EPA Greenhouse Gas Reporting Rule. On September 22, 2009, the EPA issued a final rule mandating that certain GHG emission sources, including electric generating units, are required to report GHG emissions. The rule is intended to allow the EPA to collect accurate and timely data on GHG emissions that can be used to form future policy decisions. The rule was effective January 1, 2010, and all GHG emissions must be reported on an annual basis beginning March 31, 2011. Currently, we have the equipment and data tools necessary to report our 2010 emissions to comply with this rule.

EPA Regulation of GHG Emissions. On December 15, 2009, the EPA issued an “Endangerment Finding” with respect to emissions of GHGs. The Endangerment Finding was the EPA’s published determination that six GHGs endanger human health or welfare, and that emissions from motor vehicles contribute to that endangerment. Following this determination, on April 1, 2010, the United States Department of Transportation and the EPA jointly announced GHG emission standards for new passenger vehicles and light-duty trucks. The EPA’s exercise of authority over GHG emissions through the Endangerment Finding and Light Duty Vehicle Rule triggered the EPA’s regulation of stationary sources for GHGs under the Clean Air Act.  

ALLETE Second Quarter 2010 Form 10-Q

 

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NOTE 13.  COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)

Environmental Matters (Continued)

On May 13, 2010, the EPA issued the final Prevention of Significant Deterioration (PSD) and Title V Greenhouse Gas Tailoring Rule. The PSD/Title V Greenhouse Gas Tailoring Rule establishes thresholds for when permits will be required to address GHG emissions for new facilities, at existing facilities that undergo major modifications, and at other facilities that are characterized as major sources under the Clean Air Act’s Title V program. Under the new rule, existing sources of emissions that already have a Title V permit would have GHG provisions added to their permits upon renewal. The rule requires large industrial facilities, including power plants, that undergo major modifications resulting in a significant increase in GHG emissions to obtain PSD permits that demonstrate that Best Available Control Technology (BACT) is being used at the facility to control emissions. The EPA has defined significant emissions increase for existing sources as a GHG increase of 75,000 tons per year or more of total GHG on a CO2 equivalent basis. The EPA is expected to propose BACT standards for GHG emissions from stationary sources in late 2010.

For our existing facilities, the rule does not require amending our existing Title V operating permits to include GHGs requirements. Implementation of that requirement to add GHG provisions will be completed at the state level in Minnesota by the MPCA when the Title V permits are renewed. However, installation of new units or modification of existing units resulting in GHG emissions that trigger the PSD permitting requirements will require obtaining PSD permits and amending our operating permits to incorporate BACT to control GHG emissions. Minnesota Power’s existing facilities become subject to the BACT requirements if they undergo major modifications that result in a significant emissions increase. Legal challenges to the EPA’s regulation of GHG emissions, including the Tailoring Rule, have been filed and are awaiting jud icial determination.

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.

Coal Ash Management Facilities. Minnesota Power generates coal ash at all five of its steam electric stations. Two facilities store ash in onsite impoundments (ash ponds) with engineered liners and containment dikes. Another facility stores dry ash in a landfill with an engineered liner and leachate collection system. Two facilities generate a combined wood and coal ash that is either land applied as an approved beneficial use, or trucked to state permitted landfills. On June 18, 2010, the EPA proposed new regulations for coal combustion residuals generated by the electric utility sector. The proposal seeks comments on two general regulatory schemes for coal ash. Comments are due to the EPA by September 18, 2010. We are unable to predict the compliance costs we might incur; howev er, there is the possibility they could have a material impact.

Manufactured Gas Plant Site. We are reviewing and addressing environmental conditions at a former manufactured gas plant site within the City of Superior, Wisconsin, and formerly operated by SWL&P. We have been working with the WDNR to determine the extent of contamination and the remediation of contaminated locations. At June 30, 2010, we have a $0.5 million liability for this site, and a corresponding regulatory asset as we expect recovery of remediation costs to be allowed by the PSCW.

BNI Coal. As of June 30, 2010, BNI Coal had surety bonds outstanding of $18.4 million related to the reclamation liability for closing costs associated with its mine and mine facilities. Although the coal supply agreements obligate the customers to provide for the closing costs, an additional guarantee is required by federal and state regulations. In addition to the surety bonds, BNI Coal has secured a Letter of Credit with CoBANK ACB for an additional $10.0 million. The combination of the surety bonds and the Letter of Credit is sufficient to meet the requirements to guarantee BNI Coal’s total reclamation liability, currently estimated at $25.1 million.

ALLETE Properties. As of June 30, 2010, ALLETE Properties, through its subsidiaries, had surety bonds outstanding of $14.7 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 $9.0 million, and ALLETE Properties does not believe it is likely that any of these outstanding bonds will be drawn upon.

ALLETE Second Quarter 2010 Form 10-Q

 

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NOTE 13.  COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)

Community Development District Obligations. In March 2005, the Town Center District issued $26.4 million of tax-exempt, 6 percent Capital Improvement Revenue Bonds, Series 2005; and in May 2006, the Palm Coast Park District issued $31.8 million of tax-exempt, 5.7 percent Special Assessment Bonds, Series 2006. The Capital Improvement Revenue Bonds and the Special Assessment Bonds are payable through property tax assessments on the land owners over 31 years (by May 1, 2036, and 2037, respectively). The bond proceeds were used to pay for the construction of a portion of the major infrastructure improvements in each district, and to mitigate traffic and environmental impacts. The bonds are payable from and secured by the revenue derived from annual assessments imposed, levied and coll ected by each district. The assessments are being billed annually to the landowners. To the extent that we own land at the time of the annual assessment, we will incur the cost of our portion of these assessments, based upon our ownership of benefited property. At June 30, 2010, we owned 69 percent of the assessable land in the Town Center District (69 percent at December 31, 2009) and 93 percent of the assessable land in the Palm Coast Park District (86 percent at December 31, 2009). At these ownership levels our annual assessments are approximately $1.5 million for Town Center and $2.1 million for Palm Coast Park. 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.

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements, notes to those statements, Management’s Discussion and Analysis of Financial Condition and Results of Operations from the 2009 Form 10-K and the other financial information appearing elsewhere in this report. In addition to historical information, the following discussion and other parts of this Form 10-Q contain forward-looking information that involves risks and uncertainties. Readers are cautioned that forward-looking statements should be read in conjunction with our disclosures in this Form 10-Q under the heading: “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995” located on page 5 and “Risk Factors” located in Part I, Item 1A, page 23 of our 2009 Form 10-K. The risks and u ncertainties described in this Form 10-Q and our 2009 Form 10-K are not the only risks facing our Company. Additional risks and uncertainties that we are not presently aware of, or that we currently consider immaterial, may also affect our business operations. Our business, financial condition or results of operations could suffer if the concerns set forth are realized.

OVERVIEW

Regulated Operations includes our regulated utilities, Minnesota Power and SWL&P, as well as our investment in ATC, a Wisconsin-based regulated utility that owns and maintains electric transmission assets in parts of Wisconsin, Michigan, Minnesota and Illinois. Minnesota Power provides regulated utility electric service in northeastern Minnesota to 145,000 retail customers and wholesale electric service to 16 municipalities. Minnesota Power also provides regulated utility electric service to 1 private utility in Wisconsin. SWL&P provides regulated electric, 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 und er the jurisdiction of state and federal regulatory authorities.

ALLETE Second Quarter 2010 Form 10-Q

 

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OVERVIEW (Continued)

Investments and Other is comprised primarily of BNI Coal, our coal mining operations in North Dakota, and ALLETE Properties, our Florida real estate investment. This segment also includes a small amount of non-rate base generation, approximately 7,000 acres of land available-for-sale in Minnesota, and earnings on cash and investments.

ALLETE is incorporated under the laws of Minnesota. Our corporate headquarters are in Duluth, Minnesota. Statistical information is presented as of June 30, 2010, 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.

Financial Overview

The following net income discussion summarizes a comparison of the six months ended June 30, 2010, to the six months ended June 30, 2009.

Net income attributable to ALLETE for the six months ended June 30, 2010, was $42.4 million, or $1.25 per diluted share, compared to $26.3 million, or $0.84 per diluted share, for the same period of 2009. The first six months of 2009 was reduced by a $4.9 million, or $0.15 per share, after-tax charge for the accrual of retail rate refunds related to 2008.

Regulated Operations net income attributable to ALLETE was $43.1 million for the first six months of 2010, compared to $28.4 million for the same period of 2009; the first six months of 2009 was reduced by a $4.9 million after-tax charge for the accrual of retail rate refunds related to 2008. The period-over-period increase is attributable to MPUC-approved interim retail rates (subject to refund), increased sales to our large power customers, higher FERC-approved wholesale rates, and increased transmission-related margins. These increases were significantly offset by higher operating and maintenance, depreciation, interest and income tax expenses. Income tax expense included a $3.6 million charge resulting from the Patient Protection and Affordable Care Act of 2010 that eliminated the deduction for expenses reimbursed under Medicare Part D. In addition, 2010 reflected $0.3 million in additional after-tax earnings from our investment in ATC over 2009.

Investments and Other reflected a net loss attributable to ALLETE of $0.7 million in the first six months of 2010, compared to a net loss of $2.1 million in 2009. The decrease in net loss was primarily due to a tax benefit of $1.1 million (including interest) resulting from the completion of a state income tax audit and to lower equity losses on investments of $0.6 million. This was partially offset by a $0.4 million charge related to the Patient Protection and Affordable Care Act of 2010 and the transfer of a small generating facility to our Regulated Operations in November 2009.

COMPARISON OF THE QUARTERS ENDED JUNE 30, 2010 AND 2009

(See Note 2. Business Segments for financial results by segment.)

Regulated Operations

 

Operating revenue increased $46.7 million, or 32 percent, from 2009 due to authorized Minnesota interim retail rates from our 2010 rate case, and the absence of an accrual of prior year retail rate refunds related to our 2008 retail rate case. Also contributing to increased revenue was higher fuel and purchased power recoveries, increased sales to our retail and municipal customers, and higher transmission revenues. These increases were partially offset by lower sales to Other Power Suppliers.

 

Interim retail rates authorized by the MPUC in December 2009, and effective January 1, 2010, resulted in an increase of approximately $11.3 million. Interim rates are subject to refund pending the MPUC’s final rate order. (See Note 5. Regulatory Matters.)

 

Retail rate refunds related to 2008 resulting from the 2009 MPUC Order were recorded in 2009 and resulted in a reduction in 2009 revenues of $2.3 million.

ALLETE Second Quarter 2010 Form 10-Q

 

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COMPARISON OF THE QUARTERS ENDED JUNE 30, 2010 AND 2009 (Continued)

Regulated Operations (Continued)

 

Higher fuel and purchased power recoveries, along with an increase in retail and municipal kilowatt-hour sales, combined for a total revenue increase of $37.2 million. Fuel and purchased power recoveries increased due to an increase in fuel and purchased power expense. (See Fuel and Purchased Power Expense.) Total kilowatt-hour sales to retail and municipal customers increased 50.5 percent from 2009 primarily due to increased sales to our taconite customers.

 

Transmission revenues increased $5.0 million from 2009 primarily due to revenues related to the 250 kV DC transmission line we purchased from Square Butte on December 31, 2009.

 

The increase in kilowatt-hour sales to retail and municipal customers was partially offset by decreased revenue from marketing power to Other Power Suppliers, which decreased $10.4 million in 2010. Sales to Other Power Suppliers are sold at market-based prices into the MISO market on a daily basis or through bilateral agreements of various durations.

 

Total kilowatt-hour sales to retail and municipal customers increased 50.5 percent from 2009 primarily due to an increase in sales to our taconite customers. Increased revenue from our industrial sales was partially offset by a 33.5 percent decrease in kilowatt-hour sales to Other Power Suppliers.

Kilowatt-hours Sold						Quantity	%
Quarter Ended June 30,				2010	2009	Variance	Variance
Millions
Regulated Utility
	Retail and Municipals
		Residential		229	242	(13)	(5.4) %
		Commercial		327	331	(4)	(1.2) %
		Industrial		1,728	874	854	97.7 %
		Municipals		228	222	6	2.7 %
			Total Retail and Municipals	2,512	1,669	843	50.5 %
	Other Power Suppliers			736	1,107	(371)	(33.5) %
Total Regulated Utility Kilowatt-hours Sold				3,248	2,776	472	17.0 %

 

Revenue from electric sales to taconite customers accounted for 26 percent of consolidated operating revenue in 2010 (13 percent in 2009). The increase in revenue from our taconite customers was partially offset by a decrease in revenue from electric sales to Other Power Suppliers which accounted for 13 percent of consolidated operating revenue in 2010 (23 percent in 2009). Revenue from electric sales to paper and pulp mills accounted for 9 percent of consolidated operating revenue in 2010 (10 percent in 2009). Revenue from electric sales to pipelines and other industrials accounted for 6 percent of consolidated operating revenue in 2010 (8 percent in 2009).

 

Operating expenses increased $34.3 million, or 27 percent, from 2009.

 

Fuel and Purchased Power Expense increased $17.5 million, or 31 percent, from 2009. The increase was due to higher fuel costs of $8.6 million resulting from a 30 percent increase in coal generation at our facilities and higher coal prices and related transportation. Purchased power expense also increased $6.2 million reflecting higher market prices and higher kilowatt-hour purchases.

 

Operating and Maintenance Expense increased $12.4 million, or 22 percent, from 2009 reflecting higher plant operating and maintenance expenses of $5.5 million, additional MISO expenses of $4.6 million relating to the 250 kV DC transmission line we purchased from Square Butte on December 31, 2009, and increased benefit costs of $2.6 million.

 

Depreciation Expense increased $4.4 million, or 31 percent, from 2009 reflecting higher property, plant, and equipment placed in service.

 

Interest expense increased $1.1 million, or 17 percent, from 2009 primarily due to additional long-term debt issued to fund new capital investments.

ALLETE Second Quarter 2010 Form 10-Q

 

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COMPARISON OF THE QUARTERS ENDED JUNE 30, 2010 AND 2009 (Continued)

Regulated Operations (Continued)

 

Income tax expense increased $5.6 million, or 97 percent, from 2009 primarily due to higher pretax income.

Investments and Other

 

Operating revenue decreased $2.5 million, or 13 percent, from 2009. This decrease was primarily attributable to BNI Coal, which operates under a cost-plus contract and recorded $2.1 million less in sales revenue as a result of lower expenses in 2010 (See Operating Expense). Revenue from non-regulated generation also decreased $1.4 million primarily due to the transfer of a small generating facility to Regulated Operations in November  2009. These decreases were partially offset by a $0.7 million pre-tax gain at ALLETE Properties in 2010, due to the receipt of property from an entity which filed for voluntary Chapter 11 bankruptcy in June 2009. (See Note 3. Investments.) No land sales were made during the second quarter of 2010 or 2009 at ALLETE Properties, due to the continued lack of demand for our properti es as a result of poor real estate market conditions in Florida.

ALLETE Properties	2010		2009
Revenue and Sales Activity	Quantity	Amount	Quantity	Amount
Dollars in Millions
Revenue from Land Sales
Acres	–	–	–	–
Contract Sales Price		–		–
Deferred Revenue		–		–
Revenue from Land Sales		–		–
Other Revenue (a)		$1.2		$0.1
Total ALLETE Properties Revenue		$1.2		$0.1

(a)	Other Revenue primarily includes a $0.7 million pre-tax gain for the quarter ended June 30, 2010, due to the receipt of property from an entity which filed for voluntary Chapter 11 bankruptcy in June 2009.

 

Operating expenses decreased $3.8 million, or 18 percent, from 2009 reflecting lower expenses at BNI Coal of $2.0 million primarily due to higher repairs in 2009 and lower diesel fuel unit costs in 2010 which were recovered through the cost-plus contract. (See Operating Revenue.) Also contributing to this decrease were lower non-regulated generation expenses of $1.1 million as a result of the transfer of a small generating facility to Regulated Operations in November 2009.

Income Taxes – Consolidated

 

For the quarter ended June 30, 2010, the effective tax rate was 32.6 percent (31.5 percent for the quarter ended June 30, 2009). The 2010 effective tax rate deviated from the statutory rate (approximately 41 percent) due to deductions for AFUDC-Equity, investment tax credits, wind production tax credits, and depletion. The 2010 effective tax rate was also favorably impacted by the completion of a state income tax audit. The 2009 effective tax rate was impacted by a state income tax refund. We expect the effective tax rate for the full year 2010 to be approximately 39 percent (36 percent excluding the effect of the Patient Protection and Affordable Care Act). (See Note 9. Income Tax Expense.)

COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(See Note 2. Business Segments for financial results by segment.)

Regulated Operations

 

Operating revenue increased $76.4 million, or 23 percent, from 2009 due to authorized Minnesota interim retail electric rates from our 2010 rate case, higher FERC-approved wholesale rates, and the absence of an accrual of prior year retail rate refunds related to our 2008 retail rate case. Also contributing to increased revenue was higher fuel and purchased power recoveries, increased sales to our retail and municipal customers, and higher transmission revenues. These increases were partially offset by lower sales to Other Power Suppliers.

ALLETE Second Quarter 2010 Form 10-Q

 

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COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (Continued)

Regulated Operations (Continued)

 

Interim retail rates authorized by the MPUC in December 2009, and effective January 1, 2010, resulted in an increase of approximately $20.8 million. Interim rates are subject to refund pending the MPUC’s final rate order. (See Note 5. Regulatory Matters.)

 

Higher rates from the January 1, 2010, FERC-approved wholesale rate increases for our municipal customers increased revenue by $4.8 million. (See Note 5. Regulatory Matters.)

 

Retail rate refunds related to 2008 resulting from the 2009 MPUC Order were recorded in 2009 and resulted in a reduction in 2009 revenues of $7.6 million.

 

Higher fuel and purchased power recoveries, along with an increase in retail and municipal kilowatt-hour sales, combined for a total revenue increase of $48.7 million. Fuel and purchased power recoveries increased due to an increase in fuel and purchased power expense. (See Fuel and Purchased Power Expense.) Total kilowatt-hour sales to retail and municipal customers increased 23.1 percent from 2009 primarily due to increased sales to our taconite customers.

 

Transmission revenues increased $11.0 million from 2009 primarily due to revenues related to the 250 kV DC transmission line we purchased from Square Butte on December 31, 2009.

 

The increase in kilowatt-hour sales to retail and municipal customers has been partially offset by decreased revenue from marketing power to Other Power Suppliers, which decreased $13.2 million in 2010. Sales to Other Power Suppliers are sold at market-based prices into the MISO market on a daily basis or through bilateral agreements of various durations.

 

Total kilowatt-hour sales to retail and municipal customers increased 23.1 percent from 2009 primarily due to an increase in sales to our taconite customers. Increased revenue from our industrial sales was partially offset by a 24.0 percent decrease in kilowatt-hour sales to Other Power Suppliers.

Kilowatt-hours Sold						Quantity	%
Six Months Ended June 30,				2010	2009	Variance	Variance
Millions
Regulated Utility
	Retail and Municipals
		Residential		586	617	(31)	(5.0) %
		Commercial		699	709	(10)	(1.4) %
		Industrial		3,157	2,197	960	43.7 %
		Municipals		493	487	6	1.2 %
			Total Retail and Municipals	4,935	4,010	925	23.1 %
	Other Power Suppliers			1,539	2,024	(485)	(24.0) %
Total Regulated Utility Kilowatt-hours Sold				6,474	6,034	440	7.3 %

 

Revenue from electric sales to taconite customers accounted for 23 percent of consolidated operating revenue in 2010 (16 percent in 2009). The increase in revenue from our taconite customers was partially offset by a decrease in revenue from electric sales to Other Power Suppliers which accounted for 13 percent of consolidated operating revenue in 2010 (23 percent in 2009). Revenue from electric sales to paper and pulp mills accounted for 9 percent of consolidated operating revenue in 2010 (9 percent in 2009). Revenue from electric sales to pipelines and other industrials accounted for 6 percent of consolidated operating revenue in 2010 (7 percent in 2009).

 

Operating expenses increased $53.2 million, or 19 percent, from 2009.

 

Fuel and Purchased Power Expense increased $24.5 million, or 19 percent, from 2009. The increase is primarily due to higher fuel costs of $13.0 million resulting from a 13 percent increase in coal generation at our facilities and higher coal prices and related transportation. Purchased power expense also increased $8.7 million reflecting higher market prices.

ALLETE Second Quarter 2010 Form 10-Q

 

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COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (Continued)

Regulated Operations (Continued)

 

Operating and Maintenance Expense increased $19.4 million, or 16 percent, from 2009 reflecting additional MISO expenses of $8.6 million relating to the 250 kV DC transmission line we purchased from Square Butte on December 31, 2009, higher plant maintenance and outage expenses of $6.6 million, and increased benefits costs of $4.6 million.

 

Depreciation Expense increased $9.3 million, or 33 percent, from 2009 reflecting higher property, plant, and equipment placed in service.

 

Interest Expense increased $1.4 million, or 10 percent, from 2009 primarily due to additional long-term debt issued to fund new capital investments. This was partially offset by $0.5 million related to interest accrued on retail rate refunds in 2009.

 

Income tax expense increased $14.5 million, or 82 percent, from 2009 primarily due to higher pretax income and a non-recurring charge to ALLETE’s net income from the Patient Protection and Affordable Care Act of $3.6 million.

Investments and Other

 

Operating revenue decreased $3.5 million, or 9 percent, from 2009 primarily due to a $2.9 million decrease in revenue from non-regulated generation primarily due to the transfer of a small generating facility to Regulated Operations in November 2009.

 

Revenue at ALLETE Properties was down $0.5 million primarily due to no land sales during the first six months of 2010. This was due to the continued lack of demand for our properties as a result of poor real estate market conditions in Florida. During the first six months of 2009, ALLETE Properties sold approximately 19 acres of property located outside of its three main development projects for $2.2 million.

ALLETE Properties	2010		2009
Revenue and Sales Activity	Quantity	Amount	Quantity	Amount
Dollars in Millions
Revenue from Land Sales
Acres (a)	–	–	19	$2.2
Contract Sales Price (b)		–		2.2
Deferred Revenue		–		(0.6)
Revenue from Land Sales		–		1.6
Other Revenue (c)		$1.3		0.2
Total ALLETE Properties Revenue		$1.3		$1.8

(a)	Acreage amounts are shown on a gross basis, including wetlands and non-controlling interest.

(b)	Reflects total contract sales price on closed land transactions. Land sales are recorded using a percentage-of-completion method.

(c)	Other Revenue primarily includes a $0.7 million pre-tax gain for the six months ended June 30, 2010, due to the receipt of property from an entity which filed for voluntary Chapter 11 bankruptcy in June 2009.

 

Operating expenses decreased $3.7 million, or 9 percent, from 2009 reflecting lower non-regulated generation expenses of $2.0 million primarily due to the transfer of a small generating facility to Regulated Operations in November 2009, and decreased expenses at ALLETE Properties of $1.0 million due to reductions in the cost of land sold and general and administrative expenses.

ALLETE Second Quarter 2010 Form 10-Q

 

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COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (Continued)

Income Taxes – Consolidated

 

For the six months ended June 30, 2010, the effective tax rate was 41.0 percent (36.4 percent for the six months ended June 30, 2009). Excluding additional tax expense recorded as a result of the Patient Protection and Affordable Care Act, the 2010 effective tax rate was 35.4 percent. The effective tax rate in each period deviated from the statutory rate (approximately 41 percent) primarily due to deductions for Medicare health subsidies, AFUDC-Equity, investment tax credits, wind productions tax credits, and depletion. The 2010 effective tax rate, excluding the additional tax expense recorded as a result of the Patient Protection and Affordable Care Act, was also favorably impacted by the completion of a state income tax audit. The 2009 effective tax rate included the effect of deductions for Medicare prescription drug subsidies and additional expense related to a non-recurring permanen t item. We expect the effective tax rate for the full year 2010 to be approximately 39 percent (36 percent excluding the effect of the Patient Protection and Affordable Care Act). (See Note 9. Income Tax Expense.)

CRITICAL ACCOUNTING ESTIMATES

Certain accounting measurements under GAAP involve management’s judgment about subjective factors and estimates, the effects of which are inherently uncertain. Accounting measurements that we believe are most critical to our reported results of operations and financial condition include: regulatory accounting, valuation of investments, pension and postretirement health and life actuarial assumptions, and taxation. These policies are reviewed with the Audit Committee of our Board of Directors on a regular basis and summarized in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2009 Form 10-K.

OUTLOOK

For additional information see our 2009 Form 10-K.

ALLETE is an energy company committed to earning a financial return that rewards our shareholders, allows for reinvestment in our businesses and sustains growth. To accomplish this, we intend to take actions necessary to earn our allowed rate of return in our regulated businesses, while we pursue growth initiatives in renewable energy, transmission and other energy-centric businesses.

We believe that over the long term, wind energy will play an increasingly important role in our nation’s energy mix. We intend to pursue the establishment of a renewable energy business focused initially on developing wind assets in North Dakota and the upper Midwest. We intend to develop wind resources which will be used to meet renewable supply requirements of our regulated businesses as well as wind resources that will be marketed to others. We will capitalize on our existing presence in North Dakota through BNI Coal, our recently acquired DC transmission line and Bison I. Through BNI Coal we have a long-term business presence and established landowner relationships in North Dakota. See page 37 for more discussion on the DC line acquisition and Bison I. For projects to be marketed to others, we intend to secure long-term power purchase agreements prior to construction of the wind generation facilities. Establishment of the business is subject to appropriate MPUC approvals.

We also plan to make investments in upper Midwest transmission opportunities that strengthen or enhance the regional transmission grid, or take advantage of our geographical location between sources of renewable energy and end users. In addition, we plan to make additional investments to fund our pro rata share of ATC’s future capital expansion program. Minnesota Power is also participating with other regional utilities in making regional transmission investments as a member of the CapX2020 initiative. The CapX2020 initiative is discussed in more detail on page 38.

We are also exploring investing in other energy-centric businesses that will complement an entrance into the renewable energy business, or leverage demand trends related to transmission, environmental control or energy efficiency.

ALLETE Second Quarter 2010 Form 10-Q

 

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OUTLOOK (Continued)

ALLETE intends to sell its Florida land assets at reasonable prices, over time or in bulk transactions, and reinvest the proceeds in its growth initiatives. ALLETE Properties does not intend to acquire additional real estate.

Regulated Operations. Minnesota Power’s long-term strategy is to maintain its competitively priced production of energy, reduce customer concentration exposure, comply with environmental permits and renewable requirements, and earn our allowed rate of return. Keeping the production of energy competitive enables Minnesota Power to effectively compete in the wholesale power markets, and minimizes retail rate increases to help maintain the viability of its customers. As part of maintaining cost competitiveness, Minnesota Power intends to reduce its exposure to possible future carbon and GHG legislation by reshaping its generation portfolio, over time, to reduce its reliance on coal. Minnesota Power intends to reduce its customer concentration risk to reduce exposure to cyclical industries; this may include restructuring commercial contracts, additional sales to other regional power suppliers, and reshaping our power supply to be more flexible to swings in customer demand. We will monitor and review environmental proposals and may challenge those that add considerable cost with limited environmental benefit. Current economic conditions require a very careful balancing of the benefit of further environmental controls with the impacts of the costs of those controls on our customers as well as on the Company and its competitive position. We will pursue current cost recovery riders to recover environmental and renewable investments, and will work with our legislators and regulators to earn a fair return.

Rates. Entities within our Regulated Operations segment file for periodic rate revisions with the MPUC, the FERC or the PSCW.

2010 Rate Case. On November 2, 2009, Minnesota Power filed a retail rate increase request for additional revenues to recover the costs of significant investments to ensure current and future system reliability, enhance environmental performance and bring new renewable energy to northeastern Minnesota. This retail rate request seeks a return on equity of 11.50 percent, a capital structure consisting of 54.29 percent equity and 45.71 percent debt and, on an annualized basis, an $81.0 million net increase in electric retail revenue, which was subsequently reduced to $72 million as discussed below.

Minnesota law allows the collection of interim rates while the MPUC processes the rate filing. On December 30, 2009, the MPUC issued an Order (the Order) authorizing $48.5 million of Minnesota Power’s November 2, 2009, interim rate increase request of $73.0 million. Interim rates, which were implemented on January 1, 2010, are subject to refund pending the MPUC’s final rate order.

The MPUC cited exigent circumstances in reducing Minnesota Power’s interim rate request. Because the scope and depth of this reduction in interim rates was unprecedented, and because Minnesota law does not allow Minnesota Power to formally challenge the MPUC’s action until a final decision in the case is rendered, on January 6, 2010, Minnesota Power sent a letter to the MPUC expressing its concerns about the Order and requested that the MPUC reconsider its decision on its own motion. Minnesota Power described its belief that the MPUC’s decision violates the law by prejudging the merits of the rate request prior to an evidentiary hearing and results in the confiscation of utility property. Further, the Company is concerned that the decision will have negative consequences on the environmental policy directions of the S tate of Minnesota by denying recovery for statutory mandates during the pendency of the rate proceeding. The MPUC has not acted in response to Minnesota Power’s letter.

The rate case process requires public hearings and an evidentiary hearing before an Administrative Law Judge. The public hearings occurred in April 2010, and the evidentiary hearing occurred in May 2010. A report and recommendation from the Administrative Law Judge is scheduled to be issued in August 2010, with a final decision on the rate request expected in November 2010.

ALLETE Second Quarter 2010 Form 10-Q

 

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OUTLOOK (Continued)

Rates (Continued)

In our April 29, 2010, rebuttal testimony filing, we lowered our initial retail rate increase request from $81 million to approximately $72 million due to adjustments for known and measurable events that have occurred since we originally filed. The largest of these adjustments relates to increased sales to our industrial customers. At the same time, we also lowered our return on equity request from 11.50 percent to 11.25 percent. Also, during the second quarter of 2010, we entered into a stipulation agreement with several rate case interveners on several issues. The stipulation agreement is non-binding on the MPUC and will be considered for approval in the normal course of this proceeding. We cannot predict the final level of rates that may be approved by the MPUC and we cannot predict whether a legal challenge to the MPUC’s inte rim rate decision will be forthcoming or successful.

2008 Rate Case – Fuel and Purchase Power. In the final 2008 rate case order, the MPUC approved the stipulation and settlement agreement that affirmed Minnesota Power’s continued recovery of fuel and purchased power costs under the former base cost of fuel that was in effect prior to the 2008 retail rate filing. The transition to the former base cost of fuel began with the implementation of final rates on November 1, 2009. Any revenue impact associated with this transition will be identified in a future filing related to Minnesota Power’s fuel clause operation.

FERC-Approved Wholesale Rates. Minnesota Power’s non-affiliated municipal customers consist of 16 municipalities in Minnesota and 1 private utility in Wisconsin. SWL&P, a wholly-owned subsidiary of ALLETE, is also a private utility in Wisconsin and a customer of Minnesota Power. In 2008, Minnesota Power entered into new contracts that transitioned these customers to formula-based rates which expire December 31, 2013. Under the formula-based rates provision, wholesale rates are set at the beginning of the year based on expected costs and provide for a true-up calculation for actual costs. Wholesale rate increases implemented on January 1, 2010, are expected to generate approximately $7 million in revenues on an annualized basis.

Wisconsin Rates. SWL&P’s current retail rates are based on a 2008 PSCW retail rate order, effective January 1, 2009. On May 17, 2010, SWL&P filed a rate increase request with the PSCW seeking an average overall increase of 3.6 percent for retail customers (a 1.4 percent increase in electric rates, a 3.0 percent increase in natural gas rates, and a 17.9 percent increase in water rates). The rate filing seeks an overall return on equity of 11.3 percent, and a capital structure consisting of 56.9 percent equity and 43.1 percent debt. On an annualized basis, the requested rate increase would generate approximately $3 million in additional revenue. Evidentiary and public hearings are schedul ed to be held in September 2010. The Company anticipates new rates will take effect during the first quarter of 2011. We cannot predict the level of rates that may be approved by the PSCW. 

Industrial Customers. Electric power is one of several key inputs in the taconite mining, paper production, and pipeline industries. Approximately 49 percent of our Regulated Utility kilowatt-hour sales in the quarter ended June 30, 2010 (36 percent in the quarter ended June 30, 2009), were made to our industrial customers, which include the taconite, paper and pulp, and pipeline industries.

According to the American Iron and Steel Institute, domestic raw steel production for the first six months of 2010, was approximately 71 percent of capacity, compared to 45 percent of capacity for the first six months of 2009. As a result, Minnesota Power expects an increase in taconite production for 2010 compared to 2009 (approximately 18 million tons in 2009), although production will still be less than previous levels (40 million tons in 2008). We will continue to market available power to Other Power Suppliers in an effort to mitigate the earnings impact of these lower industrial sales. Sales to Other Power Suppliers are dependent upon the availability of generation and are sold at market-based prices into the MISO market on a daily basis or through bilateral agreements of various durations. We can make no assurances that our powe r marketing efforts will fully offset the reduced earnings resulting from lower demand nominations from our industrial customers.

ALLETE Second Quarter 2010 Form 10-Q

 

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OUTLOOK (Continued)

Renewable Energy. In February 2007, Minnesota enacted a law requiring 25 percent of Minnesota Power’s total retail energy sales in Minnesota to come from renewable energy sources by 2025. The law also requires Minnesota Power to meet interim milestones of 12 percent by 2012, 17 percent by 2016, and 20 percent by 2020. Minnesota Power has developed a plan to meet the renewable goals set by Minnesota and has included this plan in the most recent filing of the Integrated Resource Plan with the MPUC. The law allows the MPUC to modify or delay meeting a milestone if implementation will cause significant ratepayer cost or technical reliability issues. If a utility is not in compliance with a milestone, th e 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 the enactment of this law and this activity continues.

We are executing our renewable energy strategy. In 2006 and 2007, we entered into two long-term power purchase agreements for a total of 98 MWs of wind energy in North Dakota (Oliver Wind I and II). Taconite Ridge Wind I, our $50 million, 25-MW wind facility located in northeastern Minnesota became operational in 2008.

North Dakota Wind Project. After obtaining the required approvals from the MPUC and the FERC in the fourth quarter of 2009, on December 31, 2009, we closed on the purchase of the existing 250 kV DC transmission line from Square Butte for $69.7 million. The 465-mile transmission line runs from Center, North Dakota, to Duluth, Minnesota. We expect to use this line to transport increasing amounts of wind energy from North Dakota while gradually phasing out coal-based electricity currently being delivered to our system over this transmission line from Square Butte’s lignite coal-fired generating unit.

On July 7, 2009, the MPUC approved Minnesota Power’s petition seeking current cost recovery eligibility for investments and expenditures related to Bison I and associated transmission upgrades. On September 29, 2009, the NDPSC authorized site construction for Bison I. On March 10, 2010, the NDPSC authorized construction of a 22 mile, 230 kV transmission line that will connect Bison I to the DC transmission line at the Square Butte Substation in Center, North Dakota. Bison I is the first portion of several hundred MWs of our North Dakota Wind Project, which upon completion will help fulfill the Minnesota 2025 renewable energy supply requirement for our retail load. Bison I, located near Center, North Dakota, will be comprised of 33 wind turbines with a total nameplate capacity of 75.9 MWs and will be phased into service in late 2010 and 2011. Bison I, including the associated transmission upgrades to the DC Line, will have a total capital cost of approximately $177 million. As of June 30, 2010, total costs incurred were approximately $63 million. In March 2010, we filed a petition with the MPUC to establish current cost recovery through customer billings for the approved project. On July 21, 2010, the MPUC approved our petition establishing new rates effective August 1, 2010.

Manitoba Hydro. On April 30, 2010, Minnesota Power signed a definitive agreement with Manitoba Hydro, subject to MPUC approval, to purchase surplus energy beginning in May 2011 through April 2022. This energy-only transaction primarily consists of surplus hydro energy on Manitoba Hydro’s system that is delivered to Minnesota Power on a non-firm basis. The pricing is based on forward market prices. Under this agreement with Manitoba Hydro, Minnesota Power will be purchasing at least one million MWh of energy.

Integrated Resource Plan. On October 5, 2009, Minnesota Power filed with the MPUC its 2010 Integrated Resource Plan, a comprehensive estimate of future capacity needs within Minnesota Power’s service territory. Minnesota Power does not anticipate the need for new base load generation within the Minnesota Power service territory through 2025, and plans to meet estimated future customer demand while achieving:

·	Increased system flexibility to adapt to volatile business cycles and varied future industrial load scenarios;

·	Reductions in the emission of GHGs (primarily carbon dioxide); and

·	Compliance with mandated renewable energy standards.

To achieve these objectives over the coming years, we plan to reshape our generation portfolio by adding 300 to 500 megawatts of renewable energy to our generation mix, and exploring options to incorporate peaking or intermediate resources. Bison I in North Dakota is expected to be in service in late 2010 and 2011.

ALLETE Second Quarter 2010 Form 10-Q

 

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OUTLOOK (Continued)

Integrated Resource Plan (Continued)

We project average annual long-term growth of approximately one percent in electric usage through 2025. We will also focus on conservation and demand side management to meet the energy savings goals established in Minnesota legislation.

Emission Reduction Plans. We have made investments in pollution control equipment at our Boswell Unit 3 generating unit that reduces particulates, SO2, NOx and mercury emissions to meet future federal and state requirements. This equipment was placed in service in November 2009. Our 2010 rate case proposes to move this project from a current cost recovery rider to base rates.

Boswell NOX Reduction Plan. In September 2008, we submitted to the MPCA and MPUC a $92 million environmental initiative proposing cost recovery for expenditures relating to NOX emission reductions from Boswell Units 1, 2, and 4. The Boswell NOX Reduction Plan is expected to significantly reduce NOX emissions from these units. In conjunction with the NOX reduction, we plan to make an efficiency improvement to our existing turbine/generator at Boswell Unit 4 adding approximately 60 MWs of total output. The Boswell 1, 2 and 4 selective non-catalytic reduction NOX controls are currently in service, while the Boswell 4 low NOX burners and turbine efficiency projects will begin in the third quarter of 2010 and are anticipated to be in service in late 2010. Our 2010 rate case seeks recovery of the costs associated with these projects in base rates.

Transmission. We plan to make investments in upper Midwest transmission opportunities that strengthen or enhance the regional transmission grid. These investments include the CapX2020 initiative, investments in our transmission assets, and our investment in ATC.

CapX2020. Minnesota Power is a participant in the CapX2020 initiative which represents an effort to ensure electric transmission and distribution reliability in Minnesota and the surrounding region for the future. CapX2020, which consists of electric cooperatives, municipals and investor-owned utilities, including Minnesota’s largest transmission owners, has assessed 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.

Minnesota Power intends to invest in two 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. The MPUC issued the Certificate of Need for the 230 kV line in July 2009. On July 12, 2010, the MPUC issued a Route Permit for the portion of the 345 kV line from Monticello to St. Cloud, Minnesota, and a decision for the remaining portion of the line to Fargo is still pending. Our total investment in these lines is expected to be between $100 and $125 million. We intend to seek recovery of these costs under the Minnesota Power transmission cost recovery tariff rider authorized by Minnesota legislation. Construction of the lines is targeted to begin in late 2010 and may take up to five years.

Transmission Investments. We have an approved cost recovery rider in place for certain transmission expenditures, and our current billing factor was approved by the MPUC in June 2009. The billing factor allows us to charge our retail customers on a current basis for the costs of constructing certain transmission facilities plus a return on the capital invested. Our 2010 rate case proposes to move completed transmission projects from the current cost recovery rider to base rates. In July 2010, we filed for an updated billing factor that includes additional transmission projects and expenses which we expect to be approved later this year.

Investment in ATC. At June 30, 2010, our equity investment in ATC was $91.1 million, representing an approximate 8 percent ownership interest. 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. ATC rates are based on a 12.2 percent return on common equity dedicated to utility plant. ATC has identified $2.5 billion in future projects needed over the next 10 years to improve the adequacy and reliability of the electric transmission system. This investment is expected to be funded through a combination of internally generated cash, debt, and investor contributions. As additional opportunities arise, we plan t o make additional investments in ATC through general capital calls based upon our pro-rata ownership interest in ATC. We expect to invest an additional $1 million in 2010. (See Note 6. Investment in ATC.)

ALLETE Second Quarter 2010 Form 10-Q

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OUTLOOK (Continued)

Power Sales Agreement. On October 29, 2009, Minnesota Power entered into an agreement to sell Basin 100 MWs of capacity and energy for the next ten years, beginning in May 2010. The Basin agreement contains a fixed monthly schedule of capacity charges with an annual escalation provision. The energy charge is based on a fixed monthly schedule and provides for annual escalation based on our cost of fuel. The agreement allows us to recover a pro-rata share of increased costs related to emissions that may occur during the last five years of the contract.

Investments and Other

BNI Coal. BNI Coal anticipates selling approximately 4 million tons of coal in 2010 (4.2 million tons were sold in 2009) and has sold approximately 2 million tons through June 30, 2010 (2.2 million tons sold as of June 30, 2009).

ALLETE Properties. ALLETE Properties represents our Florida real estate investment. Our current strategy for the assets is to complete and maintain key entitlements and infrastructure improvements without requiring significant additional investment, and sell the portfolio over time or in bulk transactions. ALLETE intends to sell its Florida land assets at reasonable prices when opportunities arise, and reinvest the proceeds in its growth initiatives. ALLETE Properties does not intend to acquire additional real estate.

Our two major development projects are Town Center and Palm Coast Park. Ormond Crossings is a third major project that is currently in the planning stage. On February 16, 2010, the City of Ormond Beach, Florida, approved a Development Agreement for Ormond Crossings. The agreement will facilitate development of the project as currently planned. Separately, the Lake Swamp wetland mitigation bank was permitted on land that was previously part of Ormond Crossings.

Summary of Development Projects			Residential	Non-residential
Land Available-for-Sale	Ownership	Acres (a)	Units (b)	Sq. Ft. (b, c)
Current Development Projects
Town Center	80%	862	2,089	2,215,200
Palm Coast Park	100%	3,868	3,554	3,056,800
Total Current Development Projects		4,730	5,643	5,272,000
Planned Development Project
Ormond Crossings	100%	2,924	2,950	3,215,000
Other
Lake Swamp Wetland Mitigation Project	100%	3,049	(d)	(d)
Total of Development Projects		10,703	8,593	8,487,000

 

(a)	Acreage amounts are approximate and shown on a gross basis, including wetlands and non-controlling interest.

(b)	Estimated and includes non-controlling 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)

The Lake Swamp wetland mitigation bank is a regionally significant wetlands mitigation bank that was permitted by the St. Johns River Water Management District in 2008 and by the U.S. Army Corps of Engineers in December 2009. Wetland mitigation credits will be used at Ormond Crossings, and will also be available-for-sale to developers of other projects that are located in the bank’s service area.

ALLETE Properties also has 1,980 acres of other land available-for-sale outside of the three development projects.

ALLETE intends to sell its Florida land assets at reasonable prices when opportunities arise. However, if weak market conditions continue for an extended period of time, the impact on our future operations would be the continuation of minimal or no sales while still incurring operating expenses such as community development district assessments and property taxes. This could result in annual net losses for ALLETE Properties similar to 2009.

ALLETE Second Quarter 2010 Form 10-Q

 

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OUTLOOK (Continued)

Income Taxes. ALLETE’s aggregate federal and multi-state statutory tax rate is approximately 41 percent for 2010. 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, wind production tax credits, AFUDC-Equity, domestic manufacturer’s deduction, depletion, Medicare prescription drug subsidies, as well as other items. The annual effective rate can also be impacted by such items as changes in income before non-controlling interest and income taxes, state and feder al 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 2010 effective tax rate to be approximately 39 percent (36 percent excluding the effect of the Patient Protection and Affordable Care Act).

LIQUIDITY AND CAPITAL RESOURCES

Liquidity Position. ALLETE is well-positioned to meet the Company’s immediate cash flow needs. At June 30, 2010, we had a cash balance of $45.3 million, $153.6 million in available consolidated lines of credit which included a committed, syndicated, unsecured revolving line of credit of $150.0 million, and a debt-to-capital ratio of 42 percent. At June 30, 2010, we project sufficient capital availability.

Capital Structure. ALLETE’s capital structure is as follows:

 

	June 30,		December 31,
	2010	%	2009	%
Millions
ALLETE Equity	$962.3	57	$929.5	57
Non-Controlling Interest	9.3	1	9.5	–
Long-Term Debt (Including Long-Term Debt Due within One Year)	711.2	42	701.0	43
Short-Term Debt	1.4	–	1.9	–
	$1,684.2	100	$1,641.9	100

 

Cash Flows. Selected information from ALLETE’s Consolidated Statement of Cash Flows is as follows:

For the Six Months Ended June 30,	2010	2009
Millions
Cash and Cash Equivalents at Beginning of Period	$25.7	$102.0
Cash Flows from (used for)
Operating Activities	108.5	63.7
Investing Activities	(82.2)	(135.0)
Financing Activities	(6.7)	41.7
Change in Cash and Cash Equivalents	19.6	(29.6)
Cash and Cash Equivalents at End of Period	$45.3	$72.4

Operating Activities. Cash from operating activities was $108.5 million for the six months ended June 30, 2010 ($63.7 million for the six months ended June 30, 2009). Cash from operating activities was higher in 2010 primarily due to higher net income, higher depreciation expense, the collection of tax receivables in 2010, and lower contributions to the defined benefit pension and other postretirement benefit plans (included in changes in regulatory and other non-current liabilities on the consolidated statement of cash flows).

Investing Activities. Cash used for investing activities was $82.2 million for the six months ended June 30, 2010 ($135.0 million for the six months ended June 30, 2009). Cash used for investing activities was lower than 2009 reflecting decreased capital additions to property, plant and equipment. Capital additions in 2009 were higher due to construction activity for environmental retrofit projects in 2009.

 
 

ALLETE Second Quarter 2010 Form 10-Q

 

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LIQUIDITY AND CAPITAL RESOURCES (Continued)

Financing Activities. Cash used for financing activities was $6.7 million for the six months ended June 30, 2010 (cash from financing activities was $41.7 million for the six months ended June 30, 2009). The change in cash used for financing activities from a source of cash in 2009 to a use of cash in 2010 reflects lower net proceeds from debt issued due to higher repayments on outstanding debt in 2010. In February 2010, we issued $80 million of First Mortgage Bonds and used the majority of the proceeds to pay off the $65 million borrowed from the syndicated revolving credit facility in late 2009, resulting in net proceeds of $15 million in 2010, compared to $42 million of proceeds in 2009. More financing was needed in 2009 because of higher capital additions.

Working Capital. Additional working capital, if and when needed, generally is provided by consolidated bank lines of credit or the sale of securities or commercial paper. At June 30, 2010, we had available consolidated bank lines of credit aggregating $153.6 million, the majority of which expire in January 2012. In addition, we had 2.1 million original issue shares of our common stock available for issuance through Invest Direct, our direct stock purchase and dividend reinvestment plan, and 3.1 million original issue shares of common stock available for issuance through a Distribution Agreement with KCCI, Inc. The amount and timing of future sales of our securities will depend upon market conditions and our specific needs.

Securities. In February 2010, we issued $80.0 million in principal amount of unregistered First Mortgage Bonds (Bonds) in the private placement market in three series (See Note 7. Short-Term and Long-Term Debt). We used the proceeds from the sale of Bonds to pay down the syndicated revolving credit facility, to fund utility capital investments and for general corporate purposes. We have the option to prepay all or a portion of the Bonds at our discretion, subject to a make-whole provision. The Bonds are subject to the terms and conditions of our utility mortgage. The Bonds were sold in reliance on an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended, to institutional accredited investors.

In June 2010, we agreed to sell $75.0 million in principal amount of unregistered First Mortgage Bonds in the private placement market in two series on or about August 17, 2010 (See Note 7. Short-Term and Long-Term Debt). We expect to use the proceeds to fund utility capital investments and for general corporate purposes.

We entered into a Distribution Agreement with KCCI, Inc., in February 2008, which was subsequently amended in February 2009, with respect to the issuance and sale of up to an aggregate of 6.6 million shares of our common stock, without par value. The shares may be offered for sale, from time to time, in accordance with the terms of the agreement pursuant to Registration Statement No. 333-147965. For the six months ended June 30, 2010, 0.2 million shares of common stock were issued under this agreement resulting in net proceeds of $6.0 million.

In 2010, we issued 0.3 million shares of common stock through Invest Direct, the Employee Stock Purchase Plan and the Retirement Savings and Stock Ownership Plan resulting in net proceeds of $9.2 million. These shares of common stock were registered under Registration Statement Nos. 333-150681, 333-105225, and 333-124455, respectively.

Financial Covenants. See Note 7. Short-Term and Long-Term Debt for information regarding our financial covenants.

Pension and Other Postretirement Benefit Plans. The funded status of the defined benefit pension plan and other postretirement benefit plan obligations refers to the difference between plan assets and estimated obligations under the plans. The funded status may change over time due to several factors, including contribution levels, assumed discount rates and actual and assumed rates of return on plan assets.

Management considers various factors when making funding decisions, such as regulatory requirements, actuarially determined minimum contribution requirements, and contributions required to avoid benefit restrictions for the defined benefit pension plans. Our total 2010 contributions for our defined benefit pension plan and our other postretirement benefit plan are expected to be approximately $2 million and $13 million, respectively. (See Note 12. Pension and Other Postretirement Benefit Plans for 2010 contributions made to date.) Estimated defined benefit pension contributions for years 2011 through 2014 are expected to be up to $25 million per year, and are based on estimates and assumptions that are subject to change. Funding for the other postretirement benefit plans is impacted by utility regulatory requirements. Estimated other p ostretirement benefit plan contributions for years 2011 through 2014 are expected to be approximately $11 million per year, and are based on estimates and assumptions that are subject to change.

ALLETE Second Quarter 2010 Form 10-Q

 

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LIQUIDITY AND CAPITAL RESOURCES (Continued)

Off-Balance Sheet Arrangements

Off-balance sheet arrangements are summarized in our 2009 Form 10-K, with additional disclosure in Note 13. Commitments, Guarantees and Contingencies of this Form 10-Q.

Capital Requirements

Our capital expenditures for 2010 are expected to be $250 million as disclosed in our 2009 Form 10-K. For the six months ended June 30, 2010, capital expenditures totaled $85.1 million ($122.5 million at June 30, 2009). The expenditures were primarily made in the Regulated Operations segment. Internally generated funds and long-term debt and equity issuances were the primary sources of funding.

OTHER

Environmental Matters

Our businesses are subject to regulation of environmental matters by various federal, state and local authorities. Due to restrictive environmental requirements through legislation and/or rulemaking in the future, we anticipate that potential expenditures for environmental matters will be material and will require significant capital investments. Environmental Matters are summarized in our 2009 Form 10-K, with additional disclosure in Note 13. Commitments, Guarantees and Contingencies of this Form 10-Q. We are unable to predict the outcome of the matters discussed.

Employees

Minnesota Power and SWL&P have an aggregate 611 employees who are members of the International Brotherhood of Electrical Workers (IBEW) Local 31. Throughout 2009, Minnesota Power, SWL&P and IBEW Local 31 worked towards settling new contracts to replace those which expired on January 31, 2009. Final resolution of the union contracts for Minnesota Power and SWL&P occurred in January, and March 2010, respectively. The terms of both agreements are retroactive to February 1, 2009, and will expire on January 31, 2012. 

NEW ACCOUNTING STANDARDS

New accounting standards are discussed in Note 1. Operations and Significant Accounting Policies of this Form 10-Q.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

SECURITIES INVESTMENTS

Available-for-sale Securities. As of June 30, 2010, our available-for-sale securities portfolio consisted of securities established to fund certain employee benefits and auction rate securities. (See Note 3. Investments.)

COMMODITY PRICE RISK

Our regulated utility operations incur costs for power and fuel (primarily coal and related transportation) in Minnesota, and power and natural gas purchased for resale in our regulated service territory in Wisconsin. Our Minnesota regulated utilities’ exposure to price risk for these commodities is significantly mitigated by the current ratemaking process and regulatory environment, which allows recovery of fuel costs in excess of those in the 2008 retail rate case filing. Conversely, costs below those in the 2008 retail rate case filing result in a credit to our ratepayers. We seek to prudently manage our customers’ exposure to price risk by entering into contracts of various durations and terms for the purchase of power and coal and related transportation costs (in Minnesota) and natural gas (in Wisconsin).

 
 

ALLETE Second Quarter 2010 Form 10-Q

 

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POWER MARKETING

Our power marketing activities consist of (1) purchasing energy in the wholesale market to serve our regulated service territory when retail energy requirements exceed generation output and (2) selling excess available energy and purchased power. From time to time, our utility operations may have excess energy that is temporarily not required by retail and wholesale customers in our regulated service territory. We actively sell to the wholesale market to optimize the value of this energy.

Demand nominations for power from our taconite customers in 2010 are expected to be higher than 2009, but lower than previous years’ levels.

We are exposed to credit risk primarily through our power marketing activities. We use credit policies to manage credit risk, which includes utilizing an established credit approval process and monitoring counterparty limits.

Power Sales Agreement. On October 29, 2009, Minnesota Power entered into an agreement to sell Basin 100 MWs of capacity and energy for the next ten years, which began in May 2010. The Basin agreement contains a fixed monthly schedule of capacity charges with a minimum annual escalation provision. The energy charge is based on a fixed monthly schedule and provides for annual escalation based on our cost of fuel. The agreement allows us to recover a pro-rata share of increased costs related to emissions that may occur during the last five years of the contract.

INTEREST RATE RISK

We are also 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. Interest rates on variable rate long-term debt are reset on a periodic basis reflecting current market conditions. Based on the variable rate debt outstanding at June 30, 2010, 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 $0.7 million. This amount was determined by considering the impact of a hypothetical 100 basis point change to the average variable interest rate on the var iable rate debt outstanding as of June 30, 2010.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. As of June 30, 2010, evaluations were performed, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, 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 wit hin 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 officer and principal financial officer, to allow timely decisions regarding required disclosure.

Changes in Internal Controls. While we continue to enhance our internal control over financial reporting, there has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

None.

ALLETE Second Quarter 2010 Form 10-Q

 

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ITEM 1A.  RISK FACTORS

There have been no material changes from the risk factors disclosed in Part 1, Item 1A Risk Factors of our 2009 Form 10-K.

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

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  RESERVED

ITEM 5.  OTHER INFORMATION

None.

ITEM 6.  EXHIBITS

Exhibit

Number

31(a)

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

31(b)

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

32

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

99

ALLETE News Release dated August 4, 2010, announcing 2010 second quarter earnings. (This exhibit has been furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.)

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

ALLETE Second Quarter 2010 Form 10-Q

 

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SIGNATURES

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

		ALLETE, INC.
August 4, 2010		/s/ Mark A. Schober
		Mark A. Schober
		Senior Vice President and Chief Financial Officer
August 4, 2010		/s/ Steven Q. DeVinck
		Steven Q. DeVinck
		Controller and Vice President – Business Support

ALLETE Second Quarter 2010 Form 10-Q

 

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Exhibit 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

I, Alan R. Hodnik, of ALLETE, Inc. (ALLETE), certify that:

1.	I have reviewed this quarterly report on Form 10-Q for the quarterly period ended June 30, 2010, 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:  August 4, 2010

Alan R. Hodnik

 

Alan R. Hodnik

President and Chief Executive Officer

 

 

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Exhibit 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

I, Mark A. Schober, of ALLETE, Inc. (ALLETE), certify that:

1.	I have reviewed this quarterly report on Form 10-Q for the quarterly period ended June 30, 2010, 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:  August 4, 2010

Mark A. Schober

 

Mark A. Schober

Senior Vice President and Chief Financial Officer

 

 

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Exhibit 32

Section 1350 Certification of Periodic Report

By the Chief Executive Officer and Chief Financial Officer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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 Quarterly Report on Form 10-Q of ALLETE for the quarterly period ended June 30, 2010, (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:  August 4, 2010

Alan R. Hodnik

 

Alan R. Hodnik

President and Chief Executive Officer

Date:  August 4, 2010

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.

 

 

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NEWS		Exhibit 99
	For Release:	August 4, 2010
	Investor Contact:	Tim Thorp
		218-723-3953
		tthorp@allete.com

 

ALLETE reports second quarter 2010 earnings of 57 cents per share

 

 

ALLETE, Inc. (NYSE: ALE) today reported second quarter 2010 earnings of 57 cents per share on revenue of $211.2 million and net income of $19.4 million. The company earned 29 cents per share in the corresponding period a year ago on revenue of $164.7 million and net income of $9.4 million.

ALLETE’s Regulated Operations earned $18.2 million during the quarter, compared to $10.7 million in the second quarter of 2009. Minnesota Power’s industrial kilowatt-hour sales were 98 percent higher than in the second quarter of 2009, when the company’s taconite customers dramatically curtailed production.

“We’re pleased to see our taconite customers returning to higher production levels,” said ALLETE President and CEO Alan R. Hodnik. He noted that Minnesota Power recently received demand nominations from its industrial customers for the last four months of 2010 that are 43 percent higher than the same period in 2009, and are similar to the preceding four month period. The projected increase in sales to industrial customers was the primary reason Minnesota Power reduced the size of its requested rate increase from $81 million to $72 million earlier in 2010. The Minnesota Public Utilities Commission is expected to act on this requested increase later this year.

In addition to significantly higher industrial power sales, other contributing factors in the year-over-year earnings improvement included interim retail electric rates approved by the Minnesota Public Utilities Commission. These increases were partially offset by higher operating and maintenance, depreciation and interest expenses, and by lower sales to other power suppliers compared to the same period a year ago. In addition, net income for the second quarter of 2009 was reduced by an accrual for rate refunds related to the 2008 rate case.

The Investments and Other segment earned $1.2 million in the second quarter of 2010 compared to a $1.3 million loss in last year’s comparable period. ALLETE, in the second quarter of 2010, recorded a successful resolution from a state income tax audit.

An increase in the average number of common shares outstanding, with issuance proceeds used to fund the company’s capital expenditure program, had a dilutive impact of four cents per share.

“We are on track to meet our earnings guidance of $2.05 to $2.35 per share for 2010,” said Hodnik. The earnings guidance provides for a range of potential regulatory outcomes, and excludes the impact of a non-recurring 12 cents per share charge recorded in the first quarter as a result of the Patient Protection and Affordable Care Act.

ALLETE (NYSE: ALE) is an energy company in the Upper Midwest whose regulated utility holdings include Minnesota Power and Superior Water, Light & Power. ALLETE owns BNI Coal of North Dakota and holds investments in Florida real estate and the American Transmission Company. 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’s press releases and other communications may include certain non-Generally Accepted Accounting Principles (GAAP) financial measures. A “non-GAAP financial measure” is defined as a numerical measure of a company’s financial performance, financial position or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP in the company’s financial statements.

Non-GAAP financial measures utilized by the Company include presentations of earnings (loss) per share. ALLETE’s management believes that these non-GAAP financial measures provide useful information to investors by removing the effect of variances in GAAP reported results of operations that are not indicative of changes in the fundamental earnings power of the Company’s operations. Management believes that the presentation of the non-GAAP financial measures is appropriate and enables investors and analysts to more accurately compare the company’s ongoing financial performance over the periods presented.

 

 

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ALLETE, Inc.

 

Consolidated Statement of Income

For the Periods Ended June 30, 2010 and 2009

Millions Except Per Share Amounts – Unaudited

			Quarter Ended		Year to Date
			2010	2009	2010	2009
Operating Revenue
	Operating Revenue		$211.2	$167.0	$444.8	$371.9
	Prior Year Rate Refunds		–	(2.3)	–	(7.6)
		Total Operating Revenue	211.2	164.7	444.8	364.3
Operating Expenses
	Fuel and Purchased Power		74.3	56.8	154.1	129.6
	Operating and Maintenance		85.4	76.7	173.1	157.2
	Depreciation		19.8	15.5	39.8	30.7
		Total Operating Expenses	179.5	149.0	367.0	317.5
Operating Income			31.7	15.7	77.8	46.8
Other Income (Expense)
	Interest Expense		(9.5)	(8.4)	(18.4)	(17.1)
	Equity Earnings in ATC		4.4	4.3	8.9	8.5
	Other		2.2	1.9	3.2	3.0
		Total Other Income (Expense)	(2.9)	(2.2)	(6.3)	(5.6)
Income Before Non-Controlling Interest and Income Taxes			28.8	13.5	71.5	41.2
Income Tax Expense			9.4	4.2	29.3	15.0
Net Income			19.4	9.3	42.2	26.2
	Less: Non-Controlling Interest in Subsidiaries		–	(0.1)	(0.2)	(0.1)
Net Income Attributable to ALLETE			$19.4	$9.4	$42.4	$26.3
Average Shares of Common Stock
	Basic		34.1	31.8	34.0	31.3
	Diluted		34.2	31.8	34.1	31.4
Basic and Diluted Earnings Per Share of Common Stock			$0.57	$0.29	$1.25	$0.84
Dividends Per Share of Common Stock			$0.44	$0.44	$0.88	$0.88

Consolidated Balance Sheet

Millions – Unaudited

	Jun. 30,	Dec. 31,			Jun. 30,	Dec. 31,
	2010	2009			2010	2009
Assets				Liabilities and Equity
Cash and Short-Term Investments	$45.3	$25.7		Current Liabilities	$119.2	$133.1
Other Current Assets	186.9	199.8		Long-Term Debt	709.6	695.8
Property, Plant and Equipment	1,671.7	1,622.7		Other Liabilities	324.0	325.0
Regulatory Assets	287.8	293.2		Regulatory Liabilities	46.5	47.1
Investment in ATC	91.1	88.4		Deferred Income Taxes	276.9	253.1
Investments	131.6	130.5		Equity	971.6	939.0
Other	33.4	32.8
Total Assets	$2,447.8	$2,393.1		Total Liabilities and Equity	$2,447.8	$2,393.1

 

 

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					Quarter Ended		Year to Date
					June 30,		June 30,
ALLETE, Inc.					2010	2009	2010	2009
Income (Loss)
Millions
	Regulated Operations				$18.2	$10.7	$43.1	$28.4
	Investments and Other				1.2	(1.3)	(0.7)	(2.1)
	Net Income Attributable to ALLETE				$19.4	$9.4	$42.4	$26.3
Diluted Earnings Per Share					$0.57	$0.29	$1.25	$0.84

Statistical Data
Corporate
	Common Stock
		High			$37.87	$29.14	$37.87	$33.27
		Low			$32.90	$24.45	$29.99	$23.35
		Close			$34.24	$28.75	$34.24	$28.75
	Book Value				$26.97	$25.66	$26.97	$25.66

Kilowatt-hours Sold
Millions
	Regulated Utility
		Retail and Municipals
			Residential		229	242	586	617
			Commercial		327	331	699	709
			Municipals		228	222	493	487
			Industrial		1,728	874	3,157	2,197
				Total Retail and Municipal	2,512	1,669	4,935	4,010
		Other Power Suppliers			736	1,107	1,539	2,024
				Total Regulated Utility	3,248	2,776	6,474	6,034
	Non-regulated Energy Operations				28	49	60	106
				Total Kilowatt-hours Sold	3,276	2,825	6,534	6,140

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.

 

 

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