sales.
Full
profit recognition is recorded on sales upon closing, provided cash collections
are at least 20 percent of the contract price and the other requirements of SFAS
66, “Accounting for Sales of Real Estate,” are met. In certain cases, where
there are obligations to perform significant development activities after the
date of sale, we recognize profit on a percentage-of-completion basis in
accordance with SFAS 66. Pursuant to this method of accounting, gross profit is
recognized based upon the relationship of development costs incurred as of that
date to the total estimated development costs of the parcels, including related
amenities or common costs of the entire project. Revenue and cost of real estate
sold in excess of the amount recognized based on the percentage-of-completion
method is deferred and recognized as revenue and cost of real estate sold during
the period in which the related development costs are incurred. Deferred revenue
and cost of real estate sold are recorded net as Deferred Profit on Sales of
Real Estate on our consolidated balance sheet. Certain contracts allow us
to receive participation revenue from land sales to third parties if various
formula-based criteria are achieved.
In
certain cases, we pay fees or construct improvements to mitigate offsite traffic
impacts. In return, we receive traffic impact fee credits as a result of some of
these expenditures. We recognize revenue from the sale of traffic impact fee
credits when payment is received.
Land held
for sale is recorded at the lower of cost or fair value determined by the
evaluation of individual land parcels and is included in Investments on our
consolidated balance sheet. Real estate costs include the cost of land acquired,
subsequent development costs and costs of improvements, capitalized development
period interest, real estate taxes and payroll costs of certain employees
devoted directly to the development effort. These real estate costs incurred are
capitalized to the cost of real estate parcels based upon the relative sales
value of parcels within each development project in accordance with SFAS 67,
“Accounting for Costs and Initial Rental Operations of Real Estate Projects.”
When real estate is sold, the cost of real estate sold includes the actual costs
incurred and the estimate of future completion costs allocated to the real
estate sold based upon the relative sales value method.
Whenever
events or circumstances indicate that the carrying value of the real estate may
not be recoverable, impairments would be recorded and the related assets would
be adjusted to their estimated fair value, less costs to sell.
Other includes investments in
emerging technologies, and earnings on cash and short-term investments. As part
of our emerging technology portfolio, we have several minority investments in
venture capital funds and direct investments in privately-held, start-up
companies. We account for our investment in venture capital funds under the
equity method and account for our direct investments in privately-held companies
under the cost method because of our ownership percentage. Short-term
investments consist of auction rate bonds and variable rate demand notes, and
are classified as available-for-sale securities. All income generated from these
short-term investments is recorded as interest income. (See Note
6.)
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. When regulated utility property, plant and equipment are retired or
otherwise disposed, no gain or loss is recognized, pursuant to SFAS 71,
“Accounting for the Effects of Certain Types of Regulations.” Our Regulated
Utility operations capitalize AFUDC, which includes both an interest and equity
component. (See Note 3.)
Long-Lived Asset Impairments.
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
conduct this assessment using SFAS 144, “Accounting for the Impairment and
Disposal of Long-Lived Assets.” 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 would recognize an
impairment loss only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted future cash flows. Management judgment is
involved in both deciding if testing for recoverability is necessary and in
estimating undiscounted future cash flows.
ALLETE
2007 Form 10-K
66
Note
2. Operations
and Significant Accounting Policies (Continued)
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, overall portfolio quality, review of specific problems
and such other factors that, in our judgment, deserve recognition in estimating
losses.
|
Accounts
Receivable
|
||
|
December
31
|
2007
|
2006
|
|
Millions
|
||
|
Trade
Accounts Receivable
|
||
|
Billed
|
$63.9
|
$58.5
|
|
Unbilled
|
16.6
|
13.5
|
|
Less: Allowance
for Doubtful Accounts
|
1.0
|
1.1
|
|
Total
Accounts Receivable – Net
|
$79.5
|
$70.9
|
Inventories. Inventories are
stated at the lower of cost or market. Amounts removed from inventory are
recorded on an average cost basis.
|
Inventories
|
||
|
December
31
|
2007
|
2006
|
|
Millions
|
||
|
Fuel
|
$22.1
|
$18.9
|
|
Materials
and Supplies
|
27.4
|
24.5
|
|
Total
Inventories
|
$49.5
|
$43.4
|
Unamortized Discount and Premium on
Debt. Discount and premium on debt are deferred and amortized over the
terms of the related debt instruments using the effective interest
method.
Cash and Cash Equivalents. We
consider all investments purchased with original maturities of three months or
less to be cash equivalents.
Supplemental Statement of Cash Flow
Information.
|
Consolidated
Statement of Cash Flows
|
|||
|
Supplemental
Disclosure
|
|||
|
For
the Year Ended December 31
|
2007
|
2006
|
2005
|
|
Millions
|
|||
|
Cash
Paid During the Period for
|
|||
|
Interest
– Net of Amounts Capitalized
|
$26.3
|
$25.3
|
$24.6
|
|
Income
Taxes
|
$34.2
|
$32.4 (a)
|
$27.1
|
|
Noncash
Investing Activities
|
|||
|
Accounts
Payable for Capital Additions to Property, Plant and
Equipment
|
$9.8
|
$7.1
|
–
|
|
AFUDC
- Equity
|
$3.8
|
–
|
–
|
|
(a)
|
Net
of a $24.3 million cash refund.
|
Available-for-Sale Securities.
Available-for-sale securities are recorded at fair value with unrealized
gains and losses included in accumulated other comprehensive income (loss), net
of tax. Unrealized losses that are other than temporary are recognized in
earnings. Our auction rate securities and variable rate demand notes, classified
as available-for-sale securities, are recorded at cost because their cost
approximates fair market value as they typically reset every 7 to 35 days.
Despite the long-term nature of their stated contractual maturities, we have the
ability to quickly liquidate these securities. 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 share price
trends and the impact of overall market conditions.
ALLETE
2007 Form 10-K
67
Note
2. Operations
and Significant Accounting Policies (Continued)
Accounting for Stock-Based
Compensation. Effective January 1, 2006, we adopted the fair value
recognition provisions of SFAS 123R, “Share-Based Payment,” using the modified
prospective transition method. Under this method, we recognize compensation
expense for all share-based payments granted after January 1, 2006, and those
granted prior to but not yet vested as of January 1, 2006. Under the fair value
recognition provisions of SFAS 123R, we recognize stock-based compensation net
of an estimated forfeiture rate and only recognize compensation expense for
those shares expected to vest over the required service period of the award.
Prior to our adoption of SFAS 123R, we accounted for share-based payments under
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” and related interpretations. (See Note 16.)
|
Prepayments
and Other Current Assets
|
||
|
December
31
|
2007
|
2006
|
|
Millions
|
||
|
Deferred
Fuel Adjustment Clause
|
$26.5
|
$15.1
|
|
Other
|
12.6
|
8.7
|
|
Total
Prepayments and Other Current Assets
|
$39.1
|
$23.8
|
|
Other
Assets
|
||
|
December
31
|
2007
|
2006
|
|
Millions
|
||
|
Deferred
Regulatory Charges (See Note 5)
|
||
|
Future
Benefit Obligations Under Defined Benefit Pension and Other Postretirement
Plans
|
$53.7
|
$86.1
|
|
Other
Deferred Regulatory Charges
|
22.9
|
17.5
|
|
Total
Deferred Regulatory Charges
|
76.6
|
103.6
|
|
Other
|
34.8
|
31.4
|
|
Total
Other Assets
|
$111.4
|
$135.0
|
|
Other
Liabilities
|
||
|
December
31
|
2007
|
2006
|
|
Millions
|
||
|
Future
Benefit Obligation Under Defined Benefit Pension and Other Postretirement
Plans
|
$71.6
|
$108.2
|
|
Deferred
Regulatory Credits (See Note 5)
|
31.3
|
33.8
|
|
Asset
Retirement Obligation (See Note 3)
|
36.5
|
27.2
|
|
Other
|
60.7
|
56.9
|
|
Total
Other Liabilities
|
$200.1
|
$226.1
|
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 operating expense unless
recoverable in rates from customers. (See Note 8.)
Income Taxes. We file a
consolidated federal income tax return. 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 assets and 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. Effective January 1, 2007, we adopted the
provisions of FIN 48, “Accounting for Uncertainty in Income Taxes – an
Interpretation of FASB Statement No. 109.” Under this provision we are
required to recognize in our financial statements the largest tax benefit of a
tax position that is “more-likely-than-not” to be sustained, on audit, based
solely on the technical merits of the position as of the reporting date. Only
tax positions that meet the “more-likely-than-not’ threshold may be recognized,
and the term “more-likely-than-not” means more than 50 percent. (See Note
12.)
Excise Taxes. We collect
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.
ALLETE
2007 Form 10-K
68
Note
2. Operations
and Significant Accounting Policies (Continued)
New Accounting Standards.
SFAS 157. In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements,” to increase
consistency and comparability in fair value measurements by defining fair value,
establishing a framework for measuring fair value in generally accepted
accounting principles, and expanding disclosures about fair value measurements.
SFAS 157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement. It clarifies the extent to which fair value is used
to measure recognized assets and liabilities, the inputs used to develop the
measurements, and the effect of certain measurements on earnings for the period.
SFAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and is applied on a prospective basis. On February 6,
2008, the FASB announced it will issue a FASB Staff Position (FSP) to allow a
one-year deferral of adoption of SFAS 157 for nonfinancial assets and
nonfinancial liabilities that are recognized at fair value on a nonrecurring
basis. The FSP will also amend SFAS 157 to exclude SFAS 13, “Accounting for
Leases,” and its related interpretive accounting pronouncements. The FSP is
expected to be issued in the near future. We have determined that the adoption
of SFAS 157 will not have a material impact on our consolidated financial
position, results of operations or cash flows.
SFAS 159. In February 2007, the
FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial
Liabilities,” which is an elective, irrevocable election to measure eligible
financial instruments and certain other assets and liabilities at fair value on
an instrument-by-instrument basis. The election may only be applied at specified
election dates and to instruments in their entirety rather than to portions of
instruments. Upon initial election, the entity reports the difference between
the instruments’ carrying value and their fair value as a cumulative-effect
adjustment to the opening balance of retained earnings. At each subsequent
reporting date, an entity reports in earnings, unrealized gains and losses on
items for which the fair value option has been elected. SFAS 159 is effective
for financial statements issued for fiscal years beginning after November 15,
2007, and is applied on a prospective basis. Early adoption of SFAS 159 is
permitted provided the entity also elects to adopt the provisions of SFAS 157 as
of the early adoption date selected for SFAS 159. We have elected not to adopt
the provisions of SFAS 159 at this time.
SFAS 141R. In December 2007, the
FASB issued SFAS 141(revised 2007), “Business Combinations,” to increase the
relevance, representational faithfulness, and comparability of the information a
reporting entity provides in its financial reports about a business combination
and its effects. SFAS 141R replaces SFAS 141, “Business Combinations” but,
retains the fundamental requirements of SFAS 141 that the acquisition method of
accounting be used and an acquirer be identified for all business combinations.
SFAS 141R expands the definition of a business and of a business combination and
establishes how the acquirer is to: (1) recognize and measure in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree; (2) recognize and measure the goodwill
acquired in the business combination or a gain from a bargain purchase; and (3)
determine what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS 141R is applicable to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008, and is to be applied
prospectively. Early adoption is prohibited. SFAS 141R will impact ALLETE if we
elect to enter into a business combination subsequent to December 31,
2008.
SFAS 160. In December 2007,
the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial
Statements – an amendment of ARB No. 51,” to improve the relevance,
comparability, and transparency of the financial information a reporting entity
provides in its consolidated financial statements. SFAS 160 amends ARB 51 to
establish accounting and reporting standards for noncontrolling interests in
subsidiaries and to make certain consolidation procedures consistent with the
requirements of SFAS 141R. It defines a noncontrolling interest in a subsidiary
as an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. SFAS 160 changes the way the
consolidated income statement is presented by requiring consolidated net income
to include amounts attributable to the parent and the noncontrolling interest.
SFAS 160 establishes a single method of accounting for changes in a parent’s
ownership interest in a subsidiary which do not result in deconsolidation. SFAS
160 also requires expanded disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners of a subsidiary. SFAS 160 is effective for financial statements issued
for fiscal years beginning on or after December 15, 2008, and interim periods
within those fiscal years. Early adoption is prohibited. SFAS 160 shall be
applied prospectively, with the exception of the presentation and disclosure
requirements which shall be applied retrospectively for all periods presented.
We are currently evaluating the effect that the adoption of SFAS 160 will have
on our consolidated financial position, results of operations and cash flows;
however ALLETE Properties does have certain noncontrolling interests in
consolidated subsidiaries. If SFAS 160 had been applied as of December 31, 2007,
the $9.3 million reported as Minority Interest in the Liabilities section on our
Consolidated Balance Sheet would have been reported as $9.3 million of
Noncontrolling Interest in Subsidiaries in the Equity section of our
Consolidated Balance Sheet.
ALLETE
2007 Form 10-K
69
Note
3. Property,
Plant and Equipment
|
Property,
Plant and Equipment
|
||
|
December
31
|
2007
|
2006
|
|
Millions
|
||
|
Regulated
Utility
|
$1,683.0
|
$1,575.8
|
|
Construction
Work in Progress
|
165.8
|
71.4
|
|
Accumulated
Depreciation
|
(796.8)
|
(781.3)
|
|
Regulated
Utility Plant – Net
|
1,052.0
|
865.9
|
|
Nonregulated
Energy Operations
|
89.9
|
88.5
|
|
Construction
Work in Progress
|
2.5
|
2.6
|
|
Accumulated
Depreciation
|
(43.2)
|
(40.1)
|
|
Nonregulated
Energy Operations Plant – Net
|
49.2
|
51.0
|
|
Other
Plant – Net
|
3.3
|
4.7
|
|
Property,
Plant and Equipment – Net
|
$1,104.5
|
$921.6
|
Depreciation
is computed using the straight-line method over the estimated useful lives of
the various classes of assets. The MPUC and the PSCW have approved depreciation
rates for our Regulated Utility plant.
|
Estimated
Useful Lives of Property, Plant and Equipment
|
||||
|
Regulated
Utility –
|
Generation
|
4
to 29 years
|
Nonregulated
Energy Operations
|
4
to 40 years
|
|
Transmission
|
40
to 60 years
|
Other
Plant
|
5
to 25 years
|
|
|
Distribution
|
30
to 70 years
|
|||
Asset Retirement Obligations.
Pursuant to SFAS 143, “Accounting for Asset Retirement Obligations,” 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 land
reclamation at BNI Coal, and are included in Other Liabilities on our
consolidated balance sheet. Removal costs associated with certain distribution
and transmission assets have not been recognized as these facilities have been
determined to have indeterminate useful lives. Prior to the adoption of SFAS
143, utility decommissioning obligations were accrued through depreciation
expense at depreciation rates approved by the MPUC. Conditional asset retirement
obligations have been identified for treated wood poles and remaining
polychlorinated biphenyl and asbestos-containing assets; however, removal costs
have not been recognized because they are considered immaterial to our
consolidated financial statements.
|
Asset
Retirement Obligation
|
|
|
Millions
|
|
|
Obligation
at December 31, 2005
|
$25.3
|
|
Accretion
Expense
|
1.8
|
|
Additional
Liabilities Incurred in 2006
|
0.1
|
|
Obligation
at December 31, 2006
|
27.2
|
|
Accretion
Expense
|
2.1
|
|
Additional
Liabilities Incurred in 2007
|
7.2
|
|
Obligation
at December 31, 2007
|
$36.5
|
|
Note
4.
|
Jointly-Owned
Electric Facility
|
We own 80
percent of the 536-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., the owner of the other 20 percent 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 percent share of the original cost of
Boswell Unit 4, which is included in property, plant and equipment at December
31, 2007, was $316 million ($314 million at December 31, 2006). The
corresponding accumulated depreciation balance was $170 million at December 31,
2007 ($168 million at December 31, 2006).
ALLETE
2007 Form 10-K
70
|
Note
5.
|
Regulatory
Matters
|
Electric Rates. Entities
within our Regulated Utility segment file for periodic rate revisions with the
MPUC, the FERC or the PSCW. On February 8, 2008, the FERC approved our wholesale
rate filing. Our wholesale customers consist of 16 municipalities in
Minnesota and two private utilities in Wisconsin, including SWL&P. The FERC
authorized an average 10 percent increase for wholesale municipal customers, a
12.5 percent increase for SWL&P, and an overall return on equity of 11.25
percent. The rate increase will go into effect on March 1, 2008, and on an
annualized basis, the filing will generate approximately $7.5 million in
additional revenue. Minnesota Power’s retail rates are based on a 1994 MPUC
retail rate order that allows for an 11.6 percent return on common equity
dedicated to utility plant. SWL&P’s current retail rates are based on a 2006
PSCW retail rate order, effective January 1, 2007. In 2007, 76 percent of our
consolidated operating revenue was under regulatory authority (72 percent in
2006 and 2005). The MPUC had regulatory authority over approximately 58 percent
of our consolidated operating revenue in 2007 (56 percent in 2006 and
2005).
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 except for deferred fuel adjustment clause charges which are
included in Prepayments and Other Current Assets (See Note 2). No deferred
regulatory charges or credits are currently earning a return.
|
Deferred
Regulatory Charges and Credits
|
||
|
December
31
|
2007
|
2006
|
|
Millions
|
||
|
Deferred
Charges
|
||
|
Income
Taxes
|
$11.3
|
$11.6
|
|
Premium
on Reacquired Debt
|
2.3
|
2.8
|
|
Future
Benefit Obligations Under
|
||
|
Defined
Benefit Pension and Other Postretirement Plans (See Note
15)
|
53.7
|
86.1
|
|
Deferred
MISO Costs
|
3.7
|
–
|
|
Asset
Retirement Obligation
|
3.6
|
2.3
|
|
Other
|
2.0
|
0.8
|
|
76.6
|
103.6
|
|
|
Deferred
Credits – Income Taxes
|
31.3
|
33.8
|
|
Net
Deferred Regulatory Assets
|
$45.3
|
$69.8
|
|
Note
6.
|
Investments
|
Available-for-Sale
Investments. We account for our
available-for-sale portfolio in accordance with SFAS 115, “Accounting for
Certain Investments in Debt and Equity Securities.” Our available-for-sale
securities portfolio consisted of securities in a grantor trust established to
fund certain employee benefits included in Investments and various auction rate
municipal bonds and variable rate municipal demand notes included as Short-Term
Investments (see below). As a result of our periodic assessments, we did not
record an impairment charge on our available for sale securities in the last
three years.
|
Available-For-Sale
Securities
|
||||
|
Millions
|
||||
|
Gross
Unrealized
|
||||
|
At December 31
|
Cost
|
Gain
|
(Loss)
|
Fair
Value
|
|
2007
|
$45.3
|
$8.4
|
$(0.1)
|
$53.6
|
|
2006
|
$123.2
|
$7.0
|
$(0.1)
|
$130.1
|
|
2005
|
$135.2
|
$4.4
|
$(0.1)
|
$139.5
|
|
Net
|
||||
|
Unrealized
|
||||
|
Gain
(Loss)
|
||||
|
in
Other
|
||||
|
Year
Ended
|
Sales
|
Gross
Realized
|
Comprehensive
|
|
|
December
31
|
Proceeds
|
Gain
|
(Loss)
|
Income
|
|
2007
|
$81.4
|
–
|
–
|
$1.4
|
|
2006
|
$12.4
|
–
|
–
|
$2.5
|
|
2005
|
$32.3
|
–
|
–
|
$1.3
|
ALLETE
2007 Form 10-K
71
Note
6. Investments
(Continued)
Short-Term Investments. At
December 31, 2007, we held $23.1 million of short-term investments
($104.5 million at December 31, 2006) consisting of various auction rate
municipal bonds and variable rate municipal demand notes. Substantially all of
these securities consisted of guaranteed student loans, insured or reinsured by
the federal government. The credit markets are currently experiencing
significant uncertainty, and some of this uncertainty has impacted the markets
where our auction rate securities would be offered. We are unable to estimate
the impact, if any, which emerging credit market conditions may have on the
liquidity of our auction rate securities. Any reduction in liquidity of our
auction rate securities will not have a material impact on our overall liquidity
needs. We believe the $23.1 million carrying value is not impaired, but we may
have to reclassify the investment from short-term to long-term investments if
future liquidity conditions mandate.
Investments. At December 31,
2007, our long-term investment portfolio included the real estate assets of
ALLETE Properties, our investment in ATC, debt and equity securities consisting
primarily of securities held to fund employee benefits, and our emerging
technology portfolio.
|
Investments
|
||
|
December
31
|
2007
|
2006
|
|
Millions
|
||
|
Real
Estate Assets
|
$91.3
|
$89.8
|
|
Debt
and Equity Securities
|
48.9
|
36.4
|
|
Investment
in ATC
|
65.7
|
53.7
|
|
Emerging
Technology Portfolio
|
7.9
|
9.2
|
|
Total
Investments
|
$213.8
|
$189.1
|
|
Real
Estate Assets
|
2007
|
2006
|
|
Millions
|
||
|
Land
Held for Sale Beginning Balance
|
$58.0
|
$48.0
|
|
Additions
during period: Capitalized Improvements
|
12.8
|
18.8
|
|
Purchases
|
–
|
1.4
|
|
Deductions
during period: Cost of Real Estate Sold
|
(8.2)
|
(10.2)
|
|
Land
Held for Sale Ending Balance
|
62.6
|
58.0
|
|
Long-Term
Finance Receivables
|
15.3
|
18.3
|
|
Other (a)
|
13.4
|
13.5
|
|
Total
Real Estate Assets
|
$91.3
|
$89.8
|
|
(a)
|
Consisted
primarily of a shopping center.
|
Finance
receivables, which are collateralized by property sold, accrue interest at
market-based rates and are net of an allowance for doubtful accounts of $0.2
million at December 31, 2007 ($0.2 million at December 31, 2006). The
majority are receivables having maturities up to 5 years. Minority interest
associated with real estate operations was $9.3 million at December 31, 2007
($7.4 million at December 31, 2006).
Investment in ATC. Our
Wisconsin subsidiary, Rainy River Energy Corporation - Wisconsin, has invested
$60 million in ATC, a Wisconsin-based public utility that owns and maintains
electric transmission assets in parts of Wisconsin, Michigan, Minnesota and
Illinois. ATC provides transmission service under rates regulated by the FERC
that are set in accordance with the FERC’s policy of establishing the
independent operation and ownership of, and investment in, transmission
facilities. We account for our investment in ATC under the equity method of
accounting, pursuant to EITF 03-16, “Accounting for Investments in Limited
Liability Companies.” As of December 31, 2007, our equity investment balance in
ATC was $65.7 million ($53.7 million at December 31, 2006), representing an
approximate 8.0 percent ownership interest.
|
ALLETE’s
Interest in ATC
|
|
|
For
the Year Ended December 31, 2007
|
|
|
Millions
|
|
|
Equity
Investment Balance at December 31, 2006
|
$53.7
|
|
2007
Cash Investments
|
8.7
|
|
Equity
in ATC Earnings
|
12.6
|
|
Distributed
ATC Earnings
|
(9.3)
|
|
Equity
Investment Balance at December 31, 2007
|
$65.7
|
ALLETE
2007 Form 10-K
72
Note
6. Investments
(Continued)
Emerging Technology Portfolio.
As part of our emerging technology portfolio, we have several minority
investments in venture capital funds and direct investments in privately-held,
start-up companies. We account for our investment in venture capital funds under
the equity method and account for our direct investments in privately-held
companies under the cost method because of our ownership percentage. The total
carrying value of our emerging technology portfolio was $7.9 million at December
31, 2007 ($9.2 million at December 31, 2006). Our policy is to review these
investments quarterly for impairment by assessing such factors as continued
commercial viability of products, cash flow and earnings. Any impairment would
reduce the carrying value of the investment. Due to the distribution of
investments from matured venture capital funds, our basis in direct investments
in privately-held companies included in the emerging technology portfolio was
$1.2 million at December 31, 2007 (zero at December 31, 2006). In 2007, we
recorded $0.5 million ($0.3 million after tax) of impairments related
to our venture capital funds whose future business prospects had significantly
diminished. Developments at these companies indicated that future commercial
viability was unlikely, as was new financing necessary to continue development.
We did not record any impairments in 2006. In 2005, we recorded
$5.1 million ($3.3 million after tax) of impairments related to our
direct investments in certain privately-held, start-up companies.
Fair Value of Financial
Instruments. With the exception of the items listed below, the estimated
fair value of all financial instruments approximates the carrying amount. The
fair value for the items below were based on quoted market prices for the same
or similar instruments.
|
Financial
Instruments
|
||
|
December
31
|
Carrying
Amount
|
Fair
Value
|
|
Millions
|
||
|
Long-Term
Debt, Including Current Portion
|
||
|
2007
|
$422.7
|
$410.9
|
|
2006
|
$389.5
|
$387.6
|
Concentration of Credit Risk.
Financial instruments that subject us to concentrations of credit risk consist
primarily of accounts receivable. Minnesota Power sells electricity to 12 Large
Power Customers. Receivables from these customers totaled approximately $14
million at December 31, 2007 ($9 million at December 31, 2006). Minnesota Power
does not obtain collateral to support utility receivables, but monitors the
credit standing of major customers. In addition, our taconite-producing Large
Power Customers are on a weekly billing cycle, which allows us to closely manage
collection of amounts due.
|
Note
7.
|
Short-Term
and Long-Term Debt
|
Short-Term Debt. Total
short-term debt outstanding at December 31, 2007, was $11.8 million ($29.7
million at December 31, 2006) and consisted of Long-Term Debt Due Within
One Year.
As of
December 31, 2007, we had bank lines of credit aggregating $170.0 million
($170.0 million at December 31, 2006), the majority of which expire in January
2012. These bank lines of credit made financing available through short-term
bank loans and provided credit support for commercial paper. At December 31,
2007, $4.3 million ($2.9 million at December 31, 2006) was drawn on our
lines of credit leaving a $165.7 million balance available for use ($167.1
million at December 31, 2006). The drawn amounts at December 31, 2007, related
to an $8.5 million revolving development loan with CypressCoquina Bank that we
entered into in March 2005. The revolving development loan has an interest rate
equal to the prime rate, with an initial term of 36 months. The term of the loan
may be extended 24 months if certain conditions are met. The loan is guaranteed
by Lehigh Acquisition Corporation, an 80 percent owned subsidiary of ALLETE
Properties. There was no commercial paper issued as of December 31, 2007
and 2006.
In
January 2006, we renewed, increased and extended a committed, syndicated,
unsecured revolving credit facility (Line) with LaSalle Bank National
Association, as Agent, for $150 million. The Line was subsequently extended
for an additional year in December 2006 and currently matures in January 2012.
At our request and subject to certain conditions, the Line may be increased to
$200 million and extended for two additional 12-month periods. The Line may
be used for general corporate purposes and working capital, and to provide
liquidity in support of our commercial paper program. We may prepay amounts
outstanding under the Line in whole or in part at our discretion without premium
or penalty. Additionally, we may irrevocably terminate or reduce the size of the
Line prior to maturity without premium or penalty. No funds were drawn under
this Line at December 31, 2007 and 2006.
ALLETE
2007 Form 10-K
73
|
Note
7.
|
Short-Term
and Long-Term Debt (Continued)
|
Long-Term Debt. The aggregate
amount of long-term debt maturing during 2008 is $11.8 million
($10.7 million in 2009; $5.0 million in 2010; $1.4 million in 2011; $3.1
million in 2012; and $390.7 million thereafter). Substantially all of our
electric plant is subject to the lien of the mortgages collateralizing various
first mortgage bonds.
On
February 1, 2007, we issued $60 million in principal amount of First Mortgage
Bonds (Bonds), 5.99% Series due February 1, 2027, in the private placement
market. The Company has the option to prepay all or a portion of the Bonds at
its discretion, subject to a make-whole provision. Proceeds were used to retire
$60 million in principal amount of First Mortgage Bonds, 7% Series on
February 15, 2007.
On June
8, 2007, we issued $50 million of senior unsecured notes (Notes) in the
private placement market. The Notes bear an interest rate of 5.99% and will
mature on June 1, 2017. The Company has the option to prepay all or a portion of
the Notes at its discretion, subject to a make-whole provision. The Company used
the proceeds from the sale of the Notes to fund utility capital projects and for
general corporate purposes.
On behalf
of SWL&P, the City of Superior, Wisconsin, issued $6.4 million in principal
amount of Collateralized Utility Revenue Refunding Bonds (Series A Bonds) and
$6.1 million of Collateralized Utility Revenue Bonds (Series B Bonds) on October
3, 2007. The Series A Bonds bear an interest rate of 5.375% and will mature on
November 1, 2021. The proceeds, together with other funds, were used to redeem
$6.5 million of existing 6.125% bonds. The Series B Bonds bear an interest rate
of 5.75% and will mature on November 1, 2037. The proceeds from the Series B
Bonds will be used to fund qualifying electric and gas projects.
On
February 1, 2008, we issued $60 million in principal amount of First Mortgage
Bonds (Bonds), 4.86% Series due April 1, 2013, in the private placement market.
We have the option to prepay all or a portion of the Bonds at our discretion,
subject to a make-whole provision. We intend to use the proceeds from the sale
of the Bonds to fund utility capital expenditures and for general corporate
purposes.
|
Long-Term
Debt
|
||
|
December
31
|
2007
|
2006
|
|
Millions
|
||
|
First
Mortgage Bonds
|
||
|
6.68%
Series Due 2007
|
–
|
$20.0
|
|
7.00%
Series Due 2007
|
–
|
60.0
|
|
5.28%
Series Due 2020
|
$35.0
|
35.0
|
|
4.95%
Pollution Control Series F Due 2022
|
111.0
|
111.0
|
|
5.99%
Series Due 2027
|
60.0
|
–
|
|
5.69%
Series Due 2036
|
50.0
|
50.0
|
|
Senior
Unsecured Notes 5.99% Due 2017
|
50.0
|
–
|
|
Variable
Demand Revenue Refunding Bonds
Series
1997 A, B, and C Due 2009 – 2020
|
36.5
|
39.0
|
|
Industrial
Development Revenue Bonds 6.5% Due 2025
|
6.0
|
6.0
|
|
Industrial
Development Variable Rate Demand Refunding
|
||
|
Revenue
Bonds Series 2006 Due 2025
|
27.8
|
27.8
|
|
Other
Long-Term Debt, 2.0% – 8.0% Due 2008 – 2037
|
46.4
|
40.7
|
|
Total
Long-Term Debt
|
422.7
|
389.5
|
|
Less:
Due Within One Year
|
11.8
|
29.7
|
|
Net
Long-Term Debt
|
$410.9
|
$359.8
|
Financial Covenants. Our
long-term debt arrangements contain customary covenants. In addition, our lines
of credit and letters of credit supporting certain long-term debt arrangements
contain financial covenants. The most restrictive covenant requires
ALLETE to maintain a quarterly ratio of its funded debt to total capital of
less than or equal to .65 to 1.00. Failure to meet this covenant 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. Some of ALLETE’s
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.
ALLETE
2007 Form 10-K
74
Note
8. Commitments,
Guarantees and Contingencies
Off-Balance Sheet Arrangements.
Square Butte Power Purchase Agreement.
Minnesota Power has a power purchase agreement with Square Butte that extends
through 2026 (Agreement). It provides a long-term supply of low-cost energy to
customers in our electric service territory and enables Minnesota Power to meet
power pool reserve requirements. Square Butte, a North Dakota cooperative
corporation, owns a 455-MW coal-fired generating unit (Unit) near Center, North
Dakota. The Unit is adjacent to a generating unit owned by Minnkota Power, a
North Dakota cooperative corporation whose Class A members are also members of
Square Butte. Minnkota Power serves as the operator of the Unit and also
purchases power from Square Butte.
Minnesota
Power was entitled to approximately 71 percent of the Unit’s output under the
Agreement prior to 2006. Minnkota Power exercised its option to reduce Minnesota
Power’s entitlement by approximately 5 percent annually to 66 percent in 2006
and 60 percent in 2007. We received notices from Minnkota Power that they
further reduced our output entitlement by approximately 5 percent annually to 55
percent on January 1, 2008, and 50 percent on January 1, 2009, and thereafter.
Minnkota Power has no further option to reduce Minnesota Power’s entitlement
below 50 percent.
Minnesota
Power is obligated to pay its pro rata share of Square Butte’s costs based
on Minnesota Power’s entitlement to Unit output. Minnesota Power’s payment
obligation will be suspended if Square Butte fails to deliver any power, whether
produced or purchased, for a period of one year. Square Butte’s fixed costs
consist primarily of debt service. At December 31, 2007, Square Butte had
total debt outstanding of $323.0 million. Total annual debt service for Square
Butte is expected to be approximately $29 million in each of the years 2008
through 2012. 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 2007 was $57.3 million
($57.9 million in 2006; $56.4 million in 2005). This reflects Minnesota Power’s
pro rata share of total Square Butte costs, based on the 60 percent output
entitlement in 2007, the 66 percent output entitlement in 2006 and the 71
percent output entitlement in 2005. Included in this amount was Minnesota
Power’s pro rata share of interest expense of $11.0 million in 2007 ($12.6
million in 2006; $13.6 million in 2005). Minnesota Power’s payments to Square
Butte are approved as a purchased power expense for ratemaking purposes by both
the MPUC and the FERC.
We have
two wind power purchase agreements with an affiliate of FPL Energy to purchase
the output from two wind facilities, Oliver Wind I and II located near Center,
North Dakota. We began purchasing the output from Oliver Wind I, a 50-MW
facility, in December 2006 and the output from Oliver Wind II, a 48-MW facility
in November 2007. Each agreement is for 25 years and provides for the purchase
of all output from the facilities. There are no fixed capacity charges, and we
only pay for energy as it is delivered to us.
Leasing Agreements. BNI Coal
is obligated to make lease payments for a dragline totaling $2.8 million
annually for the lease term which expires in 2027. BNI Coal has the option at
the end of the lease term to renew the lease at a fair market rental, to
purchase the dragline at fair market value, or to surrender the dragline and pay
a $3.0 million termination fee. We lease other properties and equipment under
operating lease agreements with terms expiring through 2016. The aggregate
amount of minimum lease payments for all operating leases is $8.1 million in
2008, $8.1 million in 2009, $7.7 million in 2010, $7.2 million in 2011,
$6.6 million in 2012 and $48.7 million thereafter. Total rent and lease expense
was $6.6 million in 2007 ($6.8 million in 2006; $6.2 million in
2005).
Coal, Rail and Shipping
Contracts. We have three coal supply agreements with various expiration
dates ranging from December 2008 to December 2011. We also have rail and
shipping agreements for the transportation of all of our coal, with various
expiration dates ranging from December 2008 to December 2011. Our minimum annual
payment obligations under these coal, rail and shipping agreements are currently
$44.8 million in 2008, $10.8 million in 2009, $5.3 million in 2010, $5.4 million
in 2011 and no specific commitments beyond 2011. Our minimum annual payment
obligations will increase when annual nominations are made for coal deliveries
in future years.
On
January 24, 2008, the Company received a letter from BNSF alleging Minnesota
Power defaulted on a material obligation under the Company’s Coal Transportation
Agreement (CTA). In the notice, BNSF claimed Minnesota Power underpaid
approximately $1.6 million for coal transportation services in 2006 and that
failure to pay such amounts plus interest within 60 days may result in BNSF’s
termination of the CTA. Minnesota Power believes it does not owe the amount
claimed, and that BNSF’s claims are wholly without merit. Minnesota Power
intends to vigorously defend its position in this dispute.
Fuel Clause Recovery of MISO Day 2
Costs. We filed a petition with the MPUC in February 2005 to amend
our fuel clause to accommodate costs and revenue related to the day-ahead and
real-time markets through which we engage in wholesale energy transactions in
MISO (MISO Day 2). In December 2006, the MPUC issued an order allowing Minnesota
Power and the other utilities involved in the MISO Day 2 proceeding to continue
recovering MISO Day 2 charges through the Minnesota retail fuel clause except
for MISO Day 2 administrative charges. On January 8, 2007, this order was
challenged by the Minnesota OAG, through a request for reconsideration. The
request was opposed by Minnesota Power and the other utilities, as well as
MISO. The reconsideration request effectively was denied by the MPUC. Upon
denial of the reconsideration request, the OAG appealed the MPUC Order in a
filing with the Minnesota Court of Appeals. Oral argument in the case is
scheduled to be held on February 27, 2008, and a decision would be expected
approximately 90 days there after. We are unable to predict the outcome of this
matter.
ALLETE
2007 Form 10-K
75
Note
8. Commitments,
Guarantees and Contingencies (Continued)
Fuel Clause Recovery of MISO Day 2
Costs
(Continued). The
December 2006 MPUC order, subject to the rehearing request, granted deferred
accounting treatment for three MISO Day 2 charge types that were determined to
be administrative charges. Under the order, Minnesota Power refunded, through
customer bills, approximately $2 million of administrative charges
previously collected through the fuel clause between April 1, 2005, and December
31, 2006, and recorded these administrative charges as a regulatory asset. We
were permitted to continue accumulating MISO Day 2 administrative charges after
December 31, 2006, as a regulatory asset until we file our next rate case,
at which time recovery for such charges will be determined. The balance of this
regulatory asset was $3.7 million on December 31, 2007, and we consider
regulatory recovery to be probable. This order removed the subject to refund
requirement of the two interim orders, and included extensive fuel clause
reporting requirements that review our monthly and annual fuel clause filings
with the MPUC. There was no impact on earnings as a result of this ruling. As a
result of the MPUC’s December 2006 order allowing recovery of nearly all MISO
Day 2 charges through the fuel clause, we rescinded our December 2005 Letter of
Intent to Withdraw from MISO in December 2006.
Emerging Technology Portfolio.
We have investments in emerging technologies through minority investments in
venture capital funds structured as limited liability companies, and direct
investments in privately-held, start-up companies. We have committed to make
additional investments in certain emerging technology venture capital funds. The
total future commitment was $1.0 million at December 31, 2007, and may be
invested in 2008. We do not have plans to make any additional investments beyond
this commitment.
Discontinued
Operations. Two of our subsidiaries, which were involved in our
discontinued water operations, have been named in a claim brought by Capital
Resources and Properties, Inc, (CRP). CRP alleges that Georgia Water and ALLETE
Water Services are obligated to pay $2 million dollars plus interest and
attorney fees pursuant to a contract that was entered into in 2001. The contract
provides for payments of certain amounts upon the satisfaction of specified
contingencies, which CRP alleges were satisfied in 2005 or were waived, or are
otherwise due and owing. We intend to vigorously assert our defenses to the
claim, and cannot predict the outcome of this matter. A trial date is expected
later this year.
Environmental Matters. Our
businesses are subject to regulation of environmental matters by various
federal, state and local authorities. Due to future stricter environmental
requirements through legislation and/or rulemaking, we anticipate that potential
expenditures for environmental matters will be material and will require
significant capital investments. We review environmental matters on a quarterly
basis. Accruals for environmental matters are recorded when it is probable that
a liability has been incurred and the amount of the liability can be reasonably
estimated, based on current law and existing technologies. These accruals are
adjusted periodically as assessment and remediation efforts progress or as
additional technical or legal information becomes available. Accruals for
environmental liabilities are included in the balance sheet at undiscounted
amounts and exclude claims for recoveries from insurance or other third parties.
Costs related to environmental contamination treatment and cleanup are charged
to expense unless recoverable in rates from customers.
MR
SWL&P Manufactured Gas
Plant. In May 2001, SWL&P received notice from the WDNR that the City
of Superior had found soil contamination on property adjoining a former
Manufactured Gas Plant (MGP) site owned and operated by SWL&P from 1889 to
1904. A report submitted in 2003 identified some MGP-like chemicals that were
found in the soil near the former plant site. The final Phase II report was
issued in June 2007, confirming our understanding of the issues involved. The
final Phase II Report and Risk Assessment were sent to the WDNR for review in
June 2007. A remediation plan was developed during the fourth quarter of 2007
and will be submitted to the WDNR during the first quarter of 2008. Although it
is not possible to quantify the potential clean-up cost until the investigation
is completed, a $0.5 million liability was recorded in December 2003 to
address the known areas of contamination. The Company has recorded a
corresponding dollar amount as a regulatory asset to offset this liability. The
PSCW approved the collection through rates of $0.3 million of site investigation
costs that had been incurred through 2005. ALLETE maintains pollution
liability insurance coverage that includes coverage for SWL&P. A claim has
been filed with respect to this matter. The insurance carrier has issued a
reservation of rights letter and the Company continues to work with the insurer
to determine the availability of insurance coverage.
EPA Clean Air Interstate
Rule. In March 2005, the EPA announced the final Clean Air Interstate
Rule (CAIR) that reduces and permanently caps emissions of SO2, NOX and
particulates in the eastern United States. The CAIR includes Minnesota as one of
the 28 states it considers as “significantly contributing” to air quality
standards non-attainment in other states. The CAIR has been challenged in the
court system, which may delay implementation or modify provisions in the rules.
Minnesota Power is participating in the legal challenge to the CAIR. However, if
the CAIR does go into effect, Minnesota Power expects to be required
to:
|
|
(1) make
emissions reductions;
|
|
|
(2) purchase
mercury, SO2
and NOX
allowances through the EPA’s cap-and-trade system;
and/or
|
| (3) use a combination of both. |
ALLETE
2007 Form 10-K
76
Note
8. Commitments,
Guarantees and Contingencies (Continued)
EPA Clean Air Mercury Rule.
In March 2005, the EPA also announced the final Clean Air Mercury Rule (CAMR)
that would have reduced and permanently capped emissions of electric utility
mercury emissions in the continental United States. On February 8, 2008 the
United States Court of Appeals for the District of Columbia Circuit overturned
the CAMR and remanded the rulemaking to the EPA for reconsideration. The Court’s
decision is subject to appeal. It is uncertain how the EPA will respond; and
therefore it is also uncertain whether mercury emission reductions expected as a
result of implementing AREA Plan expenditures at Taconite Harbor, and
implementation of the 2006 Minnesota Mercury Emission Reduction Law which
applies to Boswell Units 3 and 4, will meet the EPA’s reformed mercury
regulations. (See Minnesota Mercury Emission Law.) Cost estimates for complying
with future mercury regulations under the Clean Air Act are therefore premature
at this time.
Real Estate. As of December
31, 2007, ALLETE Properties, through its subsidiaries, had surety bonds
outstanding of $35.9 million primarily related to performance and maintenance
obligations to governmental entities to construct improvements in the company’s
various projects. The remaining work to be completed on these improvements is
estimated to be approximately $6.4 million, and ALLETE Properties does not
believe it is likely that any of these outstanding bonds will be drawn
upon.
Community Development District
Obligations. Town Center. In March 2005, the Town
Center District issued $26.4 million of tax-exempt, 6% Capital Improvement
Revenue Bonds, Series 2005, which are payable through property tax assessments
on the land owners over 31 years (by May 1, 2036). The bond proceeds (less
capitalized interest, a debt service reserve fund and cost of issuance) were
used to pay for the construction of a portion of the major infrastructure
improvements at Town Center. The bonds are payable from and secured by the
revenue derived from assessments imposed, levied and collected by the Town
Center District. The assessments represent an allocation of the costs of the
improvements, including bond financing costs, to the lands within the Town
Center District benefiting from the improvements. The assessments were billed to
Town Center landowners effective in November 2006. To the extent that we still
own land at the time of the assessment, in accordance with EITF 91-10,
“Accounting for Special Assessments and Tax Increment Financing Entities,” we
will incur the cost of our portion of these assessments, based upon our
ownership of benefited property. At December 31, 2007, we owned approximately 69
percent of the assessable land in the Town Center District (73 percent at
December 31, 2006). As we sell property, the obligation to pay special
assessments will pass to the new landowners. Under current accounting rules,
these bonds are not reflected as debt on our consolidated balance
sheet.
Palm Coast Park. In May 2006, the Palm Coast
Park District issued $31.8 million of tax-exempt, 5.7% Special Assessment
Bonds, Series 2006, which are payable through property tax assessments on the
land owners over 31 years (by May 1, 2037). The bond proceeds (less capitalized
interest, a debt service reserve fund and cost of issuance) were used to pay for
the construction of the major infrastructure improvements at Palm Coast Park and
to mitigate traffic and environmental impacts. The bonds are payable from and
secured by the revenue derived from assessments imposed, levied and collected by
the Palm Coast Park District. The assessments represent an allocation of the
costs of the improvements, including bond financing costs, to the lands within
the Palm Coast Park District benefiting from the improvements. The assessments
will be billed to Palm Coast Park landowners effective in November 2007. To the
extent that we still own land at the time of the assessment, in accordance with
EITF 91-10, “Accounting for Special Assessments and Tax Increment Financing
Entities,” we will incur the cost of our portion of these assessments,
based upon our ownership of benefited property. At December 31, 2007, we
owned 86 percent of the assessable land in the Palm Coast Park District (97
percent at December 31, 2006). As we sell property, the obligation to pay
special assessments will pass to the new landowners. Under current
accounting rules, these bonds are not reflected as debt on our consolidated
balance sheet.
Other. We are involved in
litigation arising in the normal course of business. Also in the normal course
of business, we are involved in tax, regulatory and other governmental audits,
inspections, investigations and other proceedings that involve state and federal
taxes, safety, compliance with regulations, rate base and cost of service
issues, among other things. While the resolution of such matters could have a
material effect on earnings and cash flows in the year of resolution, none of
these matters are expected to materially change our present liquidity position,
or have a material adverse effect on our financial condition.
ALLETE
2007 Form 10-K
77
|
Note
9.
|
Common
Stock and Earnings Per Share
|
Our
Articles of Incorporation contains provisions that, under certain circumstances,
would restrict the payment of common stock dividends. As of December 31, 2007,
no retained earnings were restricted as a result of these
provisions.
|
Summary
of Common Stock
|
Shares
|
Equity
|
|
Thousands
|
Millions
|
|
|
Balance
at December 31, 2004
|
29,651
|
$400.1
|
|
2005 Employee
Stock Purchase Plan
|
13
|
0.5
|
|
Invest Direct (a)
|
238
|
10.5
|
|
Options
and Stock Awards
|
241
|
10.0
|
|
Balance
at December 31, 2005
|
30,143
|
421.1
|
|
2006 Employee
Stock Purchase Plan
|
12
|
0.5
|
|
Invest
Direct (a)
|
218
|
10.0
|
|
Options
and Stock Awards
|
63
|
7.1
|
|
Balance
at December 31, 2006
|
30,436
|
438.7
|
|
2007 Employee
Stock Purchase Plan
|
17
|
0.7
|
|
Invest
Direct (a)
|
331
|
15.1
|
|
Options
and Stock Awards
|
43
|
6.7
|
|
Balance
at December 31, 2007
|
30,827
|
$461.2
|
|
(a)
|
Invest
Direct is ALLETE’s direct stock purchase and dividend reinvestment
plan.
|
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. In July 2006, we amended the rights plan to extend the expiration of the
Rights to July 11, 2009. The amendment also provides that the Company may not
consolidate, merge, or sell a majority of its assets or earning power if doing
so would be counter to the intended benefits of the Rights or would result in
the distribution of Rights to the shareholders of the other parties to the
transaction. Finally, the amendment provides for the creation of a committee of
independent directors to annually review the terms and conditions of the amended
rights plan (Rights Plan), as well as to consider whether termination or
modification of the Rights Plan would be in the best interests of the
shareholders and to make a recommendation based on such review to the Board of
Directors.
The
Rights, which are currently not exercisable or transferable apart from our
common stock, entitle the holder to purchase one-and-a-half one-hundredths
(three two-hundredths) of a share of ALLETE’s Junior Serial Preferred
Stock A, without par value. The purchase price, as defined in the Rights
Plan, remains at $90. These Rights would become exercisable if a person or group
acquires beneficial ownership of 15 percent 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 percent or more of our common stock, subject to certain
exceptions. If the 15 percent threshold is met, each Right entitles the holder
(other than the acquiring person or group) to receive, upon payment of the
purchase price, the number of shares of common stock (or, in certain
circumstances, cash, property or other securities of ours) having a market value
equal to twice the exercise price of the Right. If we are acquired in a merger
or business combination, or more than 50 percent of our assets or earning power
are sold, each exercisable Right entitles the holder to receive, upon payment of
the purchase price, the number of shares of 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 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 Rights
Plan.
ALLETE
2007 Form 10-K
78
Note
9. Common
Stock and Earnings Per Share (Continued)
Earnings Per Share. The
difference between basic and diluted earnings per share arises from outstanding
stock options and performance share awards granted under our Executive and
Director Long-Term Incentive Compensation Plans. In accordance with SFAS 128,
“Earnings Per Share,” for 2007, 0.2 million options to purchase shares of common
stock were excluded from the computation of diluted earnings per share because
the option exercise prices were greater than the average market prices, and
therefore, their effect would be anti-dilutive (no shares were excluded for 2006
and 2005).
|
Reconciliation
of Basic and Diluted
|
|||
|
Earnings
Per Share
|
Dilutive
|
||
|
For
the Year Ended December 31
|
Basic
|
Securities
|
Diluted
|
|
Millions
Except Per Share Amounts
|
|||
|
2007
|
|||
|
Income
from Continuing Operations
|
$87.6
|
–
|
$87.6
|
|
Common
Shares
|
28.3
|
0.1
|
28.4
|
|
Per
Share from Continuing Operations
|
$3.09
|
–
|
$3.08
|
|
2006
|
|||
|
Income
from Continuing Operations
|
$77.3
|
–
|
$77.3
|
|
Common
Shares
|
27.8
|
0.1
|
27.9
|
|
Per
Share from Continuing Operations
|
$2.78
|
–
|
$2.77
|
|
2005
|
|||
|
Income
from Continuing Operations
|
$17.6
|
–
|
$17.6
|
|
Common
Shares
|
27.3
|
0.1
|
27.4
|
|
Per
Share from Continuing Operations
|
$0.65
|
–
|
$0.64
|
|
Note
10.
|
Kendall
County Charge
|
On April
1, 2005, Rainy River Energy, a wholly-owned subsidiary of ALLETE, assigned its
power purchase agreement with LSP-Kendall Energy, LLC, the owner of an energy
generation facility located in Kendall County, Illinois, to Constellation Energy
Commodities. Rainy River Energy paid Constellation Energy Commodities $73
million in cash to assume the power purchase agreement that remains in effect
through mid-September 2017. The federal tax benefits of the payment were
realized through a $24.3 million capital loss carryback refund received in the
third quarter of 2006. In addition, consent, advisory and closing costs of
$4.9 million were incurred to complete the transaction. As a result of this
transaction, ALLETE incurred a charge to operating expenses totaling $77.9
million ($50.4 million after tax, or $1.84 per diluted share) in the second
quarter of 2005.
Note
11. Other
Income (Expense)
|
For
the Year Ended December 31
|
2007
|
2006
|
2005
|
|
Millions
|
|||
|
Loss
on Emerging Technology Investments
|
$(1.3)
|
$(0.9)
|
$(6.1)
|
|
AFUDC
- Equity
|
3.8
|
0.5
|
0.2
|
|
Debt
Prepayment Premium and Unamortized Debt Issuance Costs
|
–
|
(0.6)
|
–
|
|
Investments
and Other Income
|
13.0
|
12.9
|
7.0
|
|
Total
Other Income
|
$15.5
|
$11.9
|
$1.1
|
In August
2006, we redeemed $29.1 million of outstanding Collier County Industrial
Development Refunding Revenue Bonds 6.5% Series 1996 due 2025 with proceeds from
the issuance of $27.8 million of Collier County Industrial Development Variable
Rate Demand Refunding Revenue Bonds Series 2006 due 2025 and internally
generated funds. As a result of an early redemption premium, we recognized an
expense of $0.6 million in the third quarter of 2006.
ALLETE
2007 Form 10-K
79
Note
12. Income
Tax Expense
|
Income
Tax Expense
|
||||||
|
Year
Ended December 31
|
2007
|
2006
|
2005
|
|||
|
Millions
|
||||||
|
Current
Tax Expense
|
||||||
|
Federal
|
$26.5
|
$8.9
|
(a)
|
$27.2
|
(b)
|
|
|
State
|
7.2
|
9.6
|
6.5
|
(b)
|
||
|
Total
Current Tax Expense
|
33.7
|
18.5
|
33.7
|
|||
|
Deferred
Tax Expense (Benefit)
|
||||||
|
Federal
|
10.7
|
28.0
|
(a)
|
(26.4)
|
(b)
|
|
|
State
|
4.7
|
2.0
|
(9.5)
|
|||
|
Total
Deferred Tax Expense (Benefit)
|
15.4
|
30.0
|
(35.9)
|
|||
|
Change
in Valuation Allowance
|
(0.3)
|
(1.1)
|
3.0
|
|||
|
Investment
Tax Credit Amortization
|
(1.1)
|
(1.1)
|
(1.3)
|
|||
|
Income
Tax Expense (Benefit) for Continuing Operations
|
47.7
|
46.3
|
(0.5)
|
|||
|
Income
Tax Expense (Benefit) for Discontinued Operations
|
–
|
(0.6)
|
3.4
|
|||
|
Total
Income Tax Expense
|
$47.7
|
$45.7
|
$2.9
|
|
(a)
|
Included
a current federal tax benefit of $24.3 million and a deferred federal tax
expense of $24.3 million related to the refund from the Kendall County
capital loss carryback. (See Note
10.)
|
|
(b)
|
Included
a current federal tax benefit of $1.3 million, current state tax benefit
of $0.4 million and deferred federal tax benefit of $25.8 million
related to the Kendall County charge. (See Note
10.)
|
|
Reconciliation
of Taxes from Federal Statutory
|
|||
|
Rate
to Total Income Tax Expense for Continuing Operations
|
|||
|
Year
Ended December 31
|
2007
|
2006
|
2005
|
|
Millions
|
|||
|
Income
from Continuing Operations
Before
Minority Interest and Income Taxes
|
$137.2
|
$128.2
|
$19.8
|
|
Statutory
Federal Income Tax Rate
|
35%
|
35%
|
35%
|
|
Income
Taxes Computed at 35% Statutory Federal Rate
|
$48.0
|
$44.9
|
$6.9
|
|
Increase
(Decrease) in Tax Due to:
|
|||
|
Amortization
of Deferred Investment Tax Credits
|
(1.1)
|
(1.1)
|
(1.3)
|
|
State
Income Taxes – Net of Federal Income Tax Benefit
|
7.4
|
6.5
|
1.1
|
|
Depletion
|
(0.9)
|
(1.1)
|
(1.0)
|
|
Employee
Benefits
|
0.4
|
0.1
|
(0.5)
|
|
Domestic
Manufacturing Deduction
|
(1.1)
|
(0.6)
|
(0.4)
|
|
Regulatory
Differences for Utility Plant
|
(2.2)
|
(0.9)
|
(0.6)
|
|
Positive
Resolution of Audit Issues
|
(1.6)
|
–
|
(3.7)
|
|
Other
|
(1.2)
|
(1.5)
|
(1.0)
|
|
Total
Income Tax Expense (Benefit) for Continuing Operations
|
$47.7
|
$46.3
|
$(0.5)
|
The
effective tax rate on income from continuing operations before minority interest
was a 34.8 percent expense for 2007; (36.1 percent expense for 2006; 2.5 percent
benefit for 2005). The 2007 effective tax rate was impacted by state income tax
audit settlements ($1.6 million), deductions for Medicare health subsidies
(included in Employee Benefits, above), domestic manufacturing deduction,
AFUDC-Equity (included in Regulatory Differences for Utility Plant, above),
investment tax credits and depletion. The 2006 effective rate was impacted
by investment tax credits, deductions for Medicare health subsidies, depletion
and the expected use of state capital loss carryforwards, of which a
$1.1 million benefit was included in the state tax
provision.
ALLETE
2007 Form 10-K
80
Note
12. Income Tax Expense (Continued)
|
Deferred
Tax Assets and Liabilities
|
||
|
December
31
|
2007
|
2006
|
|
Millions
|
||
|
Deferred
Tax Assets
|
||
|
Employee
Benefits and Compensation (a)
|
$80.5
|
$95.5
|
|
Property
Related
|
26.5
|
32.8
|
|
Investment
Tax Credits
|
11.4
|
12.1
|
|
Other
|
13.4
|
17.9
|
|
Gross
Deferred Tax Assets
|
131.8
|
158.3
|
|
Deferred
Tax Asset Valuation Allowance
|
(3.3)
|
(3.6)
|
|
Total
Deferred Tax Assets
|
$128.5
|
$154.7
|
|
Deferred
Tax Liabilities
|
||
|
Property
Related
|
$201.7
|
$204.7
|
|
Regulatory
Asset for Benefit Obligations
|
21.6
|
34.8
|
|
Unamortized
Investment Tax Credits
|
16.1
|
17.2
|
|
Employee
Benefits and Compensation
|
19.5
|
13.2
|
|
Fuel
Clause Adjustment
|
10.7
|
6.0
|
|
Other
|
8.1
|
9.3
|
|
Total
Deferred Tax Liabilities
|
$277.7
|
$285.2
|
|
Accumulated
Deferred Income Taxes
|
$149.2
|
$130.5
|
|
Recorded
as:
|
||
|
Net
Current Deferred Tax Liabilities (Assets)
|
$5.0
|
$(0.3)
|
|
Net
Long-Term Deferred Tax Liabilities
|
144.2
|
130.8
|
|
Net
Deferred Tax Liabilities
|
$149.2
|
$130.5
|
|
(a)
|
Includes
Unfunded Employee Benefits
|
Uncertain Tax Positions.
Effective January 1, 2007, we adopted the provisions of FIN 48, “Accounting for
Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109.” As a
result of the implementation of FIN 48, we recognized a $1.0 million increase in
the liability for unrecognized tax benefits. The adoption of FIN 48 also
resulted in a reduction in retained earnings of $0.7 million, a reduction of
deferred tax liabilities of $0.8 million and an increase in accrued interest of
$0.5 million. Subsequent to the implementation of FIN 48, ALLETE’s gross
unrecognized tax benefits were $10.4 million. Of this total, $6.8 million (net
of federal tax benefit on state issues) represents the amount of unrecognized
tax benefits that, if recognized, would favorably affect the effective income
tax rate.
|
Uncertain
Tax Positions
|
|
|
December
31, 2007
|
|
|
Millions
|
Gross
Unrecognized Income Tax Benefits
|
|
Balance
at January 1, 2007
|
$10.4
|
|
Additions
for Tax Positions Related to the Current Year
|
0.8
|
|
Reductions
for Tax Positions Related to the Current Year
|
–
|
|
Additions
for Tax Positions Related to Prior Years
|
–
|
|
Reduction
for Tax Positions Related to Prior Years
|
(2.4)
|
|
Settlements
|
(3.5)
|
|
Balance
at December 31, 2007
|
$5.3
|
|
Less:
Tax Attributable to Temporary Items and Federal Benefit on State
Tax
|
(2.3)
|
|
Total
Unrecognized Tax Benefits that, if Recognized, Would Impact the Effective
Tax Rate as of December 31, 2007
|
$3.0
|
We
recognize interest related to unrecognized tax benefits in interest expense and
penalties in operating expenses in the Consolidated Statement of Income. As of
January 1, 2007, the Company had $1.3 million of accrued interest and no accrued
penalties related to unrecognized tax benefits included in the Consolidated
Balance Sheet. As of December 31, 2007, the liability for the payment of
interest is $0.9 million with no penalties. Due to the settlement of
audits, $0.1 million of interest benefit and no penalties were recognized in the
Consolidated Statement of Income for the year ended December 31,
2007.
We file
income tax returns in the U.S. federal and various state jurisdictions. With few
exceptions, ALLETE is no longer subject to federal examination for years before
2003 or state examinations for years before 2004.
We expect
that the total amount of unrecognized tax benefits as of December 31, 2007, will
change by less than $2.0 million in the next 12 months due to statute
expirations.
ALLETE
2007 Form 10-K
81
Note
13. Discontinued
Operations
Enventis Telecom. In December
2005, we sold all the stock of our telecommunications subsidiary, Enventis
Telecom, to Hickory Tech Corporation of Mankato, Minnesota, for $35.5 million.
The transaction resulted in an after-tax loss of $3.6 million, which was
included in our 2005 loss from discontinued operations. Net cash proceeds
realized from the sale were approximately $29 million after transaction costs,
repayment of debt and payment of income taxes. In accordance with SFAS 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” we have
reported our telecommunications business in discontinued operations for all
periods presented.
Water Services. 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 2004, we essentially concluded our strategy to exit our Water
Services businesses with the sale of our North Carolina water assets and the
sale of the remaining 72 water and wastewater systems in Florida. Aqua Utilities
Florida, Inc. (Aqua Utilities) purchased our North Carolina water assets for
$48 million and assumed approximately $28 million in debt. Aqua
Utilities also purchased 63 of our water and wastewater systems in Florida for
$14 million. Seminole County purchased the remaining 9 Florida systems for a
total of $4 million. The FPSC approved the Seminole County transaction in
September 2004. In December 2005, the FPSC ordered a $1.7 million reduction to
plant investment, which the Company reserved for in 2005, and approved the
transfer of the remaining 63 water and wastewater systems from Florida Water to
Aqua Utilities. In March 2006, the Company paid Aqua Utilities the adjustment
refund amount of $1.7 million.
In
February 2005, we completed the exit from our Water Services businesses in
Georgia with the sale of our wastewater assets for an immaterial gain. In 2005,
we also incurred administrative and other expenses to support Florida Water
transfer proceedings and recorded the $1.7 million rate-base settlement charge
related to the sale by Florida Water of 63 systems to Aqua Utilities mentioned
above.
Financial
results for 2006 reflected additional legal and administrative expenses incurred
by the Company to exit the Water Services businesses. There were no discontinued
operations in 2007.
|
Discontinued
Operations
|
||
|
Summary
Income Statement
|
||
|
For
the Year Ended December 31
|
2006
|
2005
|
|
Millions
|
||
|
Operating
Revenue
|
||
|
Enventis
Telecom
|
–
|
$50.7
|
|
Total
Operating Revenue
|
–
|
$50.7
|
|
Pre-Tax
Income from Operations
|
||
|
Enventis
Telecom
|
–
|
$3.0
|
|
–
|
3.0
|
|
|
Income
Tax Expense
|
||
|
Enventis
Telecom
|
–
|
1.2
|
|
–
|
1.2
|
|
|
Total
Income from Operations
|
–
|
1.8
|
|
Loss
on Disposal
|
||
|
Water
Services
|
$(1.5)
|
(4.5)
|
|
Enventis
Telecom
|
–
|
0.6
|
|
(1.5)
|
(3.9)
|
|
|
Income
Tax Expense (Benefit)
|
||
|
Water
Services
|
(0.6)
|
(2.0)
|
|
Enventis
Telecom
|
–
|
4.2
|
|
(0.6)
|
2.2
|
|
|
Net
Loss on Disposal
|
(0.9)
|
(6.1)
|
|
Loss
from Discontinued Operations
|
$(0.9)
|
$(4.3)
|
ALLETE
2007 Form 10-K
82
Note
14. Other
Comprehensive Income (Loss)
|
Other
Comprehensive Income (Loss)
|
Pre-Tax
|
Tax
Expense
|
Net-of-Tax
|
|
Year
Ended December 31
|
Amount
|
(Benefit)
|
Amount
|
|
Millions
|
|||
|
2007
|
|||
|
Unrealized
Gain on Securities During the Year
|
$1.4
|
$0.3
|
$1.1
|
|
Defined
Benefit Pension and Other Postretirement Plans
|
5.5
|
2.3
|
3.2
|
|
Other
Comprehensive Income
|
$6.9
|
$2.6
|
$4.3
|
|
2006
|
|||
|
Unrealized
Gain on Securities During the Year
|
$2.5
|
$0.6
|
$1.9
|
|
Additional
Pension Liability
|
11.0
|
4.6
|
6.4
|
|
Other
Comprehensive Income
|
$13.5
|
$5.2
|
$8.3
|
|
2005
|
|||
|
Unrealized
Gain on Securities During the Year
|
$1.3
|
$0.7
|
$0.6
|
|
Additional
Pension Liability
|
(3.4)
|
(1.4)
|
(2.0)
|
|
Other
Comprehensive Loss
|
$(2.1)
|
$(0.7)
|
$(1.4)
|
Accumulated
Other Comprehensive Income (Loss)
|
December
31
|
2007
|
2006
|
|
Millions
|
||
|
Unrealized
Gain on Securities
|
$5.1
|
$4.0
|
|
Defined
Benefit Pension and Other Postretirement Plans
|
(9.6)
|
(12.8)
|
|
Total
Accumulated Other Comprehensive Loss
|
$(4.5)
|
$(8.8)
|
Note
15. Pension
and Other Postretirement Benefit Plans
We have
noncontributory defined benefit pension plans covering eligible 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; employer contributions are made through our employee stock ownership
plan (see Note 16), except for BNI Coal, which made cash contributions of $0.4
million in 2007 ($0.7 million in 2006 and 2005). In 2007, we made no
contributions to ALLETE’s defined benefit plan ($8.3 million in
2006).
On August
9, 2006, ALLETE’s Board of Directors approved amendments to the Minnesota Power
and Affiliated Companies Retirement Plan A (Retirement Plan A) and the Minnesota
Power and Affiliated Companies Retirement Savings and Stock Ownership Plan
(RSOP). Retirement Plan A was amended to suspend further crediting service
pursuant to the plan, effective as of September 30, 2006, and to close
Retirement Plan A to new participants. Participants will continue to accrue
benefits under the plan for future pay increases. In conjunction with this
change, the Board of Directors took action to increase benefits employees will
receive under the RSOP. The modification of Retirement Plan A required us to
re-measure our pension expense as of August 9, 2006. As a result of the
re-measurement, Retirement Plan A pension expense for 2006 was reduced by
$0.2 million.
We have
postretirement health care and life insurance plans covering eligible 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. In 2007,
$5.9 million was transferred from the grantor trust to the VEBAs ($3.6 million
in 2006; $11.4 million in 2005).
In
September 2006, the FASB issued SFAS 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans” (SFAS 158). SFAS 158 requires
that employers recognize on a prospective basis the funded status of their
defined benefit pension and other postretirement plans on their consolidated
balance sheet and recognize as a component of other comprehensive income, net of
tax, the gains or losses and prior service costs or credits that arise during
the period but that are not recognized as components of net periodic benefit
cost. SFAS 158 also requires additional disclosures in the notes to financial
statements. SFAS 158 was effective for fiscal years ending after
December 15, 2006.
ALLETE
2007 Form 10-K
83
Note
15. Pension
and Other Postretirement Benefit Plans (Continued)
We use a
September 30 measurement date for the pension and postretirement health and life
plans. Pursuant to SFAS 158, we are required to change our measurement date
to December 31 during the year ending December 31, 2008. On January 1,
2008, ALLETE recorded three months of pension expense as a reduction to retained
earnings in the amount of $1.6 million, net of tax, to reflect the impact of
this measurement date change.
Approximately
82 percent of the defined benefit pension and 69 percent of the postretirement
health and life benefit costs recognized annually by our regulated companies are
recovered through rates filed with our regulatory jurisdictions. It is expected
that these costs will continue to be recovered in future rates in accordance
with the requirements of SFAS 71. As a result, these amounts that are required
to otherwise be recognized in accumulated other comprehensive income under the
provisions of SFAS 158 have been recognized as a long-term regulatory asset on
our consolidated balance sheet. The remaining 18 percent of the defined benefit
pension and 31 percent of the postretirement health and life benefit costs
relate to costs associated with our nonregulated operations and, accordingly,
have been recognized as a charge to accumulated other comprehensive income at
December 31, 2007.
|
Pension
Obligation and Funded Status
|
||
|
At
September 30
|
2007
|
2006
|
|
Millions
|
||
|
Accumulated
Benefit Obligation
|
$384.9
|
$376.1
|
|
Change
in Benefit Obligation
|
||
|
Obligation,
Beginning of Year
|
$417.7
|
$412.4
|
|
Service
Cost
|
5.3
|
9.1
|
|
Interest
Cost
|
23.4
|
22.2
|
|
Actuarial
Gain
|
(7.1)
|
(12.2)
|
|
Benefits
Paid
|
(21.6)
|
(19.8)
|
|
Participant
Contributions
|
2.7
|
6.0
|
|
Obligation,
End of Year
|
$420.4
|
$417.7
|
|
Change
in Plan Assets
|
||
|
Fair
Value, Beginning of Year
|
$364.7
|
$337.1
|
|
Actual
Return on Assets
|
58.9
|
32.5
|
|
Employer
Contribution
|
3.6
|
8.9
|
|
Benefits
Paid
|
(21.6)
|
(19.8)
|
|
Other
|
–
|
6.0
|
|
Fair
Value, End of Year
|
$405.6
|
$364.7
|
|
Funded
Status, End of Year
|
$(14.8)
|
$(53.0)
|
|
Net
Pension Amounts Recognized in Consolidated Balance Sheet Consist
of:
|
||
|
Noncurrent
Assets
|
$29.3
|
–
|
|
Current
Liabilities
|
$0.8
|
$0.8
|
|
Noncurrent
Liabilities
|
$43.3
|
$52.3
|
ALLETE
2007 Form 10-K
84
Note
15.Pension and Other Postretirement Benefit Plans (Continued)
The
pension costs reported on our consolidated balance sheet as regulatory long-term
assets and accumulated other comprehensive income consist of the
following:
|
Pension
Costs
|
||
|
Year
Ended December 31
|
2007
|
2006
|
|
Millions
|
||
|
Net
Loss
|
$31.1
|
$69.9
|
|
Prior
Service Cost
|
3.2
|
3.9
|
|
Transition
Obligation
|
–
|
(0.1)
|
|
Total
Pension Cost
|
$34.3
|
$73.7
|
|
Components
of Net Periodic Pension Expense
|
|||
|
Year
Ended December 31
|
2007
|
2006
|
2005
|
|
Millions
|
|||
|
Service
Cost
|
$5.3
|
$9.1
|
$8.7
|
|
Interest
Cost
|
23.4
|
22.2
|
21.3
|
|
Expected
Return on Assets
|
(30.6)
|
(28.6)
|
(28.2)
|
|
Amortized
Amounts
|
|||
|
Loss
|
3.4
|
4.6
|
3.1
|
|
Prior
Service Cost
|
0.6
|
0.6
|
0.6
|
|
Transition
Obligation
|
–
|
–
|
0.2
|
|
Net
Pension Expense
|
$2.1
|
$7.9
|
$5.7
|
|
Other
Changes in Plan Assets and Benefit Obligations Recognized in Other
Comprehensive Income
|
||
|
Year
Ended December 31
|
2007
|
2006
|
|
Millions
|
||
|
Net
Gain
|
$(35.4)
|
$(5.9)
|
|
Amortization
|
–
|
|
|
Prior
Service Cost
|
(0.6)
|
(0.6)
|
|
Prior
Loss
|
(3.3)
|
(4.6)
|
|
Total
Recognized in Other Comprehensive Income
|
$(39.3)
|
$(11.1)
|
|
Information
for Pension Plans with an
|
||
|
Accumulated
Benefit Obligation in Excess of Plan Assets
|
||
|
At
September 30
|
2007
|
2006
|
|
Millions
|
||
|
Projected
Benefit Obligation
|
$170.6
|
$180.4
|
|
Accumulated
Benefit Obligation
|
$188.3
|
$160.6
|
|
Fair
Value of Plan Assets
|
$145.3
|
$130.9
|
ALLETE
2007 Form 10-K
85
Note
15. Pension
and Other Postretirement Benefit Plans (Continued)
|
Postretirement
Health and Life Obligation and Funded Status
|
||
|
At
September 30
|
2007
|
2006
|
|
Millions
|
||
|
Change
in Benefit Obligation
|
||
|
Obligation,
Beginning of Year
|
$138.9
|
$136.9
|
|
Service
Cost
|
4.2
|
4.4
|
|
Interest
Cost
|
7.9
|
7.4
|
|
Actuarial
Loss (Gain)
|
7.5
|
(4.7)
|
|
Participation
Contributions
|
1.4
|
1.4
|
|
Benefits
Paid
|
(6.2)
|
(6.4)
|
|
Amendments
|
–
|
(0.1)
|
|
Obligation,
End of Year
|
$153.7
|
$138.9
|
|
Change
in Plan Assets
|
||
|
Fair
Value, Beginning of Year
|
$78.9
|
$60.9
|
|
Actual
Return on Assets
|
9.6
|
5.8
|
|
Employer
Contribution
|
6.8
|
17.2
|
|
Participation
Contributions
|
1.4
|
1.4
|
|
Benefits
Paid
|
(5.8)
|
(6.4)
|
|
Fair
Value, End of Year
|
$90.9
|
$78.9
|
|
Funded
Status, End of Year
|
($62.8)
|
$(60.0)
|
|
Net
Pension Amounts Recognized in Consolidated Balance Sheet Consist
of:
|
||
|
Current
Liabilities
|
$0.6
|
|
|
Noncurrent
Liabilities
|
$62.2
|
$60.0
|
Under
SFAS 106, “Employers’ Accounting for Postretirement Benefits Other Than
Pensions,” only assets in the VEBAs are treated as plan assets in the above
table for the purpose of determining funded status. In addition to the
postretirement health and life assets reported in the previous table, we had
$22.8 million in an irrevocable grantor trust at December 31, 2007 ($25.6
million at December 31, 2006). We consolidate the irrevocable grantor trust and
it is included in Investments on our consolidated balance sheet.
The
postretirement health and life costs reported on our consolidated balance sheet
as regulatory long-term assets and accumulated other comprehensive income
consist of the following:
|
Postretirement
Health and Life Costs
|
||
|
Year
Ended December 31
|
2007
|
2006
|
|
Millions
|
||
|
Net
Loss
|
$22.7
|
$19.2
|
|
Prior
Service Cost
|
(0.1)
|
(0.1)
|
|
Transition
Obligation
|
12.6
|
15.0
|
|
Total
Postretirement Health and Life Costs
|
$35.2
|
$34.1
|
|
Components
of Net Periodic Postretirement Health and Life Expense
(Income)
|
|||
|
Year
Ended December 31
|
2007
|
2006
|
2005
|
|
Millions
|
|||
|
Service
Cost
|
$4.2
|
$4.4
|
$4.0
|
|
Interest
Cost
|
7.8
|
7.4
|
6.7
|
|
Expected
Return on Assets
|
(6.5)
|
(5.6)
|
(4.8)
|
|
Amortized
Amounts
|
|||
|
Loss
|
1.0
|
1.7
|
0.7
|
|
Transition
Obligation
|
2.4
|
2.4
|
2.4
|
|
Net
Expense
|
$8.9
|
$10.3
|
$9.0
|
ALLETE
2007 Form 10-K
86
Note
15. Pension
and Other Postretirement Benefit Plans (Continued)
|
Postretirement
|
||
|
Estimated
Future Benefit Payments
|
Pension
|
Health
and Life
|
|
Millions
|
||
|
2008
|
$22.5
|
$5.9
|
|
2009
|
$23.1
|
$6.7
|
|
2010
|
$24.0
|
$7.6
|
|
2011
|
$25.0
|
$8.4
|
|
2012
|
$25.9
|
$9.0
|
|
Years
2013 – 2017
|
$148.2
|
$54.8
|
The
pension and postretirement health and life costs recorded in other long-term
assets and accumulated other comprehensive income expected to be recognized as a
component of net pension and postretirement benefit costs for the year ending
December 31, 2008, are as follows:
|
Postretirement
|
||
|
Pension
|
Health
and Life
|
|
|
Millions
|
||
|
Net
Loss
|
$1.5
|
$1.4
|
|
Prior
Service Costs
|
$0.6
|
–
|
|
Transition
Obligations
|
–
|
$2.5
|
|
Total
Pension and Postretirement Health and Life Costs
|
$2.1
|
$3.9
|
|
Weighted-Average
Assumptions
|
||
|
Used
to Determine Benefit Obligation
|
||
|
At
September 30
|
2007
|
2006
|
|
Discount
Rate
|
6.25%
|
5.75%
|
|
Rate
of Compensation Increase
|
4.3
– 4.6%
|
3.5
– 4.5%
|
|
Health
Care Trend Rates
|
||
|
Trend
Rate
|
10%
|
10%
|
|
Ultimate
Trend Rate
|
5%
|
5%
|
|
Year
Ultimate Trend Rate Effective
|
2012
|
2011
|
|
Weighted-Average
Assumptions
|
|||
|
Used
to Determine Net Periodic Benefit Costs
|
|||
|
Year
Ended December 31
|
2007
|
2006
|
2005
|
|
Discount
Rate
|
5.75%
|
5.50%
|
5.75%
|
|
Expected
Long-Term Return on Plan Assets
|
|||
|
Pension
|
9.0%
|
9.0%
|
9.0%
|
|
Postretirement
Health and Life
|
5.0
– 9.0%
|
5.0
– 9.0%
|
5.0
– 9.0%
|
|
Rate
of Compensation Increase
|
4.3
– 4.6%
|
3.5
– 4.5%
|
3.5
– 4.5%
|
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.
ALLETE
2007 Form 10-K
87
Note
15. Pension
and Other Postretirement Benefit Plans (Continued)
Currently
for plan valuation purposes, the discount rate is determined considering
high-quality long-term corporate bond rates at the valuation date. The discount
rate is compared to the Citigroup Pension Discount Curve adjusted for ALLETE’s
specific cash flows.
|
Sensitivity
of a One-Percentage-Point
|
One
Percent
|
One
Percent
|
|
Change
in Health Care Trend Rates
|
Increase
|
Decrease
|
|
Millions
|
||
|
Effect
on Total of Postretirement Health and Life Service and Interest
Cost
|
$1.9
|
$(1.5)
|
|
Effect
on Postretirement Health and Life Obligation
|
$18.4
|
$(15.1)
|
|
Pension
|
Postretirement
Health
and Life (a)
|
|||
|
Plan
Asset Allocations
|
2007
|
2006
|
2007
|
2006
|
|
Equity
Securities
|
61.3%
|
65.1%
|
61.6%
|
68.9%
|
|
Debt
Securities
|
25.1%
|
29.6%
|
27.9%
|
30.6%
|
|
Real
Estate
|
1.6%
|
0.8%
|
–
|
–
|
|
Private
Equity
|
9.4%
|
4.2%
|
5.5%
|
–
|
|
Cash
|
2.6%
|
0.3%
|
5.0%
|
0.5%
|
|
100.0%
|
100.0%
|
100.0%
|
100.0%
|
|
|
(a)
|
Includes
VEBAs and irrevocable grantor
trust.
|
Pension
plan equity securities did not include ALLETE common stock at September 30, 2007
or 2006.
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.
|
Postretirement
|
||
|
Plan
Asset Target Allocations
|
Pension
|
Health and Life (a)
|
|
Equity
Securities
|
60%
|
69%
|
|
Debt
Securities
|
24
|
30
|
|
Real
Estate
|
9
|
–
|
|
Private
Equity
|
6
|
–
|
|
Cash
|
1
|
1
|
|
100%
|
100%
|
(a) Includes
VEBAs and irrevocable grantor trust.
In May
2004, the FASB issued FSP 106-2, “Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug, Improvement and Modernization Act of 2003
(Act),” which provides accounting and disclosure guidance for employers that
sponsor postretirement health care plans that provide prescription drug
benefits. FSP 106-2 requires that the accumulated postretirement benefit
obligation and postretirement benefit cost reflect the impact of the Act upon
adoption. We provide postretirement health benefits that include prescription
drug benefits and have concluded that our prescription drug benefits qualified
us for the federal subsidy to be provided for under the Act. We adopted
FSP 106-2 in the third quarter of 2004. The deduction for Medicare health
subsidies reduced our after-tax postretirement medical expense by $2.3 million
for 2007 ($2.4 million for 2006; $3.5 million in 2005).
In 2005,
we determined that our postretirement health care plans met the requirements of
the Centers for Medicare and Medicaid Services’ (CMS) regulations, and enrolled
with the CMS to begin recovering the subsidy. We received the first subsidy
payment of $0.3 million in May 2007 for 2006 credits.
ALLETE
2007 Form 10-K
88
Note
16. Employee
Stock and Incentive Plans
Employee Stock Ownership Plan.
We sponsor a leveraged employee stock ownership plan (ESOP) within the RSOP. As
of their date of hire, all employees of ALLETE, SWL&P and Minnesota Power
Affiliate Resources are eligible to contribute to the plan. In 1990, the ESOP
issued a $75 million note (term not to exceed 25 years at 10.25 percent) to us
as consideration for 2.8 million shares (1.9 million shares adjusted for stock
splits) of our newly issued common stock. The note was refinanced in 2006 at 6
percent. We make 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 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. As
shares are released from collateral, we report compensation expense equal to the
current market price of the shares less dividends on allocated shares. 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 $9.5 million in 2007
($6.9 million in 2006; $5.5 million in 2005).
Pursuant
to AICPA Statement of Position 93-6, “Employers’ Accounting for Employee Stock
Ownership Plans,” unallocated ALLETE common stock currently held and purchased
by the ESOP will be treated as unearned ESOP shares and not considered as
outstanding for earnings per share computations. ESOP shares are included in
earnings per share computations after they are allocated to
participants.
|
Year
Ended December 31
|
2007
|
2006
|
2005
|
|
Millions
|
|||
|
ESOP
Shares
|
|||
|
Allocated
|
1.8
|
1.7
|
1.9
|
|
Unallocated
|
2.2
|
2.5
|
2.6
|
|
Total
|
4.0
|
4.2
|
4.5
|
|
Fair
Value of Unallocated Shares
|
$87.1
|
$115.2
|
$115.0
|
Stock-Based Compensation.
Stock Incentive Plan.
Under our Executive Long-Term Incentive Compensation Plan (Executive
Plan), share-based awards may be issued to key employees through a broad range
of methods, including non-qualified and incentive stock options, performance
shares, performance units, restricted stock, stock appreciation rights and other
awards. There are 1.5 million shares of common stock reserved for issuance under
the Executive Plan, with 0.9 million of these shares available for issuance as
of December 31, 2007.
We had a
Director Long-Term Stock Incentive Plan (Director Plan) which expired on January
1, 2006. No grants have been made since 2003 under the Director Plan.
Approximately 7,758 options were outstanding under the Director Plan at
December 31, 2007.
ALLETE
2007 Form 10-K
89
Note
16. Employee
Stock and Incentive Plans (Continued)
We
currently have the following types of share-based awards
outstanding:
Non-Qualified Stock Options.
The options allow for the purchase of shares of common stock at a price equal to
the market value of our common stock at the date of grant. Options become
exercisable beginning one year after the grant date, with one-third vesting each
year over three years. Options may be exercised up to ten years following the
date of grant. In the case of qualified retirement, death or disability, options
vest immediately and the period over which the options can be exercised is three
years. Employees have up to three months to exercise vested options upon
voluntary termination or involuntary termination without cause. All options are
cancelled upon termination for cause. All options vest immediately upon
retirement, death, disability or a change of control, as defined in the award
agreement. We determine the fair value of options using the Black-Scholes
option-pricing model. The estimated fair value of options, including the effect
of estimated forfeitures, is recognized as expense on the straight-line basis
over the options’ vesting periods, or the accelerated vesting period if the
employee is retirement eligible.
The
following assumptions were used in determining the fair value of stock options
granted during 2007, under the Black-Scholes option-pricing model:
|
2007
|
2006
|
|
|
Risk-Free
Interest Rate
|
4.8%
|
4.5%
|
|
Expected
Life
|
5
Years
|
5
Years
|
|
Expected
Volatility
|
20%
|
20%
|
|
Dividend
Growth Rate
|
5%
|
5%
|
The
risk-free interest rate for periods within the contractual life of the option is
based on the U.S. Treasury yield curve in effect at the grant date. Expected
volatility is estimated based on the historic volatility of our stock and the
stock of our peer group companies. We utilize historical option exercise and
employee pre-vesting termination data to estimate the option life. The dividend
growth rate is based upon historical growth rates in our dividends.
Performance Shares. Under
these awards, the number of shares earned is contingent upon attaining specific
performance targets over a three-year performance period. In the case of
qualified retirement, death or disability during a performance period, a
pro-rata portion of the award will be earned at the conclusion of the
performance period based on the performance goals achieved. In the case of
termination of employment for any reason other than qualified retirement, death
or disability, no award will be earned. If there is a change in control, a
pro-rata portion of the award will be paid based on the greater of actual
performance up to the date of the change in control or target performance. The
fair value of these awards is equal to the grant date fair value which is
estimated based upon the assumed share-based payment three years from the date
of grant. Compensation cost is recognized over the three-year performance period
based on our estimate of the number of shares which will be earned by the award
recipients.
Employee Stock Purchase Plan
(ESPP). Under our ESPP, eligible employees may purchase ALLETE common
stock at a 5 percent discount from the market price. Because the discount is not
greater than 5 percent, we are not required by SFAS 123R to apply fair value
accounting to these awards.
RSOP. Shares held in our RSOP
are excluded from SFAS 123R and are accounted for in accordance with the AICPA
Statement of Position No. 93-6, “Employers’ Accounting for Employee Stock
Ownership Plans.”
The
following share-based compensation expense amounts were recognized in our
consolidated statement of income for the periods presented since our adoption of
SFAS 123R.
|
Share-Based
Compensation Expense
|
||
|
For
the Year Ended December 31
|
2007
|
2006
|
|
Millions
|
||
|
Stock
Options
|
$0.8
|
$0.8
|
|
Performance
Shares
|
1.0
|
1.0
|
|
Total
Share-Based Compensation Expense
|
$1.8
|
$1.8
|
|
Income
Tax Benefit
|
$0.7
|
$0.7
|
There
were no capitalized stock-based compensation costs at December 31,
2007.
As of
December 31, 2007, the total unrecognized compensation cost for performance
share awards not yet recognized in our statements of income was $1.1 million.
This amount is expected to be recognized over a weighted-average period of 1.7
years.
ALLETE
2007 Form 10-K
90
Note
16. Employee
Stock and Incentive Plans (Continued)
The
following table presents the pro forma effect of stock-based compensation had we
applied the provisions of SFAS 123 for the year ended December 31,
2005.
|
Pro
Forma Effect of SFAS 123
|
|
|
Accounting
for Stock-Based Compensation
|
2005
|
|
Millions
Except Per Share Amounts
|
|
|
Net
Income
|
|
|
As
Reported
|
$13.3
|
|
Less: Employee
Stock Compensation Expense Determined Under SFAS 123 – Net of
Tax
|
1.5
|
|
Plus: Employee
Stock Compensation Expense Included in Net Income – Net of
Tax
|
1.5
|
|
Pro
Forma Net Income
|
$13.3
|
|
Basic
Earnings Per Share
|
|
|
As
Reported
|
$0.49
|
|
Pro
Forma
|
$0.49
|
|
Diluted
Earnings Per Share
|
|
|
As
Reported
|
$0.48
|
|
Pro
Forma
|
$0.48
|
In the
previous table, the pro forma expense determined under SFAS 123 for employee
stock options granted was calculated using the Black-Scholes option-pricing
model with the following assumptions:
|
2005
|
|
|
Risk-Free
Interest Rate
|
3.7%
|
|
Expected
Life
|
5
Years
|
|
Expected
Volatility
|
20.0%
|
|
Dividend
Growth Rate
|
5%
|
The
following table presents information regarding our outstanding stock options for
the year ended December 31, 2007.
|
Weighted-Average
|
||||
|
Weighted-Average
|
Aggregate
|
Remaining
|
||
|
Number
of
|
Exercise
|
Intrinsic
|
Contractual
|
|
|
Options
|
Price
|
Value
|
Term
|
|
|
Millions
|
||||
|
Outstanding
at December 31, 2006
|
438,351
|
$37.35
|
$4.0
|
7.2
years
|
|
Granted
|
100,702
|
$48.65
|
||
|
Exercised
|
(28,061)
|
$32.80
|
||
|
Forfeited
|
–
|
–
|
||
|
Outstanding
at December 31, 2007
|
510,992
|
$39.83
|
$(0.1)
|
6.8
years
|
|
Exercisable
at December 31, 2007
|
327,473
|
$36.43
|
$1.0
|
6.0
years
|
|
Fair
Value of Options
|
||||
|
Granted
During the Year
|
$8.15
|
The
weighted-average grant-date fair value of options was $6.92 for 2007 ($6.48 for
2006). The intrinsic value of a stock award is the amount by which the fair
value of the underlying stock exceeds the exercise price of the award. The total
intrinsic value of options exercised was $0.4 million during 2007 ($0.6 in
2006).
At
December 31, 2007, options outstanding consisted of 0.1 million with exercise
prices ranging from $18.85 to $29.79, 0.2 million with exercise prices ranging
from $37.76 to $41.35 and 0.2 million with exercise prices ranging from $44.15
to $48.65. The options with exercise prices ranging from $18.85 to $29.79 have
an average remaining contractual life of 3.8 years; all are exercisable at
December 31, 2007, at a weighted average price of $26.70. The options with
exercise prices ranging from $37.76 to $41.35 have an average remaining
contractual life of 6.6 years; all are exercisable on December 31, 2007, at a
weighted average price of $39.92. The options with exercise prices ranging
from $44.15 to $48.65 have an average remaining contractual life of 8.5
years; less than 0.1 million are exercisable on December 31, 2007, at a
weighted average price of $46.25.
In
February 2007, we granted stock options to purchase 0.1 million shares of common
stock (exercise price of $48.65 per share).
ALLETE
2007 Form 10-K
91
Note
16. Employee
Stock and Incentive Plans (Continued)
Performance Shares. The
following table presents information regarding our nonvested performance shares
for the year ended December 31, 2007.
|
Weighted-Average
|
||
|
Number
of
|
Grant
Date
|
|
|
Shares
|
Fair
Value
|
|
|
Nonvested
at December 31, 2006
|
71,004
|
$45.39
|
|
Granted
|
23,974
|
$54.48
|
|
Awarded
|
(24,714)
|
$42.80
|
|
Forfeited
|
(3,299)
|
$49.70
|
|
Nonvested
at December 31, 2007
|
66,965
|
$49.39
|
Less than
0.1 million performance share grants were awarded in February 2007 for
performance periods ending in 2009. 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 $1.1
million.
Less than
0.1 million performance share grants were awarded in February 2006 for the
performance periods ending in 2007. The grant date fair value of the share
awards was $1.0 million. Performance share grants related to the 2007 period
will be issued in early 2008.
ALLETE
2007 Form 10-K
92
Note
17. Quarterly
Financial Data (Unaudited)
Information
for any one quarterly period is not necessarily indicative of the results which
may be expected for the year.
|
Quarter
Ended
|
Mar.
31
|
Jun.
30
|
Sept.
30
|
Dec.
31
|
|
Millions
Except Earnings Per Share
|
||||
|
2007
|
||||
|
Operating
Revenue
|
$205.3
|
$223.3
|
$200.8
|
$212.3
|
|
Operating
Income from Continuing Operations
|
$41.3
|
$33.9
|
$24.7
|
$33.8
|
|
Income
from Continuing Operations
|
$26.3
|
$22.6
|
$16.5
|
$22.2
|
|
Net
Income
|
$26.3
|
$22.6
|
$16.5
|
$22.2
|
|
Earnings
Per Share of Common Stock
|
||||
|
Basic Continuing
Operations
|
$0.93
|
$0.80
|
$0.58
|
$0.78
|
|
Diluted Continuing
Operations
|
$0.93
|
$0.80
|
$0.58
|
$0.77
|
|
2006
|
||||
|
Operating
Revenue
|
$192.5
|
$178.3
|
$199.1
|
$197.2
|
|
Operating
Income from Continuing Operations
|
$36.4
|
$26.3
|
$38.7
|
$39.3
|
|
Income
from Continuing Operations
|
$18.8
|
$13.6
|
$21.9
|
$23.0
|
|
Loss
from Discontinued
Operations
|
–
|
(0.4)
|
(0.1)
|
(0.4)
|
|
Net
Income
|
$18.8
|
$13.2
|
$21.8
|
$22.6
|
|
Earnings
(Loss) Per Share of Common Stock
|
||||
|
Basic Continuing
Operations
|
$0.68
|
$0.50
|
$0.78
|
$0.82
|
|
Discontinued
Operations
|
–
|
(0.02)
|
–
|
(0.01)
|
|
$0.68
|
$0.48
|
$0.78
|
$0.81
|
|
|
Diluted Continuing
Operations
|
$0.68
|
$0.49
|
$0.78
|
$0.82
|
|
Discontinued
Operations
|
–
|
(0.02)
|
–
|
(0.01)
|
|
$0.68
|
$0.47
|
$0.78
|
$0.81
|
ALLETE
2007 Form 10-K
93
Schedule
II
ALLETE
Valuation
and Qualifying Accounts and Reserves
|
Balance
at
|
Additions
|
Deductions
|
Balance
at
|
||
|
Beginning
|
Charged
|
Other
|
from
|
End
of
|
|
|
For
the Year Ended December 31
|
of
Year
|
to
Income
|
Changes
|
Reserves
(a)
|
Period
|
|
Millions
|
|||||
|
Reserve
Deducted from Related Assets
|
|||||
|
Reserve
For Uncollectible Accounts
|
|||||
|
2007 Trade
Accounts Receivable
|
$1.1
|
$1.0
|
–
|
$1.1
|
$1.0
|
|
Finance
Receivables – Long-Term
|
0.2
|
–
|
–
|
–
|
0.2
|
|
2006 Trade
Accounts Receivable
|
1.0
|
0.7
|
_
|
0.6
|
1.1
|
|
Finance
Receivables – Long-Term
|
0.6
|
_
|
_
|
0.4
|
0.2
|
|
2005 Trade
Accounts Receivable
|
1.0
|
1.1
|
–
|
1.1
|
1.0
|
|
Finance
Receivables – Long-Term
|
0.7
|
–
|
–
|
0.1
|
0.6
|
|
Deferred
Asset Valuation Allowance
|
|||||
|
2007 Deferred
Tax Assets
|
3.6
|
(0.3)
|
–
|
–
|
3.3
|
|
2006 Deferred
Tax Assets
|
4.1
|
(1.1)
|
$0.6
|
–
|
3.6
|
|
2005 Deferred
Tax Assets
|
1.1
|
3.8
|
–
|
0.8
|
4.1
|
|
(a)
|
Includes
uncollectible accounts written off.
|
ALLETE
2007 Form 10-K
94
Exhibit
4(a)3
ALLETE
2007 Form 10-K
ALLETE,
Inc.
(formerly
Minnesota Power & Light Company
and
formerly Minnesota Power, Inc.)
TO
THE
BANK OF NEW YORK
(formerly
Irving Trust Company)
AND
DOUGLAS
J. MacINNES
(successor
to Richard H. West, J. A. Austin,
E.
J. McCabe, D. W. May, J. A. Vaughan and W. T. Cunningham)
As
Trustees under
ALLETE, Inc.’s
Mortgage
and Deed of
Trust dated as of
September
1,
1945
Twenty-seventh
Supplemental Indenture
Providing,
among other things, for
First
Mortgage Bonds, 4.86% Series due April 1, 2013
(Thirty-third
Series)
Dated
as ofFebruary 1, 2008
TWENTY-SEVENTH
SUPPLEMENTAL INDENTURE
THIS
INDENTURE, dated as of February 1, 2008, by and between ALLETE, Inc.
(formerly Minnesota Power & Light Company and formerly Minnesota Power,
Inc.), a corporation of the State of Minnesota, whose post office address is
30
West Superior Street, Duluth, Minnesota 55802 (hereinafter sometimes called
the
“Company”), and THE BANK OF NEW YORK (formerly Irving Trust Company), a
corporation of the State of New York, whose post office address is 101 Barclay
Street, New York, New York 10286 (hereinafter sometimes called the “Corporate
Trustee”), and DOUGLAS J. MACINNES (successor to Richard H. West, J. A. Austin,
E. J. McCabe, D. W. May, J. A. Vaughan and W. T. Cunningham), whose post office
address is 1784 W. McGalliard Avenue, Hamilton, New Jersey 08610 (said Douglas
J. MacInnes being hereinafter sometimes called the “Co-Trustee” and the
Corporate Trustee and the Co-Trustee being hereinafter together sometimes called
the “Trustees”), as Trustees under the Mortgage and Deed of Trust, dated as of
September 1, 1945, between the Company and Irving Trust Company and Richard
H.
West, as Trustees, securing bonds issued and to be issued as provided therein
(hereinafter sometimes called the “Mortgage”), reference to which Mortgage is
hereby made, this indenture (hereinafter sometimes called the “Twenty-seventh
Supplemental Indenture”) being supplemental thereto:
WHEREAS,
the Mortgage was filed and recorded in various official records in the State
of
Minnesota; and
WHEREAS,
an instrument, dated as of October 16, 1957, was executed and delivered under
which J. A. Austin succeeded Richard H. West as Co-Trustee under the Mortgage,
and such instrument was filed and recorded in various official records in the
State of Minnesota; and
WHEREAS,
an instrument, dated as of April 4, 1967, was executed and delivered under
which
E. J. McCabe in turn succeeded J. A. Austin as Co-Trustee under the Mortgage,
and such instrument was filed and recorded in various official records in the
State of Minnesota; and
WHEREAS,
under the Sixth Supplemental Indenture, dated as of August 1, 1975, to which
reference is hereinafter made, D. W. May in turn succeeded E. J. McCabe as
Co-Trustee under the Mortgage; and
WHEREAS,
an instrument, dated as of June 25, 1984, was executed and delivered under
which
J. A. Vaughan in turn succeeded D. W. May as Co-Trustee under the Mortgage,
and
such instrument was filed and recorded in various official records in the State
of Minnesota; and
WHEREAS,
an instrument, dated as of July 27, 1988, was executed and delivered under
which
W. T. Cunningham in turn succeeded J. A. Vaughan as Co-Trustee under the
Mortgage, and such instrument was filed and recorded in various official records
in the State of Minnesota; and
WHEREAS,
on May 12, 1998, the Company filed Amended and Restated Articles of
Incorporation with the Secretary of State of the State of Minnesota changing
its
name from Minnesota Power & Light Company to Minnesota Power, Inc. effective
May 27, 1998; and
WHEREAS,
an instrument, dated as of April 15, 1999, was executed and delivered under
which Douglas J. MacInnes in turn succeeded W. T. Cunningham as Co-Trustee
under
the Mortgage, and such instrument was filed and recorded in various official
records in the State of Minnesota; and
WHEREAS,
on May 8, 2001, the Company filed Amended and Restated Articles of Incorporation
with the Secretary of State of the State of Minnesota changing its name from
Minnesota Power, Inc. to ALLETE, Inc.; and
WHEREAS,
by the Mortgage the Company covenanted, among other things, that it would
execute and deliver such supplemental indenture or indentures and such further
instruments and do such further acts as might be necessary or proper to carry
out more effectually the purposes of the Mortgage and to make subject to the
lien of the Mortgage any property thereafter acquired and intended to be subject
to the lien thereof; and
WHEREAS,
for said purposes, among others, the Company executed and delivered the
following indentures supplemental to the Mortgage:
|
Designation
|
Dated
as of
|
|
First
Supplemental Indenture
|
March
1, 1949
|
|
Second
Supplemental Indenture
|
July
1, 1951
|
|
Third
Supplemental Indenture
|
March
1, 1957
|
|
Fourth
Supplemental Indenture
|
January
1, 1968
|
|
Fifth
Supplemental Indenture
|
April
1, 1971
|
|
Sixth
Supplemental Indenture
|
August
1, 1975
|
|
Seventh
Supplemental Indenture
|
September
1, 1976
|
|
Eighth
Supplemental Indenture
|
September
1, 1977
|
|
Ninth
Supplemental Indenture
|
April
1, 1978
|
|
Tenth
Supplemental Indenture
|
August
1, 1978
|
|
Eleventh
Supplemental Indenture
|
December
1, 1982
|
|
Twelfth
Supplemental Indenture
|
April
1, 1987
|
|
Thirteenth
Supplemental Indenture
|
March
1, 1992
|
|
Fourteenth
Supplemental Indenture
|
June
1, 1992
|
|
Fifteenth
Supplemental Indenture
|
July
1, 1992
|
|
Sixteenth
Supplemental Indenture
|
July
1, 1992
|
|
Seventeenth
Supplemental Indenture
|
February
1, 1993
|
|
Eighteenth
Supplemental Indenture
|
July
1, 1993
|
|
Nineteenth
Supplemental Indenture
|
February
1, 1997
|
|
Twentieth
Supplemental Indenture
|
November
1, 1997
|
|
Twenty-first
Supplemental Indenture
|
October
1, 2000
|
|
Twenty-second
Supplemental Indenture
|
July
1, 2003
|
|
Twenty-third
Supplemental Indenture
|
August
1, 2004
|
|
Twenty-fourth
Supplemental Indenture
|
March
1, 2005
|
|
Twenty-fifth
Supplemental Indenture
|
December
1, 2005
|
|
Twenty-sixth
Supplemental Indenture
|
October
1, 2006
|
which
supplemental indentures were filed and recorded in various official records
in
the State of Minnesota; and
WHEREAS,
the Company has heretofore issued, in accordance with the provisions of the
Mortgage, as heretofore supplemented, the following series of First Mortgage
Bonds:
|
Series
|
Principal
|
Principal
|
|
Amount
|
Amount
|
|
|
Issued
|
Outstanding
|
|
|
3-1/8%
Series due 1975
|
$26,000,000
|
None
|
|
3-1/8%
Series due 1979
|
4,000,000
|
None
|
|
3-5/8%
Series due 1981
|
10,000,000
|
None
|
|
4-3/4%
Series due 1987
|
12,000,000
|
None
|
|
6-1/2%
Series due 1998
|
18,000,000
|
None
|
|
8-1/8%
Series due 2001
|
23,000,000
|
None
|
|
10-1/2%
Series due 2005
|
35,000,000
|
None
|
|
8.70%
Series due 2006
|
35,000,000
|
None
|
|
8.35%
Series due 2007
|
50,000,000
|
None
|
|
9-1/4%
Series due 2008
|
50,000,000
|
None
|
|
Pollution
Control Series A
|
111,000,000
|
None
|
|
Industrial
Development Series A
|
2,500,000
|
None
|
|
Industrial
Development Series B
|
1,800,000
|
None
|
|
Industrial
Development Series C
|
1,150,000
|
None
|
|
Pollution
Control Series B
|
13,500,000
|
None
|
|
Pollution
Control Series C
|
2,000,000
|
None
|
|
Pollution
Control Series D
|
3,600,000
|
None
|
|
7-3/4%
Series due 1994
|
55,000,000
|
None
|
|
7-3/8%
Series due March 1, 1997
|
60,000,000
|
None
|
|
7-3/4%
Series due June 1, 2007
|
55,000,000
|
None
|
|
7-1/2%
Series due August 1, 2007
|
35,000,000
|
None
|
|
Pollution
Control Series E
|
111,000,000
|
None
|
|
7%
Series due March 1, 2008
|
50,000,000
|
None
|
|
6-1/4%
Series due July 1, 2003
|
25,000,000
|
None
|
|
7%
Series due February 15, 2007
|
60,000,000
|
None
|
|
6.68%
Series due November 15, 2007
|
20,000,000
|
None
|
|
Floating
Rate Series due October 20, 2003
|
250,000,000
|
None
|
|
Collateral
Series A
|
255,000,000
|
None
|
|
Pollution
Control Series F
|
111,000,000
|
111,000,000
|
|
5.28%
Series due August 1, 2020
|
35,000,000
|
35,000,000
|
|
5.69%
Series due March 1, 2036
|
50,000,000
|
50,000,000
|
|
5.99%
Series due February 1, 2027
|
60,000,000
|
60,000,000
|
which
bonds are also hereinafter sometimes called bonds of the First through
Thirty-second Series, respectively; and
WHEREAS,
Section 8 of the Mortgage provides that the form of each series of bonds (other
than the First Series) issued thereunder and of coupons to be attached to coupon
bonds of such series shall be established by Resolution of the Board of
Directors of the Company and that the form of such series, as established by
said Board of Directors, shall specify the descriptive title of the bonds and
various other terms thereof, and may also contain such provisions not
inconsistent with the provisions of the Mortgage as the Board of Directors
may,
in its discretion, cause to be inserted therein expressing or referring to
the
terms and conditions upon which such bonds are to be issued and/or secured
under
the Mortgage; and
WHEREAS,
Section 120 of the Mortgage provides, among other things, that any power,
privilege or right expressly or impliedly reserved to or in any way conferred
upon the Company by any provision of the Mortgage, whether such power, privilege
or right is in any way restricted or is unrestricted, may (to the extent
permitted by law) be in whole or in part waived or surrendered or subjected
to
any restriction if at the time unrestricted or to additional restriction if
already restricted, and the Company may enter into any further covenants,
limitations or restrictions for the benefit of any one or more series of bonds
issued thereunder, or the Company may cure any ambiguity contained therein,
or
in any supplemental indenture, or may establish the terms and provisions of
any
series of bonds (other than said First Series) by an instrument in writing
executed and acknowledged by the Company in such manner as would be necessary
to
entitle a conveyance of real estate to record in all of the states in which
any
property at the time subject to the lien of the Mortgage shall be situated;
and
WHEREAS,
the Company now desires to create a new series of bonds and (pursuant to the
provisions of Section 120 of the Mortgage) to add to its covenants and
agreements contained in the Mortgage, as heretofore supplemented, certain other
covenants and agreements to be observed by it and to alter and amend in certain
respects the covenants and provisions contained in the Mortgage, as heretofore
supplemented; and
WHEREAS,
the execution and delivery by the Company of this Twenty-seventh Supplemental
Indenture, and the terms of the bonds of the Thirty-third Series, hereinafter
referred to, have been duly authorized by the Board of Directors of the Company
by appropriate resolutions of said Board of Directors;
NOW,
THEREFORE, THIS INDENTURE WITNESSETH:
That
the
Company, in consideration of the premises and of One Dollar to it duly paid
by
the Trustees at or before the ensealing and delivery of these presents, the
receipt whereof is hereby acknowledged, and in further evidence of assurance
of
the estate, title and rights of the Trustees and in order further to secure
the
payment of both the principal of and interest and premium, if any, on the bonds
from time to time issued under the Mortgage, as heretofore supplemented,
according to their tenor and effect and the performance of all the provisions
of
the Mortgage (including any instruments supplemental thereto and any
modification made as in the Mortgage provided) and of said bonds, hereby
grants, bargains, sells, releases, conveys, assigns, transfers, mortgages,
pledges, sets over and confirms (subject, however, to Excepted Encumbrances)
unto THE BANK OF NEW YORK and DOUGLAS J. MACINNES, as Trustees under the
Mortgage, and to their successor or successors in said trust, and to said
Trustees and their successors and assigns forever, all property, real, personal
and mixed, of the kind or nature specifically mentioned in the Mortgage, as
heretofore supplemented, or of any other kind or nature acquired by the Company
after the date of the execution and delivery of the Mortgage, as heretofore
supplemented (except any herein or in the Mortgage, as heretofore supplemented,
expressly excepted), now owned or, subject to the provisions of subsection
(I)
of Section 87 of the Mortgage, hereafter acquired by the Company (by purchase,
consolidation, merger, donation, construction, erection or in any other way)
and
wheresoever situated, including (without in anywise limiting or impairing by
the
enumeration of the same the scope and intent of the foregoing or of any general
description contained in this Twenty-seventh Supplemental Indenture) all lands,
power sites, flowage rights, water rights, water locations, water
appropriations, ditches, flumes, reservoirs, reservoir sites, canals, raceways,
dams, dam sites, aqueducts, and all other rights or means for appropriating,
conveying, storing and supplying water; all rights of way and roads; all plants
for the generation of electricity by steam, water and/or other power; all power
houses, gas plants, street lighting systems, standards and other equipment
incidental thereto, telephone, radio and television systems, air-conditioning
systems and equipment incidental thereto, water works, water systems, steam
heat
and hot water plants, substations, lines, service and supply systems, bridges,
culverts, tracks, ice or refrigeration plants and equipment, offices, buildings
and other structures and the equipment thereof; all machinery, engines, boilers,
dynamos, electric, gas and other machines, regulators, meters, transformers,
generators, motors, electrical, gas and mechanical appliances, conduits, cables,
water, steam heat, gas or other pipes, gas mains and pipes, service pipes,
fittings, valves and connections, pole and transmission lines, wires, cables,
tools, implements, apparatus, furniture and chattels; all municipal and other
franchises, consents or permits; all lines for the transmission and distribution
of electric current, gas, steam heat or water for any purpose including towers,
poles, wires, cables, pipes, conduits, ducts and all apparatus for use in
connection therewith; all real estate, lands, easements, servitudes, licenses,
permits, franchises, privileges, rights of way and other rights in or relating
to real estate or the occupancy of the same and (except as herein or in the
Mortgage, as heretofore supplemented, expressly excepted) all the right, title
and interest of the Company in and to all other property of any kind or nature
appertaining to and/or used and/or occupied and/or enjoyed in connection with
any property hereinbefore or in the Mortgage, as heretofore supplemented,
described.
TOGETHER
WITH all and singular the tenements, hereditaments, prescriptions, servitudes
and appurtenances belonging or in anywise appertaining to the aforesaid property
or any part thereof, with the reversion and reversions, remainder and remainders
and (subject to the provisions of Section 57 of the Mortgage) the tolls, rents,
revenues, issues, earnings, income, product and profits thereof, and all the
estate, right, title and interest and claim whatsoever, at law as well as in
equity, which the Company now has or may hereafter acquire in and to the
aforesaid property and franchises and every part and parcel
thereof.
IT
IS
HEREBY AGREED by the Company that, subject to the provisions of subsection (I)
of Section 87 of the Mortgage, all the property, rights, and franchises acquired
by the Company (by purchase, consolidation, merger, donation, construction,
erection or in any other way) after the date hereof,
except any herein or in the Mortgage, as heretofore supplemented, expressly
excepted, shall be and are as fully granted and conveyed hereby and by the
Mortgage and as fully embraced within the lien hereof and the lien of the
Mortgage as if such property, rights and franchises were now owned by the
Company and were specifically described herein or in the Mortgage and conveyed
hereby or thereby.
PROVIDED
that the following are not and are not intended to be now or hereafter granted,
bargained, sold, released, conveyed, assigned, transferred, mortgaged,
hypothecated, affected, pledged, set over or confirmed hereunder and are hereby
expressly excepted from the lien and operation of this Twenty-seventh
Supplemental Indenture and from the lien and operation of the Mortgage,
namely: (1) cash, shares of stock, bonds, notes and other obligations
and other securities not hereafter specifically pledged, paid, deposited,
delivered or held under the Mortgage or covenanted so to be; (2) merchandise,
equipment, apparatus, materials or supplies held for the purpose of sale or
other disposition in the usual course of business; fuel, oil and similar
materials and supplies consumable in the operation of any of the properties
of
the Company; all aircraft, rolling stock, trolley coaches, buses, motor coaches,
automobiles and other vehicles and materials and supplies held for the purpose
of repairing or replacing (in whole or part) any of the same; all timber,
minerals, mineral rights and royalties; (3) bills, notes and accounts
receivable, judgments, demands and choses in action, and all contracts, leases
and operating agreements not specifically pledged under the Mortgage or
covenanted so to be; the Company’s contractual rights or other interest in or
with respect to tires not owned by the Company; (4) the last day of the term
of
any lease or leasehold which may hereafter become subject to the lien of the
Mortgage; (5) electric energy, gas, steam, ice, and other materials or products
generated, manufactured, produced or purchased by the Company for sale,
distribution or use in the ordinary course of its business; and (6) the
Company’s franchise to be a corporation; provided, however, that the property
and rights expressly excepted from the lien and operation of this Twenty-seventh
Supplemental Indenture and from the lien and operation of the Mortgage in the
above subdivisions (2) and (3) shall (to the extent permitted by law) cease
to
be so excepted in the event and as of the date that either or both of the
Trustees or a receiver or trustee shall enter upon and take possession of the
Mortgaged and Pledged Property in the manner provided in Article XIII of the
Mortgage by reason of the occurrence of a Default as defined in Section 65
thereof.
TO
HAVE
AND TO HOLD all such properties, real, personal and mixed, granted, bargained,
sold, released, conveyed, assigned, transferred, mortgaged, pledged, set over
or
confirmed by the Company as aforesaid, or intended so to be, unto the Trustees
and their successors and assigns forever.
IN
TRUST
NEVERTHELESS, for the same purposes and upon the same terms, trusts and
conditions and subject to and with the same provisos and covenants as are set
forth in the Mortgage, as supplemented, this Twenty-seventh Supplemental
Indenture being supplemental thereto.
AND
IT IS
HEREBY COVENANTED by the Company that all the terms, conditions, provisos,
covenants and provisions contained in the Mortgage, as heretofore supplemented,
shall affect and apply to the property hereinbefore described and conveyed
and
to the estate, rights, obligations and duties of the Company and Trustees and
the beneficiaries of the trust with respect to said property, and to the
Trustees and their successors in the trust in the same manner and with the
same
effect as if said
property had been owned by the Company at the time of the execution of the
Mortgage, and had been specifically and at length described in and conveyed
to
said Trustees by the Mortgage as a part of the property therein stated to be
conveyed.
The
Company further covenants and agrees to and with the Trustees and their
successors in said trust under the Mortgage as follows:
ARTICLE
I
Thirty-third
Series of Bonds
SECTION
1. There shall be a series of bonds designated “4.86% Series due
April 1, 2013” (herein sometimes referred to as the “Thirty-third Series”), each
of which shall also bear the descriptive title “First Mortgage Bond”, and the
form thereof, which shall be established by Resolution of the Board of Directors
of the Company, shall contain suitable provisions with respect to the matters
hereinafter in this Section specified. Bonds of the Thirty-third
Series shall be dated as in Section 10 of the Mortgage provided, mature on
April
1, 2013, be issued as fully registered bonds in denominations of One Thousand
Dollars and, at the option of the Company, in any multiple or multiples of
One
Thousand Dollars (the exercise of such option to be evidenced by the execution
and delivery thereof) and bear interest (computed on the basis of a 360-day
year
of twelve thirty-day months) at the rate of 4.86% per annum, payable
semi-annually on April 1 and October 1 of each year, commencing October 1,
2008,
the principal of and interest on each said bond to be payable at the office
or
agency of the Company in the Borough of Manhattan, The City of New York, in
such
coin or currency of the United States of America as at the time of payment
is
legal tender for public and private debts.
(I) Optional
Prepayment. The Company may, at its option, upon notice as
provided below, prepay at any time all, or from time to time any part of, the
bonds of the Thirty-third Series at 100% of the principal amount so prepaid,
and
the Make-Whole Amount determined for the Settlement Date specified by the
Company in such notice with respect to such principal amount. The
Company will give each registered owner of Bonds of the Thirty-third Series
written notice (by first class mail or such other method as may be agreed upon
by the Company and such registered owner) of each optional prepayment under
this
subsection (I) mailed or otherwise given not less than 30 days and not more
than
60 days prior to the date fixed for such prepayment, to each such registered
owner at his, her or its last address appearing on the registry
books. Each such notice shall specify the Settlement Date (which
shall be a Business Day), the aggregate principal amount of the bonds of the
Thirty-third Series to be prepaid on such date, the principal amount of each
bond held by such registered owner to be prepaid (determined in accordance
with
subsection (II) of this section), and the interest to be paid on the Settlement
Date with respect to such principal amount being prepaid, and shall be
accompanied by a certificate signed by a Senior Financial Officer as to the
estimated Make-Whole Amount due in connection with such prepayment (calculated
as if the date of such notice were the date of the prepayment), setting forth
the details of such computation. Two Business Days prior to such
Settlement Date, the Company shall send to each registered owner of bonds of
the
Thirty-third Series (by first class mail or by such other method as may be
agreed upon by the Company and such
registered owner) a certificate signed by a Senior Financial Officer specifying
the calculation of such Make-Whole Amount as of the specified Settlement
Date. As promptly as practicable after the giving of the notice and
the sending of the certificates provided in this subsection, the Company shall
provide a copy of each to the Corporate Trustee. The Trustees shall
be under no duty to inquire into, may conclusively presume the correctness
of,
and shall be fully protected in relying upon the information set forth in any
such notice or certificate. The bonds of the Thirty-third Series are
not otherwise subject to voluntary or optional prepayment.
(II) Allocation
of Partial Prepayments. In the case of each
partial prepayment of the bonds of the Thirty-third Series, the principal amount
of the Bonds of the Thirty-third Series to be prepaid shall be allocated by
the
Company among all of the Bonds of the Thirty-third Series at the time
outstanding in proportion, as nearly as practicable, to the respective unpaid
principal amounts thereof not theretofore called for prepayment.
(III) Maturity;
Surrender, Etc. In the case of each notice of prepayment of bonds
of the Thirty-third Series pursuant to this section, if cash sufficient to
pay
the principal amount to be prepaid on the Settlement Date (which shall be a
Business Day), together with interest on such principal amount accrued to such
date and the applicable Make-Whole Amount, if any, is not paid as agreed upon
by
the Company and each registered owner of the affected bonds, or, to the extent
that there is no such agreement entered into with one or more such owners,
deposited with the Corporate Trustee on or before the Settlement Date, then
such
notice of prepayment shall be of no effect. If such cash is so paid
or deposited, such principal amount of the bonds of the Thirty-third Series
shall be deemed paid for all purposes and interest on such principal amount
shall cease to accrue. In case the Company pays any registered owner
pursuant to an agreement with that registered owner, the Company shall notify
the Corporate Trustee as promptly as practicable of such agreement and payment,
and shall furnish the Corporate Trustee with a copy of such agreement; in case
the Company deposits any cash with the Corporate Trustee, the Company shall
provide therewith a list of the registered owners and the amount of such cash
each registered owner is to receive. The Trustees shall be under no
duty to inquire into, may conclusively presume the correctness of, and shall
be
fully protected in relying upon the information set forth in any such notice,
list or agreement, and shall not be chargeable with knowledge of any of the
contents of any such agreement. Any bond prepaid in full shall be
surrendered to the Company or the Corporate Trustee for cancellation on or
before the Settlement Date or, with respect to cash deposited with the Corporate
Trustee, before payment of such cash by the Corporate Trustee; any bond prepaid
in part shall be surrendered to the Company or the Corporate Trustee on or
before the Settlement Date (unless otherwise agreed between the Company and
the
registered owner) or, with respect to cash deposited with Corporate Trustee
before payment of such cash by the Corporate Trustee, for a substitute bond
in
the principal amount remaining unpaid.
(IV) Make-Whole
Amount.
“Make-Whole
Amount” means, with respect to any bond of the Thirty-third Series, an amount
equal to the excess, if any, of the Discounted Value of the Remaining Scheduled
Payments with respect to the Called Principal of such bond of the Thirty-third
Series over the amount of such Called Principal,
provided that the Make-Whole Amount may in no event be less than
zero. For the purposes of determining the Make-Whole Amount, the
following terms have the following meanings:
“Business
Day” means any day other than a Saturday, a Sunday or a day on which commercial
banks in New York City are required or authorized to be closed.
“Called
Principal” means, with respect to any bond of the Thirty-third Series, the
principal of such bond that is to be prepaid pursuant to subsection (I) of
this
section.
“Discounted
Value” means, with respect to the Called Principal of any bond of the
Thirty-third Series, the amount obtained by discounting all Remaining Scheduled
Payments with respect to such Called Principal from their respective scheduled
due dates to the Settlement Date with respect to such Called Principal, in
accordance with accepted financial practice and at a discount factor (applied
on
the same periodic basis as that on which interest on the bonds of the
Thirty-third Series is payable) equal to the Reinvestment Yield with respect
to
such Called Principal.
“Reinvestment
Yield” means, with respect to the Called Principal of any bond of the
Thirty-third Series, 0.5% over the yield to maturity implied by (i) the
yields reported as of 10:00 a.m. (New York City time) on the second Business
Day
preceding the Settlement Date with respect to such Called Principal, on the
display designated as “Page PX1” (or such other display as may replace Page PX1
on Bloomberg Financial Markets (“Bloomberg”) or, if Page PX1 (or its successor
screen on Bloomberg) is unavailable, the Telerate Access Service screen which
corresponds most closely to Page PX1 for the most recently issued actively
traded U.S. Treasury securities having a maturity equal to the Remaining Average
Life of such Called Principal as of such Settlement Date, or (ii) if such
yields are not reported as of such time or the yields reported as of such time
are not ascertainable (including by way of interpolation), the Treasury Constant
Maturity Series Yields reported, for the latest day for which such yields have
been so reported as of the second Business Day preceding the Settlement Date
with respect to such Called Principal, in Federal Reserve Statistical Release
H.15 (519) (or any comparable successor publication) for actively traded U.S.
Treasury securities having a constant maturity equal to the Remaining Average
Life of such Called Principal as of such Settlement Date. Such
implied yield will be determined, if necessary, by (a) converting U.S.
Treasury bill quotations to bond equivalent yields in accordance with accepted
financial practice and (b) interpolating linearly between (1) the
actively traded U.S. Treasury security with the maturity closest to and greater
than such Remaining Average Life and (2) the actively traded U.S. Treasury
security with the maturity closest to and less than such Remaining Average
Life. The Reinvestment Yield shall be rounded to the number of
decimal places as appears in the interest rate of the applicable bond of the
Thirty-third Series.
“Remaining
Average Life” means, with respect to any Called Principal, the number of years
(calculated to the nearest one-twelfth year) obtained by dividing (i) such
Called Principal into (ii) the sum of the products obtained by multiplying
(a) the principal component of each Remaining Scheduled Payment with
respect to such Called Principal by (b) the number of years (calculated to
the nearest one-twelfth year) that will elapse between the Settlement Date
with
respect to such Called Principal and the scheduled due date of such Remaining
Scheduled Payment.
“Remaining
Scheduled Payments” means, with respect to the Called Principal of any Bond of
the Thirty-third Series, all payments of such Called Principal and interest
thereon that would be due after the Settlement Date with respect to such Called
Principal if no payment of such Called Principal were made prior to its
scheduled due date, provided that if such Settlement Date is not a date on
which
interest payments are due to be made under the terms of the Bonds of the
Thirty-third Series, then the amount of the next succeeding scheduled interest
payment will be reduced by the amount of interest accrued to such Settlement
Date and required to be paid on such Settlement Date pursuant to subsection
(I)
of this section.
“Settlement
Date” means, with respect to the Called Principal of any Bond of the
Thirty-third Series, the date on which such Called Principal is to be prepaid
pursuant to subsection (I) of this section.
“Senior
Financial Officer” means the chief financial officer, principal accounting
officer, treasurer or comptroller of the Company.
(V) At
the option of the registered owner, any bonds of the Thirty-third Series, upon
surrender thereof for cancellation at the office or agency of the Company in
the
Borough of Manhattan, The City of New York, together with a written instrument
of transfer wherever required by the Company duly executed by the registered
owner or by his duly authorized attorney, shall (subject to the provisions
of
Section 12 of the Mortgage) be exchangeable for a like aggregate principal
amount of bonds of the same series of other authorized
denominations.
Bonds
of
the Thirty-third Series shall be transferable (subject to the provisions of
Section 12 of the Mortgage) at the office or agency of the Company in the
Borough of Manhattan, The City of New York. The Company shall not be
required to make transfers or exchanges of bonds of the Thirty-third Series
for
a period of ten (10) days next preceding any designation of bonds of said series
to be prepaid, and the Company shall not be required to make transfers or
exchanges of any bonds of said series designated in whole or in part for
prepayment.
Upon
any
exchange or transfer of bonds of the Thirty-third Series, the Company may make
a
charge therefor sufficient to reimburse it for any tax or taxes or other
governmental charge, as provided in Section 12 of the Mortgage, but the Company
hereby waives any right to make a charge in addition thereto for any exchange
or
transfer of bonds of the Thirty-third Series.
After
the
delivery of this Twenty-Seventh Supplemental Indenture and upon compliance
with
the applicable provisions of the Mortgage and receipt of consideration therefor
by the Company, there shall be an initial issue of bonds of the Thirty-third
Series for the aggregate principal amount of $60,000,000.
ARTICLE
II
Reservation
of Right to Amend the Mortgage
SECTION
1. The Company reserves the right, without any vote, consent or other
action by the holders of Bonds of the Thirty-third Series or any subsequent
series, to amend the Mortgage, as herein or heretofore supplemented as
follows:
(A)
By deleting the words “having its
principal office and place of business in the Borough of Manhattan, The City
of
New York” and the word “such” from Section 35(a).
(B)
By adding the following at the
end of the first sentence of Section 101:
“;
provided however, that if all of the bonds at that time Outstanding are
registered as to principal and interest or as to principal only, such notice
shall be sufficiently given if mailed, postage prepaid to each such registered
owner of bonds at his/her last address appearing on the registry books, on
or
before the date of on which the first publication of such notice would otherwise
have been required.”
ARTICLE
III
Miscellaneous
Provisions
SECTION
1. Section 126 of the Mortgage, as heretofore amended, is hereby
further amended by adding the words “and April 1, 2013,” after the words “and
February 1, 2027.”
SECTION
2. Subject to the amendments provided for in this Twenty-seventh Supplemental
Indenture, the terms defined in the Mortgage, as heretofore supplemented, shall,
for all purposes of this Twenty-seventh Supplemental Indenture, have the
meanings specified in the Mortgage, as heretofore supplemented.
SECTION
3. The holders of bonds of the Thirty-third Series consent that the Company
may,
but shall not be obligated to, fix a record date for the purpose of determining
the holders of bonds of the Thirty-third Series entitled to consent to any
amendment, supplement or waiver. If a record date is fixed, those
persons who were holders at such record date (or their duly designated proxies),
and only those persons, shall be entitled to consent to such amendment,
supplement or waiver or to revoke any consent previously given, whether or
not
such persons continue to be holders after such record date. No such
consent shall be valid or effective for more than 90 days after such record
date.
SECTION
4. The Trustees hereby accept the trusts herein declared, provided, created
or
supplemented and agree to perform the same upon the terms and conditions herein
and in the Mortgage set forth and upon the following terms and
conditions:
The
Trustees shall not be responsible in any manner whatsoever for or in respect
of
the validity or sufficiency of this Twenty-seventh Supplemental Indenture or
for
or in respect of the recitals contained herein, all of which recitals are made
by the Company solely. In general, each and every term and condition
contained in Article XVII of the Mortgage shall apply to and form part of this
Twenty-seventh Supplemental Indenture with the same force and effect as if
the
same were herein set forth in full with such omissions, variations and
insertions, if any, as may be appropriate to make the same conform to the
provisions of this Twenty-seventh Supplemental Indenture.
SECTION
5. Whenever in this Twenty-seventh Supplemental Indenture any party hereto
is
named or referred to, this shall, subject to the provisions of Articles XVI
and
XVII of the Mortgage, as heretofore supplemented, be deemed to include the
successors or assigns of such party, and all the covenants and agreements in
this Twenty-seventh Supplemental Indenture contained by or on behalf of the
Company, or by or on behalf of the Trustees shall, subject as aforesaid, bind
and inure to the benefit of the respective successors and assigns of such party
whether so expressed or not.
SECTION
6. Nothing in this Twenty-seventh Supplemental Indenture, expressed
or implied, is intended, or shall be construed, to confer upon, or give to,
any
person, firm or corporation, other than the parties hereto and the holders
of
the bonds and coupons Outstanding under the Mortgage, any right, remedy, or
claim under or by reason of this Twenty-seventh Supplemental Indenture or any
covenant, condition, stipulation, promise or agreement hereof, and all the
covenants, conditions, stipulations, promises and agreements in this
Twenty-seventh Supplemental Indenture contained by and on behalf of the Company
shall be for the sole and exclusive benefit of the parties hereto, and of the
holders of the bonds and of the coupons Outstanding under the
Mortgage.
SECTION
7. This Twenty-seventh Supplemental Indenture shall be executed in several
counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
SECTION
8. The Company, the mortgagor named herein, by its execution hereof acknowledges
receipt of a full, true and complete copy of this Twenty-seventh Supplemental
Indenture.
IN
WITNESS WHEREOF, ALLETE, Inc. has caused its corporate name to be hereunto
affixed, and this instrument to be signed and sealed by its President, one
of
its Vice Presidents, or its Treasurer, and its corporate seal to be attested
by
its Secretary or one of its Assistant Secretaries for and in its behalf, all
in
the City of Duluth, Minnesota, and The Bank of New York has caused its corporate
name to be hereunto affixed, and this instrument to be signed and sealed by
one
of its Vice Presidents or one of its Assistant Vice Presidents and its corporate
seal to be attested by one of its Assistant Treasurers, one of its Vice
Presidents or one of its Assistant Vice Presidents, and Douglas J. MacInnes
has
hereunto set his hand and affixed his seal, all in The City of New York, as
of
the day and year first above written.
ALLETE,
Inc.
By
/s/
Donald W. Stellmaker
Donald
W.
Stellmaker
Treasurer
Attest:
/s/
Deborah A. Amberg
Deborah A. Amberg
Deborah A. Amberg
Sr.
VP, General Counsel & Secretary
Executed,
sealed and delivered by ALLETE, Inc.
in
the
presence of:
/s/
Dawn Garbo
/s/
Jodi Nash
Trustee’s
Signature Page Follows
THE
BANK
OF NEW YORK,
as
Trustee
By
/s/ Geovanni
Barris
Geovanni
Barris
Vice
President
Attest:
/s/
Carlos Luciano
Carlos
Luciano
Vice
President
/s/
Douglas J. Macinnes L.S.
DOUGLAS
J.
MACINNES
Executed,
sealed and delivered by THE BANK OF NEW
YORK
and
DOUGLAS J. MACINNES in the presence of:
/s/
Timothy Casey
Timothy
Casey
Trustee’s
Signature Page
Twenty-seventh
Supplemental Indenture dated as of February 1, 2008
To
Mortgage and Deed of Trust dated as of September 1, 1945
STATE
OF
MINNESOTA )
) SS.:
COUNTY
OF
ST.
LOUIS )
On
this 24 day of January, 2008, before me, a Notary Public within and for
said County, personally appeared Donald W. Stellmaker and Deborah A. Amberg,
to
me personally known, who, being each by me duly sworn, did say that they are
respectively the Treasurerand the Sr.Vice President, General Counsel and
Secretary of ALLETE, INC., the corporation named in the foregoing instrument;
that the seal affixed to the foregoing instrument is the corporate seal of
said
corporation; that said instrument was signed and sealed in behalf of said
corporation by authority of its Board of Directors; and said Donald W.
Stellmaker and Deborah A. Amberg acknowledged said instrument to be
the free act and deed of said corporation.
Personally
came before me on this 24 day of January, 2008, Donald W. Stellmaker to me
known to be the Treasurer, and Deborah A. Amberg, to me known to be the Sr.Vice
President, General Counsel and Secretary , of the above named ALLETE, INC.,
the
corporation described in and which executed the foregoing instrument, and to
me
personally known to be the persons who as such officers executed the foregoing
instrument in the name and behalf of said corporation, who, being by me duly
sworn did depose and say and acknowledge that they are respectively the
Treasurer and the Sr.Vice President, General Counsel and Secretary of said
corporation; that the seal affixed to said instrument is the corporate seal
of
said corporation; and that they signed, sealed and delivered said instrument
in
the name and on behalf of said corporation by authority of its Board of
Directors and stockholders, and said Donald W. Stellmaker and Deborah A. Amberg
then and there acknowledged said instrument to be the free act and deed of
said
corporation and that such corporation executed the same.
On
the 24
day of January, 2008, before me personally came Donald W. Stellmaker and
Deborah A. Amberg, to me known, who, being by me duly sworn, did depose and
say
that they respectively reside at 5114 Idlewild Street, Duluth, Minnesota, and
2738 Northridge Drive, Duluth, Minnesota; that they are respectively
the Treasurer and the Sr.Vice President, General Counsel and Secretary, of
ALLETE, INC., one of the corporations described in and which executed the above
instrument; that they know the seal of said corporation; that the seal affixed
to said instrument is such corporate seal; that it was so affixed by order
of
the Board of Directors of said corporation, and that they signed their names
thereto by like order.
GIVEN
under my hand and notarial seal this 24 day of January.
/s/
Jodi Nash
Notary
Public
STATE
OF
NEW
YORK )
) SS:
COUNTY
OF
NEW
YORK )
On
this
24 day of January, before me, a Notary Public within and for said County,
personally appeared Geovanni Barris and Carlos Luciano, to me personally known,
who, being each by me duly sworn, did say that they are each a Vice President
of
THE BANK OF NEW YORK, the corporation named in the foregoing instrument; that
the seal affixed to the foregoing instrument is the corporate seal of said
corporation; that said instrument was signed and sealed in behalf of said
corporation by authority of its Board of Directors; and said Geovanni Barris
and
Carlos Luciano acknowledged said instrument to be the free act and deed of
said
corporation.
Personally
came before me on this 24day of January, Geovanni Barris, to me known to be
a
Vice President, and Carlos Luciano, known to me to be a Vice President, of
the
above named THE BANK OF NEW YORK, the corporation described in and which
executed the foregoing instrument, and to me personally known to be the persons
who as such officers executed the foregoing instrument in the name and behalf
of
said corporation, who, being by me duly sworn did depose and say and acknowledge
that they are each a Vice President of said corporation; that the seal affixed
to said instrument is the corporate seal of said corporation; and that they
signed, sealed and delivered said instrument in the name and on behalf of said
corporation by authority of its Board of Directors, and said Geovanni Barris
and
Carlos Luciano then and there acknowledged said instrument to be the free act
and deed of said corporation and that such corporation executed the
same.
On
the 24
day of January, before me personally came Geovanni Barris and Carlos Luciano,
to
me known, who, being by me duly sworn, did depose and say that they each reside
at 101 Barclay Street, 8W, New York, New York 10286; that they are each a Vice
President of THE BANK OF NEW YORK, one of the corporations described in and
which executed the above instrument; that they know the seal of said
corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by order of the Board of Directors of said corporation,
and that they signed their names thereto by like order.
GIVEN
under my hand and notarial seal this 24 day of January.
/s/
Carlos R
Luciano
Notary
Public, State of New York
STATE
OF
NEW
YORK
)
) SS:
COUNTY
OF
NEW
YORK )
On
this
24 day of January, before me personally appeared DOUGLAS J. MACINNES, to me
known to be the person described in and who executed the foregoing instrument,
and acknowledged that he executed the same as his free act and
deed.
Personally
came before me this 24 day of January, the above named DOUGLAS J. MACINNES,
to
me known to be the person who executed the foregoing instrument, and
acknowledged the same.
On
the 24
day of January, before me personally came DOUGLAS J. MACINNES, to me known
to be
the person described in and who executed the foregoing instrument, and
acknowledged that he executed the same.
GIVEN
under my hand and notarial seal this 24 day of January.
/s/
Carlos R Luciano
Notary
Public, State of New York
Exhibit 4(c)3
ALLETE
2007 Form 10-K
SUPERIOR
WATER, LIGHT AND POWER COMPANY
2915 Hill
Avenue, Superior, WI 54880
To
U.S. BANK
NATIONAL ASSOCIATION
(formerly
First Bank (N.A.))
As
Trustee Under Superior Water, Light
and Power
Company's Mortgage and Deed of Trust,
Dated as
of March 1, 1943
_________________________________________
NINTH
SUPPLEMENTAL INDENTURE
_________________________________________
Dated as
of October 1, 2007
________________________________________________________________________
This
instrument drafted by
Bell,
Gierhart & Moore, S.C.
Madison,
WI
TABLE OF CONTENTS
|
Section
|
Heading
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Page
|
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Parties
|
1
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||
|
Recitals
|
1
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ARTICLE
I
|
BONDS
OF THE EIGHTH SERIES
|
7
|
|
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Section
1.1
|
7
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ARTICLE
II
|
MISCELLANEOUS
PROVISIONS
|
10
|
|
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Section
2.1
|
10
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Section
2.2
|
10
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Section
2.3
|
10
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Section
2.4
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10
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Section
2.5
|
10
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Section
2.6
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10
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Signature
Page
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11
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ATTACHMENTS
TO SUPPLEMENTAL INDENTURE:
|
|||
|
EXHIBIT
A - Form of Bond of the Eighth Series
|
|||
NINTH SUPPLEMENTAL
INDENTURE
INDENTURE,
dated as of the 1st day of October,
2007, made and entered into by and between SUPERIOR WATER, LIGHT AND POWER
COMPANY, a corporation of the State of Wisconsin, whose address is 2915 Hill
Avenue, Superior, Wisconsin 54880 (the "Company") and U.S. BANK
NATIONAL ASSOCIATION (successor to Chemical Bank, as Corporate Trustee, and
Peter Morse, as Co-Trustee), a national banking association, whose principal
trust office at the date hereof is in St. Paul, Minnesota (the "Trustee"), as Trustee under
the Mortgage and Deed of Trust dated as of March 1, 1943 (hereinafter called the
"Mortgage"), which
Mortgage was executed and delivered by the Company to secure the payment of
bonds issued or to be issued under and in accordance with the provisions of the
Mortgage, reference to which Mortgage is hereby made, this Ninth Supplemental
Indenture (the "Ninth
Supplemental Indenture") being supplemental thereto;
WHEREAS,
said Mortgage was recorded in the office of the Register of Deeds in and for
Douglas County, Wisconsin, on May 3, 1943, in Volume 191 of Mortgages at page 1,
Document No. 362844; and
WHEREAS,
an instrument dated as of September 15, 1949, was executed by the Company
appointing Russell H. Sherman as Co-Trustee in succession to said Howard B.
Smith, resigned, under said Mortgage, and by Russell H. Sherman accepting the
appointment as Co-Trustee under said Mortgage in succession to the said Howard
B. Smith, which instrument was recorded in the office of the Register of Deeds
in and for Douglas County, Wisconsin, on October 8, 1949, in Volume 196 of
Mortgages at page 510, Document No. 398649; and
WHEREAS,
by the Mortgage, the Company covenanted that it would execute
and deliver such supplemental indenture or indentures and such
further instruments and do such further acts as might be necessary or proper to
carry out more effectively the purposes of the Mortgage and to make subject to
the lien of the Mortgage any property acquired after the date of the execution
of the Mortgage and intended to be subject to the lien thereof; and
WHEREAS,
the Company executed and delivered its First Supplemental Indenture, dated as of
March 1, 1951 (hereinafter called its "First Supplemental
Indenture"), which was recorded in the office of the Register of Deeds in
and for Douglas County, Wisconsin, on March 30, 1951, in Volume 205 of Mortgages
at page 73, Document No. 405297; and
WHEREAS,
an instrument dated as of May 16, 1961, was executed by the Company appointing
Richard G. Pintard as Co-Trustee in succession to said Russell H. Sherman,
resigned, under said Mortgage and by Richard G. Pintard accepting the
appointment as Co-Trustee under said Mortgage in succession to said Russell H.
Sherman, which instrument was recorded in the office of the Register of Deeds in
and for Douglas County, Wisconsin, on May 31, 1961, in Volume 256 of Mortgages
at page 423, Document No. 453857; and
WHEREAS,
the Company executed and delivered its Second Supplemental Indenture, dated as
of March 1, 1962 (hereinafter called its "Second Supplemental
Indenture"), which was
1
recorded
in the office of the Register of Deeds in and for Douglas County, Wisconsin, on
March 26, 1962, in Volume 261 of Mortgages at page 81, Document No. 457662;
and
WHEREAS,
an instrument dated as of June 23, 1976, was executed by the Company appointing
Steven F. Lasher as Co-Trustee in succession to said Richard G. Pintard,
resigned, under said Mortgage and by Steven F. Lasher accepting the appointment
as Co-Trustee under said Mortgage in succession to said Richard G. Pintard,
which instrument was recorded in the office of the Register of Deeds in and for
Douglas County, Wisconsin, on July 16, 1976, in Volume 353 of Records at page
274, Document No. 532495; and
WHEREAS,
the Company executed and delivered its Third Supplemental Indenture, dated as of
July 1, 1976 (hereinafter called its "Third Supplemental
Indenture"), which was recorded in the office of the Register of Deeds in
and for Douglas County, Wisconsin, on October 1, 1976, in Volume 355 of Records
at page 683, Document No. 534332; and
WHEREAS,
an instrument dated as of December 30, 1977, was executed by the Company
appointing C. G. Martens as Co-Trustee in succession, to said Steven F. Lasher,
resigned, under said Mortgage and by C. G. Martens accepting the appointment as
Co-Trustee under said Mortgage in succession to said Steven F. Lasher, which
instrument was recorded in the office of the Register of Deeds in and for
Douglas County, Wisconsin, on February 13, 1985, in Volume 436 of Records at
page 264, Document No. 589308; and
WHEREAS,
the Company executed and delivered its Fourth Supplemental Indenture, dated as
of March 1, 1985 (hereinafter called its "Fourth Supplemental
Indenture"), which was recorded in the office of the Register of Deeds in
and for Douglas County, Wisconsin, on March 19, 1985, in Volume 436 of Records
at page 910, Document No. 589776; and
WHEREAS,
an instrument dated as of October 26, 1992, was executed by the Company
appointing Peter Morse as Co-Trustee in succession to said C. G. Martens,
resigned, under said Mortgage and by Peter Morse accepting the appointment as
Co-Trustee under said Mortgage in succession to said C. G. Martens, which
instrument was recorded in the office of the Register of Deeds in and for
Douglas County, Wisconsin, on November 13, 1992, in Volume 539 of Records at
page 9, Document No. 649056; and
WHEREAS,
the Company executed and delivered its Fifth Supplemental Indenture, dated as of
December 1, 1992, (hereinafter called its "Fifth Supplemental
Indenture"), which was recorded in the office of the Register of Deeds in
and for Douglas County, Wisconsin, on December 28, 1992, in Volume 541 of
Records at page 229, Document No. 650104; and
WHEREAS,
the Company executed and delivered its Sixth Supplemental Indenture, dated as of
March 24, 1994 (hereinafter called its "Sixth Supplemental
Indenture"), which was recorded in the office of the Register of Deeds in
and for Douglas County, Wisconsin, on March 29, 1994, in Volume 568 of Records
at page 757, Document No. 662228; and
WHEREAS,
the Company executed and delivered its Seventh Supplemental Indenture, dated as
of November 1, 1994 (hereinafter called its "Seventh Supplemental
Indenture"), which
2
was
recorded in the office of the Register of Deeds in and for Douglas County,
Wisconsin, on January 18, 1995, in Volume 583 of Records at page 242, Document
No. 669350; and
WHEREAS,
an instrument dated as of January 20, 1995, was executed by The Prudential
Insurance Company pursuant to Section 102 of the Mortgage appointing First Bank
(N.A.) as Trustee in succession to Chemical Bank as Corporate Trustee and Peter
Morse as Co-Trustee under said Mortgage and by First Bank (N.A.) (U.S. Bank
National Association, successor) accepting the appointment as Trustee under such
Mortgage in succession to said Chemical Bank and said Peter Morse, which
instrument was recorded in the Office of the Register of Deeds in and for
Douglas County, Wisconsin on April 6, 1995 in Volume 585 of Records at page 953,
Document No. 670717; and
WHEREAS,
the Company executed and delivered its Eighth Supplemental Indenture, dated as
of January 1, 1997 (hereinafter called its "Eighth Supplemental
Indenture"), which was recorded in the office of the Register of Deeds in
and for Douglas County, Wisconsin, on January 7, 1997, in Volume 617 of Records
at page 536, Document No. 685699; and
WHEREAS,
in addition to the property described in the Mortgage, as heretofore
supplemented, the Company has acquired certain other property, rights and
interests in property; and
WHEREAS,
the Company has heretofore issued, in accordance with the provisions of the
Mortgage, bonds of a series entitled and designated First Mortgage Bonds, 3 3/8%
Series due 1973 (the "Bonds of
the First Series"), in the aggregate principal amount of Two Million Five
Hundred Thousand Dollars ($2,500,000), none of which Bonds of the First Series
are now Outstanding; bonds of a series entitled and designated First Mortgage
Bonds, 3 1/10% Series due 1981 (the "Bonds of the Second Series"),
in the aggregate principal amount of Five Million Dollars ($5,000,000), none of
which Bonds of the Second Series are now Outstanding; bonds of a series entitled
and designated First Mortgage Bonds, 5% Series due 1992 (the "Bonds of the Third Series"),
in the aggregate principal amount of Two Million Seven Hundred Thousand Dollars
($2,700,000), none of which Bonds of the Third Series are now outstanding; bonds
of a series entitled and designated First Mortgage Bonds, 9 5/8% Series due 2001
(the "Bonds of the Fourth
Series"), the interest rate for which bonds was modified to 6.10% by the
Sixth Supplemental Indenture, in the aggregate principal amount of Three Million
Dollars ($3,000,000), none of which bonds of the Fourth Series are now
outstanding; bonds of a series entitled and designated First Mortgage Bonds, 12
1/2% Series due 1992 (the "Bonds of the Fifth Series"),
in the aggregate principal amount of Three Million Five Hundred Thousand Dollars
($3,500,000), none of which Bonds of the Fifth Series are now outstanding; Bonds
of a series entitled and designated First Mortgage Bonds, 7.91% Series due 2013
(the "Bonds of the Sixth
Series"), in the aggregate principal amount of Five Million Dollars
($5,000,000) of which One Million Five Hundred Thousand Dollars ($1,500,000)
aggregate principal amount is now outstanding; and Bonds of a series entitled
and designated First Mortgage Bonds, 7.27% Series due 2008 (the "Bonds of the Seventh
Series"), in the aggregate principal amount of Six Million Dollars
($6,000,000) of which Six Million Dollars ($6,000,000) aggregate principal
amount is now outstanding.
3
WHEREAS,
Section 8 of the Mortgage provides that the form of each series of bonds (other
than Bonds of the First Series) issued thereunder shall be established by
Resolution of the Board of Directors of the Company and that the form of such
series, as established by said Board of Directors, shall specify the descriptive
title of the bonds and various other terms thereof, and may also contain such
provisions not inconsistent with the provisions of the Mortgage as the Board of
Directors may, in its discretion, cause to be inserted therein; and
WHEREAS,
Section 120 of the Mortgage provides, among other things, that the Company may
enter into any further covenants, limitations or restrictions for the benefit of
any one or more series of bonds issued thereunder, or the Company may establish
the terms and provisions of any series of bonds other than said Bonds of the
First Series, by an instrument in writing executed and acknowledged by the
Company in such manner as would be necessary to entitle a conveyance of real
estate to be of record in all of the states in which any property at the time
subject to the lien of the Mortgage shall be situated; and
WHEREAS,
the Company now desires to create a new series of bonds; and
WHEREAS,
the execution and delivery by the Company of this Ninth Supplemental Indenture,
and the terms of the Bonds of the Eighth Series hereinafter referred to, have
been duly authorized by the Board of Directors of the Company by appropriate
resolutions of said Board of Directors;
NOW,
THEREFORE, THIS INDENTURE WITNESSETH: That Superior Water, Light and Power
Company, in consideration of the premises and of One Dollar ($1) to it duly paid
by the Trustee at or before the ensealing and delivery of these presents, the
receipt whereof is hereby acknowledged, and in further evidence of assurance of
the estate, title and rights of the Trustee and in order further to secure the
payment both of the principal of and interest and premium, if any, on the bonds
from time to time issued under the Mortgage, according to their tenor and
effect, and the performance of all the provisions of the Mortgage (including any
instruments supplemental thereto and any modification made as in the Mortgage
provided) and of said bonds, hereby grants, bargains, sells, releases, conveys,
assigns, transfers, mortgages, pledges, sets over and confirms (subject,
however, to Excepted Encumbrances as defined in Section 6 of the Mortgage) unto
U.S. Bank National Association, as Trustee under the Mortgage, and to its
successor or successors in said trust, and to said Trustee and its successors
and assigns forever, all and singular the permits, franchises, rights,
privileges, grants and property, real, personal and mixed, now owned or which
may be hereafter acquired by the Company (except any of the character herein or
in the Mortgage expressly excepted), including (but not limited to) its electric
light and power works, gas works, water works, buildings, structures, machinery,
equipment, mains, pipes, lines, poles, wires, easements, rights of way, permits,
franchises, rights, privileges, grants and all property of every kind and
description, situated in the City of Superior, Douglas County, Wisconsin, or
elsewhere in Douglas County, Wisconsin, in Washburn County, Wisconsin, or in any
other place or places now owned by the Company, or that may be hereafter
acquired by it, including, but not limited to, the following described
properties of the Company--that is to say:
4
All Lands
and Rights and Interests in Lands of the Company (except any such property as
may have been released from the lien of the Mortgage), including, but not
limited to, all such property acquired by the Company under the following deeds
which are referred to for more particular descriptions thereof, to
wit:
Deed
dated September 25, 2002, from Van Vleck-Clemens Agency, Inc., a Wisconsin
corporation, to the Company, which deed was recorded in the office of the
Register of Deeds of the County of Douglas, State of Wisconsin, on
October 16, 2002, as Document No. 748541.
Deed
dated September 29, 2006, from The City of Superior, a Wisconsin municipal
corporation, to the Company, which deed was recorded in the office of the
Register of Deeds of the County of Douglas, State of Wisconsin, on
October 3, 2006, as Document No. 800110, together with the vacated alley
and street described in City of Superior Common Council Resolution
No. R07-12731 adopted April 17, 2007, recorded in the office of the
Register of Deeds of the County of Douglas, State of Wisconsin, on April 19, 2007, as Document
No. 805978.
Deed
dated December 14, 2006, from Daniel V. Owen, Personal Representative of
the estate of John E. Tiedemann a/k/a Mr. John Tiedemann, a/k/a John Elmer
Tiedemann, to the Company, which deed was recorded in the office of the Register
of Deeds of the County of Douglas, State of Wisconsin, on December 22,
2006, as Document No. 802717.
Deed
dated July 21, 2006, from the County of Douglas, in the State of Wisconsin,
to the Company, which deed was recorded in the office of the Register of Deeds
of the County of Douglas, State of Wisconsin, on July 21, 2006, as Document
No. 797902;
All other
property, real, personal and mixed, acquired by the Company after the date of
the execution and delivery of the Mortgage (except any herein or in the
Mortgage, as heretofore supplemented, expressly excepted), now owned or
hereafter acquired by the Company and wheresoever situated, including (without
in any wise limiting or impairing by the enumeration of the same the scope and
intent of the foregoing or of any general description contained in this Ninth
Supplemental Indenture) all lands, power sites, flowage rights, water rights,
water franchises, water locations, water appropriations, ditches, flumes,
reservoirs, reservoir sites, canals, raceways, dams, dam sites, aqueducts, and
all other rights or means for appropriating, conveying, storing and supplying
water; all rights of way and roads; all plants, works, reservoirs and tanks for
the pumping and purification of water; all water works; all plants for the
generation of electricity by water, steam and/or other power; all power houses,
gas plants, street lighting systems, standards and other equipment incidental
thereto, telephone, radio and television
5
systems,
air-conditioning systems and equipment incidental thereto, water systems, steam
heat and hot water plants, substations, lines, service and supply systems,
bridges, culverts, tracks, street and interurban railway systems, offices,
buildings and other structures and the equipment thereof; all machinery,
engines, boilers, dynamos, water, electric, gas and other machines, regulators,
meters, transformers, generators, motors, water, electrical, gas and mechanical
appliances, conduits, cables, water, steam, heat, gas or other mains and pipes,
service pipes, fittings, valves and connections, pole and transmission lines,
wires, cables, tools, implements, apparatus, furniture, chattels and choses in
action; all municipal and other franchises, consents or permits; all lines for
the transmission and distribution of water, electric current, gas, steam heat or
hot water for any purpose, including towers, poles, wires, cables, pipes,
conduits, ducts and all apparatus for use in connection therewith; all real
estate, lands, easements, servitudes, licenses, permits, franchises, privileges,
rights of way and other rights in or relating to real estate or the occupancy of
the same and (except as herein or in the Mortgage, as heretofore supplemented,
expressly excepted) all the right, title and interest of the Company in and to
all other property of any kind or nature appertaining to and/or used and/or
occupied and/or enjoyed in connection with any property hereinbefore or in the
Mortgage, as heretofore supplemented, described.
Together
with all and singular the tenements, hereditaments and appurtenances belonging
or in any wise appertaining to the aforesaid property or any part thereof, with
the reversion and reversions, remainder and remainders and (subject to the
provisions of Section 57 of the Mortgage) the tolls, rents, revenues, issues,
earnings, income, product and profits thereof, and all the estate, right, title
and interest and claim whatsoever, at law as well as in equity, which the
Company now has or may hereafter acquire in and to the aforesaid property and
franchises and every part and parcel thereof.
It is
hereby agreed by the Company that all the property, rights and franchises
acquired by the Company after the date hereof (except any herein or in the
Mortgage, as heretofore supplemented, expressly excepted) shall be and are as
fully granted and conveyed hereby and as fully embraced within the lien of the
Mortgage as if such property, rights and franchises were now owned by the
Company and were specifically described herein and conveyed hereby.
Provided that the following
are not and are not intended to be now or hereafter granted, bargained, sold,
released, conveyed, assigned, transferred, mortgaged, pledged, set over or
confirmed hereunder and are hereby expressly excepted from the lien and
operation of the Mortgage, viz: (1) cash, shares of stock, bonds, notes and
other obligations and other securities not hereafter specifically pledged, paid,
deposited, delivered or held under the Mortgage or covenanted so to be; (2)
merchandise, equipment, materials or supplies held for the purpose of sale in
the usual course of business and fuel, oil and similar materials and supplies
consumable in the operation of any properties of the Company; rolling stock,
buses, motor coaches, automobiles and other vehicles; (3) bills, notes and
accounts receivable, and all contracts, leases and operating agreements not
specifically pledged under the Mortgage or covenanted so to be; the last day of
the term of any lease or leasehold which may heretofore have or hereafter may
become subject to the lien of the Mortgage; (4) water, electric energy, gas, ice
and other materials or products pumped, stored, generated, manufactured,
produced or purchased by the Company for sale, distribution or use in the
ordinary course of its business; (5) the Company's franchise to be a
corporation; and (6) all permits, franchises, rights, privileges, grants
and
6
property
in the state of Minnesota now owned or hereafter acquired unless such permits,
franchises, rights, privileges, grants and property in the state of Minnesota
shall have been subjected to the lien of the Mortgage by an indenture or
indentures supplemental to the Mortgage, pursuant to authorization of the Board
of Directors of the Company, whereupon all the permits, franchises, rights,
privileges, grants and property then owned or thereafter acquired by the Company
in the state of Minnesota (except property of the character expressly excepted
from the lien of the Mortgage in clauses (1) to (5) above, inclusive), shall
become and be subject to the lien of the Mortgage as part of the Mortgaged and
Pledged Property and may be released, funded and otherwise dealt with on the
same terms and subject to the same conditions and restrictions as though not
theretofore excepted from the lien of the Mortgage; provided, however, that the
property and rights expressly excepted from the lien and operation of the
Mortgage in the above subdivisions (2) and (3) shall (to the extent permitted by
law) cease to be so excepted in the event and as of the date that the Trustee or
a receiver or trustee shall enter upon and take possession of the Mortgaged and
Pledged Property in the manner provided in Article XIII of the Mortgage by
reason of the occurrence of a Default as defined in Section 65 of the
Mortgage.
To have
and to hold all such properties, real, personal and mixed, granted, bargained,
sold, released, conveyed, assigned, transferred, mortgaged, pledged, set over or
confirmed by the Company as aforesaid, or intended so to be, unto U.S. Bank
National Association as Trustee, and its successors and assigns
forever.
In trust
nevertheless, for the same purposes and upon the same terms, trusts and
conditions and subject to and with the same provisos and covenants as are set
forth in the Mortgage, as heretofore supplemented, this Ninth Supplemental
Indenture being supplemental thereto.
And it is
hereby covenanted by the Company that all the terms, conditions, provisos,
covenants and provisions contained in the Mortgage, as heretofore supplemented,
shall affect and apply to the property hereinbefore described and conveyed and
to the estate, rights, obligations and duties of the Company and the Trustee and
the beneficiaries of the trust with respect to said property, and to the Trustee
and its successors as Trustee of said property, in the same manner and with the
same effect as if said property had been owned by the Company at the time of the
execution of the Mortgage, and had been specifically and at length described in
and conveyed to the Trustee by the Mortgage as part of the property therein
stated to be conveyed.
The
Company further covenants and agrees to and with the Trustee and its successors
in said trust under the Mortgage as follows:
ARTICLE I
BONDS OF THE EIGHTH
SERIES
Section 1.1. There shall be
an Eighth series of bonds designated "First Mortgage Bonds, 5.375% Series
due November 1, 2021" (the "Bonds of the Eighth Series"),
which shall be limited to $6,370,000 aggregate principal amount, and shall be
issued as fully registered bonds without coupons in the denominations of $1,000
or any multiple thereof. The Bonds of the Eighth Series shall be
dated on the date of issuance thereof, mature on the maturity date of
the
7
City of
Superior Bonds (as defined herein) or upon earlier acceleration or redemption,
and shall bear interest from their date of issuance, at the rate borne by the
City of Superior Bonds, payable when interest on the City of Superior Bonds is
payable, the principal and interest on each said bond to be payable at the or
the office of the Company in Superior, Wisconsin or agency of the Company in the
City of St. Paul, Minnesota, in such coin or currency of the United States
of America as at the time of payment is legal tender for public and private
debts.
The Bonds
of the Eighth Series shall be authenticated and delivered from time to time,
upon the request of the Company to the Trustee, to, and registered in the name
of, the trustee under the Indenture of Trust, dated as of October 1,
2007 (herein called the "City of Superior Indenture")
of the City of Superior, Wisconsin (the "City"), in order to secure
the obligation of the Company to repay amounts borrowed in connection with the
sale of the bonds from time to time issued under the City of Superior Indenture
(herein called the "City of
Superior Bonds") pursuant to the Loan Agreement, dated as of
October 1, 2007, between the City and the Company (hereinafter called the
"Loan Agreement"),
together with interest thereon. Such request of the Company shall
specify the terms and principal amount of the bonds of the Eighth Series to be
authenticated and delivered pursuant to such request and be accompanied by such
certificates, opinions and other documents required under the
Mortgage.
The
Company shall receive a credit against its obligation to make any payment of the
principal of or interest on the bonds of this series, whether at maturity, upon
redemption or otherwise, in an amount equal to, and such obligation shall be
fully or partially, as the case may be, satisfied and discharged to the extent
of, the amount, if any, credited pursuant to the City of Superior Indenture
against the payment required to be made by or for the account of the City in
respect of the corresponding payment of the principal of or interest on the City
of Superior Bonds.
The
Trustee may conclusively presume that the obligation of the Company to pay the
principal of and interest on the Bonds of the Eighth Series as the same shall
become due and payable shall have been fully satisfied and discharged unless and
until it shall have received a written notice from the trustee under the City of
Superior Indenture, signed by its President, a Vice President or a Trust
Officer, stating that the corresponding payment of principal of or interest on
the City of Superior Bonds has become due and payable and has not been fully
paid and specifying the amount of funds required to make such
payment.
If an
Event of Default described in Section 701(a) or (b) of the City of Superior
Indenture shall have occurred, in determining whether or not any payment of the
principal of or interest on the Bonds of the Eighth Series shall have been made
in full, moneys received by the trustee under the City of Superior Indenture
from the Company shall, to the extent of the amount remaining to be paid by the
Company pursuant to subsection (e) of Section 3.02 of the Loan Agreement be
deemed to have been paid under said subsection (e) and not to have been paid on
the Bonds of the Eighth Series.
The
Trustee may conclusively presume that no Event of Default described in Section
701 of the City of Superior Indenture shall have occurred unless and until it
shall have received a written notice from the trustee under the City of Superior
Indenture, signed by its President, a Vice President or a Trust Officer stating
that such an event has occurred.
8
From time
to time, pursuant to Section 9.03 of the Loan Agreement, the Company may amend
the terms of the Bonds of the Eighth Series in order to secure the amended
obligation of the Company under the Loan Agreement. Upon receipt of a
Company request specifying the amended terms of the Bonds of the Eighth Series
and requesting the authentication and delivery of amended certificates for such
bonds, together with a written notice signed by an officer of the trustee under
the City of Superior Indenture confirming that such amended terms comply with
the requirements of Section 9.03 of the Loan Agreement, the Trustee shall
authenticate and deliver such amended certificates to the trustee under the City
of Superior Indenture. Upon such delivery of the amended
certificates, the certificates for the corresponding Bonds of the Eighth Series
previously held by the trustee under the City of Superior Indenture shall be
deemed superseded by the amended certificates and shall thereafter be deemed
obsolete, null and void. The obsolete certificates need not be
delivered to the Trustee prior to the delivery of the amended certificates, but
shall be cancelled or destroyed if and when surrendered by the trustee under the
City of Superior Indenture.
On the
date that any of the City of Superior Bonds are required to be redeemed pursuant
to Section 301 of the City of Superior Indenture, an equal principal amount of
bonds of the Eighth Series shall be redeemed at such principal amount plus
accrued interest to such redemption date.
The
Trustee may conclusively presume that no event shall have occurred which would
require the Company to redeem Bonds of the Eighth Series pursuant to this
section unless and until it shall have received a written notice from the
trustee under the City of Superior Indenture, signed by its President, a Vice
President or a Trust Officer, stating that such an event shall have occurred,
specifying the date thereof and describing such event in reasonable
detail.
At the
option of the registered owner, any Bonds of the Eighth Series, upon surrender
thereof for cancellation at the office or agency of the Company in the City of
St. Paul, Minnesota, or the office of the Company in Superior, Wisconsin,
together with a written instrument of transfer wherever required by the Company
duly executed by the registered owner or by its duly authorized attorney, shall
(subject to the provisions of Section 12 of the Mortgage) be exchangeable for a
like aggregate principal amount of bonds of the same series of other authorized
denominations.
Bonds of
the Eighth Series shall not be transferable except to any successor trustee
under the City of Superior Indenture, any such transfer to be made (subject to
the provisions of Section 12 of the Mortgage) at the office or agency of the
Company in City of St. Paul, Minnesota, or the office of the Company in
Superior, Wisconsin.
Upon the
delivery of this Ninth Supplemental Indenture and upon compliance with the
applicable provisions of the Mortgage, there shall be an initial issue of Bonds
of the Eighth Series for the aggregate principal amount of
$6,370,000.
Notwithstanding
any provision of Section 12 or Section 16 of the Mortgage, (a) no charge will be
made by the Company for any transfer or exchange of any Bond of the Eighth
Series or, in the case of any lost, destroyed or mutilated Bond, the issuance,
authentication and delivery of a new Bond of the Eighth Series in substitution
thereof, whether for any stamp tax or
9
other
governmental charge, if any, applicable thereto or otherwise, and the Company
shall reimburse the Trustee for all expenses incurred in connection therewith
and (b) in the event of any loss, destruction or mutilation of any Bond of the
Eighth Series, and a request by the holder for issuance of a new Bond of the
Eighth Series in substitution therefor, the holder's unsecured indemnity
agreement shall be deemed to be satisfactory to the Company and the Trustee for
purposes of Section 16 of the Mortgage.
Notwithstanding
any provision of Section 15 of the Mortgage, Bonds of the Eighth Series shall be
authenticated, issued and delivered only as definitive bonds. Bonds
of the Eighth Series so authenticated, issued and delivered may be in the form
of fully engraved bonds, bonds printed or lithographed on engraved borders,
bonds printed or bonds typewritten.
ARTICLE II
MISCELLANEOUS
PROVISIONS
Section 2.1. The terms
defined in the Mortgage, as heretofore supplemented, shall for all purposes of
this Ninth Supplemental Indenture have the meanings specified in the Mortgage,
as heretofore supplemented.
Section 2.2. The Trustee
hereby accepts the trust herein declared, provided and created and agrees to
perform the same upon the terms and conditions herein and in the Mortgage, as
heretofore supplemented, set forth and upon the following terms and
conditions.
Section 2.3. The Trustee shall not
be responsible in any manner whatsoever for or in respect of the validity or
sufficiency of this Ninth Supplemental Indenture or for or in respect of the
recitals contained herein, all of which recitals are made by the Company
solely. In general, each and every term and condition contained in
Article XVII of the Mortgage shall apply to and form part of this Ninth
Supplemental Indenture with the same force and effect as if the same were herein
set forth in full, with such omissions, variations and insertions, if any, as
may be appropriate to make the same conform to the provisions of this Ninth
Supplemental Indenture.
Section 2.4. Subject to the
provisions of Article XVI and Article XVII of the Mortgage, whenever in this
Ninth Supplemental Indenture any of the parties hereto is named or referred to,
this shall be deemed to include the successors or assigns of such party, and all
the covenants and agreements in this Ninth Supplemental Indenture contained by
or on behalf of the Company or by or on behalf of the Trustee shall bind and
inure to the benefit of the respective successors and assigns of such parties
whether so expressed or not.
Section 2.5. Nothing in this Ninth
Supplemental Indenture, express or implied, is intended, or shall be construed,
to confer upon, or to give to, any person, firm or corporation, other than the
parties hereto and the holders of the bonds Outstanding under the Mortgage, any
right, remedy or claim under or by reason of this Ninth Supplemental Indenture
or any covenant, condition, stipulation, promise or agreement hereof, and all
the covenants, conditions, stipulations, promises and agreements of this Ninth
Supplemental Indenture contained by or on behalf of the Company shall be for the
sole and exclusive benefit of the parties hereto, and of the holders of the
bonds and of the coupons Outstanding under the Mortgage.
Section 2.6. This Ninth
Supplemental Indenture may be executed in several counterparts, each of which
shall be an original and all of which shall constitute but one and the same
instrument.
10
IN
WITNESS WHEREOF, Superior Water, Light and Power Company has caused its
corporate name to be hereunto affixed, and this instrument to be signed and
sealed by its President or one of its Vice Presidents, and its corporate seal to
be attested by its Secretary or one of its Assistant Secretaries for and in its
behalf, and U.S. Bank National Association has caused its corporate name to be
hereunto affixed, and this instrument to be signed by its President and to be
attested by its Secretary, all as of the 1st day of October,
2007.
|
|
SUPERIOR
WATER, LIGHT AND POWER COMPANY
|
By: /s/ Roger P. Engle
President
ATTEST:
/s/
Janet A. Blake
Secretary
Executed,
sealed and delivered by
Superior
Water, Light and Power
Company
in the presence of:
/s/ Nancy A.
Venne
/s/ Paul M. Holt
11
U.S. BANK
NATIONAL ASSOCIATION,
as
Trustee
By: /s/ R. Prokosch
60;
Vice
President
ATTEST:
/s/
Ryan Hernstat
Vice President
Executed
and delivered by U.S. Bank National
Association
in the presence of:
/s/ Joel
Geist
/s/ D.
Garsteig
12
STATE OF
WISCONSIN )
) SS.
COUNTY OF
DOUGLAS )
Personally
came before me this 24 day of September, 2007, Roger P. Engle, to me known to be
the President, and Janet A. Blake, to me known to be the Secretary of the
above-named SUPERIOR WATER, LIGHT AND POWER COMPANY, the corporation described
in and which executed the foregoing instrument, and to me personally known to be
the persons who as such officers executed the foregoing instrument in the name
and behalf of said corporation, who, being by me duly sworn, did depose and say
and acknowledge that they are respectively the President and Secretary of said
corporation, that the seal affixed to said instrument is the corporate seal of
said corporation, and that they signed, sealed and delivered said instrument in
the name and on behalf of said corporation by authority of its Board of
Directors, and said Roger P. Engle and Janet A. Blake, then and there
acknowledged said instrument to be the free act and deed of said corporation and
that such corporation executed the same.
Given
under my hand and notarial seal this 24 day of September, 2007.
/s/ Nancy A. Venne
Notary Public, State
of Wisconsin
My Commission expires
July 20, 2008
13
STATE OF
MINNESOTA )
)
SS.
COUNTY OF
RAMSEY )
Personally
came before me this 20th day of September, 2007, to me known to be the and , to me known
to the of the above-named U.S. BANK NATIONAL ASSOCIATION, the corporation
described in and which executed the foregoing instrument, and to me personally
known to be the persons who as such officers executed the foregoing instrument
in the name and behalf of said corporation, who, being by me duly sworn, did
depose and say and acknowledge that they are respectively
the and of said corporation, and that they signed and
delivered said instrument in the name and on behalf of said corporation by
authority of its Board of Directors, and said Vice President and Vice
President then and there acknowledged said instrument to be the free act and
deed of said corporation and that such corporation executed the
same.
Given
under my hand and notarial seal this 20th day of September, 2007
/s/ Denise Landeen
Notary
Public, State of Minnesota
My Commission expires
January 31, 2012
14
EXHIBIT A
[FORM OF BOND OF THE EIGHTH
SERIES]
THIS BOND
IS NOT TRANSFERABLE EXCEPT TO A SUCCESSOR TRUSTEE UNDER THE INDENTURE OF TRUST,
DATED AS OF OCTOBER 1, 2007 (HEREINAFTER CALLED "THE CITY OF SUPERIOR
INDENTURE"), BETWEEN THE CITY OF SUPERIOR, WISCONSIN (HEREINAFTER CALLED
"THE CITY"), AND U.S.
BANK NATIONAL ASSOCIATION, AS TRUSTEE UNDER THE CITY OF SUPERIOR
INDENTURE.
SUPERIOR WATER, LIGHT AND POWER
COMPANY
FIRST MORTGAGE
BOND
5.375% Series due November 1,
2021
No.
R-___
0; $
SUPERIOR
WATER, LIGHT AND POWER COMPANY, a corporation of the State of Wisconsin
(hereinafter called the "Company"), for value
received, hereby promises to pay to , or
registered assigns, on November 1, 2021 , DOLLARS
($ ) in such coin or currency of
the United States of America as at the time of payment is legal tender for
public and private debts, and to pay to the registered owner hereof interest
thereon in like coin or currency (computed on the basis of a 360-day year
of twelve 30-day months) at the rate of five and three hundred seventy-five
thousandths percent (5.375%) per annum semiannually on May 1 and
November 1 of each year commencing November 1, 2007 until the
principal thereof shall have become due and payable and at the same rate per
annum on any overdue payment of principal or premium, if any, and, to the extent
enforceable under applicable law, on any overdue payment of interest. The
principal hereof (and premium, if any) and interest hereon shall be paid at the
office or agency of the Company in the City of St. Paul, Minnesota, or the
office of the Company in Superior, Wisconsin or as shall be otherwise agreed to
pursuant to the provisions of the Ninth Supplemental Indenture hereinafter
referred to.
This bond
is one of an issue of bonds of the Company issuable in series and is one of a
series designated the First Mortgage Bonds, 5.375% Series due November 1, 2021
(the "Bonds of the Eighth
Series") created by the Ninth Supplemental Indenture dated as of
October 1, 2007 executed by the Company to U.S. Bank National Association
(successor Trustee to Chemical Bank and Peter Morse), as Trustee, all bonds of
all series being issued and to be issued under and equally secured by a Mortgage
and Deed of Trust (herein, together with any indentures supplemental thereto,
called the "Mortgage"),
dated as of March 1, 1943, executed by the Company to Chemical Bank & Trust
Company and Howard B. Smith, as Trustees (U.S. Bank National Association,
successor Trustee). Reference is made to the Mortgage for a
description of the property mortgaged and pledged, the nature and extent of the
security, the rights of the holders of the bonds and of the Trustee in respect
thereof, the duties and immunities of the
A-1
Trustee
and terms and conditions upon which the bonds are and are to be secured and the
circumstances under which additional bonds may be issued.
With the
consent of the Company and to the extent permitted by and as provided in the
Mortgage, the rights and obligations of the Company and/or the rights of the
holders of the bonds and/or coupons and/or the terms and provisions of the
Mortgage may be modified or altered by affirmative vote of the holders of at
least seventy per centum (70%) in principal amount of the bonds then outstanding
under the Mortgage and, if the rights of the holders of one or more, but less
than all, series of bonds then outstanding are to be affected, then also by
affirmative vote of the holders of at least seventy per centum (70%) in
principal amount of the bonds then outstanding of each series of bonds so to be
affected (excluding in any case bonds disqualified from voting by reason of the
Company's interest therein as provided in the Mortgage); provided that, without
the consent of the holder hereof, no such modification or alteration shall,
among other things, impair or affect the right of the holder to receive payment
of the principal of (and premium, if any) and interest on this bond, on or after
the respective due dates and at the places and in the respective amounts
expressed herein, or permit the creation of any lien equal or prior to the lien
of the Mortgage or deprive the holder of the benefit of a lien on the mortgaged
and pledged property, or give any bond or bonds secured by the Mortgage any
preference over any other bond or bonds so secured, or reduce the percentage in
principal amount of the bonds required to authorize or consent to any such
modification or alteration of the Mortgage.
The Bonds
of the Eighth Series may be redeemed prior to maturity, in the manner described
in the Ninth Supplemental Indenture. The Trustee may conclusively
presume that no event shall have occurred which would require the Company to
redeem bonds of this series pursuant to Section 1.1 of the Ninth Supplemental
Indenture unless and until it shall have received a written notice from the
trustee under the City of Superior Indenture, signed by its President, a Vice
President or a Trust Officer, stating that such an event shall have occurred,
specifying the date thereof and describing such event in reasonable
detail.
The
principal hereof may be declared or may become due prior to the maturity date
hereinbefore named on the conditions, in the manner and at the time set forth in
the Mortgage, upon the occurrence of a default as in the Mortgage
provided.
If an
Event of Default described in Section 701(a) or (b) of the City of Superior
Indenture shall have occurred, in determining whether or not any payment of the
principal of or interest on the bonds of this series shall have been made in
full, moneys received by the trustee under the City of Superior Indenture from
the Company shall, to the extent of the amount remaining to be paid by the
Company pursuant to subsection (e) of Section 3.02 of the Loan Agreement, be
deemed to have been paid under said subsection (e) and not to have been paid on
the bonds of this series.
The
Trustee may conclusively presume that the obligation of the Company to pay the
principal of and interest on the bonds of this series as the same shall become
due and payable shall have been fully satisfied and discharged unless and until
it shall have received a written notice from the trustee under the City of
Superior Indenture, signed by its President, a Vice President or a Trust
Officer, stating that the corresponding payment of principal of or interest
on
A-2
the bonds
issued under the City of Superior Indenture (hereinafter called the "City of Superior Bonds") has
become due and payable and has not been fully paid and specifying the amount of
funds required to make such payment. The Trustee may conclusively presume that
no Event of Default described in Section 701 of the City of Superior Indenture
shall have occurred unless and until it shall have received a written notice
from the trustee under the City of Superior Indenture, signed by its President,
a Vice President or a Trust Officer stating that such an event has
occurred.
This bond
is not transferable except to any successor trustee under the City of Superior
Indenture, such transfer to be made as prescribed in the Mortgage by the
registered owner hereof in person, or by its duly authorized attorney, at the
office or agency of the Company in the City of St. Paul, Minnesota or the
office of the Company in Superior, Wisconsin upon surrender hereof for
cancellation, together with a written instrument of transfer in form approved by
the Company duly executed by the registered owner hereof or by its duly
authorized attorney, and thereupon a new fully registered bond or bonds of the
same series for a like principal amount will be issued to the transferee in
exchange herefor as provided in the Mortgage. This bond may, at the option of
the registered owner hereof and upon surrender hereof for cancellation at such
office or agency, be exchanged as prescribed in the Mortgage for other
registered bonds of the same series of other authorized denominations having a
like aggregate principal amount. No charge will be made by the
Company for any transfer or exchange of this bond or, in case this bond shall be
lost, destroyed or mutilated, the issuance, authentication and delivery of a new
bond in substitution hereof. The Company and the Trustee may deem and treat the
person in whose name this bond is registered as the absolute owner hereof for
the purpose of receiving payment and for all other purposes and neither the
Company nor the Trustee shall be affected by any notice to the
contrary.
As
provided in the Mortgage, the Company shall not be required to make transfers or
exchanges of bonds of any series for a period of ten (10) days next preceding
any interest payment date for bonds of said series, or next preceding any
designation of bonds of said series to be redeemed, and the Company shall not be
required to make transfers or exchanges of any bonds designated in whole or in
part for redemption.
The
Company shall receive a credit against its obligation to make any payment of the
principal of or interest on the bonds of this series, whether at maturity, upon
redemption or otherwise, in an amount equal to, and such obligation shall be
fully or partially, as the case may be, satisfied and discharged to the extent
of, the amount, if any, credited pursuant to the City of Superior Indenture
against the payment required to be made by or for the account of the City in
respect of the corresponding payment of the principal of or interest on the City
of Superior Bonds pursuant to the Loan Agreement, dated as of October 1,
2007, from the City to the Company (hereinafter called the "Loan
Agreement").
No recourse shall be had for the
payment of the principal of or interest on this bond against any incorporator or
any past, present or future subscriber to the capital stock, stockholder,
officer, or director of the Company or of any predecessor or successor
corporation, as such, either directly or through the Company or any predecessor
of successor corporation, under any rule of law, statute, or constitution or by
the enforcement of any assessment or
A-3
otherwise,
all such liability of incorporators, subscribers, stockholders, officers, and
directors being released by the holder or owner hereof by the acceptance of this
bond and being likewise waived and released by the terms of the
Mortgage.
This bond
shall not become obligatory until U.S. Bank National Association, the Trustee
under the Mortgage, or its successor thereunder, shall have signed the form of
authentication certificate endorsed hereon.
IN
WITNESS WHEREOF, SUPERIOR WATER, LIGHT AND POWER COMPANY has caused this bond to
be signed in its corporate name by its President or one of its Vice-Presidents
and its Treasurer and its corporate seal to be impressed or imprinted hereon and
attested by its Secretary or one of its Assistant Secretaries on , .
SUPERIOR
WATER, LIGHT AND POWER
COMPANY
By
Roger P.
Engle
President
By
William
S. Bombich
Treasurer
ATTEST:
Janet A. Blake
Secretary
[FORM OF TRUSTEE'S AUTHENTICATION
CERTIFICATE]
This bond
is one of the bonds, of the series herein designated, described or provided for
in the within-mentioned Mortgage.
U.S. BANK
NATIONAL ASSOCIATION,
as
Trustee
By
60;
Authorized
Officer
A-4
Exhibit 4(c)4
ALLETE
2007 Form 10-K
________________________________________________________________________
SUPERIOR
WATER, LIGHT AND POWER COMPANY
2915 Hill
Avenue, Superior, WI 54880
To
U.S. BANK
NATIONAL ASSOCIATION
(formerly
First Bank (N.A.))
As
Trustee Under Superior Water, Light
and Power
Company's Mortgage and Deed of Trust,
Dated as
of March 1, 1943
_________________________________________
TENTH
SUPPLEMENTAL INDENTURE
_________________________________________
Dated as
of October 1, 2007
________________________________________________________________________
This
instrument drafted by
Bell,
Gierhart & Moore, S.C.
Madison,
WI
TABLE OF CONTENTS
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Section
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Heading
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Page
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Parties
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1
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Recitals
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1
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ARTICLE
I
|
BONDS
OF THE NINTH SERIES
|
7
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Section
1.1
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7
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ARTICLE
II
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MISCELLANEOUS
PROVISIONS
|
9
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Section
2.1
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9
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Section
2.2
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9
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Section
2.3
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9
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Section
2.4
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10
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Section
2.5
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10
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Section
2.6
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10
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Signature
Page
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11
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ATTACHMENTS
TO SUPPLEMENTAL INDENTURE:
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EXHIBIT
A - Form of Bond of the Ninth Series
|
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TENTH SUPPLEMENTAL
INDENTURE
SUPPLEMENTAL
INDENTURE, dated as of the 1st day of October,
2007, made and entered into by and between SUPERIOR WATER, LIGHT AND POWER
COMPANY, a corporation of the State of Wisconsin, whose address is 2915 Hill
Avenue, Superior, Wisconsin 54880 (the "Company") and U.S. BANK
NATIONAL ASSOCIATION (successor to Chemical Bank, as Corporate Trustee, and
Peter Morse, as Co-Trustee), a national banking association, whose principal
trust office at the date hereof is in St. Paul, Minnesota (the "Trustee"), as Trustee under
the Mortgage and Deed of Trust dated as of March 1, 1943 (hereinafter called the
"Mortgage"), which
Mortgage was executed and delivered by the Company to secure the payment of
bonds issued or to be issued under and in accordance with the provisions of the
Mortgage, reference to which Mortgage is hereby made, this Tenth Supplemental
Indenture (the "Tenth
Supplemental Indenture") being supplemental thereto;
WHEREAS,
said Mortgage was recorded in the office of the Register of Deeds in and for
Douglas County, Wisconsin, on May 3, 1943, in Volume 191 of Mortgages at page 1,
Document No. 362844; and
WHEREAS,
an instrument dated as of September 15, 1949, was executed by the Company
appointing Russell H. Sherman as Co-Trustee in succession to said Howard B.
Smith, resigned, under said Mortgage, and by Russell H. Sherman accepting the
appointment as Co-Trustee under said Mortgage in succession to the said Howard
B. Smith, which instrument was recorded in the office of the Register of Deeds
in and for Douglas County, Wisconsin, on October 8, 1949, in Volume 196 of
Mortgages at page 510, Document No. 398649; and
WHEREAS,
by the Mortgage, the Company covenanted that it would execute
and deliver such supplemental indenture or indentures and such
further instruments and do such further acts as might be necessary or proper to
carry out more effectively the purposes of the Mortgage and to make subject to
the lien of the Mortgage any property acquired after the date of the execution
of the Mortgage and intended to be subject to the lien thereof; and
WHEREAS,
the Company executed and delivered its First Supplemental Indenture, dated as of
March 1, 1951 (hereinafter called its "First Supplemental
Indenture"), which was recorded in the office of the Register of Deeds in
and for Douglas County, Wisconsin, on March 30, 1951, in Volume 205 of Mortgages
at page 73, Document No. 405297; and
WHEREAS,
an instrument dated as of May 16, 1961, was executed by the Company appointing
Richard G. Pintard as Co-Trustee in succession to said Russell H. Sherman,
resigned, under said Mortgage and by Richard G. Pintard accepting the
appointment as Co-Trustee under said Mortgage in succession to said Russell H.
Sherman, which instrument was recorded in the office of the Register of Deeds in
and for Douglas County, Wisconsin, on May 31, 1961, in Volume 256 of Mortgages
at page 423, Document No. 453857; and
WHEREAS,
the Company executed and delivered its Second Supplemental Indenture, dated as
of March 1, 1962 (hereinafter called its "Second Supplemental
Indenture"), which was
1
recorded
in the office of the Register of Deeds in and for Douglas County, Wisconsin, on
March 26, 1962, in Volume 261 of Mortgages at page 81, Document No. 457662;
and
WHEREAS,
an instrument dated as of June 23, 1976, was executed by the Company appointing
Steven F. Lasher as Co-Trustee in succession to said Richard G. Pintard,
resigned, under said Mortgage and by Steven F. Lasher accepting the appointment
as Co-Trustee under said Mortgage in succession to said Richard G. Pintard,
which instrument was recorded in the office of the Register of Deeds in and for
Douglas County, Wisconsin, on July 16, 1976, in Volume 353 of Records at page
274, Document No. 532495; and
WHEREAS,
the Company executed and delivered its Third Supplemental Indenture, dated as of
July 1, 1976 (hereinafter called its "Third Supplemental
Indenture"), which was recorded in the office of the Register of Deeds in
and for Douglas County, Wisconsin, on October 1, 1976, in Volume 355 of Records
at page 683, Document No. 534332; and
WHEREAS,
an instrument dated as of December 30, 1977, was executed by the Company
appointing C. G. Martens as Co-Trustee in succession, to said Steven F. Lasher,
resigned, under said Mortgage and by C. G. Martens accepting the appointment as
Co-Trustee under said Mortgage in succession to said Steven F. Lasher, which
instrument was recorded in the office of the Register of Deeds in and for
Douglas County, Wisconsin, on February 13, 1985, in Volume 436 of Records at
page 264, Document No. 589308; and
WHEREAS,
the Company executed and delivered its Fourth Supplemental Indenture, dated as
of March 1, 1985 (hereinafter called its "Fourth Supplemental
Indenture"), which was recorded in the office of the Register of Deeds in
and for Douglas County, Wisconsin, on March 19, 1985, in Volume 436 of Records
at page 910, Document No. 589776; and
WHEREAS,
an instrument dated as of October 26, 1992, was executed by the Company
appointing Peter Morse as Co-Trustee in succession to said C. G. Martens,
resigned, under said Mortgage and by Peter Morse accepting the appointment as
Co-Trustee under said Mortgage in succession to said C. G. Martens, which
instrument was recorded in the office of the Register of Deeds in and for
Douglas County, Wisconsin, on November 13, 1992, in Volume 539 of Records at
page 9, Document No. 649056; and
WHEREAS,
the Company executed and delivered its Fifth Supplemental Indenture, dated as of
December 1, 1992, (hereinafter called its "Fifth Supplemental
Indenture"), which was recorded in the office of the Register of Deeds in
and for Douglas County, Wisconsin, on December 28, 1992, in Volume 541 of
Records at page 229, Document No. 650104; and
WHEREAS,
the Company executed and delivered its Sixth Supplemental Indenture, dated as of
March 24, 1994 (hereinafter called its "Sixth Supplemental
Indenture"), which was recorded in the office of the Register of Deeds in
and for Douglas County, Wisconsin, on March 29, 1994, in Volume 568 of Records
at page 757, Document No. 662228; and
WHEREAS,
the Company executed and delivered its Seventh Supplemental Indenture, dated as
of November 1, 1994 (hereinafter called its "Seventh Supplemental
Indenture"), which
2
was
recorded in the office of the Register of Deeds in and for Douglas County,
Wisconsin, on January 18, 1995, in Volume 583 of Records at page 242, Document
No. 669350; and
WHEREAS,
an instrument dated as of January 20, 1995, was executed by The Prudential
Insurance Company pursuant to Section 102 of the Mortgage appointing First Bank
(N.A.) as Trustee in succession to Chemical Bank as Corporate Trustee and Peter
Morse as Co-Trustee under said Mortgage and by First Bank (N.A.) (U.S. Bank
National Association, successor) accepting the appointment as Trustee under such
Mortgage in succession to said Chemical Bank and said Peter Morse, which
instrument was recorded in the Office of the Register of Deeds in and for
Douglas County, Wisconsin on April 6, 1995 in Volume 585 of Records at page 953,
Document No. 670717; and
WHEREAS,
the Company executed and delivered its Eighth Supplemental Indenture, dated as
of January 1, 1997 (hereinafter called its "Eighth Supplemental
Indenture"), which was recorded in the office of the Register of Deeds in
and for Douglas County, Wisconsin, on January 7, 1997, in Volume 617 of Records
at page 536, Document No. 685699; and
WHEREAS,
the Company executed and delivered its Ninth Supplemental Indenture, dated as of
October 1, 2007 (hereinafter called its "Ninth Supplemental
Indenture"), which will be recorded in the office of the Register of
Deeds in and for Douglas County, Wisconsin, contemporaneously with the recording
of this instrument; and
WHEREAS,
in addition to the property described in the Mortgage, as heretofore
supplemented, the Company has acquired certain other property, rights and
interests in property; and
WHEREAS,
the Company has heretofore issued, in accordance with the provisions of the
Mortgage, bonds of a series entitled and designated First Mortgage Bonds, 3 3/8%
Series due 1973 (the "Bonds of
the First Series"), in the aggregate principal amount of Two Million Five
Hundred Thousand Dollars ($2,500,000), none of which Bonds of the First Series
are now Outstanding; bonds of a series entitled and designated First Mortgage
Bonds, 3 1/10% Series due 1981 (the "Bonds of the Second Series"),
in the aggregate principal amount of Five Million Dollars ($5,000,000), none of
which Bonds of the Second Series are now Outstanding; bonds of a series entitled
and designated First Mortgage Bonds, 5% Series due 1992 (the "Bonds of the Third Series"),
in the aggregate principal amount of Two Million Seven Hundred Thousand Dollars
($2,700,000), none of which Bonds of the Third Series are now outstanding; bonds
of a series entitled and designated First Mortgage Bonds, 9 5/8% Series due 2001
(the "Bonds of the Fourth
Series"), the interest rate for which bonds was modified to 6.10% by the
Sixth Supplemental Indenture, in the aggregate principal amount of Three Million
Dollars ($3,000,000), none of which bonds of the Fourth Series are now
outstanding; bonds of a series entitled and designated First Mortgage Bonds, 12
1/2% Series due 1992 (the "Bonds of the Fifth Series"),
in the aggregate principal amount of Three Million Five Hundred Thousand Dollars
($3,500,000), none of which Bonds of the Fifth Series are now outstanding; Bonds
of a series entitled and designated First Mortgage Bonds, 7.91% Series due 2013
(the "Bonds of the Sixth
Series"), in the aggregate principal amount of Five Million Dollars
($5,000,000) of which One
3
Million
Five Hundred Thousand Dollars ($1,500,000) aggregate principal amount is now
outstanding; Bonds of a series entitled and designated First Mortgage Bonds,
7.27% Series due 2008 (the "Bonds of the Seventh
Series"), in the aggregate principal amount of Six Million Dollars
($6,000,000) of which Six Million Dollars ($6,000,000) aggregate principal
amount is now outstanding; and Bonds of a series entitled and designated First
Mortgage Bonds, 5.375% Series due 2021 (the "Bonds of the Eighth Series"),
in the aggregate principal amount of $6,370,000, none of which has yet been
issued.
WHEREAS,
Section 8 of the Mortgage provides that the form of each series of bonds (other
than Bonds of the First Series) issued thereunder shall be established by
Resolution of the Board of Directors of the Company and that the form of such
series, as established by said Board of Directors, shall specify the descriptive
title of the bonds and various other terms thereof, and may also contain such
provisions not inconsistent with the provisions of the Mortgage as the Board of
Directors may, in its discretion, cause to be inserted therein; and
WHEREAS,
Section 120 of the Mortgage provides, among other things, that the Company may
enter into any further covenants, limitations or restrictions for the benefit of
any one or more series of bonds issued thereunder, or the Company may establish
the terms and provisions of any series of bonds other than said Bonds of the
First Series, by an instrument in writing executed and acknowledged by the
Company in such manner as would be necessary to entitle a conveyance of real
estate to be of record in all of the states in which any property at the time
subject to the lien of the Mortgage shall be situated; and
WHEREAS,
the Company now desires to create a new series of bonds; and
WHEREAS,
the execution and delivery by the Company of this Tenth Supplemental Indenture,
and the terms of the Bonds of the Ninth Series hereinafter referred to, have
been duly authorized by the Board of Directors of the Company by appropriate
resolutions of said Board of Directors;
NOW,
THEREFORE, THIS INDENTURE WITNESSETH: That Superior Water, Light and Power
Company, in consideration of the premises and of One Dollar ($1) to it duly paid
by the Trustee at or before the ensealing and delivery of these presents, the
receipt whereof is hereby acknowledged, and in further evidence of assurance of
the estate, title and rights of the Trustee and in order further to secure the
payment both of the principal of and interest and premium, if any, on the bonds
from time to time issued under the Mortgage, according to their tenor and
effect, and the performance of all the provisions of the Mortgage (including any
instruments supplemental thereto and any modification made as in the Mortgage
provided) and of said bonds, hereby grants, bargains, sells, releases, conveys,
assigns, transfers, mortgages, pledges, sets over and confirms (subject,
however, to Excepted Encumbrances as defined in Section 6 of the Mortgage) unto
U.S. Bank National Association, as Trustee under the Mortgage, and to its
successor or successors in said trust, and to said Trustee and its successors
and assigns forever, all and singular the permits, franchises, rights,
privileges, grants and property, real, personal and mixed, now owned or which
may be hereafter acquired by the Company (except any of the character herein or
in the Mortgage expressly excepted), including (but not limited to) its electric
light and power works, gas works, water works, buildings, structures,
machinery,
4
equipment,
mains, pipes, lines, poles, wires, easements, rights of way, permits,
franchises, rights, privileges, grants and all property of every kind and
description, situated in the City of Superior, Douglas County, Wisconsin, or
elsewhere in Douglas County, Wisconsin, in Washburn County, Wisconsin, or in any
other place or places now owned by the Company, or that may be hereafter
acquired by it, including, but not limited to, the following described
properties of the Company--that is to say:
All
property, real, personal and mixed, acquired by the Company after the date of
the execution and delivery of the Mortgage (except any herein or in the
Mortgage, as heretofore supplemented, expressly excepted), now owned or
hereafter acquired by the Company and wheresoever situated, including (without
in any wise limiting or impairing by the enumeration of the same the scope and
intent of the foregoing or of any general description contained in this Tenth
Supplemental Indenture) all lands, power sites, flowage rights, water rights,
water franchises, water locations, water appropriations, ditches, flumes,
reservoirs, reservoir sites, canals, raceways, dams, dam sites, aqueducts, and
all other rights or means for appropriating, conveying, storing and supplying
water; all rights of way and roads; all plants, works, reservoirs and tanks for
the pumping and purification of water; all water works; all plants for the
generation of electricity by water, steam and/or other power; all power houses,
gas plants, street lighting systems, standards and other equipment incidental
thereto, telephone, radio and television systems, air-conditioning systems and
equipment incidental thereto, water systems, steam heat and hot water plants,
substations, lines, service and supply systems, bridges, culverts, tracks,
street and interurban railway systems, offices, buildings and other structures
and the equipment thereof; all machinery, engines, boilers, dynamos, water,
electric, gas and other machines, regulators, meters, transformers, generators,
motors, water, electrical, gas and mechanical appliances, conduits, cables,
water, steam, heat, gas or other mains and pipes, service pipes, fittings,
valves and connections, pole and transmission lines, wires, cables, tools,
implements, apparatus, furniture, chattels and choses in action; all municipal
and other franchises, consents or permits; all lines for the transmission and
distribution of water, electric current, gas, steam heat or hot water for any
purpose, including towers, poles, wires, cables, pipes, conduits, ducts and all
apparatus for use in connection therewith; all real estate, lands, easements,
servitudes, licenses, permits, franchises, privileges, rights of way and other
rights in or relating to real estate or the occupancy of the same and (except as
herein or in the Mortgage, as heretofore supplemented, expressly excepted) all
the right, title and interest of the Company in and to all other property of any
kind or nature appertaining to and/or used and/or occupied and/or enjoyed in
connection with any property hereinbefore or in the Mortgage, as heretofore
supplemented, described.
Together
with all and singular the tenements, hereditaments and appurtenances belonging
or in any wise appertaining to the aforesaid property or any part thereof, with
the reversion and reversions, remainder and remainders and (subject to the
provisions of Section 57 of the Mortgage) the tolls, rents, revenues, issues,
earnings, income, product and profits thereof, and all the estate, right, title
and interest and claim whatsoever, at law as well as in equity, which the
Company now has or may hereafter acquire in and to the aforesaid property and
franchises and every part and parcel thereof.
It is
hereby agreed by the Company that all the property, rights and franchises
acquired by the Company after the date hereof (except any herein or in the
Mortgage, as heretofore
5
supplemented,
expressly excepted) shall be and are as fully granted and conveyed hereby and as
fully embraced within the lien of the Mortgage as if such property, rights and
franchises were now owned by the Company and were specifically described herein
and conveyed hereby.
Provided that the following
are not and are not intended to be now or hereafter granted, bargained, sold,
released, conveyed, assigned, transferred, mortgaged, pledged, set over or
confirmed hereunder and are hereby expressly excepted from the lien and
operation of the Mortgage, viz: (1) cash, shares of stock, bonds, notes and
other obligations and other securities not hereafter specifically pledged, paid,
deposited, delivered or held under the Mortgage or covenanted so to be; (2)
merchandise, equipment, materials or supplies held for the purpose of sale in
the usual course of business and fuel, oil and similar materials and supplies
consumable in the operation of any properties of the Company; rolling stock,
buses, motor coaches, automobiles and other vehicles; (3) bills, notes and
accounts receivable, and all contracts, leases and operating agreements not
specifically pledged under the Mortgage or covenanted so to be; the last day of
the term of any lease or leasehold which may heretofore have or hereafter may
become subject to the lien of the Mortgage; (4) water, electric energy, gas, ice
and other materials or products pumped, stored, generated, manufactured,
produced or purchased by the Company for sale, distribution or use in the
ordinary course of its business; (5) the Company's franchise to be a
corporation; and (6) all permits, franchises, rights, privileges, grants and
property in the state of Minnesota now owned or hereafter acquired unless such
permits, franchises, rights, privileges, grants and property in the state of
Minnesota shall have been subjected to the lien of the Mortgage by an indenture
or indentures supplemental to the Mortgage, pursuant to authorization of the
Board of Directors of the Company, whereupon all the permits, franchises,
rights, privileges, grants and property then owned or thereafter acquired by the
Company in the state of Minnesota (except property of the character expressly
excepted from the lien of the Mortgage in clauses (1) to (5) above, inclusive),
shall become and be subject to the lien of the Mortgage as part of the Mortgaged
and Pledged Property and may be released, funded and otherwise dealt with on the
same terms and subject to the same conditions and restrictions as though not
theretofore excepted from the lien of the Mortgage; provided, however, that the
property and rights expressly excepted from the lien and operation of the
Mortgage in the above subdivisions (2) and (3) shall (to the extent permitted by
law) cease to be so excepted in the event and as of the date that the Trustee or
a receiver or trustee shall enter upon and take possession of the Mortgaged and
Pledged Property in the manner provided in Article XIII of the Mortgage by
reason of the occurrence of a Default as defined in Section 65 of the
Mortgage.
To have
and to hold all such properties, real, personal and mixed, granted, bargained,
sold, released, conveyed, assigned, transferred, mortgaged, pledged, set over or
confirmed by the Company as aforesaid, or intended so to be, unto U.S. Bank
National Association as Trustee, and its successors and assigns
forever.
In trust
nevertheless, for the same purposes and upon the same terms, trusts and
conditions and subject to and with the same provisos and covenants as are set
forth in the Mortgage, as heretofore supplemented, this Tenth Supplemental
Indenture being supplemental thereto.
6
And it is
hereby covenanted by the Company that all the terms, conditions, provisos,
covenants and provisions contained in the Mortgage, as heretofore supplemented,
shall affect and apply to the property hereinbefore described and conveyed and
to the estate, rights, obligations and duties of the Company and the Trustee and
the beneficiaries of the trust with respect to said property, and to the Trustee
and its successors as Trustee of said property, in the same manner and with the
same effect as if said property had been owned by the Company at the time of the
execution of the Mortgage, and had been specifically and at length described in
and conveyed to the Trustee by the Mortgage as part of the property therein
stated to be conveyed.
The
Company further covenants and agrees to and with the Trustee and its successors
in said trust under the Mortgage as follows:
ARTICLE I
BONDS OF THE NINTH
SERIES
Section 1.1. There shall be
a Ninth series of bonds designated "First Mortgage Bonds, 5.75% Series
due November 1, 2037" (the "Bonds of the Ninth Series"),
which shall be limited to $6,130,000 aggregate principal amount, and shall be
issued as fully registered bonds without coupons in the denominations of $1,000
or any multiple thereof. The Bonds of the Ninth Series shall be dated
on the date of issuance thereof, mature on the maturity date of the City of
Superior Bonds (as defined herein) or upon earlier acceleration or redemption,
and shall bear interest from their date of issuance, at the rate borne by the
City of Superior Bonds, payable when interest on the City of Superior Bonds is
payable, the principal and interest on each said bond to be payable at the or
the office of the Company in Superior, Wisconsin or agency of the Company in the
City of St. Paul, Minnesota, in such coin or currency of the United States
of America as at the time of payment is legal tender for public and private
debts.
The Bonds
of the Ninth Series shall be authenticated and delivered from time to time, upon
the request of the Company to the Trustee, to, and registered in the name of,
the trustee under the Indenture of Trust, dated as of October 1,
2007 (herein called the "City of Superior Indenture")
of the City of Superior, Wisconsin (the "City"), in order to secure
the obligation of the Company to repay amounts borrowed in connection with the
sale of the bonds from time to time issued under the City of Superior Indenture
(herein called the "City of
Superior Bonds") pursuant to the Loan Agreement, dated as of
October 1, 2007, between the City and the Company (hereinafter called the
"Loan Agreement"),
together with interest thereon. Such request of the Company shall
specify the terms and principal amount of the Bonds of the Ninth Series to be
authenticated and delivered pursuant to such request and be accompanied by such
certificates, opinions and other documents required under the
Mortgage.
The
Company shall receive a credit against its obligation to make any payment of the
principal of or interest on the bonds of this series, whether at maturity, upon
redemption or otherwise, in an amount equal to, and such obligation shall be
fully or partially, as the case may be, satisfied and discharged to the extent
of, the amount, if any, credited pursuant to the City of Superior Indenture
against the payment required to be made by or for the account of the City
in
7
respect
of the corresponding payment of the principal of or interest on the City of
Superior Bonds.
The
Trustee may conclusively presume that the obligation of the Company to pay the
principal of and interest on the Bonds of the Ninth Series as the same shall
become due and payable shall have been fully satisfied and discharged unless and
until it shall have received a written notice from the trustee under the City of
Superior Indenture, signed by its President, a Vice President or a Trust
Officer, stating that the corresponding payment of principal of or interest on
the City of Superior Bonds has become due and payable and has not been fully
paid and specifying the amount of funds required to make such
payment.
If an
Event of Default described in Section 701(a) or (b) of the City of Superior
Indenture shall have occurred, in determining whether or not any payment of the
principal of or interest on the Bonds of the Ninth Series shall have been made
in full, moneys received by the trustee under the City of Superior Indenture
from the Company shall, to the extent of the amount remaining to be paid by the
Company pursuant to subsection (e) of Section 3.02 of the Loan Agreement be
deemed to have been paid under said subsection (e) and not to have been paid on
the Bonds of the Ninth Series.
The
Trustee may conclusively presume that no Event of Default described in Section
701 of the City of Superior Indenture shall have occurred unless and until it
shall have received a written notice from the trustee under the City of Superior
Indenture, signed by its President, a Vice President or a Trust Officer stating
that such an event has occurred.
From time
to time, pursuant to Section 9.03 of the Loan Agreement, the Company may amend
the terms of the Bonds of the Ninth Series in order to secure the amended
obligation of the Company under the Loan Agreement. Upon receipt of a
Company request specifying the amended terms of the Bonds of the Ninth Series
and requesting the authentication and delivery of amended certificates for such
bonds, together with a written notice signed by an officer of the trustee under
the City of Superior Indenture confirming that such amended terms comply with
the requirements of Section 9.03 of the Loan Agreement, the Trustee shall
authenticate and deliver such amended certificates to the trustee under the City
of Superior Indenture. Upon such delivery of the amended
certificates, the certificates for the corresponding Bonds of the Ninth Series
previously held by the trustee under the City of Superior Indenture shall be
deemed superseded by the amended certificates and shall thereafter be deemed
obsolete, null and void. The obsolete certificates need not be
delivered to the Trustee prior to the delivery of the amended certificates, but
shall be cancelled or destroyed if and when surrendered by the trustee under the
City of Superior Indenture.
On the
date that any of the City of Superior Bonds are required to be redeemed pursuant
to Section 301 of the City of Superior Indenture, an equal principal amount of
Bonds of the Ninth Series shall be redeemed at such principal amount plus
accrued interest to such redemption date.
The
Trustee may conclusively presume that no event shall have occurred which would
require the Company to redeem Bonds of the Ninth Series pursuant to this section
unless and until it shall have received a written notice from the trustee under
the City of Superior Indenture,signed by its President, a Vice President or a
Trust Officer, stating that such an event shall have occurred, specifying the
date thereof and describing such event in reasonable detail.
8
At the
option of the registered owner, any Bonds of the Ninth Series, upon surrender
thereof for cancellation at the office or agency of the Company in the City of
St. Paul, Minnesota, or the office of the Company in Superior, Wisconsin,
together with a written instrument of transfer wherever required by the Company
duly executed by the registered owner or by its duly authorized attorney, shall
(subject to the provisions of Section 12 of the Mortgage) be exchangeable for a
like aggregate principal amount of bonds of the same series of other authorized
denominations.
Bonds of
the Ninth Series shall not be transferable except to any successor trustee under
the City of Superior Indenture, any such transfer to be made (subject to the
provisions of Section 12 of the Mortgage) at the office or agency of the Company
in City of St. Paul, Minnesota, or the office of the Company in Superior,
Wisconsin.
Upon the
delivery of this Tenth Supplemental Indenture and upon compliance with the
applicable provisions of the Mortgage, there shall be an initial issue of Bonds
of the Ninth Series for the aggregate principal amount of
$6,130,000.
Notwithstanding
any provision of Section 12 or Section 16 of the Mortgage, (a) no charge will be
made by the Company for any transfer or exchange of any Bond of the Ninth Series
or, in the case of any lost, destroyed or mutilated Bond, the issuance,
authentication and delivery of a new Bond of the Ninth Series in substitution
thereof, whether for any stamp tax or other governmental charge, if any,
applicable thereto or otherwise, and the Company shall reimburse the Trustee for
all expenses incurred in connection therewith and (b) in the event of any loss,
destruction or mutilation of any Bond of the Ninth Series, and a request by the
holder for issuance of a new Bond of the Ninth Series in substitution therefor,
the holder's unsecured indemnity agreement shall be deemed to be satisfactory to
the Company and the Trustee for purposes of Section 16 of the
Mortgage.
Notwithstanding
any provision of Section 15 of the Mortgage, Bonds of the Ninth Series shall be
authenticated, issued and delivered only as definitive bonds. Bonds
of the Ninth Series so authenticated, issued and delivered may be in the form of
fully engraved bonds, bonds printed or lithographed on engraved borders, bonds
printed or bonds typewritten.
ARTICLE II
MISCELLANEOUS
PROVISIONS
Section 2.1. The terms
defined in the Mortgage, as heretofore supplemented, shall for all purposes of
this Tenth Supplemental Indenture have the meanings specified in the Mortgage,
as heretofore supplemented.
Section 2.2. The Trustee
hereby accepts the trust herein declared, provided and created and agrees to
perform the same upon the terms and conditions herein and in the Mortgage, as
heretofore supplemented, set forth and upon the following terms and
conditions.
9
Section 2.3. The Trustee
shall not be responsible in any manner whatsoever for or in respect of the
validity or sufficiency of this Tenth Supplemental Indenture or for or in
respect of the recitals contained herein, all of which recitals are made by the
Company solely. In general, each and every term and condition
contained in Article XVII of the Mortgage shall apply to and form part of this
Tenth Supplemental Indenture with the same force and effect as if the same were
herein set forth in full, with such omissions, variations and insertions, if
any, as may be appropriate to make the same conform to the provisions of this
Tenth Supplemental Indenture.
Section 2.4. Subject to the
provisions of Article XVI and Article XVII of the Mortgage, whenever in this
Tenth Supplemental Indenture any of the parties hereto is named or referred to,
this shall be deemed to include the successors or assigns of such party, and all
the covenants and agreements in this Tenth Supplemental Indenture contained by
or on behalf of the Company or by or on behalf of the Trustee shall bind and
inure to the benefit of the respective successors and assigns of such parties
whether so expressed or not.
Section 2.5. Nothing in
this Tenth Supplemental Indenture, express or implied, is intended, or shall be
construed, to confer upon, or to give to, any person, firm or corporation, other
than the parties hereto and the holders of the bonds Outstanding under the
Mortgage, any right, remedy or claim under or by reason of this Tenth
Supplemental Indenture or any covenant, condition, stipulation, promise or
agreement hereof, and all the covenants, conditions, stipulations, promises and
agreements of this Tenth Supplemental Indenture contained by or on behalf of the
Company shall be for the sole and exclusive benefit of the parties hereto, and
of the holders of the bonds and of the coupons Outstanding under the
Mortgage.
Section 2.6. This Tenth
Supplemental Indenture may be executed in several counterparts, each of which
shall be an original and all of which shall constitute but one and the same
instrument.
10
IN
WITNESS WHEREOF, Superior Water, Light and Power Company has caused its
corporate name to be hereunto affixed, and this instrument to be signed and
sealed by its President or one of its Vice Presidents, and its corporate seal to
be attested by its Secretary or one of its Assistant Secretaries for and in its
behalf, and U.S. Bank National Association has caused its corporate name to be
hereunto affixed, and this instrument to be signed by its President and to be
attested by its Secretary, all as of the 1st day of October,
2007.
|
|
SUPERIOR
WATER, LIGHT AND POWER COMPANY
|
By: /s/ Roger P. Engle
President
ATTEST:
/s/ Janet A.
Blake
Secretary
Executed,
sealed and delivered by
Superior
Water, Light and Power
Company
in the presence of:
/s/ Nancy
A. Venne
/s/ Paul M.
Holt
11
U.S. BANK
NATIONAL ASSOCIATION,
as
Trustee
By: /s/ R. Prokosch &
#160;
Vice
President
ATTEST:
/s/
Ryan Hernstat
Vice President
Executed
and delivered by U.S. Bank National
Association
in the presence of:
/s/ Joel
Geist
/s/ D.
Garsteig
12
STATE OF
WISCONSIN )
) SS.
COUNTY OF
DOUGLAS )
Personally
came before me this 24 day of September, 2007, Roger P. Engle, to me known to be
the President, and Janet A. Blake, to me known to be the Secretary of the
above-named SUPERIOR WATER, LIGHT AND POWER COMPANY, the corporation described
in and which executed the foregoing instrument, and to me personally known to be
the persons who as such officers executed the foregoing instrument in the name
and behalf of said corporation, who, being by me duly sworn, did depose and say
and acknowledge that they are respectively the President and Secretary of said
corporation, that the seal affixed to said instrument is the corporate seal of
said corporation, and that they signed, sealed and delivered said instrument in
the name and on behalf of said corporation by authority of its Board of
Directors, and said Roger P. Engle and Janet A. Blake, then and there
acknowledged said instrument to be the free act and deed of said corporation and
that such corporation executed the same.
Given
under my hand and notarial seal this 24 day of September, 2007.
/s/ Nancy A. Venne
0; Notary Public, State of Wisconsin
My Commission expires
July 20, 2008
13
STATE OF
MINNESOTA
)
)
SS.
COUNTY OF
RAMSEY
)
Personally
came before me this 20th day of September, 2007, Richard Prokosch, to me
known to be the Vice President, and Raymond Haverstock, to me known to the
Vice President of the above-named U.S. BANK NATIONAL ASSOCIATION, the
corporation described in and which executed the foregoing instrument, and to me
personally known to be the persons who as such officers executed the foregoing
instrument in the name and behalf of said corporation, who, being by me duly
sworn, did depose and say and acknowledge that they are respectively the Vice
President and Vice President of said corporation, and that they signed and
delivered said instrument in the name and on behalf of said corporation by
authority of its Board of Directors, and said Vice President and Vice President
then and there acknowledged said instrument to be the free act and deed of said
corporation and that such corporation executed the same.
Given
under my hand and notarial seal this 20th day of September, 2007
/s/ Denise Landeen
Notary Public, State
of Minnesota
My Commission expires
January 31, 2012
14
EXHIBIT A
[FORM OF BOND OF THE NINTH
SERIES]
THIS BOND
IS NOT TRANSFERABLE EXCEPT TO A SUCCESSOR TRUSTEE UNDER THE INDENTURE OF TRUST,
DATED AS OF OCTOBER 1, 2007 (HEREINAFTER CALLED "THE CITY OF SUPERIOR
INDENTURE"), BETWEEN THE CITY OF SUPERIOR, WISCONSIN (HEREINAFTER CALLED
"THE CITY"), AND U.S.
BANK NATIONAL ASSOCIATION, AS TRUSTEE UNDER THE CITY OF SUPERIOR
INDENTURE.
SUPERIOR WATER, LIGHT AND POWER
COMPANY
FIRST MORTGAGE
BOND
5.75% Series due November 1,
2037
No.
R-___
; $
SUPERIOR
WATER, LIGHT AND POWER COMPANY, a corporation of the State of Wisconsin
(hereinafter called the "Company"), for value
received, hereby promises to pay to ,
or registered assigns, on November 1, 2037, DOLLARS
($ ) in such coin
or currency of the United States of America as at the time of payment is legal
tender for public and private debts, and to pay to the registered owner hereof
interest thereon in like coin or currency (computed on the basis of a
360-day year of twelve 30-day months) at the rate of five and seventy-five
hundredths percent (5.75%) per annum semiannually on May 1 and
November 1 of each year commencing November 1, 2007 until the
principal thereof shall have become due and payable and at the same rate per
annum on any overdue payment of principal or premium, if any, and, to the extent
enforceable under applicable law, on any overdue payment of interest. The
principal hereof (and premium, if any) and interest hereon shall be paid at the
office or agency of the Company in the City of St. Paul, Minnesota, or the
office of the Company in Superior, Wisconsin or as shall be otherwise agreed to
pursuant to the provisions of the Tenth Supplemental Indenture hereinafter
referred to.
This bond
is one of an issue of bonds of the Company issuable in series and is one of a
series designated the First Mortgage Bonds, 5.75% Series due November 1,
2037 (the "Bonds of the Ninth
Series") created by the Tenth Supplemental Indenture dated as of
October 1, 2007 executed by the Company to U.S. Bank National Association
(successor Trustee to Chemical Bank and Peter Morse), as Trustee, all bonds of
all series being issued and to be issued under and equally secured by a Mortgage
and Deed of Trust (herein, together with any indentures supplemental thereto,
called the "Mortgage"),
dated as of March 1, 1943, executed by the Company to Chemical Bank & Trust
Company and Howard B. Smith, as Trustees (U.S. Bank National Association,
successor Trustee). Reference is made to the Mortgage for a
description of the property mortgaged and pledged, the nature and extent of the
security, the rights of the holders of the bonds and of the Trustee in respect
thereof, the duties and immunities of the
A-1
Trustee
and terms and conditions upon which the bonds are and are to be secured and the
circumstances under which additional bonds may be issued.
With the
consent of the Company and to the extent permitted by and as provided in the
Mortgage, the rights and obligations of the Company and/or the rights of the
holders of the bonds and/or coupons and/or the terms and provisions of the
Mortgage may be modified or altered by affirmative vote of the holders of at
least seventy per centum (70%) in principal amount of the bonds then outstanding
under the Mortgage and, if the rights of the holders of one or more, but less
than all, series of bonds then outstanding are to be affected, then also by
affirmative vote of the holders of at least seventy per centum (70%) in
principal amount of the bonds then outstanding of each series of bonds so to be
affected (excluding in any case bonds disqualified from voting by reason of the
Company's interest therein as provided in the Mortgage); provided that, without
the consent of the holder hereof, no such modification or alteration shall,
among other things, impair or affect the right of the holder to receive payment
of the principal of (and premium, if any) and interest on this bond, on or after
the respective due dates and at the places and in the respective amounts
expressed herein, or permit the creation of any lien equal or prior to the lien
of the Mortgage or deprive the holder of the benefit of a lien on the mortgaged
and pledged property, or give any bond or bonds secured by the Mortgage any
preference over any other bond or bonds so secured, or reduce the percentage in
principal amount of the bonds required to authorize or consent to any such
modification or alteration of the Mortgage.
The Bonds
of the Ninth Series may be redeemed prior to maturity, in the manner described
in the Tenth Supplemental Indenture. The Trustee may conclusively
presume that no event shall have occurred which would require the Company to
redeem bonds of this series pursuant to Section 1.1 of the Tenth Supplemental
Indenture unless and until it shall have received a written notice from the
trustee under the City of Superior Indenture, signed by its President, a Vice
President or a Trust Officer, stating that such an event shall have occurred,
specifying the date thereof and describing such event in reasonable
detail.
The
principal hereof may be declared or may become due prior to the maturity date
hereinbefore named on the conditions, in the manner and at the time set forth in
the Mortgage, upon the occurrence of a default as in the Mortgage
provided.
If an
Event of Default described in Section 701(a) or (b) of the City of Superior
Indenture shall have occurred, in determining whether or not any payment of the
principal of or interest on the bonds of this series shall have been made in
full, moneys received by the trustee under the City of Superior Indenture from
the Company shall, to the extent of the amount remaining to be paid by the
Company pursuant to subsection (e) of Section 3.02 of the Loan Agreement, be
deemed to have been paid under said subsection (e) and not to have been paid on
the bonds of this series.
The
Trustee may conclusively presume that the obligation of the Company to pay the
principal of and interest on the bonds of this series as the same shall become
due and payable shall have been fully satisfied and discharged unless and until
it shall have received a written notice from the trustee under the City of
Superior Indenture, signed by its President, a Vice President or a Trust
Officer, stating that the corresponding payment of principal of or interest
on
A-2
the bonds
issued under the City of Superior Indenture (hereinafter called the "City of Superior Bonds") has
become due and payable and has not been fully paid and specifying the amount of
funds required to make such payment. The Trustee may conclusively presume that
no Event of Default described in Section 701 of the City of Superior Indenture
shall have occurred unless and until it shall have received a written notice
from the trustee under the City of Superior Indenture, signed by its President,
a Vice President or a Trust Officer stating that such an event has
occurred.
This bond
is not transferable except to any successor trustee under the City of Superior
Indenture, such transfer to be made as prescribed in the Mortgage by the
registered owner hereof in person, or by its duly authorized attorney, at the
office or agency of the Company in the City of St. Paul, Minnesota or the
office of the Company in Superior, Wisconsin upon surrender hereof for
cancellation, together with a written instrument of transfer in form approved by
the Company duly executed by the registered owner hereof or by its duly
authorized attorney, and thereupon a new fully registered bond or bonds of the
same series for a like principal amount will be issued to the transferee in
exchange herefor as provided in the Mortgage. This bond may, at the option of
the registered owner hereof and upon surrender hereof for cancellation at such
office or agency, be exchanged as prescribed in the Mortgage for other
registered bonds of the same series of other authorized denominations having a
like aggregate principal amount. No charge will be made by the
Company for any transfer or exchange of this bond or, in case this bond shall be
lost, destroyed or mutilated, the issuance, authentication and delivery of a new
bond in substitution hereof. The Company and the Trustee may deem and treat the
person in whose name this bond is registered as the absolute owner hereof for
the purpose of receiving payment and for all other purposes and neither the
Company nor the Trustee shall be affected by any notice to the
contrary.
As
provided in the Mortgage, the Company shall not be required to make transfers or
exchanges of bonds of any series for a period of ten (10) days next preceding
any interest payment date for bonds of said series, or next preceding any
designation of bonds of said series to be redeemed, and the Company shall not be
required to make transfers or exchanges of any bonds designated in whole or in
part for redemption.
The
Company shall receive a credit against its obligation to make any payment of the
principal of or interest on the bonds of this series, whether at maturity, upon
redemption or otherwise, in an amount equal to, and such obligation shall be
fully or partially, as the case may be, satisfied and discharged to the extent
of, the amount, if any, credited pursuant to the City of Superior Indenture
against the payment required to be made by or for the account of the City in
respect of the corresponding payment of the principal of or interest on the City
of Superior Bonds pursuant to the Loan Agreement, dated as of October 1,
2007, from the City to the Company (hereinafter called the "Loan
Agreement").
No recourse shall be had for the
payment of the principal of or interest on this bond against any incorporator or
any past, present or future subscriber to the capital stock, stockholder,
officer, or director of the Company or of any predecessor or successor
corporation, as such, either directly or through the Company or any predecessor
of successor corporation, under any rule of law, statute, or constitution or by
the enforcement of any assessment or otherwise, all such liability of
incorporators, subscribers, stockholders, officers, and directors being released
by the holder or owner hereof by the acceptance of this bond and being likewise
waived and released by the terms of the Mortgage.
A-3
This bond
shall not become obligatory until U.S. Bank National Association, the Trustee
under the Mortgage, or its successor thereunder, shall have signed the form of
authentication certificate endorsed hereon.
IN
WITNESS WHEREOF, SUPERIOR WATER, LIGHT AND POWER COMPANY has caused this bond to
be signed in its corporate name by its President or one of its Vice-Presidents
and its Treasurer and its corporate seal to be impressed or imprinted hereon and
attested by its Secretary or one of its Assistant Secretaries on ,
.
SUPERIOR
WATER, LIGHT AND POWER
COMPANY
By
Roger P.
Engle
President
By
60;
William
S. Bombich
Treasurer
ATTEST:
Janet A.
Blake
Secretary
[FORM OF TRUSTEE'S AUTHENTICATION
CERTIFICATE]
This bond
is one of the bonds, of the series herein designated, described or provided for
in the within-mentioned Mortgage.
U.S. BANK
NATIONAL ASSOCIATION,
as
Trustee
By
60;
Authorized
Officer
A-4
Exhibit
10(m)10
ALLETE
2007 Form 10-K
ANNEX
B
TO
ALLETE
EXECUTIVE
LONG TERM INCENTIVE COMPENSATION PLAN
PERFORMANCE
SHARE GRANT
Effective
2008
[Eligible
Executive Employees]
Financial
Measure:
Total
Shareholder Return (TSR) computed over the three-year period.
Performance
Share Award:
If
ALLETE’s TSR ranking is 3rd or higher
among a
peer group of 16 companies (superior performance), 200% of the Performance
Share
Grant will be earned. If ALLETE’s TSR performance ranks 9th among the
peer
group (target performance), 100% of the Grant will be earned. If
ALLETE’s TSR performance ranks 12th (threshold
performance), 50% of the Grant will be earned. If TSR performance is
below threshold, no Performance Shares will be earned. Straight-line
interpolation will be used to determine earned awards based on the TSR ranking
between threshold, target and superior.
|
TSR
Rank
|
Perf.
Level
|
Payout
%
|
|
|
1
|
200.0%
|
||
|
2
|
200.0%
|
||
|
3
|
Superior
|
200.0%
|
|
|
4
|
183.3%
|
||
|
5
|
166.7%
|
||
|
6
|
150.0%
|
||
|
7
|
133.3%
|
||
|
8
|
116.7%
|
||
|
9
|
Target
|
100.0%
|
|
|
10
|
83.3%
|
||
|
11
|
66.7%
|
||
|
12
|
Threshold
|
50.0%
|
|
|
13
|
0%
|
||
|
14
|
0%
|
||
|
15
|
0%
|
||
|
16
|
0%
|
||
|
17
|
0%
|
Exhibit 10(q)
ALLETE
2007 Form 10-K
ALLETE AND AFFILIATED
COMPANIES
CHANGE IN CONTROL SEVERANCE
PLAN
ALLETE’s Board of Directors has
determined that it is in the best interest of ALLETE and its shareholders to
foster the continued dedication and objectivity of certain key members of the
Company's management notwithstanding the possibility or occurrence of an
acquisition by another company or other change in control of the
Company. Accordingly, ALLETE has adopted this Change in Control
Severance Plan effective as of the “Effective Date.”
Section
1. Definitions.
For purposes of the Plan, the following terms shall have the meanings indicated
below:
“Act” means the Securities
Exchange Act of 1934, as amended from time to time.
“Affiliate” means any entity
directly or indirectly controlled by, controlling or under common control with,
ALLETE.
“ALLETE” means ALLETE, Inc., a
Minnesota Corporation.
“Base Salary” shall mean, as
to any Participant, the highest amount a Participant is entitled to receive
annually as base salary at any time during the Protection Period, without
reduction for any pre-tax contributions to benefit plans.
“Benefit Continuation Payment”
means the payment described in Section 2.1.2.
“Board” means the Board of
Directors of ALLETE.
“Bonus Amount” shall mean, as
to any Participant, an amount equal to the Participant's annual bonus which
would have been payable under the Bonus Plans in which he or she participates
(x) as of immediately prior to the Change in Control had he or she continued in
employment until the end of the fiscal year of the Employer in which the Change
in Control occurs and had bonuses been payable at "target" levels
for such year or (y) if greater, as of the Termination Date had he or
she continued in employment until the end of the fiscal year of the Employer in
which the Termination Date occurs and had bonuses been payable at "target"
levels for such year.
“Bonus Plans” shall mean the
ALLETE Executive Annual Incentive Plan, the ALLETE Results Sharing Program and
any similar or successor annual bonus or profit sharing plans, excluding plans
intended to qualify under Section 401(a) of the Code.
“Cause” means:
(a) the
Participant’s willful and continued failure to perform the duties and
responsibilities of his or her position (other than as a result of the
Participant’s disability or anticipated failure after the Participant gives
notice of Termination for Good Reason
by the
Participant) after there has been delivered to the Participant a written demand
for performance which describes the basis for the belief that the Participant
has not substantially performed his or her duties and after the Participant
fails to take full corrective action within twenty (20) days of receipt of such
notice; or
(b) any
material act of personal dishonesty taken by the Participant in connection with
his or her responsibilities as an employee of the Company which is demonstrably
and materially injurious to the Company; or
(c) the
Participant’s conviction of, or plea of nolo contendere to, a felony
that the Company (or in the case of the Chief Executive Officer, the Board)
reasonably believes has had or will have a material detrimental effect on the
Company’s business or reputation.
“Change in Control” means the
earliest of:
(a) the
date any one Person, or more than one Person acting as a group (as the term
“group” is used in Treasury Regulation section 1.409A-3(i)(5)(v)(B)), acquires
ownership of stock of ALLETE that, together with stock previously held by the
acquiror, constitutes more than fifty (50%) percent of the total fair market
value or total voting power of ALLETE stock. If any one Person, or
more than one Person acting as a group, is considered to own more than fifty
(50%) percent of the total fair market value or total voting power of ALLETE
stock, the acquisition of additional stock by the same Person or Persons acting
as a group does not cause a Change in Control. An increase in the
percentage of stock owned by any one Person, or Persons acting as a group, as a
result of a transaction in which ALLETE acquires its stock in exchange for
property, is treated as an acquisition of stock;
(b) the
date any one Person, or more than one Person acting as a group (as the term
“group” is used in Treasury Regulation section 1.409A-3(i)(5)(v)(B)), acquires
(or has acquired during the twelve (12) month period ending on the date of the
most recent acquisition by that Person or Persons) ownership of a ALLETE stock
possessing at least thirty (30%) percent of the total voting power of ALLETE
stock;
(c) the
date a majority of the members of the ALLETE board of directors is replaced
during any twelve (12) month period by directors whose appointment or election
is not endorsed by a majority of the members of the board of directors prior to
the date of appointment or election; or
(d) the
date any one Person, or more than one Person acting as a group (as the term
“group” is used in Treasury Regulation section 1.409A-3(i)(5)(v)(B)), acquires
(or has acquired during the twelve (12) month period ending on the date of the
most recent acquisition by that Person or Persons) assets from ALLETE that have
a total gross fair market value equal to at least forty (40%) percent of the
total gross fair market value of all ALLETE’s assets immediately prior to the
acquisition or acquisitions.
For this
purpose, “gross fair market value” means the value of the corporation’s assets,
or the value of the assets being disposed of, without regard to any liabilities
associated with these assets.
In
determining whether a Change in Control occurs, the attribution rules of Code
Section 318 apply to determine stock ownership. The stock underlying
a vested option is treated as owned by the individual who holds the vested
option, and the stock underlying an unvested option is not treated as owned by
the individual who holds the unvested option.
“Change in Control Severance
Payment” means the Severance Payment and Benefit Continuation
Payment.
“Code” means the Internal
Revenue Code of 1986, as amended from time to time.
“Committee” means the
committee responsible for administering the Plan, as described in Section
5.
“Company” means ALLETE and its
Affiliates and except for purposes of determining whether a Change in Control
has occurred, shall include any successor in interest to its business or assets
which assumes the obligations of the Plan as required in Section 6.1 or which
becomes bound by the terms of the Plan by operation of law.
“Effective Date” means
February 13, 2008.
“Good Reason” means the
occurrence of any of the following without the Participant’s consent, which will
permit the Participant to terminate employment within ninety (90) days after the
end of the Cure Period (defined below):
(a) a
material diminution of the Participant’s authority, duties, or responsibilities
relative to the authority, duties or responsibilities of the Participant prior
to such reduction; or
(b) a
material diminution by the Company in the Participant’s total compensation,
including base pay, aggregate incentive compensation opportunities (but
excluding any reduction in incentive compensation awards as the result of the
performance of the Participant or the Company) and aggregate benefits, as in
effect immediately prior to such reduction; or
(c) the
relocation of the Participant to a location or facility more than fifty (50)
miles from the Participant's location immediately prior to change;
or
(d) a
material diminution by the Company of the authority, duties, or responsibilities
of the supervisor to whom the Participant is required to report relative to the
authority, duties or responsibilities of the supervisor prior to such reduction,
including a requirement that the Participant report to a corporate officer or
employee instead of reporting directly to the Board; or
(e) a
material diminution in the budget over which the Participant retains authority
relative to the budget prior to such reduction; or
(f) any
other action or inaction that constitutes a material breach by the Company of an
agreement under which a Participant provides services.
Notwithstanding
the foregoing, the Participant may not resign for Good Reason without first
providing the Employer with written notice (except in the case
of ALLETE’s Chief Executive Officer who shall provide such notice to
the Board) of the condition that could constitute a “Good Reason” event within
ninety (90) days of the initial existence of the condition and then only if such
condition has not been remedied by the Employer within thirty (30) days of such
written notice (the “Cure Period”).
“Employer” shall mean, as applicable to any
Participant, ALLETE or an Affiliate that employs the
Participant.
“Involuntary Separation”
means, with respect to a Participant, an involuntary termination of
employment by the Employer without Cause, or a voluntary termination by the
Participant with Good Reason.
“Participant” means an
individual who the Committee has selected to participate in the Plan and who has
received written notification of both the eligibility to participate and status
as either a “Group A Participant” or a “Group B Participant.”
“Person” means any individual,
corporation (including any non-profit corporation), general, limited or limited
liability partnership, limited liability company, joint venture, estate, trust,
firm, association, organization or other entity or any governmental or
quasi-governmental authority, organization, agency or body.
“Plan” means this ALLETE and
Affiliated Companies Change in Control Severance Plan.
“Protection Period” means the
period beginning on the date that is six (6) months prior to a Change in Control
and ending on the date that is twenty four (24) months after a Change in
Control.
“Severance Duration
Multiplier” means with respect to any Group A Participant, 2.5; and, with
respect to any Group B Participant, 1.5.
“Severance Payment” means the
payment described in Section 2.1.1.
“Termination Date” shall mean,
with respect to a Participant, the date of the Participant’s Involuntary
Separation.
Section
2. Change in Control Severance
Benefits.
2.1 Involuntary Separation in
Connection with Change in Control. If a Participant has
an Involuntary Separation on any date during the Protection Period,
Participant will receive the following severance benefits from the
Employer:
2.1.1 Severance
Payment. Participant will receive a lump sum cash payment in
an amount equal to the product of (a) the applicable Severance Duration
Multiplier and (b) the sum of (i) the Participant’s Base Salary and (ii) the
Participant’s Bonus Amount.
2.1.2 Benefit Continuation
Payment. Participant will receive an additional lump sum cash
payment in an amount equal to (a) plus (b) as follows:
(a) the
applicable Severance Duration Multiplier times the sum of: (i) the annual
premium for medical and dental benefits in effect on the Termination Date as
determined for individuals who are entitled to elect continuation coverage
pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended (“COBRA”); (ii) the annual premium the Employer would have paid to
maintain core life insurance on behalf of the Participant had the Participant
remained an employee of the Employer; (iii) an amount the Employer would have
allocated to the Participant annually under the Minnesota Power and Affiliated
Companies Flexible Compensation Plan, determined with reference to the
Participant’s Base Salary; and (iv) the annual SERP II Annual Make-Up Award
Participant would have received had Participant remained employed by the
Employer, determined on the basis of Participant’s Base Salary and Bonus
Amounts, and the maximum Employer matching contribution to defined contribution
plans; and
(b) the
lump sum present value of the additional supplemental retirement benefit the
Participant would have accrued under the ALLETE and Affiliated Companies
Supplemental Executive Retirement Plan II (“SERP II”) if Participant had
remained employed by the Company for an additional number of years equal to the
applicable Severance Duration Multiplier, determined on the basis of
Participant’s Base Salary and Bonus Amounts, and the actuarial assumptions used
in connection with SERP II on the date of the Change of Control.
Participants
will be responsible for electing benefit continuation coverage, if such coverage
is desired, pursuant to COBRA, within the time period prescribed pursuant to
COBRA, and for paying all COBRA premiums for any continuation coverage so
elected.
2.1.3 Outplacement
Services. The Company will pay up to an aggregate of $25,000
for outplacement services obtained by Participant on or before the end of the
second year following the year including the Termination Date, provided that the
services commence not later than three (3) months following the later of the
Change in Control or the Termination Date, and all amounts must be paid by the
end of the third year following the year including the Termination
Date. Outplacement services will be provided only in kind; the
Company will pay the outplacement service provider(s) directly for services
rendered to the Participant in accordance with this Section. No cash
will be paid in lieu of outplacement services, nor will cash compensation to the
Participant be increased if the Participant declines or does not use
outplacement services.
2.2 Timing of Severance
Payments. Subject to Sections 2.5 and 3.1, the Company will
pay any Change in Control Severance Payment to which a Participant is entitled
within 30 days after
the later
of the Termination Date or the effective date of the Separation Agreement and
Release, but in no event more than seventy-four (74) calendar days after the
later of the date of the Change of Control or the Termination Date.
2.3 Voluntary Resignation;
Termination for Cause. If Participant’s employment with the
Company terminates for any reason other than Involuntary Separation, Participant
will not receive any payments under this Plan.
2.4 Coordination with other
Payments. The
payments and benefits under this Plan to a Participant are intended to
constitute the exclusive payments in the nature of severance or termination pay
that shall be due to a Participant upon termination of his or her employment
without Cause or for Good Reason in connection with a Change in Control and
shall be in lieu of any such other payments under any agreement, plan, practice
or policy of the Company, except as otherwise expressly provided in a written
agreement between the Company and the Participant that such severance payments
or benefits are to be paid in addition to any payment or benefit described
herein. Accordingly, if a Participant is a party to an employment, severance,
termination, salary continuation or other similar agreement with the Company or
any of its Affiliates, or is a participant in any other severance plan, practice
or policy of the Company or any of its Affiliates that does not expressly
provide that such severance payments or benefits are to be paid in addition to
any payment or benefit described herein, the severance pay to which the
Participant is entitled under this Plan shall be reduced (but not below zero) by
the amount of severance pay to which he or she is entitled under such other
agreement, plan, practice or policy; provided that the reduction set forth in
this sentence shall not apply as to any other such agreement, plan, practice or
policy that contains a reduction provision substantially similar to this Section
2.4 so long as the reduction provision of such other agreement, plan, practice
or policy is applied.
2.5 Code Section
409A. To the extent that any payment under this Plan is deemed
to be deferred compensation subject to the requirements of Section 409A of the
Code, or any final regulations or guidance promulgated thereunder (“Section
409A”), the plan will be operated in compliance with Section 409A with respect
to the subject payment. Notwithstanding anything in this Plan
to the contrary, if Participant is a Specified Employee, the payment of any
amount under this Plan that is Nonqualified Deferred Compensation, and that
becomes payable on account of a Separation from Service, will be delayed and
paid in a lump sum, with interest from the date on which it would otherwise have
been paid in accordance with Section 2.2 at the short-term applicable federal
rate, on the first date on which any such amount may be paid without triggering
a tax under Section 409A, but in no event before the date that is six (6) months
and one (1) day following the Participant’s Separation from
Service. The Plan is intended to comply with the requirements of
Section 409A so that none of the severance payments and benefits to be provided
hereunder will be subject to the additional tax imposed under Section 409A, and
any ambiguities herein will be interpreted to so comply. The Company
may amend or modify the plan, at any time, to comply with Section
409A. The terms “Specified Employee,” “Nonqualified Deferred
Compensation,” and “Separation from Service” shall have the meaning provided by
Section 409A and the applicable Treasury Regulations.
Section
3. Conditions to Receipt of
Benefits; No Mitigation.
3.1 Separation Agreement and
Release of Claims. No Change in Control Severance Payment shall be
provided to a Participant unless, within sixty (60) days following the later of
the Change in Control or Participant’s Termination Date, the Participant
delivers to the Company a Separation Agreement and Release, that has been
properly executed on or after the Participant’s Termination Date and has become
irrevocable as provided therein. The initial form of the Separation
Agreement and Release, including non-solicitation, non-competition and
non-disparagement provisions, is attached to this Plan as Appendix
A. Prior to the occurrence of a Change in Control, the Company
may revise the Separation Agreement and Release. The Company may in
any event modify the Separation Agreement and Release to conform it to the laws
of the local jurisdiction applicable to a Participant or a change in applicable
federal law so long as such modification does not increase the obligations of
the Participant thereunder.
3.2 No Duty to
Mitigate. Participant will not be required to mitigate the
amount of any payment or benefit contemplated by this Plan, nor will any
earnings that Participant may receive from any other source reduce any such
payment or benefits.
Section
4. Limitation on Payments;
Excise Tax Gross-up.
4.1 Notwithstanding
anything in this Plan to the contrary and except as set forth below, in the
event it shall be determined that any “Payment,” as defined in Section 4.6,
would be subject to the “Excise Tax,” as defined in Section 4.6, then the
Participant shall be entitled to receive an additional payment (the “Gross-Up
Payment,” as defined in Section 4.6) in an amount such that the net amount of
the Gross-Up Payment retained by Participant, after payment of all federal,
state and local income and employment taxes (including, without limitation, any
federal, state, and local income and employment taxes and Excise Tax imposed on
the Gross-Up Payment, and any interest or penalties imposed with respect to such
taxes, but excluding any tax on the Payment), shall be equal to the Excise Tax
imposed on the Payment. Notwithstanding the foregoing provisions of this Section
4, if it shall be determined that the Participant is entitled to the Gross-Up
Payment, but that the Parachute Value, as defined in Section 4.6, of all
Payments will not exceed the Safe Harbor Amount, as defined in Section 4.6, if
the Payments are reduced to an amount not less than 85% of the total of all
Payments, then no Gross-Up Payment shall be made to the Participant and the
amounts payable under this Agreement shall be reduced so that the Parachute
Value of all Payments, in the aggregate, equals the Safe Harbor
Amount. The reduction of the amounts payable hereunder, if
applicable, shall be made by first reducing the Severance Payment, unless an
alternative method of reduction is elected by the Participant, and in any event
shall be made in such a manner as to maximize the Value, as defined in Section
4.6, of all Payments actually made to the Participant. For purposes
of reducing the Payments to the Safe Harbor Amount, only amounts payable under
this Agreement (and no other Payments) shall be reduced. If the
reduction of the amount payable under this Agreement would not result in a
reduction of the Parachute Value of all Payments to the Safe Harbor Amount, no
amounts payable under the Agreement shall be reduced pursuant to this
Section.
4.2
Subject to the provisions of Section 4.3, all determinations required to be made
under this Section 4, including whether and when a Gross-Up Payment is required,
the amount of such Gross-Up Payment and the assumptions to be utilized in
arriving at such determination, shall be made by a
nationally recognized certified public accounting firm as may be designated by
the Participant (the "Accounting Firm"). For purposes of the Accounting Firm’s
determinations, the Participant shall be deemed to pay federal income tax and
employment taxes at the highest marginal rate of federal income and employment
taxation in the calendar year in which the Gross-Up Payment is to be made and
state and local income taxes at the highest marginal rate of taxation in the
state and locality of the Participant's residence on the date the Payment is
made, net of the reduction in federal income taxes that the Participant may
obtain from the deduction of such state and local income taxes. The Accounting
Firm shall provide detailed supporting calculations both to the Company and the
Participant within 15 business days of the receipt of notice from the
Participant that there has been a Payment or such earlier time as is requested
by the Company. In the event that the Accounting Firm is serving as accountant
or auditor for the individual, entity or group effecting the Change in Control,
the Participant may appoint another nationally recognized accounting firm to
make the determinations required hereunder (which accounting firm shall then be
referred to as the Accounting Firm hereunder). All fees and expenses of the
Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section, shall be paid by the Company to the
Participant within 5 days of the receipt of the Accounting Firm's determination.
Any determination by the Accounting Firm shall be binding upon the Company and
the Participant. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments that will not
have been made by the Company should have been made (the "Underpayment"),
consistent with the calculations required to be made hereunder. In the event the
Company exhausts its remedies pursuant to Section 4.3 and the Participant
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Participant.
4.3
The Participant shall notify the Company in writing of any claim by the Internal
Revenue Service that, if successful, would require the payment by the Company of
the Gross-Up Payment. Such notification shall be given as soon as practicable,
but no later than 10 business days after the Participant is informed in writing
of such claim. The Participant shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid. The Participant
shall not pay such claim prior to the expiration of the 30-day period following
the date on which the Participant gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with respect to such
claim is due). If the Company notifies the Participant in writing prior to the
expiration of such period that the Company desires to contest such claim, the
Participant shall:
4.3.1 give the Company any
information reasonably requested by the Company relating to such
claim,
4.3.2 take such
action in connection with contesting such claim as the Company shall reasonably
request in writing from time to time, including, without limitation, accepting
legal representation with respect to such claim by an attorney reasonably
selected by the Company,
4.3.3 cooperate
with the Company in good faith in order effectively to contest such claim,
and
4.3.4 permit the
Company to participate in any proceedings relating to such claim; provided,
however, that the Company shall bear and pay directly all costs and expenses
(including additional interest and penalties) incurred in connection with such
contest, and shall indemnify and hold the Participant harmless, on an after-tax
basis, for any Excise Tax or income tax (including interest and penalties)
imposed as a result of such representation and payment of costs and
expenses.
Without
limitation on the foregoing provisions of this Section 4.3, the Company shall
control all proceedings taken in connection with such contest, and, at its sole
discretion, may pursue or forgo any and all administrative appeals, proceedings,
hearings and conferences with the applicable taxing authority in respect of such
claim and may, at its sole discretion, either pay the tax claimed to the
appropriate taxing authority on behalf of the Participant and direct the
Participant to sue for a refund or contest the claim in any permissible manner,
and the Participant agrees to prosecute such contest to a determination before
any administrative tribunal, in a court of initial jurisdiction and in one or
more appellate courts, as the Company shall determine; provided, however, that,
if the Company pays such claim and directs the Participant to sue for a refund,
the Company shall indemnify and hold the Participant harmless, on an after-tax
basis, from any Excise Tax or income tax (including interest or penalties)
imposed with respect to such payment or with respect to any imputed income in
connection with such payment; and provided, further, that any extension of the
statute of limitations relating to payment of taxes for the taxable year of the
Participant with respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the Company's control of
the contest shall be limited to issues with respect to which the Gross-Up
Payment would be payable hereunder, and the Participant shall be entitled to
settle or contest, as the case may be, any other issue raised by the Internal
Revenue Service or any other taxing authority.
4.4
If, after the receipt by the Participant of a Gross-Up Payment or payment by the
Company of an amount on the Participant's behalf pursuant to Section 4.3, the
Participant becomes entitled to receive any refund with respect to the Excise
Tax to which such Gross-Up Payment relates or with respect to such claim, the
Participant shall (subject to the Company complying with the requirements of
Section 4.3, if applicable) promptly pay to the Company the amount of such
refund (together with any interest paid or credited thereon after taxes
applicable thereto). If, after payment by the Company of an amount on the
Participant's behalf pursuant to Section 4.3, a determination is made that the
Participant shall not be entitled to any refund with respect to such claim and
the Company does not notify the Participant in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determination, then the amount of such payment shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
4.5
Notwithstanding any other provision of this Section 4, the Company may, in its
sole discretion, withhold and pay over to the Internal Revenue Service or any
other applicable taxing authority, for the benefit of the Participant, all or
any portion of any Gross-Up Payment, and the Participant hereby consents to such
withholding.
4.6 Definitions. The
following terms shall have the following meanings for purposes of this Section
4.
4.6.1 “Excise Tax” shall
mean the excise tax imposed by Section 4999 of the Code, together with any
interest or penalties imposed with respect to such excise tax.
4.6.2 “Parachute
Value” of a Payment shall mean the present value as of the date of the change of
control for purposes of Section 280G of the Code of the portion of such Payment
that constitutes a "parachute payment" under Section 280G(b)(2), as determined
by the Accounting Firm for purposes of determining whether and to what extent
the Excise Tax will apply to such Payment.
4.6.3 A “Payment” shall
mean any payment or distribution in the nature of compensation (within the
meaning of Section 280G(b)(2) of the Code) to or for the benefit of the
Participant, whether paid or payable pursuant to this Agreement or
otherwise.
4.6.4 The “Safe Harbor
Amount” means 2.99 times the Participant's “base amount,” within the meaning of
Section 280G(b)(3) of the Code.
4.6.5 “Value” of a Payment
shall mean the economic present value of a Payment as of the date of the change
of control for purposes of Section 280G of the Code, as determined by the
Accounting Firm using the discount rate required by Section 280G(d)(4) of the
Code.
Section
5. Plan
Administration.
5.1 The
Plan shall be interpreted, administered and operated by the Executive
Compensation Committee of the Board (“Committee”). Subject to the
express terms of the Plan, the Committee shall have complete authority, in its
sole discretion, to determine who shall be a Participant, to interpret the Plan,
to prescribe, amend and rescind rules relating to the Plan, and to make all
other determinations necessary or advisable for the administration of the Plan.
Notwithstanding the foregoing, the Committee may delegate any of its duties
hereunder to such Person or Persons from time to time as it may
designate.
5.2 All
expenses and liabilities that members of the Committee incur in connection with
the administration of the Plan shall be borne by the Company. The Committee may
employ attorneys, consultants, accountants, appraisers, brokers, or other
Persons, and the Committee, the Company and the Company's officers and directors
shall be entitled to rely upon the advice, opinions or valuations of any such
Persons. No member of the Committee or the Board shall be personally liable for
any action, determination or interpretation made in good faith with respect to
the Plan, and all members of the Committee shall be fully protected by the
Company in respect of any such action, determination or
interpretation.
Section
6. Successors.
6.1 The Company’s
Successors. This Plan shall bind any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, in the same manner and to the same extent that the Company would be
obligated under this Plan if no succession had taken place. In the
case of any transaction in which a successor would not by the foregoing
provision or by operation of law be bound by this Plan, the Company shall
require such successor expressly and unconditionally to assume and agree to
perform the obligations of the Company and each Employer under this Plan,
in the same manner and to the same
extent that the Company and each Employer would be required to perform if no
such succession had taken place.
6.2 Participant’s
Successors. All rights of the Participant under this Plan will inure to
the benefit of, and be enforceable by, the Participant's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees, legatees or other beneficiaries. If a Participant dies while any
amount is payable to such Participant hereunder (other than amounts which, by
their terms, terminate upon the death of the Participant) if such Participant
had continued to live, all such amounts, unless otherwise provided herein, shall
be paid in accordance with the terms of this Plan to the executors, personal
representatives or administrators of such Participant's estate.
Section
7. Notices.
7.1 General. Notices
and all other communications provided for in the Plan shall be in writing and
shall be deemed to have been duly given when personally delivered or when mailed
by United States registered or certified mail, return receipt requested and
postage prepaid. In the case of a Participant, mailed notices will be
sent to his or her home address most recently communicated to the Company in
writing. In the case of the Company, mailed notices will be addressed
to its corporate headquarters, and all notices will be directed to the attention
of its Vice President, Human Resources.
7.2 Notice of
Termination. Any termination of a Participant’s employment by
the Company for Cause or by a Participant for Good Reason will be communicated
by a notice of termination to the other party given in accordance with Section
7.1 of the Plan.
Section
8. Miscellaneous.
8.1 No Waiver. No waiver
by the Company or any Participant, as the case may be, at any time of any lack
of compliance with any condition or provision of this Plan to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same, or at any prior or subsequent time. All other plans,
policies and arrangements of the Company in which the Participant participates
during the term of this Plan shall be interpreted so as to avoid the duplication
of benefits paid hereunder.
8.2 No Right to
Employment. Nothing contained in this Plan or any documents relating to
the Plan shall: (a) confer on a Participant any right to continue in the employ
of the Company or a subsidiary, (b)constitute any contract or agreement of
employment, or (c) interfere in any way with the right of the Company to
terminate the Participant's employment at any time, with or without
Cause.
8.3 Legal Fees and
Expenses. If a Participant commences a legal action to enforce
any of the obligations of the Company under this Plan and Participant prevails
on the merits of the substantive issues in dispute in such proceeding, the
Company shall pay the Participant the amount necessary to reimburse the
Participant in full for all actual reasonable expenses (including
reasonable attorneys' fees and legal expenses) incurred by the Participant with
respect to such action.
8.4 Plan Termination; Amendment
of Plan. Prior to a Change in Control, the Plan may be amended
or modified in any respect, and may be terminated, in any such case by
resolution adopted by the Executive Compensation Committee of the Board;
provided, however, that no such amendment, modification or termination that
would adversely affect the benefits or protections hereunder of any individual
who is a Participant as of the date such amendment, modification or termination
is adopted shall be effective as it relates to such individual unless no Change
in Control occurs within one year after such adoption, any such attempted
amendment, modification or termination adopted within one year prior to a Change
in Control being null and void ab initio as it relates to all such individuals
who were Participants prior to such adoption (it being understood, however, that
the hiring, termination of employment, promotion or demotion of any employee of
the Company prior to a Change in Control shall not be construed to be an
amendment, modification or termination of the Plan); provided, further, however,
that the Plan may not be amended, modified or terminated, (i) at the request of
a third party who has indicated an intention or taken steps to effect a Change
in Control and who effectuates a Change in Control or (ii) otherwise in
connection with, or in anticipation of, a Change in Control which actually
occurs, any such attempted amendment, modification or termination being null and
void ab initio. Any action taken to amend, modify or terminate the
Plan which is taken after the execution of an agreement providing for a
transaction or transactions which, if consummated, would constitute a Change in
Control shall conclusively be presumed to have been taken in connection with a
Change in Control. From and after the occurrence of a Change in
Control, the Plan may not be amended or modified in any manner that would in any
way adversely affect the benefits or protections provided hereunder to any
individual who is a Participant in the Plan on the date the Change in Control
occurs. From and after the occurrence of a Change in Control, except
to the extent specifically permitted by the last sentence of Section 3.1, the
revision of the Separation Agreement and Release, attached hereto as Appendix A, shall be
deemed to be a modification of the Plan for purposes of this Section
8.4. If a Change in Control occurs, this Plan shall continue in full
force and effect and shall not terminate or expire until after all Participants
who have become entitled to Change in Control Severance Payments hereunder shall
have received such payments in full.
8.5 Benefits not
Assignable. Except as otherwise provided herein or by law, no right or
interest of a Participant under the Plan shall be assignable or transferable, in
whole or in part, either directly or by operation of law or otherwise, including
without limitation by execution, levy, garnishment, attachment, pledge or in any
manner; no attempted assignment or transfer thereof shall be effective; and no
right or interest of a Participant under the Plan shall be liable for, or
subject to, any obligation or liability of such Participant. When a payment is
due pursuant this Plan to a Participant who is unable to care for his or her
affairs, payment may be made directly to his or her legal guardian or personal
representative.
8.6 Tax Withholding. All
amounts payable hereunder shall be subject to withholding of applicable federal,
state and local taxes.
8.7 Minnesota Law. This
Plan will be construed and interpreted, and the rights of the Company and
Participants will be determined in accordance with, the laws of the State of
Minnesota (without regard to the conflicts of laws principles thereof), to the
extent not preempted by federal law, which shall otherwise control.
8.8 Validity. The
invalidity or unenforceability of any provision of this Plan shall not affect
the validity or enforceability of any other provision of this Plan, which shall
remain in full force and effect. If this Plan shall for any reason be or become
unenforceable by either party, this Plan shall thereupon terminate and become
unenforceable by the other party as well.
NOW, THEREFORE, ALLETE has adopted this
Change in Control Severance Plan effective as of the Effective
Date.
ALLETE, Inc.
By _/s/ Donald J.
Shipper__________________
Its _Chairman, President, and
CEO_________
Attest:
By _/s/__Deborah A.
Amberg________________________________
Its
___Sr. VP, General Counsel &
Secretary____________________
Appendix
A
Form
of
SEPARATION
AGREEMENT AND RELEASE
WHEREAS
<< [full
name]>> (“Executive”) is a Participant of the ALLETE Change in
Control Severance Plan (“the Plan”), and whereas Executive’s employment with
<>
(together with all affiliates of ALLETE, Inc., the “Company”) terminated
effective <>
(“<<”Termination
Date” / “Retirement Date”>>)under circumstances that make Executive
eligible to receive certain compensation and other benefits under the Plan, and
whereas Executive enters into this Separation Agreement and Release
(“Agreement”) of << [his /
her] >> own free will and deed; therefore, as of the
date written below the Company and Executive agree as
follows:
1. Separation
Benefit. Executive will receive from the Company the payment
and other benefits provided by the Plan and delivered in accordance with the
Plan provided that this Agreement becomes effective and Executive has not
rescinded the Agreement within the Reconsideration Period (defined
below).
2. Non-Solicitation. From
the <<Termination
Date” / “Retirement Date>> and for a period continuing through the
date that twenty four (24) months following the later of the <<Termination Date” /
“Retirement Date>> or a Change in Control (as defined in
the Plan) Executive will not solicit, or assist any Person (as defined in the
Plan) in the solicitation of, any director, officer or employee of the Company
for employment other than with the Company, or otherwise interfere with or
disrupt any employment relationship (contractual or otherwise) of the
Company.
3. Non-Competition. For
a period of twelve (12) months following the later of the <<Termination Date” /
“Retirement Date>> or a Change in Control (as defined in the Plan)
Executive will not, without the written express consent of the Company, directly
or indirectly, alone or as a partner, owner, officer, director, employee, or
consultant of any other firm, business or entity, engage in any activity in
competition with the Company. This prohibition will apply only to
activities in which the Company is engaged at any time during the Executive’s
employment with the Company and only with respect to those geographic regions in
which the Company is engaged in such business activities or reasonably
anticipates engaging in such business activities. << Provide specific
areas or examples as appropriate>>. Notwithstanding the
foregoing, nothing herein shall prohibit Executive from owning stock of any
corporation, if such stock is traded on a recognized national securities
exchange.
4. Nondisparagement. For
a period of twelve (12) months following the later of the <<Termination Date” /
“Retirement Date>> or a Change in Control (as defined in the Plan)
Executive will not, directly or indirectly, knowingly and materially disparage,
criticize, or otherwise make derogatory statements regarding the Company or any
aspect of management policies, operations, practices, or personnel of the
Company. Notwithstanding the foregoing, nothing contained herein will
be deemed to restrict the Participant from providing information to any
governmental or regulatory agency (or in any way limit the content of such
information) to the
extent the Participant is required to provide such information pursuant to
applicable law or regulation; nor will the foregoing restrict the Participant
from enforcing his or her rights under this Agreement or the Plan. The Company
promises that its officers will not disparage Executive, and will do nothing
intentionally calculated to harm the Executive’s
reputation.
5. Non
Disclosure. Executive agrees to keep confidential all
information and trade secrets to which Executive has had access during and in
the course of Executive’s employment by the Company, (whether written, prepared
or made by him or others), including but not limited to the terms of this
Agreement, the business practices, strategies, and opportunities of the Company,
and any other non-public information relating to the Company’s
business. Notwithstanding the foregoing, Executive may reveal the
existence of this Agreement, its terms and conditions, and the facts and
circumstances leading up to this Agreement with Executive’s spouse, attorneys,
accountants, tax consultants, and to state and federal tax authorities or as may
be required by law.
6. Waiver and
Release. Except with respect to Executive’s rights under this
Agreement and the Plan, Executive on behalf of himself and his heirs, executors,
administrators, representatives, successors and assigns, agrees to release and
forever discharge ALLETE, Inc., and its affiliates, subsidiaries, predecessors,
successors, related entities, insurers and the current and former officers,
directors, shareholders, employees, attorneys, agents and trustees or
administrators of any benefit plan of each of the foregoing (any and all of
which are referred to as “Releasees”) generally from any and all charges,
complaints, claims, promises, agreements, causes of actions, damages, and debts
of any nature whatsoever, known or unknown (collectively “Claims”), which
Executive has, claims to have, ever had, or ever claimed to have had against
Releasees up through the date of execution of this Agreement, including but not
limited to any Claims under the common law or any statute. This
waiver and release includes but is not limited to any rights, remedies, claims,
and causes of action under the Minnesota Human Rights Act, Title VII of the
Civil Rights Act of 1964, as amended, the Age Discrimination in Employment Act
of 1967, the Employee Retirement Income Securities Act of 1974, as amended, (but
only as to claims arising thereunder prior to the date hereof) the Older Workers
Benefit Protection Act, the Americans with Disabilities Act, the Family Medical
Leave Act, state unemployment compensation benefits, and any other federal,
state or local discrimination or civil rights statute or any federal, state or
local ordinance of any kind, any tort theory, any contract theory and any
equitable theory, and all claims for back pay, front pay, vacation pay, or sick
pay, excepting only:
(a) rights
of the Executive under this Separation Agreement and Release and the
Plan;
(b) rights
of the Executive relating to equity awards held by the Executive as of his or
her Termination Date (as defined in the Plan);
(c) the
right of the Executive to receive COBRA continuation coverage in accordance with
applicable law;
(d) rights
to indemnification the Executive may have (i) under applicable corporate law,
(ii) under the by-laws or certificate of incorporation of any Releasee or (iii)
as an insured under any director's and officer's liability insurance policy now
or previously in force;
(e) claims
(i) for benefits under any health, disability, retirement, deferred
compensation, life insurance or other, similar Executive benefit plan or
arrangement of the Company and (ii) for earned but unused vacation pay through
the Termination Date in accordance with applicable Company policy;
and
(f) claims
for the reimbursement of unreimbursed business expenses incurred prior to the
Termination Date pursuant to applicable Company policy.
Executive
has been provided a period of twenty-one (21) days to consider this Agreement
before executing it. Executive has had an opportunity to discuss this
agreement with Executive’s attorney or other adviser << [he /
she] >> had determined to be
appropriate. Executive may rescind this waiver and release of claims
within fifteen (15) days of the date of this Agreement, (the “Reconsideration
Period”) in which event the Company shall have no obligation to pay the benefits
described in paragraph 1 above or otherwise provided under the
Plan.
7. Severability. Should
any provision of this agreement be held invalid or illegal, such illegality
shall not invalidate the whole of this agreement, but, rather, the agreement
shall be construed as if it did not contain the illegal part, and the rights and
obligations of the parties shall be construed and enforced
accordingly.
8. Voluntary
Agreement. This Agreement is entered into on a completely
voluntary basis by both Executive and Minnesota Power, and represents the
complete agreement between the parties, superseding any previous
agreements.
The date of
this Agreement shall be dated <<
______________________>>.
EXECUTIVE:
By: ______________________________________
Name:
____________________________________
ALLETE,
Inc. << or
applicable affiliate employer>>
By: ______________________________________
Name:
____________________________________
Exhibit 12
ALLETE
2007 Form 10-K
ALLETE
Computation of Ratios of Earnings to
Fixed Charges (Unaudited)
|
For the Year Ended December
31
|
2007
|
2006
|
2005
|
2004
|
2003
|
|
Millions Except
Ratios
|
|||||
|
Income
from Continuing Operations
|
|||||
|
Before
Minority Interest and Income Taxes
|
$137.2
|
$128.2
|
$19.8
|
$57.0
|
$49.5
|
|
Less: Minority
Interest (a)
|
–
|
–
|
–
|
2.1
|
2.6
|
|
Undistributed
Income from Less than 50 percent
|
|||||
|
Owned
Equity Investment
|
3.3
|
2.3
|
–
|
–
|
2.9
|
|
133.9
|
125.9
|
19.8
|
54.9
|
44.0
|
|
|
Fixed
Charges
|
|||||
|
Interest
on Long-Term Debt
|
21.2
|
22.2
|
23.1
|
60.3
|
70.0
|
|
Capitalized
Interest
|
2.0
|
0.6
|
0.3
|
0.7
|
1.2
|
|
Other
Interest Charges (b)
|
3.5
|
5.3
|
3.5
|
8.7
|
4.3
|
|
Interest
Component of All Rentals (c)
|
1.9
|
2.0
|
2.8
|
3.5
|
8.0
|
|
Total
Fixed Charges
|
28.6
|
30.1
|
29.7
|
73.2
|
83.5
|
|
Earnings
Before Income Taxes and Fixed Charges
|
|||||
|
(Excluding
Capitalized Interest)
|
$160.5
|
$155.4
|
$49.2
|
$127.4
|
$126.3
|
|
Ratio
of Earnings to Fixed Charges
|
5.61
|
5.16
|
1.66
|
1.74
|
1.51
|
|
(a)
|
Pre-tax income of subsidiaries
that have not incurred fixed
charges.
|
|
(b)
|
Includes interest expense
relating to the adoption of FIN 48 – “Accounting for Uncertainty in Income
Taxes.”
|
|
(c)
|
Represents interest portion of
rents estimated at 33 1/3
percent.
|
Exhibit 21
ALLETE
2007 Form 10-K
SUBSIDIARIES OF THE
REGISTRANT
(As of December 31,
2007)
(Reported Under Item 601 of
Regulation S-K)
0; State or Country
Name &
#160; of
Organization
|
ALLETE,
Inc. (d.b.a. ALLETE;
Minnesota Power; Minnesota Power, Inc.;
|
Minnesota
|
||||||||||
|
Minnesota Power & Light
Company; MPEX; MPEX A Division of Minnesota
Power)
|
|||||||||||
|
ALLETE
Automotive Services, LLC
|
Minnesota
|
||||||||||
|
ALLETE
Capital II
|
Delaware
|
||||||||||
|
ALLETE
Capital III
|
Delaware
|
||||||||||
|
ALLETE
Properties, LLC (d.b.a.
ALLETE Properties)
|
Minnesota
|
||||||||||
|
ALLETE
Commercial, LLC
|
Florida
|
||||||||||
|
Cape
Coral Holdings, Inc.
|
Florida
|
||||||||||
|
Cape
Properties, Inc.
|
Florida
|
||||||||||
|
Lehigh
Acquisition Corporation
|
Delaware
|
||||||||||
|
Florida
Landmark Communities, Inc.
|
Florida
|
||||||||||
|
Cliffside
Properties, Inc.
|
|
California
|
|||||||||
| Enterprise Lehigh, Inc. |
|
Florida
|
|||||||||
| Lehigh Corporation |
|
Florida
|
|||||||||
|
Lehigh
Land & Investment, Inc.
|
|
Florida
|
|||||||||
|
Mardem,
LLC
|
|
Florida
|
|||||||||
| Palm Coast Holdings, Inc. |
|
Florida
|
|||||||||
| Port Orange Holdings, LLC |
|
Florida
|
|||||||||
|
Interlachen
Lakes Estates, Inc.
|
Florida
|
||||||||||
|
SRC
of Florida, Inc.
|
Florida
|
||||||||||
|
Sundowner
Properties, Inc.
|
Pennsylvania
|
||||||||||
|
Palm
Coast Forest, LLC
|
Florida
|
||||||||||
|
Palm
Coast Land, LLC
|
Florida
|
||||||||||
|
Tomoka
Holdings, LLC
|
Florida
|
||||||||||
|
Winter
Haven Citi Centre, LLC
|
Florida
|
||||||||||
|
ALLETE
Water Services, Inc.
|
Minnesota
|
||||||||||
|
Florida
Water Services Corporation
|
Florida
|
||||||||||
|
Auto
Replacement Property, LLC
|
Indiana
|
||||||||||
|
Energy
Replacement Property, LLC
|
Minnesota
|
||||||||||
|
Georgia
Water Services Corporation
|
Georgia
|
||||||||||
|
Energy
Land, Incorporated
|
Wisconsin
|
||||||||||
|
Lakeview
Financial Corporation I
|
Minnesota
|
||||||||||
|
Lakeview
Financial Corporation II
|
Minnesota
|
||||||||||
|
Logistics
Coal, LLC
|
Minnesota
|
||||||||||
|
Minnesota
Power Enterprises, Inc.
|
Minnesota
|
||||||||||
|
BNI
Coal, Ltd.
|
North
Dakota
|
||||||||||
|
MP
Affiliate Resources, Inc.
|
Minnesota
|
||||||||||
|
Rainy
River Energy Corporation
|
Minnesota
|
||||||||||
|
Rainy
River Energy Corporation - Wisconsin
|
Wisconsin
|
||||||||||
|
Synertec,
Incorporated
|
Minnesota
|
||||||||||
|
Upper
Minnesota Properties, Inc.
|
Minnesota
|
||||||||||
|
Upper Minnesota Properties - Development, Inc.
|
|
Minnesota
|
|||||||||
| Upper Minnesota Properties - Irving, Inc. |
|
Minnesota
|
|||||||||
| Upper Minnesota Properties - Meadowlands, Inc. |
|
Minnesota
|
|||||||||
|
Meadowlands
Affordable Housing
Limited Partnership
|
Minnesota | ||||||||||
|
MP
Investments, Inc.
|
Delaware
|
||||||||||
|
RendField
Land Company, Inc.
|
Minnesota
|
||||||||||
|
Superior
Water, Light and Power Company
|
Wisconsin
|
||||||||||
Exhibit
23(a)
ALLETE
2007 Form 10-K
Consent
of Independent Registered Public Accounting Firm
We
hereby
consent to the incorporation by reference in the Registration Statements on
Form
S-3 (Nos. 333-02109, 333-41882, 333-57104, 333-147965) and Form S-8 (Nos.
333-16445, 333-16463, 333-82901, 333-91348, 333-105225, 333-124455) of ALLETE,
Inc. of our report dated February 11, 2008, relating to the consolidated
financial statements, financial statement schedule and the effectiveness of
internal control over financial reporting, which appears in this Form
10-K.
PricewaterhouseCoopers
LLP
PRICEWATERHOUSECOOPERS
LLP
Minneapolis,
Minnesota
February
15, 2008
Exhibit
23(b)
ALLETE
2007 Form 10-K
Consent
of General Counsel
The
statements of law and legal conclusions under “Item 1. Business” in ALLETE’s
Annual Report on Form 10-K for the year ended December 31, 2007, have been
reviewed by me and are set forth therein in reliance upon my opinion as an
expert.
I
hereby
consent to the incorporation by reference of such statements of law and legal
conclusions in Registration Statement Nos. 333-02109, 333-41882, 333-57104
and
333-147965 on Form S-3, and Registration Statement Nos. 333-16445, 333-16463,
333-82901, 333-91348, 333-105225 and 333-124455 on Form S-8.
Deborah
A. Amberg
Deborah
A. Amberg
Duluth,
Minnesota
February
15, 2008
Exhibit 31(a)
ALLETE
2007 Form 10-K
Rule 13a-14(a)/15d-14(a)
Certification by the Chief Executive Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Donald J. Shippar, of ALLETE, Inc.
(ALLETE), certify that:
|
1.
|
I
have reviewed this annual report on Form 10-K for the fiscal year ended
December 31, 2007, of ALLETE;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
|
|
|
a.
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
|
b.
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
|
c.
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
|
d.
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
|
|
a.
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
|
b.
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
Date: February
15,
2008 Donald J.
Shippar
Donald J. Shippar
Chairman, President and Chief
Executive Officer
Exhibit
31(b)
ALLETE
2007 Form 10-K
Rule
13a-14(a)/15d-14(a) Certification by the Chief Financial
Officer
Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
I,
Mark A. Schober, of ALLETE, Inc.
(ALLETE), certify that:
|
1.
|
I
have reviewed this annual report on Form 10-K for the fiscal year
ended
December 31, 2007, of ALLETE;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
|
|
a.
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
|
|
b.
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision,
to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
|
c.
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
|
d.
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting,
to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
|
|
a.
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
|
b.
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
Date: February
15,
2008
Mark A. Schober
Mark
A. Schober
Senior
Vice President and Chief
Financial Officer
Exhibit
32
ALLETE
2007 Form 10-K
Section
1350 Certification of Periodic Report
By
the Chief Executive Officer and Chief Financial Officer
Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, each
of the undersigned officers of ALLETE, Inc. (ALLETE), does hereby certify
that:
|
1.
|
The
Annual Report on Form 10-K of ALLETE for the fiscal year ended December
31, 2007, (Report) fully complies with the requirements of Section
13(a)
of the Securities Exchange Act of 1934 (15 U.S.C. 78m);
and
|
|
2.
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of
ALLETE.
|
Date: February
15,
2008 Donald
J.
Shippar
Donald
J. Shippar
President and Chief Executive Officer
Date: February
15,
2008 Mark
A.
Schober
Mark
A. Schober
Senior
Vice President and Chief Financial Officer
This
certification shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934 or otherwise subject to liability pursuant
to
that section. Such certification shall not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except to the extent that ALLETE specifically incorporates
it by reference.
A
signed
original of this written statement required by Section 906, or other document
authenticating, acknowledging, or otherwise adopting the signature that appears
in typed form within the electronic version of this written statement required
by Section 906, has been provided to ALLETE and will be retained by ALLETE
and
furnished to the Securities and Exchange Commission or its staff upon
request.
Exhibit 99
ALLETE
2007 Form 10-K
 |
For
Release:
|
Feb.
15, 2008
|
|
Contact:
|
Eric
Olson
|
|
|
218-723-3947
|
||
|
eolson@allete.com
|
||
|
Investor
|
Tim
Thorp
|
|
|
Contact:
|
218-723-3953
|
|
|
tthorp@allete.com
|
||
|
NEWS
|
ALLETE reports 2007 EPS of $3.08, 11%
higher than in 2006
ALLETE
(NYSE:ALE) today reported 2007 net income of $87.6 million on revenue of $841.7
million, compared to $76.4 million in net income and $767.1 million in revenue
in 2006. Diluted earnings per share from continuing operations rose 11% to $3.08
from $2.77 in 2006.
“We are
pleased with our financial performance in 2007, especially when considering the
difficult market conditions faced by our real estate business,” said Chairman,
President, and CEO Donald J. Shippar.
Income
from ALLETE’s Energy
business segments were $65.9 million for 2007 compared to $52.4 million in the
preceding year. Weather-related kilowatt-hour sales increases, a full year’s
earnings contribution from the company’s investment in the American Transmission
Company, higher rates at Superior, Water, Light & Power and the addition of
two new municipal full requirements customers all contributed to the
improvement. These increases were partially offset by higher operation and
maintenance expenses during the year, compared to 2006. The Energy business also
benefited from a lower effective tax rate in 2007.
Income
from ALLETE’s Real
Estate segment was $17.7 million on 2007 versus $22.8 million in 2006 due
to decreased demand for property during the year.
ALLETE
continues to expect 2008 earnings per share to be within a range of $2.70 to
$2.90, with about 10 to 20 percent from the real estate segment. Shippar also
noted that the company’s board of directors recently announced a 5% dividend
increase.
ALLETE’s
corporate headquarters are located in Duluth, Minnesota. ALLETE provides energy
services in the upper Midwest and has significant real estate holdings in
Florida. More information about the company is available on ALLETE’s Web site at
www.allete.com.
The statements contained in this
release and statements that ALLETE may make orally in connection with this
release that are not historical facts, are forward-looking statements. Actual
results may differ materially from those projected in the forward-looking
statements. These forward-looking statements involve risks and uncertainties and
investors are directed to the risks discussed in documents filed by ALLETE with
the Securities and Exchange Commission.
###
ALLETE · 30 West Superior
Street, Duluth, Minnesota
55802
www.allete.com
ALLETE, Inc.
Consolidated Statement of
Income
For the Periods Ended December 31,
2007 and 2006
Millions
Except Per Share Amounts
|
Quarter
Ended
|
Year to
Date
|
|||||
|
|
|
2007
|
2006
|
2007
|
2006
|
|
|
Operating
Revenue
|
$212.3
|
$197.2
|
$841.7
|
$767.1
|
||
|
Operating
Expenses
|
||||||
|
Fuel
and Purchased Power
|
85.2
|
69.8
|
347.6
|
281.7
|
||
|
Operating
and Maintenance
|
80.6
|
76.0
|
311.9
|
296.0
|
||
|
|
Depreciation
|
12.7
|
12.1
|
48.5
|
48.7
|
|
|
|
|
Total
Operating Expenses
|
178.5
|
157.9
|
708.0
|
626.4
|
|
Operating Income from
Continuing Operations
|
33.8
|
39.3
|
133.7
|
140.7
|
||
|
Other Income
(Expense)
|
||||||
|
Interest
Expense
|
(5.9)
|
(7.3)
|
(24.6)
|
(27.4)
|
||
|
Equity
Earnings in ATC
|
3.3
|
2.0
|
12.6
|
3.0
|
||
|
|
Other
|
3.6
|
4.1
|
15.5
|
11.9
|
|
|
|
|
Total
Other Income (Expense)
|
1.0
|
(1.2)
|
3.5
|
(12.5)
|
|
Income from Continuing
Operations Before Minority
|
||||||
|
Interest and Income
Taxes
|
34.8
|
38.1
|
137.2
|
128.2
|
||
|
Income Tax
Expense
|
12.3
|
13.7
|
47.7
|
46.3
|
||
|
Minority
Interest
|
0.3
|
1.4
|
1.9
|
4.6
|
||
|
Income from Continuing
Operations
|
22.2
|
23.0
|
87.6
|
77.3
|
||
|
Loss from Discontinued
Operations - Net of Tax
|
–
|
(0.4)
|
–
|
(0.9)
|
||
|
Net
Income
|
$22.2
|
$22.6
|
$87.6
|
$76.4
|
||
|
Average Shares of Common
Stock
|
||||||
|
Basic
|
28.6
|
27.9
|
28.3
|
27.8
|
||
|
|
Diluted
|
28.7
|
28.0
|
28.4
|
27.9
|
|
|
Basic Earnings Per Share of
Common Stock
|
||||||
|
Continuing
Operations
|
$0.78
|
$0.82
|
$3.09
|
$2.78
|
||
|
|
Discontinued
Operations
|
–
|
(0.01)
|
–
|
(0.03)
|
|
|
|
|
|
$0.78
|
$0.81
|
$3.09
|
$2.75
|
|
Diluted Earnings Per Share of
Common Stock
|
||||||
|
Continuing
Operations
|
$0.77
|
$0.82
|
$3.08
|
$2.77
|
||
|
|
Discontinued
Operations
|
–
|
(0.01)
|
–
|
(0.03)
|
|
|
|
|
$0.77
|
$0.81
|
$3.08
|
$2.74
|
|
|
Dividends Per Share of Common
Stock
|
$0.4100
|
$0.3625
|
$1.6400
|
$1.4500
|
||
Consolidated Balance
Sheet
Millions
|
Dec. 31,
|
Dec. 31,
|
Dec. 31,
|
Dec.
31,
|
|||
|
2007
|
2006
|
2007
|
2006
|
|||
|
Assets
|
Liabilities and Shareholders'
Equity
|
|||||
|
Cash
and Short-Term Investments
|
$46.4
|
$149.3
|
Current
Liabilities
|
$137.1
|
$143.5
|
|
|
Other
Current Assets
|
168.1
|
138.4
|
Long-Term
Debt
|
410.9
|
359.8
|
|
|
Property,
Plant and Equipment
|
1,104.5
|
921.6
|
Other
Liabilities
|
353.6
|
364.3
|
|
|
Investments
|
213.8
|
189.1
|
Shareholders'
Equity
|
742.6
|
665.8
|
|
|
Other
|
111.4
|
135.0
|
||||
|
Total
Assets
|
$1,644.2
|
$1,533.4
|
Total Liabilities and
Shareholders' Equity
|
$1,644.2
|
$1,533.4
|
|
Quarter
Ended
|
Year to
Date
|
|||||||
|
December
31,
|
December
31,
|
|||||||
|
ALLETE,
Inc.
|
|
2007
|
2006
|
2007
|
2006
|
|||
|
Income
(Loss)
|
||||||||
|
Millions
|
||||||||
|
Regulated
Utility
|
$17.0
|
$13.3
|
$54.9
|
$46.8
|
||||
|
Nonregulated
Energy Operations
|
0.1
|
0.8
|
3.5
|
3.7
|
||||
|
ATC
|
1.9
|
1.3
|
7.5
|
1.9
|
||||
|
Real
Estate
|
2.5
|
7.1
|
17.7
|
22.8
|
||||
|
|
Other
|
|
|
0.7
|
0.5
|
4.0
|
2.1
|
|
|
Income
from Continuing Operations
|
22.2
|
23.0
|
87.6
|
77.3
|
||||
|
|
Loss
from Discontinued Operations
|
–
|
(0.4)
|
–
|
(0.9)
|
|||
|
|
Net
Income
|
|
$22.2
|
$22.6
|
$87.6
|
$76.4
|
||
|
Diluted Earnings Per
Share
|
||||||||
|
Continuing
Operations
|
$0.77
|
$0.82
|
$3.08
|
$2.77
|
||||
|
|
Discontinued
Operations
|
–
|
(0.01)
|
–
|
(0.03)
|
|||
|
|
|
|
|
$0.77
|
$0.81
|
$3.08
|
$2.74
|
|
|
Statistical
Data
|
||||||||
|
Corporate
|
||||||||
|
Common
Stock
|
||||||||
|
High
|
$46.48
|
$47.84
|
$51.30
|
$49.30
|
||||
|
Low
|
$38.17
|
$42.55
|
$38.17
|
$42.55
|
||||
|
Close
|
$39.58
|
$46.54
|
$39.58
|
$46.54
|
||||
|
Book
Value
|
$24.11
|
$21.90
|
$24.11
|
$21.90
|
||||
|
Kilowatthours
Sold
|
||||||||
|
Millions
|
||||||||
|
Regulated
Utility
|
||||||||
|
Retail
and Municipals
|
||||||||
|
Residential
|
309.0
|
300.3
|
1,141.1
|
1,100.4
|
||||
|
Commercial
|
339.5
|
329.3
|
1,373.1
|
1,335.2
|
||||
|
Municipals
|
256.2
|
226.5
|
1,007.5
|
910.5
|
||||
|
Industrial
|
1,838.3
|
1,776.5
|
7,053.5
|
7,205.6
|
||||
|
|
|
|
Other
|
22.0
|
19.3
|
84.8
|
78.7
|
|
|
Total
Retail and Municipal
|
2,756.0
|
2,651.9
|
10,660.0
|
10,630.4
|
||||
|
|
|
Other
Power Suppliers
|
548.5
|
548.0
|
2,157.3
|
2,152.9
|
||
|
Total
Regulated Utility
|
3,313.5
|
3,199.9
|
12,817.3
|
12,783.3
|
||||
|
|
Nonregulated
Energy Operations
|
64.2
|
59.1
|
248.4
|
240.4
|
|||
|
|
|
|
|
Total
Kilowatthours Sold
|
3,377.7
|
3,259.0
|
13,065.7
|
13,023.7
|
|
Real
Estate
|
||||||||
|
Town
Center Development Project
|
||||||||
|
Non-residential
Square Footage Sold
|
65,583
|
36,976
|
540,059
|
401,971
|
||||
|
Residential
Units
|
–
|
231
|
130
|
773
|
||||
|
Palm
Coast Park Development Project
|
||||||||
|
Non-residential
Square Footage Sold
|
–
|
–
|
40,000
|
–
|
||||
|
Residential
Units
|
200
|
–
|
606
|
200
|
||||
|
Other
Land
|
||||||||
|
Acres
Sold
|
33
|
24
|
483
|
732
|
||||