October
17, 2007
VIA
EDGAR
TRANSMISSION AND FEDERAL EXPRESS
Mr.
William H. Thompson
Branch
Chief
Division
of Corporation Finance
U.S.
Securities and Exchange Commission
100
F
Street, N.E.
Washington,
D.C. 20549
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Re:
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ALLETE,
Inc.
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Form
10-K for Fiscal Year Ended December 31, 2006
and
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Form
10-Q for Fiscal Quarter Ended June 30,
2007
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File
No. 1-3548
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Dear
Mr.
Thompson:
ALLETE,
Inc. (Company, we, us, our) has reviewed the Securities and Exchange Commission
(SEC) staff letter of comment dated September 18, 2007, concerning the
above-referenced filings. For the convenience of the staff of the SEC, the
staff’s comments are included, followed by the Company’s response.
FORM
10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2006
Item
9A Controls and Procedures, page 52
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1.
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Please
disclose whether there was any change in your internal control
over
financial reporting that occurred during the most recent fiscal
quarter
that has materially affected, or is reasonably likely to materially
affect, your internal control over financial reporting. Refer to
Item
308(c) of Regulation S-K as well as paragraph 4(d) of your certifications
filed as exhibits.
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Response
There
was
no change in our internal control over financial reporting that occurred
during
the most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting
during the quarters ended December 31, 2006, March 31, 2007, and June 30,
2007.
1
Financial
Statements
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Consolidated
Statement of Income, page
61
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2.
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Please
tell us the circumstances that support your classification and/or
presentation of minority interest in income of consolidated subsidiaries
and equity in earnings of unconsolidated subsidiaries in a manner
different from Rule 5-03 of Regulation
S-X.
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Response
Minority
Interest
In
future
filings we will revise the presentation of our Consolidated Statement of
Income
to show minority interest in a manner closer aligned with Rule 5-03 of
Regulation S-X.
Earnings
from Equity Method Investments
Prior
to
2007, we did not separately present equity method investment earnings as
called
for by Rule 5-03 of Regulation S-X, because the earnings were immaterial
to our
Consolidated Statement of Income.
As
disclosed in Note 6 of our Form 10-K for the year ended December 31, 2006,
in
May 2006 we began making a phased-in investment in American Transmission
Company
LLC (ATC), which was completed in February 2007 and, as of June 30, 2007,
represented an approximate 8% ownership interest in ATC. 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.” Although the
earnings were considered immaterial to our Consolidated Statement of Income,
we
elected to disclose ATC as a reportable segment, in accordance with Statement
of
Financial Accounting Standards (SFAS) 131, in Note 1 of our Form 10-K
for the year ended December 31, 2006. Earnings from ATC in 2007 are expected
to
be significantly higher than 2006.
As
a
limited liability company, ATC is not subject to income tax; consequently,
we
believe the earnings from our investment in ATC are more accurately reflected
pre-tax as a separate line item in the “Other Income (Expense)” category.
Additionally, we hold equity investments in other small companies. The earnings
from these equity investments in other small companies are immaterial to
our
Consolidated Statement of Income and will be reported in the “Other” line item
within the “Other Income (Expense)” category of our Consolidated Statement of
Income. With consideration to the statement included in the footnotes to
Rule
5-03 of Regulation S-X, we believe the circumstances related to our investment
in ATC justify a presentation different than that specified by Regulation
S-X.
2
Prospectively,
we will revise our Consolidated Statement of Income, in relation to minority
interest and equity method investment earnings, in future filings as
follows:
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Operating
Revenue
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Operating
Expenses
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Fuel
and Purchased Power
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Operating
and Maintenance
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Depreciation
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Total
Operating Expenses
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Operating
Income from Continuing Operations
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Other
Income (Expense)
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Interest
Expense
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Equity
Earnings in ATC
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Other
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Total
Other Income (Expense)
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Income
from Continuing Operations Before Minority Interest and Income
Taxes
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Income
Tax Expense
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Minority
Interest
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Income
from Continuing Operations
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Income
(Loss) from Discontinued Operations
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Net
Income
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Consolidated
Statement of Shareholders’ Equity, page 63
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3.
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Please
tell us how you report the difference between the fair value of
shares
released from the ESOP and the cost of the shares to the
ESOP.
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Response
Pursuant
to the American Institute of Certified Public Accountant’s Statement of Position
93-6, “Employers’ Accounting for Employee Stock Ownership Plans,” we report the
difference between fair value of shares released from the ESOP and the cost
of
the shares to the ESOP in additional paid-in-capital, which is included as
a
component of “Common Stock Without Par Value” on our Consolidated Balance Sheet.
Supplementally, the following information related to our ESOP is disclosed
in
the first paragraph of footnote 17 in our Form 10-K for the year ended December
31, 2006, included below for your reference:
As
shares
are released from collateral, the Company reports 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 $4.6
million in 2006 ($5.5 million in 2005; $5.0 million in 2004).
3
Notes
to Consolidated Financial Statements, page 64
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Note
2. Operations and Significant Accounting Policies, page
66
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General
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4.
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Please
disclose the method by which amounts are removed from inventory
(e.g.,
“average,” “first-in, first-out,” “last-in, first-out”) in the inventory
policy on page 68.
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Response
In
future
filings we will include the method by which we remove amounts from inventory
in
our Operations and Significant Accounting Policies note. The revised disclosure
will read as follows:
Inventories.
Inventories are stated at the lower of cost or market. Amounts removed from
inventory are recorded on an average cost basis.
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September
30,
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December
31,
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2007
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2006
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Inventories
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Millions
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Fuel
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$
-
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$18.9
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Materials
and Supplies
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-
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24.5
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Total
Inventories
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$
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$43.4
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Note
3. Property, Plant and Equipment, page
70
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5.
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Please
explain to us why you do not have sufficient information to reasonably
estimate settlement dates or range of potential settlement dates
of
conditional asset retirement obligations for treated wood poles
and
remaining polychlorinated biphenyl and asbestos-containing assets.
Refer
to paragraph 5b of FIN 47.
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Response
Conditional
asset retirement obligations have been identified for treated wood poles
and
remaining polychlorinated biphenyl and asbestos-containing assets; however,
we
have not recognized asset retirement obligations related to treated wood
poles
and polychlorinated biphenyl and certain asbestos-containing assets (exclusive
of asbestos removal activities in our steam generating plants, which have
been
included in our recorded asset retirement obligation liability) because we
have
concluded that the potential liability is immaterial to our consolidated
financial statements. Additionally, the settlement dates of certain obligations
are indeterminate as we are unable to determine when our normal operating
activities associated with these assets will cease.
Upon
removal, approximately 90 percent of our treated wood poles are given to
unrelated third parties, with the remaining 10 percent disposed of in lined
landfills in accordance with Minnesota Pollution Control Agency regulations.
When transferred, the unrelated third party is required to sign a bill-of-sale
acknowledging that the individual is receiving treated wood poles that may
contain toxic and/or hazardous chemicals. Title and liability is transferred
from us to the third party at the time the bill-of-sale is signed. The asset
retirement obligation related to the remaining 10 percent of the treated
wood
poles is considered immaterial to our consolidated financial statements.
We
currently have a routine maintenance program that keeps our transmission
and
distribution assets in good operating condition and will keep them operable
into
the foreseeable future. In response to Federal regulations, beginning in
1979,
we removed substantially all of our polychlorinated biphenyl contaminated
electrical assets. The remaining number of polychlorinated biphenyl contaminated
items is not significant based on current field experience and will continue
to
diminish over time since polychlorinated biphenyl equipment has not been
installed since the late 1970s. The potential liability related to these
remaining assets is considered immaterial to our consolidated financial
statements. We will continue to retire the assets as needed or as we become
aware of them. According to Environmental Protection Agency regulations,
these
assets are assumed to be non-polychlorinated biphenyl until removed from
service
or identified. We have no current or future plans to cease operations with
the
above-described assets and we are not aware of any factors at this time which
would require the retirement of any of these assets.
The
majority of our asbestos-containing assets are located within our steam
generating facilities, with minor undetermined amounts of asbestos located
at
various other facilities. We have established an asset retirement obligation
liability for the decommissioning of our steam generating facilities, which
includes the expected cost of asbestos removal. For the remaining amounts,
we do
not currently have a legal obligation to remove asbestos under an established
timeframe. We consider any potential liability related to our remaining
asbestos-containing assets to be immaterial to our consolidated financial
statements. As the assets are retired, we will address the asbestos and any
potential liability associated therewith.
Historically,
with respect to our utility businesses, recovery of asset retirement costs
through our rates charged to customers has been allowed by our regulators.
Accordingly, we record regulatory assets and liabilities, pursuant to SFAS
71,
for the difference between asset retirement costs currently recovered in
rates
and asset retirement obligations recorded under SFAS 143. The recording of
the
obligation has no impact on our Consolidated Statement of Income.
Because
the potential liability related to the above-described items is immaterial
to
our consolidated financial statements, we will revise the following disclosures
related to asset retirement obligations, previously included in Note 3 of
our
Form 10-K for the year ended December 31, 2006, in future applicable filings,
as
follows:
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.
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Exhibits
31(a) and 31(b)
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6.
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Please
remove the titles of your chief executive officer and chief financial
officer from the introductory paragraphs of the certifications
to conform
to the format provided in Item 601(b)(31) of Regulation S-K. Please
confirm to us that the inclusion of the titles of your chief executive
officer and chief financial officer was not intended to limit the
capacity
in which such individual provided the
certifications.
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Response
In
future
filings we will remove the titles of our chief executive officer and chief
financial officer from the introductory paragraphs of the certifications
provided to comply with Item 601(b)(31) of Regulation S-K. We confirm to
the staff that the inclusion of these titles was not intended to limit the
capacity in which such individuals provided the certifications.
4
Form
10-Q for Fiscal Quarter Ended June 30, 2007
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7.
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Please
address the comments above in future filings as
applicable.
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Response
In
future
filings we will revise our disclosures as described herein.
Item
4. Controls and Procedures, page 29
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8.
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You
state that you maintain a system of controls and procedures designed
to
provide reasonable assurance as to the reliability of the financial
statements and other disclosures included in the report, as well
as to
safeguard assets from unauthorized use or disposition. Please revise
to
state, if true, that your disclosure controls and procedures are
designed
to ensure that information required to be disclosed in the reports
that
you file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
Commission’s rules and forms, and is accumulated and communicated to
management, including your principal executive and principal financial
officer, or persons performing similar functions, to allow timely
decisions regarding required disclosure. Please refer to the definition
of
disclosure controls and procedures in Exchange Act Rule 13a-15(c).
Also,
if you include the “reasonable assurance” language in the definition of
disclosure controls and procedures, you should state, if true,
that your
chief executive officer and chief financial officer concluded that
your
disclosure controls and procedures are effective at the reasonable
assurance level.
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Response
We
confirm that our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were effective as of
December 31, 2006, March 31, 2007 and June 30, 2007 to ensure that information
required to be disclosed in our 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.
We
will include the information in our discussion of disclosure controls and
procedures in future filings.
The
following is the disclosure that the Company plans to include in our third
quarter 2007 Form 10-Q and in future filings:
As
of
[the end of the period covered by this Form 10-Q/K], 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 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.
5
Additionally,
we acknowledge that:
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·
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We
are responsible for the adequacy and accuracy of the disclosure
in our
filings;
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·
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SEC
comments or changes to disclosure in response to SEC staff comments
do not
foreclose the SEC from taking any action with respect to our filings;
and
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·
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We
may not assert SEC staff comments as a defense in any proceeding
initiated
by the SEC or any person under the federal securities laws of the
United
States.
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If
you
have any further questions or would like to discuss our responses, please
contact me at (218) 723-3975, or Steve DeVinck, Controller, at (218)
723-3920.
Sincerely,
Mark
A.
Schober
Senior
Vice President and Chief Financial Officer
c Mr.
Donald Shippar
Ta
Tanisha Meadows
6