United States
Securities and Exchange Commission
Washington, D.C. 20549
(Mark
Form 10-K
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
| R | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended DECEMBERDecember 31, 2004
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
2007
| £ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from ______________ to ______________
Commission File No. 1-3548
ALLETE, INC.
(ExactInc.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0418150
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Minnesota | | 41-0418150 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
30 WEST SUPERIOR STREET, DULUTH, MINNESOTAWest Superior Street, Duluth, Minnesota 55802-2093
(Address of principal executive offices, including zip code)
(218) 279-5000
(Registrant's
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name
Securities Registered Pursuant to Section 12(b) of Each Stock Exchange
the Act:
Title of Each Class | | Name of Each Stock Exchange on Which Registered |
Common Stock, without par value | | New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of Each Class on Which Registered
------------------- -------------------
Common Stock, without par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes R No £
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes £ No R
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes /X/R No / /
£
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/
R
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Act).
Large Accelerated Filer R | Accelerated Filer £ | Non-Accelerated Filer £ | Smaller Reporting Company £ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes /X/£ No / /
R
The aggregate market value of voting stock held by nonaffiliates on June 30,
200429, 2007, was $2,937,852,029.
$1,437,610,992.
As of February 1, 2005,2008, there were 29,677,13330,829,791 shares of ALLETE Common Stock, without par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Incorporated By Reference
Portions of the Proxy Statement for the
20052008 Annual Meeting of Shareholders are incorporated by reference in Part III.
INDEX
DEFINITIONS.................................................................. 2
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995...................................................................... 3
PART I
Item 1. Business ........................................................... 4
Regulated Utility.............................................. 5
Electric Sales............................................. 6
Purchased Power............................................ 8
Fuel....................................................... 8
Regulatory Issues.......................................... 9
Competition................................................ 11
Franchises................................................. 11
Nonregulated Energy Operations................................. 11
Real Estate.................................................... 13
Regulation................................................. 14
Competition................................................ 14
Other.......................................................... 15
Environmental Matters.......................................... 15
Employees...................................................... 17
Executive Officers of the Registrant........................... 18
Item 2. Properties.......................................................... 19
Item 3. Legal Proceedings................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders................. 19
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities...................... 20
Item 6. Selected Financial Data............................................. 21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 23
Executive Summary................................................... 23
Net Income.......................................................... 25
2004 Compared to 2003............................................... 26
2003 Compared to 2002............................................... 28
Critical Accounting Policies........................................ 29
Outlook............................................................. 30
Liquidity and Capital Resources..................................... 32
Capital Requirements................................................ 34
Environmental and Other Matters..................................... 34
Market Risk......................................................... 34
New Accounting Standards............................................ 36
Factors that May Affect Future Results.............................. 36
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.......... 41
Item 8. Financial Statements and Supplementary Data......................... 41
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 41
Item 9A. Controls and Procedures............................................. 41
Item 9B. Other Information................................................... 41
PART III
Item 10. Directors and Executive Officers of the Registrant.................. 42
Item 11. Executive Compensation.............................................. 42
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters................................ 42
Item 13. Certain Relationships and Related Transactions...................... 42
Item 14. Principal Accountant Fees and Services.............................. 42
PART IV
Item 15. Exhibits and Financial Statement Schedules.......................... 43
SIGNATURES................................................................... 46
CONSOLIDATED FINANCIAL STATEMENTS............................................ 47
Page 1 Index
Definitions | 3 |
| |
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 | 5 |
| |
Part I | |
Item 1. | Business | 6 |
| Energy – Regulated Utility | 6 |
| | Electric Sales / Customers | 6 |
| | Power Supply | 10 |
| | Transmission & Distribution | 11 |
| | Properties | 11 |
| | Regulatory Matters | 12 |
| | Minnesota Legislation | 14 |
| | Competition | 15 |
| | Franchises | 15 |
| Energy – Nonregulated Energy Operations | 15 |
| Energy – Investment in ATC | 16 |
| Real Estate | 16 |
| | Seller Financing | 17 |
| | Regulation | 18 |
| | Competition | 18 |
| Other | 18 |
| Environmental Matters | 18 |
| Employees | 20 |
| Executive Officers of the Registrant | 21 |
Item 1A. | Risk Factors | 22 |
Item 1B. | Unresolved Staff Comments | 26 |
Item 2. | Properties | 26 |
Item 3. | Legal Proceedings | 26 |
Item 4. | Submission of Matters to a Vote of Security Holders | 26 |
| | |
Part II | |
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 26 |
Item 6. | Selected Financial Data | 27 |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 28 |
| Overview | 28 |
| 2007 Compared to 2006 | 30 |
| 2006 Compared to 2005 | 32 |
| Critical Accounting Estimates | 34 |
| Outlook | 36 |
| Liquidity and Capital Resources | 44 |
| Capital Requirements | 48 |
| Environmental and Other Matters | 48 |
| Market Risk | 48 |
| New Accounting Standards | 49 |
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk | 50 |
Item 8. | Financial Statements and Supplementary Data | 50 |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 50 |
Item 9A. | Controls and Procedures | 50 |
Item 9B. | Other Information | 51 |
| |
Part III | |
Item 10. | Directors, Executive Officers and Corporate Governance | 52 |
Item 11. | Executive Compensation | 52 |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 52 |
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 52 |
Item 14. | Principal Accountant Fees and Services | 52 |
| |
Part IV | | |
Item 15. | Exhibits and Financial Statement Schedules | 53 |
| |
Signatures | 57 |
| |
Consolidated Financial Statements | 59 |
ALLETE
20042007 Form 10-K
DEFINITIONS
Definitions
The following abbreviations or acronyms are used in the text. References in this report to "we," "us"“we,” “us” and "our"“our” are to ALLETE, Inc. and its subsidiaries, collectively.
ABBREVIATION OR ACRONYM TERM
- --------------------------------------------------------------------------------
ADESA ADESA, Inc.
AICPA
Abbreviation or Acronym | Term |
AICPA | American Institute of Certified Public Accountants |
ALLETE | ALLETE, Inc. |
ALLETE Properties | ALLETE Properties, LLC and its subsidiaries |
AFUDC | Allowance for Funds Used During Construction - the cost of both the debt and equity funds used to finance utility plant additions during construction periods |
AREA | Arrowhead Regional Emission Abatement |
ATC | American Transmission Company LLC |
Blandin Paper | UPM, Blandin Paper Mill |
BNI Coal | BNI Coal, Ltd. |
Boswell | Boswell Energy Center |
Company | ALLETE, Inc. and its subsidiaries |
Constellation Energy Commodities | Constellation Energy Commodities Group, Inc. |
DOC | Minnesota Department of Commerce |
DRI | Development of Regional Impact |
EITF | Emerging Issues Task Force |
Enventis Telecom | Enventis Telecom, Inc. |
EPA | Environmental Protection Agency |
ESA | Electric Service Agreement |
ESOP | Employee Stock Ownership Plan |
FASB | Financial Accounting Standards Board |
FERC | Federal Energy Regulatory Commission |
Florida Landmark | Florida Landmark Communities, Inc. |
Florida Water | Florida Water Services Corporation |
Form 8-K | ALLETE Current Report on Form 8-K |
Form 10-K | ALLETE Annual Report on Form 10-K |
Form 10-Q | ALLETE Quarterly Report on Form 10-Q |
FPL Energy | FPL Energy, LLC |
FPSC | Florida Public Service Commission |
FSP | Financial Accounting Standards Board Staff Position |
GAAP | Accounting Principles Generally Accepted in the United States |
Heating Degree Days | Measure of the extent to which the average daily temperature is below 65 degrees Fahrenheit, increasing demand for heating |
Invest Direct | ALLETE’s Direct Stock Purchase and Dividend Reinvestment Plan |
IPO | Initial Public Offering |
kV | Kilovolt(s) |
Laskin | Laskin Energy Center |
Manitoba Hydro | Manitoba Hydro Board |
MBtu | Million British thermal units |
Mesabi Nugget | Mesabi Nugget Delaware, LLC |
Minnesota Power | An operating division of ALLETE, Inc. |
Minnkota Power | Minnkota Power Cooperative, Inc. |
MISO | Midwest Independent Transmission System Operator, Inc. |
Moody’s | Moody’s Investors Service, Inc. |
MPCA | Minnesota Pollution Control Agency |
MPUC | Minnesota Public Utilities Commission |
Definitions (Continued)
Abbreviation or Acronym | Term |
MW / MWh | Megawatt(s) / Megawatthour(s) |
Non-residential | Retail commercial, non-retail commercial, office, industrial, warehouse, storage and institutional |
NOX | Nitrogen Oxide |
Northwest Airlines | Northwest Airlines, Inc. |
Note ___ | Note ___ to the consolidated financial statements in this Form 10-K |
NPDES | National Pollutant Discharge Elimination System |
NYSE | New York Stock Exchange |
OAG | Office of the Attorney General |
Oliver Wind I | Oliver Wind I Energy Center |
Oliver Wind II | Oliver Wind II Energy Center |
Palm Coast Park | Palm Coast Park development project in Florida |
Palm Coast Park District | Palm Coast Park Community Development District |
PolyMet Mining | PolyMet Mining, Inc. |
PSCW | Public Service Commission of Wisconsin |
PUHCA 1935 | Public Utility Holding Company Act of 1935 |
PUHCA 2005 | Public Utility Holding Company Act of 2005 |
Rainy River Energy | Rainy River Energy Corporation |
SEC | Securities and Exchange Commission |
SFAS | Statement of Financial Accounting Standards No. |
SO2 | Sulfur Dioxide |
Square Butte | Square Butte Electric Cooperative |
Standard & Poor’s | Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. |
SWL&P | Superior Water, Light and Power Company |
Taconite Harbor | Taconite Harbor Energy Center |
Town Center | Town Center at Palm Coast development project in Florida |
Town Center District | Town Center at Palm Coast Community Development District |
WDNR | Wisconsin Department of Natural Resources |
Safe Harbor Statement
Under the Private Securities Litigation Reform Act of
Certified Public
Accountants
ALLETE ALLETE, Inc.
ALLETE Properties ALLETE Properties, Inc.
APB Accounting Principles Board
Aqua America Aqua America, Inc.
BNI Coal BNI Coal, Ltd.
Boswell Boswell Energy Center
CIP Conservation Improvement Programs
Company ALLETE, Inc. and its subsidiaries
Constellation Energy Commodities Constellation Energy Commodities Group,
Inc.
DOC Minnesota Department of Commerce
EITF Emerging Issues Task Force
Enventis Telecom Enventis Telecom, Inc.
EPA Environmental Protection Agency
ESOP Employee Stock Ownership Plan
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Florida Water Florida Water Services Corporation
Form 8-K ALLETE Current Report on Form 8-K
Form 10-K ALLETE Annual Report on Form 10-K
Form 10-Q ALLETE Quarterly Report on Form 10-Q
FPSC Florida Public Service Commission
FSP Financial Accounting Standards Board Staff
Position
GAAP Accounting Principles Generally Accepted
in the United States
Hibbard Hibbard Energy Center
Invest Direct ALLETE's Direct Stock Purchase and
Dividend Reinvestment Plan
IPO Initial Public Offering
kWh Kilowatthour(s)
kV Kilovolt(s)
Laskin Laskin Energy Center
LSP-Kendall Energy LSP-Kendall Energy, LLC
MAPP Mid-Continent Area Power Pool
MBtu Million British thermal units
Minnesota Power An operating division of ALLETE, Inc.
Minnkota Power Minnkota Power Cooperative, Inc.
MISO Midwest Independent Transmission System
Operator, Inc.
Moody's Moody's Investors Service, Inc.
MPCA Minnesota Pollution Control Agency
MPUC Minnesota Public Utilities Commission
MW Megawatt(s)
MWh Megawatthour(s)
Note ___ Note ___ to the consolidated financial
statements in this Form 10-K
NPDES National Pollutant Discharge Elimination
System
NYSE New York Stock Exchange
PSCW Public Service Commission of Wisconsin
Rainy River Energy Rainy River Energy Corporation
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting
Standards No.
Split Rock Energy Split Rock Energy LLC
Square Butte Square Butte Electric Cooperative
Standard & Poor's Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies,
Inc.
SWL&P Superior Water, Light and Power Company
Taconite Harbor Taconite Harbor Energy Center
WDNR Wisconsin Department of Natural Resources
WPPI Wisconsin Public Power, Inc.
ALLETE 2004 Form 10-K Page 2
SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, we are hereby filing cautionary statements identifying important factors that could cause our actual results to differ materially from those projected in forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) made by or on behalf of ALLETE in thisthe Annual Report on Form 10-K, in presentations, in response to questions or otherwise. Any statements that express, or involve discussions as to expectations, beliefs, plans, objectives, assumptions, or future events or performance (often, but not always, through the use of words or phrases such as "anticipates," "believes," "estimates," "expects," "intends,"
"plans," "projects," "will“anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “projects,” “will likely result," "will continue"” “will continue,” “could,” “may,” “potential,” “target,” “outlook” or similar expressions) are not statements of historical facts and may be forward-looking.
Forward-looking statements involve estimates, assumptions, risks and uncertainties, which are beyond our control and may cause actual results or outcomes to differ materially from those that may be projected. These statements are qualified in their entirety by reference to, and are accompanied by, the following important factors, which are difficultin addition to predict,
contain uncertainties, are beyond our controlany assumptions and may cause actual results or
outcomesother factors referred to differ materially from those contained in forward-looking
statements:
- our ability to successfully implement our strategic objectives;
- prevailing governmental policies and regulatory actions, including
those of the United States Congress, state legislatures, the FERC, the
MPUC, the FPSC, the PSCW, and various local and county regulators, and
city administrators, about allowed rates of return, financings,
industry and rate structure, acquisition and disposal of assets and
facilities, real estate development, operation and construction of
plant facilities, recovery of purchased power and capital investments,
present or prospective wholesale and retail competition (including but
not limited to transmission costs), and zoning and permitting of land
held for resale;
- effects of restructuring initiatives in the electric industry;
- economic and geographic factors, including political and economic
risks;
- changes in and compliance with environmental and safety laws and
policies;
- weather conditions;
- natural disasters;
- war and acts of terrorism;
- wholesale power market conditions;
- population growth rates and demographic patterns;
- the effects of competition, including competition for retail and
wholesale customers;
- pricing and transportation of commodities;
- changes in tax rates or policies or in rates of inflation;
- unanticipated project delays or changes in project costs;
- unanticipated changes in operating expenses and capital expenditures;
- global and domestic economic conditions;
- capital market conditions;
- changes in interest rates and the performance of the financial markets;
- competition for economic expansion or development opportunities;
- our ability to manage expansion and integrate acquisitions; and
- the outcome of legal and administrative proceedings (whether civil or
criminal) and settlements that affect the business and profitability of
ALLETE.
specifically:
· | our ability to successfully implement our strategic objectives; |
· | our ability to manage expansion and integrate acquisitions; |
· | prevailing governmental policies, regulatory actions, and legislation including those of the United States Congress, state legislatures, the FERC, the MPUC, the PSCW, and various local and county regulators, and city administrators, allowed rates of return, financings, industry and rate structure, acquisition and disposal of assets and facilities, real estate development, operation and construction of plant facilities, recovery of purchased power, capital investments and other expenses, present or prospective wholesale and retail competition (including but not limited to transmission costs), zoning and permitting of land held for resale and environmental matters; |
· | the potential impacts of climate change on our Regulated Utility operations; |
· | effects of restructuring initiatives in the electric industry; |
· | economic and geographic factors, including political and economic risks; |
· | changes in and compliance with laws and policies; |
· | weather conditions; |
· | natural disasters and pandemic diseases; |
· | war and acts of terrorism; |
· | wholesale power market conditions; |
· | population growth rates and demographic patterns; |
· | effects of competition, including competition for retail and wholesale customers; |
· | changes in the real estate market; |
· | pricing and transportation of commodities; |
· | changes in tax rates or policies or in rates of inflation; |
· | unanticipated project delays or changes in project costs; |
· | availability and management of construction materials and skilled construction labor for capital projects; |
· | unanticipated changes in operating expenses, capital and land development expenditures; |
· | global and domestic economic conditions; |
· | our ability to access capital markets and bank financing; |
· | changes in interest rates and the performance of the financial markets; |
· | our ability to replace a mature workforce and retain qualified, skilled and experienced personnel; and |
· | the outcome of legal and administrative proceedings (whether civil or criminal) and settlements that affect the business and profitability of ALLETE. |
| |
Additional disclosures regarding factors that could cause our results and performance to differ from results or performance anticipated by this report are discussed in Item 71A under the heading "Factors that May Affect Future Results"“Risk Factors” beginning on page 3622 of this Form 10-K. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which that statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all of these factors, nor can it assess the impact of each of these factors on the businesses of ALLETE or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. Readers are urged to carefully review and consider the various disclosures made by us in our 2004this Form 10-K and in our other reports filed with the SEC that attempt to advise interested parties of the factors that may affect our business.
Page 3
ALLETE
20042007 Form 10-K
PARTPart I
ITEM 1. BUSINESS
ALLETE is a diversified company that has beenprovided fundamental products and services since 1906. These include our former operations in the water, paper, telecommunications and automotive industries and the core Energy and Real Estate businesses we operate today.
Energy is comprised of Regulated Utility, Nonregulated Energy Operations and Investment in ATC.
| · | Regulated Utility includes retail and wholesale rate regulated electric, natural gas and water services in northeastern Minnesota and northwestern Wisconsin under the jurisdiction of state and federal regulatory authorities. |
| · | Nonregulated Energy Operations includes our coal mining activities in North Dakota, approximately 50 MW of nonregulated generation and Minnesota land sales. |
| · | Investment in ATC includes our equity ownership interest in ATC. |
Real Estate includes our Florida real estate operations.
Other includes our investments in emerging technologies, and earnings on cash and short-term investments.
ALLETE is incorporated under the laws of Minnesota since 1906. ALLETE'sMinnesota. Our corporate headquarters are in Duluth, Minnesota. As of December 31, 2004, we had
approximately 1,500 employees, 100 of which were part-time. Statistical information is presented as of December 31, 2004,2007, unless otherwise indicated. All subsidiaries are wholly owned unless otherwise specifically indicated. References in this report to "we," "us"“we,” “us” and "our"“our” are to ALLETE and its subsidiaries, collectively.
ALLETE files annual, quarterly, and other reports and information with the SEC.
You can read and copy any information filed by ALLETE with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
obtain additional information about the Public Reference Room by calling the SEC
at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov)
that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC, including ALLETE.
ALLETE also maintains an Internet site (www.allete.com) that contains documents
as soon as reasonably practicable after such material is electronically filed
with or furnished to the SEC.
ALLETE's operations are comprised of four business segments. REGULATED UTILITY
includes retail and wholesale rate regulated electric, water and gas services in
northeastern Minnesota and northwestern Wisconsin under the jurisdiction of
state and federal regulatory authorities. NONREGULATED ENERGY OPERATIONS
includes nonregulated generation (non-rate base generation sold at market-based
rates to the wholesale market) consisting primarily of generation from Taconite
Harbor in northern Minnesota, and our coal mining activities in North Dakota.
Nonregulated Energy Operations also includes generation secured through the
Kendall County power purchase agreement, which is expected to be transferred in
April 2005. (See Item 7 - Outlook.) REAL ESTATE includes our Florida real estate
operations. OTHER includes our telecommunications activities, investments in
emerging technologies, earnings on cash, and general corporate charges and
interest not specifically related to any one business segment. General corporate
charges include employee salaries and benefits, as well as legal and other
outside service fees. Discontinued Operations includes our Automotive Services
business that was spun off on September 20, 2004, our Water Services businesses,
the majority of which were sold in 2003, and costs incurred by ALLETE associated
with the spin-off of ADESA.
Year Ended December 31 | 2007 | 2006 | 2005 |
| | | |
Consolidated Operating Revenue – Millions | $841.7 | $767.1 | $737.4 |
| | | |
Percentage of Consolidated Operating Revenue | | | |
Regulated Utility | 86 | 83 | 78 |
Nonregulated Energy Operations | 8 | 9 | 16 |
Real Estate | 6 | 8 | 6 |
| 100% | 100% | 100% |
For a detailed discussion of results of operations and trends, see Item 7
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations. For business segment information, see Notes 1 and 2.
YEAR ENDED DECEMBER 31 2004 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Consolidated Operating Revenue - Millions $751 $692 $643
- -------------------------------------------------------------------------------------------------------------------
Percentage of Consolidated Operating Revenue
Regulated Utility
Industrial
Taconite Producers 23% 22% 23%
Paper and Wood Products 9 8 10
Pipelines and Other Industries 6 6 6
- -------------------------------------------------------------------------------------------------------------------
Total Industrial 38 36 39
Residential 10 10 11
Commercial 11 11 11
Other
Energy – Regulated Utility
Electric Sales / Customers
Minnesota Power Suppliers 5 7 7
Other Revenue 10 10 10
- -------------------------------------------------------------------------------------------------------------------
Total Regulated Utility 74 74 78
Nonregulated Energy Operations 14 15 13
Real Estate 6 6 5
Other 6 5 4
- -------------------------------------------------------------------------------------------------------------------
100% 100% 100%
- -------------------------------------------------------------------------------------------------------------------
ALLETE 2004 Form 10-K Page 4
SPIN-OFF OF AUTOMOTIVE SERVICES. On September 20, 2004, the spin-off of
Automotive Services was completed by distributing to ALLETE shareholders all of
ALLETE's shares of ADESA common stock. Through a June 2004 IPO, our Automotive
Services business, doing business as ADESA, Inc. (NYSE: KAR), issued 6.3 million
shares of common stock. This represented 6.6% of ADESA's common stock
outstanding. ALLETE owned the remaining 93.4% of ADESA until the spin-off was
completed. (See Note 3.)
Discontinued operations included the operating results of our Automotive
Services business until the spin-off. Automotive Services, which does business
independently as ADESA, operates businesses that are integral parts of the
vehicle redistribution industry in North America. Those businesses include used
and salvage vehicle auctions and related services, and dealer financing. ADESA's
SEC filings are available through the SEC's website at www.sec.gov.
SALE OF WATER PLANT ASSETS. In mid-2004, we completed the sales of our North
Carolina water and wastewater assets, and our remaining 72 water and wastewater
systems in Florida. In early 2005, we sold our wastewater services business in
Georgia. The net cash proceeds from the sale of all water and wastewater assets
in 2003 and 2004, after transaction costs, retirement of most Florida Water debt
and payment of income taxes, were approximately $300 million. The transaction
relating to the sale of 63 water and wastewater systems in Florida to Aqua
America remains subject to regulatory approval by the FPSC. The approval process
may result in an adjustment to the final purchase price, based on the FPSC's
determination of plant investment for the systems. A decision is expected in
late 2005.
REGULATED UTILITY
MINNESOTA POWER, an operating division of ALLETE, provides regulated utility electric service in a 26,000 square mile service territory in northeastern Minnesota. Minnesota Power supplies regulated utility electric service to 136,000141,000 retail customers and wholesale electric service to 16 municipalities. SWL&P provides regulated utility electric service, natural gas and water service in northwestern Wisconsin. SWL&P has 14,000Wisconsin to 15,000 electric customers, 12,000 natural gas customers and 10,000 water customers.
Minnesota Power had an annual net peak load of 1,498 MW on January 30, 2004. Our
regulated power supply sources are listed below.
FOR THE YEAR ENDED
REGULATED UTILITY UNIT YEAR NET WINTER DECEMBER 31, 2004
POWER SUPPLY NO. INSTALLED CAPABILITY ELECTRIC REQUIREMENTS
- -------------------------------------------------------------------------------------------------------------------------
MW MWH %
Steam
Coal-Fired
Boswell Energy Center 1 1958 69
near Grand Rapids, MN 2 1960 69
3 1973 350
4 1980 430
- -------------------------------------------------------------------------------------------------------------------------
918 5,814,505 48.4%
- -------------------------------------------------------------------------------------------------------------------------
Laskin Energy Center 1 1953 55
in Hoyt Lakes, MN 2 1953 55
- -------------------------------------------------------------------------------------------------------------------------
110 626,478 5.2
- -------------------------------------------------------------------------------------------------------------------------
Purchased Steam
Hibbard Energy Center in Duluth, MN 3 & 4 1949, 1951 46 69,521 0.6
- -------------------------------------------------------------------------------------------------------------------------
Total Steam 1,074 6,510,504 54.2
- -------------------------------------------------------------------------------------------------------------------------
Hydro
Group consisting of ten stations in MN Various 115 454,713 3.8
- -------------------------------------------------------------------------------------------------------------------------
Purchased Power
Square Butte burns lignite coal near Center, ND 322 2,005,776 16.7
All Other - Net - 3,047,401 25.3
- -------------------------------------------------------------------------------------------------------------------------
Total Purchased Power 322 5,053,177 42.0
- -------------------------------------------------------------------------------------------------------------------------
Total 1,511 12,018,394 100.0%
- -------------------------------------------------------------------------------------------------------------------------
We have electric transmission and distribution lines of 500 kV (8 miles), 230 kV
(606 miles), 161 kV (43 miles), 138 kV (66 miles), 115 kV (1,300 miles) and less
than 115 kV (6,767 miles). We own and operate 184 substations with a total
capacity of 8,868 megavoltamperes. Some of our transmission and distribution
lines interconnect with other utilities.
Page 5 ALLETE 2004 Form 10-K
We own offices and service buildings, an energy control center and repair shops,
and lease offices and storerooms in various localities. Substantially all of our
electric plant is subject to mortgages, which collateralize the outstanding
first mortgage bonds of Minnesota Power and of SWL&P. Generally, we hold fee
interest in our real properties subject only to the lien of the mortgages. Most
of our electric lines are located on land not owned in fee, but are covered by
appropriate easement rights or by necessary permits from governmental
authorities. WPPI owns 20% of Boswell Unit 4. WPPI has the right to use our
transmission line facilities to transport its share of Boswell generation. (See
Note 10.)
SPLIT ROCK ENERGY was a joint venture between Minnesota Power and Great River
Energy. In March 2004, we terminated our ownership interest upon receipt of FERC
approval.
ELECTRIC SALES Our regulated utility operations include retail and wholesale activities under the jurisdiction of state and federal regulatory authorities. (See(see Item 1 - Regulatory Issues.Matters.)
REGULATED UTILITY ELECTRIC SALES
YEAR ENDED DECEMBER 31 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------
MILLIONS OF KILOWATTHOURS
RetailIn addition to serving residential, commercial and Municipals
Residential 1,053 1,065 1,044
Commercial 1,282 1,286 1,257
Industrial 7,071 6,558 6,946
Municipals and Other 902 921 898
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10,308 9,830 10,145
Other Power Suppliers 918 1,314 987
- ------------------------------------------------------------------------------------------------------------------
11,226 11,144 11,132
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Minnesota Power has wholesale contracts with 16 municipal electric needs, a high proportion of our electric sales are to large industrial customers.
Regulated Utility Electric Sales Year Ended December 31 | 2007 | % | 2006 | % | 2005 | % |
Millions of Kilowatthours | | | | | | |
| | | | | | |
Retail and Municipals | | | | | | |
Residential | 1,141 | 9 | 1,100 | 9 | 1,102 | 10 |
Commercial | 1,373 | 11 | 1,335 | 10 | 1,327 | 11 |
Industrial | 7,054 | 55 | 7,206 | 56 | 7,130 | 61 |
Municipals and Other | 1,092 | 8 | 990 | 8 | 956 | 8 |
| 10,660 | 83 | 10,631 | 83 | 10,515 | 90 |
Other Power Suppliers (a) | 2,157 | 17 | 2,153 | 17 | 1,142 | 10 |
| 12,817 | 100 | 12,784 | 100 | 11,657 | 100 |
(a) | Effective January 1, 2006, Taconite Harbor was redirected from Nonregulated Energy Operations to Regulated Utility. |
Energy-Regulated Utility (Continued)
Industrial Customers
In 2007, our industrial customers SWL&Prepresented 55 percent of total regulated utility kilowatthour sales. Our industrial customers are primarily in the taconite, paper, pulp, wood products and Dahlberg Light & Power Company in rural Wisconsin. (See Regulatory Issues -
Federal Energy Regulatory Commission.)
pipeline industries.
Industrial Customer Electric Sales Year Ended December 31 | 2007 | % | 2006 | % | 2005 | % |
Millions of Kilowatthours | | | | | | |
Taconite Producers | 4,408 | 62 | 4,517 | 63 | 4,558 | 64 |
Paper, Pulp and Wood Products | 1,613 | 23 | 1,689 | 23 | 1,623 | 23 |
Pipelines | 562 | 8 | 550 | 8 | 480 | 7 |
Other Industrial | 471 | 7 | 450 | 6 | 469 | 6 |
| | | 7,054 | 100 | 7,206 | 100 | 7,130 | 100 |
Approximately 60%60 percent of the ore consumed by integrated steel facilities in the United States originates from six taconite customers of Minnesota Power. Taconite, an iron-bearing rock of relatively low iron content that is abundantly available in Minnesota, is an important domestic source of raw material for the steel industry. Taconite processing plants use large quantities of electric power to grind the ore-bearingiron-bearing rock, and agglomerate and pelletize the iron particles into taconite pellets. Strong worldwide steel demand, driven largely by extensive infrastructure development in China, has resulted in very robust world iron ore demand and steel pricing and has consequently resulted in very high
demand for iron ore and steel.pricing. This globalization of demand has positively impacted Minnesota taconite producers, which all produced near their rated
capacitiesproducers. With the exception of short-term production curtailments at two taconite plants, our taconite customers operated at maximum production levels in 2004.2007. Annual taconite production in Minnesota was 39 million tons in 2007 (40 million tons in 2006 and 41 million tons in 2004 (352005) and it is estimated that it will be 41.5 million tons in 2003; 39 million tons2008. An 800,000 ton per year expansion at Cleveland Cliffs’ Northshore taconite facility is expected to be completed in 2002). Recent consolidation
activities, combined withApril 2008, contributing to the strong steel market, have placed theexpected increased production. It is expected that throughout 2008, Minnesota taconite producers will remain in a strong position. Cleveland-Cliffs Inccompetitive position due to the strength of the world steel industry and U.S. Steel
Corp. have each announced planned significant capital investments to either
bring mothballed pellet production capacity back on line or to ensure existing
capacity continues to operate with an investment in required pollution control
equipment.
their efficiency of production.
In addition to serving the taconite industry, Minnesota Power also serves a number of customers in the paper, and pulp and wood products industry. In total, we serve four major paper and pulp mills directly and one paper mill indirectly by providing wholesale service to the retail provider of the mill. Minnesota Power also serves four wood products manufacturers. After suffering through a consecutive numberIn 2007, approximately 90 percent of down years since 2000,our revenue from this industry sector came from the North
American paper industry rebounded in 2004. The reasons forand pulp producers, and 10 percent came from the rebound included
the decline of the dollar in comparison to the Euro, which resulted in fewer
imports to the United States, a recovering economy and closing some capacity
over the past several years. The past trend of the mills in Minnesota Power's
service territory being acquired by new owners continued in 2004. In 2004, Boise
Cascade sold its paper, wood products customers.
Minnesota Power’s paper and timber holdingspulp customers ran at, or very near, full capacity in 2007 despite the fact that the industry continued to Madison Dearborn
Partners, includingface high fiber, chemical and energy costs as well as competition from exports in certain grades of paper products. Minnesota Power’s customers benefited from the International Falls paper mill which Minnesota Power
serves, the former Potlatch-Brainerd/Missota Paper mill was acquired by
Wausau-Mosinee Paper Corporation, and Potlatch's oriented strand board (plywood
substitute) plants, including the Grand Rapids planttemporary or permanent idling of capacity both in North America at mills other than those served by Minnesota Power and the idling of capacity in Europe, as well as from the strength of the Canadian dollar and the Euro which has reduced imports both from Canada and Europe. Our wood products customers ran at reduced capacity levels, and two facilities were purchasedindefinitely idled due to the decreased number of new housing starts, a resultant declining demand and pricing for their products. One of the idled facilities was down for all of 2007 while another was idled during the last quarter of 2007.
The pipeline industry is the third key industrial segment served by Ainsworth Lumber Company Ltd.Minnesota Power with services provided to two crude oil pipelines and one refinery. These customers have a common reliance on the importation of Vancouver, Canada.
Canadian crude oil. After near capacity operation in 2006 and 2007, both pipeline operators are executing expansion plans to transport newly developed Western Canadian crude oil reserves (Alberta Oil Sands) to United States markets. Access to traditional Midwest markets is being expanded to Southern markets as the Canadian supply is displacing domestic production and deliveries imported from the Gulf Coast.
ALLETE
20042007 Form 10-K
Page 6
LARGE POWER CUSTOMER CONTRACTS.Energy-Regulated Utility (Continued)
Large Power Customer Contracts. Minnesota Power has large power customer contracts with 12 customers (Large Power Customers), 11 of which require 10 MW or more of generating capacity and one of whichthat requires at least 8 MW or more of generating capacity. Large Power Customers consist of five taconite producers, four paper and pulp mills, two pipeline companies and one manufacturer.
Large Power Customer contracts require Minnesota Power to have a certain amount of generating capacity available. (See Minimum Revenue and Demand Under Contract table.table below.) In turn, each Large Power Customer is required to pay a minimum monthly demand charge that covers the fixed costs associated with having this capacity available to serve the customer, including a return on common equity. Most contracts allow customers to establish the level of megawatts subject to a demand charge on a biannual (power pool season) or four-month basis and require that a portion of their megawatt needs be committed on a take-or-pay basis for at least a portion of the agreement. In addition to the demand charge, each Large Power Customer is billed an energy charge for each kilowatthour used that recovers the variable costs incurred in generating electricity. Six of the Large Power Customers have interruptible service for a portion of their needs, which provides a discounted demand rate and energy priced at Minnesota Power'sPower’s incremental cost after serving all firm power obligations. Minnesota Power also provides incremental production service for customer demand levels above the contractcontractual take-or-pay levels. There is no demand charge for this service and energy is priced at an increment above Minnesota Power'sPower’s cost. Incremental production service is interruptible. Contracts
All contracts with 8 of the 12 Large Power Customers provide for deferral without interest of one-half of demand charge
obligations incurred during the first three months of a strike or illegal
walkout at a customer's facilities, with repayment required over the 12-month
period following resolution of the work stoppage.
All contracts continue past the contract termination date unless the required advance notice of cancellation has been given. The advance notice of cancellation varies from one to four years. Such contracts minimize the impact on earnings that otherwise would result from significant reductions in kilowatthour sales to such customers. Large Power Customers are required to purchasetake all of their purchased electric service requirements from Minnesota Power for the duration of their contracts. The rates and corresponding revenue associated with capacity and energy provided under these contracts are subject to change through the same regulatory process governing all retail electric rates. (See Regulatory Issues -Matters – Electric Rates.)
The MPUC allows
Minnesota Power, to requireas permitted by the MPUC, requires its taconite-producing Large Power Customers to pay weekly for electric usage based on monthly energy usage estimates. A normal thirty-day billing cycle with a 15-day payment period left
Minnesota Power greatly exposed to a significant revenue loss if the customer
did not or could not make payment due to discontinued operations, or delayed
making payment for electric service pending a Chapter 11 bankruptcy filing. The customers receive estimated bills based on Minnesota Power'sPower’s prediction of the customer'scustomer’s energy usage, forecasted energy prices and fuel clause adjustment estimates. Minnesota Power'sPower’s five taconite-producing Large Power Customers have generally predictable energy usage on a week-to-week basis, which makes the variance between the estimated usage and actual usage small. Taconite-producing Large Power Customers subject to weekly billings receive interest on the money paid to Minnesota Power within the billing cycle.
Minimum Revenue and Demand Under Contract As of February 1, 2008 | Minimum Annual Demand Revenue (a,b) | Monthly Megawatts |
| | |
2008 | $64.1 million | 401 |
2009 | $27.5 million | 154 |
2010 | $25.5 million | 148 |
2011 | $25.3 million | 148 |
2012 | $15.6 million | 88 |
MINIMUM REVENUE AND DEMAND UNDER CONTRACT MINIMUM MONTHLY
AS OF FEBRUARY 1, 2005 ANNUAL REVENUE MEGAWATTS
- ----------------------------------------------------------------------------------------------------------------------
2005 $69.1 421
2006 $39.4 210
2007 $32.5 178
2008 $25.8 148
2009 $5.8 36
- ----------------------------------------------------------------------------------------------------------------------
(a) | Based on past experience, we believe revenue from our Large Power Customers will be substantially in excess of the minimum contract amounts. For example, in our 2006 Form 10-K we stated that 2007 minimum annual revenue demand from these Large Power Customers would be $62.5 million. Actual 2007 demand revenue from these Large Power Customers was $118.7 million. |
Page 7 (b) | Although several contracts have a feature that allows demand to go to zero after a two-year advance notice of a permanent closure, this minimum revenue summary does not reflect this occurrence happening in the forecasted period because we believe it is unlikely. |
ALLETE
20042007 Form 10-K
Energy–Regulated Utility (Continued)
Contract Status for Minnesota Power Large Power Customers
As of February 1, 2008
CONTRACT STATUS FOR MINNESOTA POWER LARGE POWER CUSTOMERS
AS OF FEBRUARY 1, 2005
EARLIEST
CUSTOMER INDUSTRY LOCATION OWNERSHIP TERMINATION DATE
- ---------------------------------------------------------------------------------------------------------------------------------
Customer | Industry | Location | Ownership | Earliest Termination Date |
Hibbing Taconite Co. , (a) | Taconite | Hibbing, MN | 62.3% InternationalMittal Steel February 28, 2009
GroupUSA Inc. 23% Cleveland-Cliffs Inc 14.7% Stelco Inc.
Ispat Inland Mining Company , United States Steel (USS) | February 29, 2012 |
ArcelorMittal USA – Minorca Mine | Taconite | Virginia, MN Ispat Inland Mining Company February 28, 2009
U.S. | ArcelorMittal USA Inc. | December 31, 2013 |
United States Steel Corp. Corporation (USS) Minntac | Taconite | Mt. Iron, MN U.S. Steel Corp. February 28, 2009
| USS | October 31, 2014 |
USS Keewatin Taconite | Taconite | Keewatin, MN U.S. Steel Corp. February 28, 2009
| USS | October 31, 2014 |
United Taconite LLC (a) | Taconite | Eveleth, MN | 70% Cleveland-Cliffs Inc February 28, 2009
30% Laiwu Steel Group | February 29, 2012 |
UPM, Blandin Paper Mill (a) | Paper | Grand Rapids, MN | UPM-Kymmene Corporation April 30, 2007
| February 29, 2012 |
Boise White Paper, LLC (b) | Paper | International Falls, MN | Madison Dearborn December 31, 2008
Partnership | February 28, 2009 |
Sappi Cloquet LLC (a) | Paper | Cloquet, MN | Sappi Limited | February 28, 2009
Stora Enso North America, 29, 2012 |
NewPage Corporation – Duluth Mills | Paper and Pulp | Duluth, MN Stora Enso Oyj April 30, 2009
Duluth Paper Mill and
Duluth Recycled Pulp Mill
| NewPage Corporation | August 31, 2013 |
USG Interiors, Inc. (b) | Manufacturer | Cloquet, MN | USG Corporation | February 28, 2006
2009 |
Enbridge Energy Company, Limited Partnership (b) | Pipeline | Deer River, MN Floodwood, MN | Enbridge Energy Company, Limited Partnership | February 28, 2006
Limited Partnership Floodwood, MN Limited Partnership
2009 |
Minnesota Pipeline Company (b) | Pipeline | Staples, MN Little Falls, MN Park Rapids, MN | 60% Koch Pipeline Co. L.P. February 28, 2006
Little Falls, MN 40% Marathon Ashland
Park Rapids, MN Petroleum LLC
- ---------------------------------------------------------------------------------------------------------------------------------
| February 28, 2009 |
(a) | The contract will terminate four years from the date of written notice from either Minnesota Power or the customer. No notice of contract cancellation has been given by either party. Thus, the earliest date of cancellation is February 28,
2009.
In 2004, Ispat International and International Steel Group (ISG) announced a merger. At the same time, Ispat International
changed its name to Mittal Steel Company N.V. (Mittal Steel). The merger of Mittal Steel and ISG is anticipated to be
completed in the first quarter of 2005. A successful merger will result in Mittal Steel becoming the world's largest steel
producer. Mittal Steel is expected to become the owner of the Ispat Inland Mining Company and will be the majority partner
in Hibbing Taconite.
29, 2012. |
(b) | The contract will terminate one year from the date of written notice from either Minnesota Power or the customer. No notice of contract cancellation has been given by either party. Thus, the earliest date of cancellation is February 28, 2006.
2009. |
PURCHASED POWEREnergy–Regulated Utility (Continued)
Power Supply
In order to meet our customer’s electric requirements, we utilize a mix of Company generation and purchased power. The Company’s generation is primarily coal fired, but also includes approximately 115 MWs of hydro generation from ten hydro stations in Minnesota. Purchased power is made up of long–term power purchase agreements and market purchases. The following table reflects the Company’s generating capabilities and total electrical requirements as of December 31, 2007. Minnesota Power has contracts to purchase capacity and energy from various
entities. The largest contract is with Square Butte. Underhad an agreement with
Square Butte expiring at the endannual net peak load of 2026, Minnesota Power is currently entitled
to approximately 71% (66% beginning in 2006; 60% in 2007) of the output of a
455-MW coal-fired generating unit located near Center, North Dakota. (See Note
11.)
FUEL1,614 MW on July 30, 2007.
Regulated Utility Power Supply | Unit No. | Year Installed | Net Winter Capability | For the Year Ended December 31, 2007 Electric Requirements |
| | | MW | MWh | % |
Coal-Fired | | | | | |
Boswell Energy Center | 1 | 1958 | 69 | | |
in Cohasset, MN | 2 | 1960 | 69 | | |
| 3 | 1973 | 350 | | |
| 4 | 1980 | 429 | | |
| | | 917 | 6,005,520 | 45.7% |
Laskin Energy Center | 1 | 1953 | 55 | | |
in Hoyt Lakes, MN | 2 | 1953 | 54 | | |
| | | 109 | 591,499 | 4.5 |
Taconite Harbor Energy Center | 1, 2 & 3 | 1957, 1957 | | | |
in Taconite Harbor, MN | | 1967 | 220 | 1,491,457 | 11.4 |
Total Coal | | | 1,246 | 8,088,476 | 61.6 |
Purchased Steam | | | | | |
Hibbard Energy Center in Duluth, MN | 3 & 4 | 1949, 1951 | 47 | 53,354 | 0.4 |
Hydro | | | | | |
Group consisting of ten stations in MN | Various | | 115 | 428,153 | 3.3 |
Total Company Generation | | | 1,408 | 8,569,983 | 65.3 |
Long Term Purchased Power | | | | | |
Square Butte burns lignite coal near Center, ND | | | 273 | 1,533,186 | 11.7 |
Wind – Oliver County, ND (a) | | | 20 | 203,675 | 1.5 |
Total Long Term Purchased Power | | | 293 | 1,736,861 | 13.2 |
| | | | | |
Other Purchased Power – Net (b) | | | – | 2,819,715 | 21.5 |
Total Purchased Power | | | 293 | 4,556,576 | 34.7 |
Total | | | 1,701 | 13,126,559 | 100.0% |
(a) | The nameplate capacity of Oliver Wind I Energy Center is 50-MWs and 48-MWs for the Oliver Wind II Energy Center. The capacity reflected in the table is actual accredited capacity of the facility. Accredited capacity is the amount of net generating capability associated with the facility for which capacity credit may be obtained under applicable Mid-Continent Area Power Pool (MAPP) rules. |
(b) | Includes short term market purchases in the MISO market and from other power suppliers. |
Fuel. Minnesota Power purchases low-sulfur, sub-bituminous coal from the Powder River Basin coal fieldregion located in Montana.Montana and Wyoming. Coal consumption in 20042007 for electric generation at Minnesota Power'sPower’s coal-fired generating stations was about 5.1approximately 4.9 million tons. As of December 31, 2004,2007, Minnesota Power had a coal inventory of about 516,000922,000 tons. Of Minnesota Power has threePower’s primary coal supply agreements, with
various expiration dates extendingone agreement extends through 2009.2011, one extends through 2009, and one has an initial term expiring at the end of 2008. Under these agreements, Minnesota Power has the tonnage flexibility to procure 70%70 percent to 100%100 percent of its total coal requirements. In 2005,2008, Minnesota Power willexpects to obtain coal under these coal supply agreements and in the spot market. This diversity in coal supply options allows Minnesota Power to manage market price and supply risk and to take advantage of favorable spot market prices. Minnesota Power is exploringcontinues to explore future coal supply options. We believe that adequate supplies of low-sulfur, sub-bituminous coal will continue to be available.
In 2001, Minnesota Power and Burlington Northern and Santa Fe Railway Company (Burlington Northern)(BNSF) entered into a long-term agreement under which Burlington
NorthernBNSF transports all of Minnesota Power'sPower’s coal by unit train from the Powder River Basin directly to Minnesota Power'sPower’s generating facilities or to a designated interconnection point. Minnesota Power also has agreements with an affiliate of the Canadian National Railway and Midwest Energy Resources Company to transport coal from the Burlington NorthernBNSF interconnection point to certain Minnesota Power facilities.
ALLETE
20042007 Form 10-K
Page 8
COAL DELIVERED TO MINNESOTA POWER
YEAR ENDED DECEMBER 31 2004 2003 2002
- -------------------------------------------------------------------------------------------------
Average Price per Ton $19.01 $20.02 $21.48
Average Price per MBtu $1.04 $1.12 $1.19
- -------------------------------------------------------------------------------------------------
Energy–Regulated Utility (Continued)
Power Supply (Continued)
On January 24, 2008, we received a letter from BNSF alleging the Company defaulted on a material obligation under the Company’s Coal Transportation Agreement (CTA). In the notice, BNSF claimed Minnesota Power underpaid approximately $1.6 million for coal transportation services in 2006 and that failure to pay such amount plus interest within 60 days may result in BNSF’s termination of the CTA. We believe we do not owe the amount claimed, and that BNSF’s claims are wholly without merit. We intend to vigorously defend our position in this dispute.
Coal Delivered to Minnesota Power Year Ended December 31 | 2007 | 2006 | 2005 |
Average Price per Ton | $21.78 | $20.19 | $19.76 |
Average Price per MBtu | $1.20 | $1.10 | $1.08 |
The Square Butte generating unit operated by Minnkota Power burns North Dakota lignite coal supplied by BNI Coal in accordance with the terms of a contract expiring in 2027.that extends through 2026. Square Butte'sButte’s cost of lignite burned in 20042007 was approximately 74 cents$1.09 per MBtu. The lignite acreage that has been dedicated to Square Butte by BNI Coal is located on lands essentially all of which are under private control and presently leased by BNI Coal. This lignite supply is sufficient to provide the fuel for the anticipated useful life of the generating unit.
REGULATORY ISSUES
We are exempt
Long Term Purchased Power. Minnesota Power has contracts to purchase capacity and energy from regulation under the Public Utility Holding Company Act of
1935 (PUHCA), except as to Section 9(a)(2), which relates to acquisition of
securities of public utility companies. Efforts to repeal PUHCA continuevarious entities. The largest contract is with Square Butte. Under an agreement with Square Butte expiring at the national level. end of 2026, Minnesota Power is currently entitled to approximately 55 percent (50 percent in 2009 and thereafter) of the output of a 455-MW coal-fired generating unit located near Center, North Dakota. (See Note 8.)
In December 2006, we began purchasing the output from a 50-MW wind facility, Oliver Wind I, located in North Dakota, under a 25-year power purchase agreement with an affiliate of FPL Energy.
In May 2007, the MPUC approved a second 25-year wind power purchase agreement to purchase an additional 48 MW of wind energy from Oliver Wind II, an expansion of Oliver Wind I located in North Dakota. The MPUC also allowed immediate cost recovery for associated transmission upgrades. In November 2007, Oliver Wind II became operational and we began purchasing the output from the 48-MW wind facility.
On May 11, 2007, the MPUC approved a 50-MW power purchase agreement between Minnesota Power and Manitoba Hydro from May 2009 through April 2015.
Transmission and Distribution
We cannot predicthave electric transmission and distribution lines of 500 kV (8 miles), 230 kV (605 miles), 161 kV (43 miles), 138 kV (129 miles), 115 kV (1,203 miles) and less than 115 kV (6,347 miles). We own and operate 170 substations with a total capacity of 9,586 megavoltamperes. Some of our transmission and distribution lines interconnect with other utilities.
Properties
We own office and service buildings, an energy control center, repair shops, and lease offices and storerooms in various localities. Substantially all of our electric plant is subject to mortgages, which collateralize the futureoutstanding first mortgage bonds of these legislative efforts.
Minnesota Power and SWL&P. Generally, we hold fee interest in our real properties subject only to the lien of the mortgages. Most of our electric lines are located on land not owned in fee, but are covered by appropriate easement rights or by necessary permits from governmental authorities. Wisconsin Public Power, Inc. (WPPI) owns 20 percent of Boswell Unit 4. WPPI has the right to use our transmission line facilities to transport its share of Boswell generation. (See Note 4.)
Energy–Regulated Utility (Continued)
Regulatory Matters
We are subject to the jurisdiction of various regulatory authorities. The MPUC has regulatory authority over Minnesota Power'sPower’s service area in Minnesota, retail rates, retail services, issuance of securities and other matters. The FERC has jurisdiction over the licensing of hydroelectric projects, the establishment of rates and charges for the sale of electricity for resale and transmission of electricity in interstate commerce and certain accounting and record keepingrecord-keeping practices. The PSCW has regulatory authority over theSWL&P’s retail sales of electricity, waternatural gas and gaswater by SWL&P. The MPUC, FERC and PSCW had regulatory authority over 56%, 7%58 percent, 10 percent and 7%,8 percent, respectively, of our 20042007 consolidated operating revenue.
ELECTRIC RATES.
Electric Rates. Minnesota Power has historically designed its electric service rates based on cost of service studies under which allocations are made to the various classes of customers. Nearly all retail sales include billing adjustment clauses, which adjust electric service rates for changes in the cost of fuel and purchased energy, and recovery of current and deferred CIPconservation improvement program expenditures and recovery of certain environmental and renewable expenditures.
In addition to Large Power Customer contracts,
Information published by the Edison Electric Institute (“Typical Bills and Average Rates Report – Summer 2007” and “Rankings – July 1, 2007”) ranked Minnesota Power also has
contracts with large industrialas having the ninth lowest average retail rates out of 177 investor-owned utilities in the United States. We had the lowest rates in Minnesota and commercial customers with monthly demandsin the region consisting of more than 2 MW but less than 10 MW of capacity. The terms of these contracts
vary depending upon the customer's demand for powerIowa, Kansas, Minnesota, Missouri, North Dakota, South Dakota and the cost of extending
Minnesota Power's facilities to provide electric service.
Wisconsin.
Minnesota Power requires that all large industrial and commercial customers under contract specify the date when power is first required. Thereafter, the customer is generally billed monthly for at least the minimum power for which they contracted. These conditions are part of all contracts covering power to be supplied to new large industrial and commercial customers and to current customers as their contracts expire or are amended. All rates and other contract terms are subject to approval by appropriate regulatory authorities.
FEDERAL ENERGY REGULATORY COMMISSION.
Federal Energy Regulatory Commission. The FERC has jurisdiction over our wholesale electric service and operations. Minnesota Power'sPower’s hydroelectric facilities, which are located in Minnesota, are also licensed by the FERC. (See
Environmental Matters - Water.)
In August 2005, the Energy Policy Act of 2005 (EPAct 2005) was signed into law, which repealed PUHCA 1935 and enacted PUHCA 2005. PUHCA 2005 gives FERC certain authority over books and records of public utility holding companies and their affiliates. It also addresses FERC review and authorization of the allocation of costs for non-power goods, or administrative or management services when requested by a holding company system or state commission. In addition, EPAct 2005 directs the FERC to issue certain rules addressing electricity reliability, investment in energy infrastructure, fuel diversity for electric generation, promotion of energy efficiency and wise energy use. The FERC is currently in the process of implementing EPAct 2005. These include (among others):
| · | rulemaking for long-term transmission rights; |
| · | dockets pertaining to the development and certification of electric reliability organizations, including delegated authority to regional entities for proposing and enforcing reliability standards; |
| · | rules specifying the form of applications for federal construction permits to be issued in the exercise of federal backstop siting authority for transmission projects; |
| · | rulemaking requiring unregulated transmitting utilities to provide open access to their transmission systems; |
| · | various rulemakings regarding the consideration of merger applications under the revised Federal Power Act Section 203; |
| · | a U.S. Department of Energy study/report on the benefits of economic dispatch and a report on recommendations of regional joint boards that considered economic dispatch; |
| · | rulemaking to facilitate transmission market transparency; and |
| · | the energy market manipulation rulemaking. |
We continue to monitor FERC activity in these and other proceedings.
On December 28, 2007, we submitted a filing with the FERC seeking to increase electric rates for our wholesale customers. On February 8, 2008, the FERC approved our wholesale rate filing. Our wholesale customers consist of 16 municipalities in Minnesota and two private utilities in Wisconsin, including SWL&P. The FERC authorized an average 10 percent increase for wholesale municipal customers, a 12.5 percent increase for SWL&P, and an overall return on equity of 11.25 percent. The rate increase will go into effect on March 1, 2008, and on an annualized basis, the filing will generate approximately $7.5 million in additional revenue.
Municipal and Wholesale Customers. Minnesota Power has contracts with 16 Minnesota municipalities receiving wholesale electric service. One contract is for service through 2005 (8,000expires April 2008 (31,000 MWh purchased in 2004) and one expires in 2006,2007), while the other 1415 are for service through at least 2007.January 2011. In 2004,2007, these municipal customers purchased 712,000893,000 MWh from Minnesota Power. Minnesota Power also has a contract for wholesale service towith Dahlberg Light & Power Company (Dahlberg) in Wisconsin. Dahlberg purchased 106,000115,000 MWh in 2004.2007.
Energy–Regulated Utility (Continued)
Federal Energy Regulatory Commission (Continued)
Midwest Independent Transmission System Operator, Inc. (MISO). Minnesota Power and SWL&P are members of the MISO. MISO was the first regional
transmission organization (RTO) approved by FERC as meeting its Order No. 2000
criteria. Minnesota Power and SWL&P retain ownership of their respective transmission assets and control area functions, but their transmission network is under the regional operational control of the MISO, and they take and provide transmission service under the MISO open access transmission tariff. MISO continues its efforts to standardize rates, terms and conditions of transmission service over theits broad region, encompassing all or parts of 15 states and one Canadian province, and over 100,000 MW of generating capacity. MISO operations
were phased in during the first half of 2002. In late 2003, MISO and PJM
Interconnection LLC, a RTO serving all or parts of Pennsylvania, New Jersey, the
District of Columbia, Maryland, Ohio, Virginia, West Virginia, Delaware,
Illinois, Indiana and Kentucky, executed a joint operating agreement. The joint
operating agreement, filed with the FERC, provides detailed information about
each RTO's operations and establishes procedures to strengthen and coordinate
reliability. MISO has continued to develop and implement its operations,
focusing on enhancing transmission system reliability and its performance of
independent market monitoring functions.
Page 9 ALLETE 2004 Form 10-K
Under MISO Day 2, the method by which Minnesota
Mid-Continent Area Power transacts wholesale energy
will change, with both Minnesota Power load and generation participating in
MISO's day-ahead and real-time markets. Generation will also become subject to
MISO economic dispatch authority. MISO Day 2 will start up on April 1, 2005. As
a result of MISO Day 2 implementation, energy transactions to serve retail
customers will be sourced by wholesale transactions with MISO as the counter
party. Minnesota Power anticipates filing with the MPUC in February 2005 a
petition to amend the fuel clause to accommodate costs and revenue related to
MISO Day 2 market implementation. We are unable to predict the outcome of this
pending matter.
On November 9, 2004, Minnesota Power and Rainy River Energy jointly filed their
triennial market power analysis with FERC. This filing is a requirement for
Minnesota Power and Rainy River Energy to maintain their market-based rate sales
authority, and the two entities must prove that they lack the ability to
exercise market power. Revised FERC screening methods generally result in
failure to meet one of the screens by integrated utilities that are not
participating in qualified RTOs. A mitigating factor that should allow the
companies to maintain their market-based rate authority is their membership in
MISO, and MISO's move to the Day 2 market (which includes a central energy
market and FERC-approved market power monitoring and mitigation program) in
April 2005.Pool (MAPP). Minnesota Power also participates in MAPP, a power pool operating in parts of eight states in the Upper Midwest and in two provinces in Canada.Canadian provinces. MAPP functions include a regional transmission committee and a generation reserve-sharing pool. Minnesota Power is also a member of the Midwest Reliability Organization that was established as a regional reliability council within the North American Electric Reliability Council on January 1, 2005.
MINNESOTA PUBLIC UTILITIES COMMISSION.
Minnesota Power'sPublic Utilities Commission. Minnesota Power’s retail rates are based on a 1994 MPUC retail rate order that allows for an 11.6%11.6 percent return on common equity dedicated to utility plant. Minnesota Power does not expect tomay file a request to increase rates for its retail utility operations during 2005.in mid-2008. Retail rates are being adjusted without a rate proceeding to reflect recovery of costs related to the AREA Plan, the Boswell 3 Environmental Improvement Plan (see AREA and Boswell Unit 3 Emission Reduction Plans), transmission investments and renewable investments.
Integrated Resource Plan. On October 31, 2007, Minnesota Power filed its Integrated Resource Plan (IRP), a comprehensive estimate of future capacity needs within the Minnesota Power service territory. Minnesota Power believes it can meet the estimated future customer demand for the next decade while achieving real reductions in the emission of greenhouse gases (primarily carbon dioxide).
Minnesota Power plans to meet expected loads through approximately 2020 by adding a significant amount of renewable generation and some supporting peaking generation. We do not plan to add new coal generation or enter into long-term power purchase agreements from coal-based generation resources without a greenhouse gas solution. We plan to add 300 to 500 megawatts of carbon-minimizing renewable energy to our generation mix. Besides the additional generation from renewable sources, Minnesota Power anticipates future supply will however, continue to monitor the costscome from a combination of serving our retail customers and
evaluatesources, including:
| · | "As-needed" peaking and intermediate generation facilities; |
| · | Expiration of wholesale contracts presently in place; |
| · | Short-term market purchases; |
| · | Improved efficiency of existing generation and power delivery assets; and |
| · | Expanded conservation and demand-side management initiatives. |
We do not anticipate the need for new base load system generation within the Minnesota Power service territory through approximately 2020, and we project a rate filingone percent average annual growth in electric usage from our existing customers over that time frame.
Large Power Contracts. In 2006, a contract for approximately 70 MW was executed with PolyMet Mining, a new customer planning to start a copper, nickel and precious metals (non-ferrous) mining operation in late 2008. If PolyMet Mining receives all necessary environmental permits and achieves start-up, the future.
As requiredcontract will be fully implemented and would run through at least 2018. In April 2007, the MPUC approved our contract with PolyMet Mining.
In June 2007, a contract was executed with Mesabi Nugget, a company currently constructing an iron nugget facility near Hoyt Lakes, Minnesota. Iron nuggets, which typically consist of more than 94 percent iron (compared to taconite pellets at 63-65 percent iron), are ideal in meeting the requirements of electric-arc furnaces producing steel. On February 7, 2008, the MPUC held a hearing on the contract and adopted a motion approving the contract, subject to the issuance of a written order. Mesabi Nugget has received all necessary permits to begin construction and operations in 2008 and would be a 15 MW customer with the potential for further load growth. The Mesabi Nugget contract would run through at least 2017.
A new contract with Blandin Paper was approved by the MPUC on December 23, 2004,February 4, 2008. The new contract carries forward the same contract term, cancellation provision and take-or-pay provisions of the prior contract and only changed the demand nomination feature.
In February 2008, United States Steel announced its intent to restart a pellet line at its Keewatin Taconite processing facility. This pellet line, which has been idled since 1980, would be restarted and updated as part of a $300 million investment. It is anticipated that this will bring approximately 3.6 million tons of additional pellet making capability to Northeastern Minnesota Power filed forby 2011, pending successful approval of a Rider for Distributed Generation Services, along with a revised
Rider for Standby Services, necessary to implement state lawenvironmental permitting.
Energy–Regulated Utility (Continued)
Minnesota Public Utilities Commission (Continued)
AREA and the MPUC's
order regarding the establishment of generic standards for utility tariffs for
interconnection and operation of distributed generation facilities. Distributed
generation is small-scale, customer-based generation. Minnesota Power's filing
utilizes the statewide generic interconnection agreement format, while
implementing a distributed generation rider that is particular to Minnesota
Power's system for the costs of connecting distributed generation systems to
Minnesota Power's distribution system.Boswell Unit 3 Emission Reduction Plans. In June 2003, the MPUC initiated an investigation into the continuing usefulness
of the fuel clause as a regulatory tool for electric utilities. Minnesota
Power's initial comments on the proposed scope and procedure of the
investigation were filed in July 2003. In November 2003,May 2006, the MPUC approved our filing for current cost recovery of expenditures to reduce emissions to meet pending federal requirements at Taconite Harbor and Laskin under the initial scopeAREA Plan. The AREA Plan approval allows Minnesota Power to recover Minnesota jurisdictional costs for SO2, NOX and proceduremercury emission reductions made at these facilities without a rate proceeding. Current cost recovery from retail customers which include a return on investment and recovery of incremental expense. The AREA Plan is expected to significantly reduce emissions from Taconite Harbor and Laskin, while maintaining a reliable and reasonably-priced energy supply to meet the needs of our customers. We believe that control and abatement technologies applicable to these plants have matured to the point where further significant air emission reductions can be attained in a relatively cost-effective manner. Cost recovery filings are required to be made 90 days prior to the anticipated in-service date for the equipment at each unit, with rate recovery beginning the month following the in-service date.
Minnesota Power has completed installation of new equipment at Laskin and current cost recovery of AREA Plan costs has begun. The first of three Taconite Harbor unit installations was completed and placed back in-service in June 2007, with current cost recovery began in July 2007. We anticipate cost recovery on the other Taconite Harbor units once work is completed and the units have been placed back in service, which is expected in late 2008. As of December 31, 2007, we have spent $36 million of the investigation. The investigation will focusanticipated $60 million in AREA Plan expenditures.
In May 2006, Minnesota Power announced plans to make emission reduction investments at our Boswell Unit 3 generating unit. Plans include reductions of particulate, SO2, NOX and mercury emissions to meet pending federal and state requirements. In late March 2007, the Boswell Unit 3 project received the necessary construction permits. On October 26, 2007, the MPUC issued a written order approving Minnesota Power’s petition for current cost recovery for the Boswell Unit 3 emission reduction plan with some minor modifications and additional reporting requirements. MPUC approval authorized a cash return on whetherconstruction work in progress during the fuel clause continues to be an appropriate regulatory tool. The
initial steps will be to reviewconstruction phase in lieu of AFUDC-Equity and allows for a return on investment and current cost recovery of incremental expenses once the clause's original purpose, structure and
rationale (including its current operation and relevanceunit is placed into service in today's regulatory
environment), and then address its ongoing appropriateness and other issues iflate 2009. On December 26, 2007, the needMPUC approved Boswell Unit 3’s rate adjustment for continued use2008. As of December 31, 2007, we have spent $89 million of the fuel adjustment clause is shown. In April
2004, the DOC issued comments providing a wide array of alternatives, including
closing the investigation as one option and eliminating the fuel clause as
another. The MPUC has not taken action on any proposal and, as a result, we are
unable to predict the outcome or impact of this proceeding at this time.anticipated $200 million in Boswell Unit 3 emission reduction plan expenditures.
Conservation Improvement Program (CIP). Minnesota requires investor-owned electric utilities to spend a minimum of 1.5%1.5 percent of gross annual retail electric revenueoperating revenues from service provided in the state on CIPenergy CIP’s each year. These investments are recovered from retail customers through a billing adjustment and amounts included in retail base rates. The MPUC allows utilities to accumulate, in a deferred account for future cost recovery, all CIP expenditures, as well as a carrying charge on the deferred account balance. The Next Generation Energy Act of 2007 introduced, in addition to minimum spending requirements, an energy-saving goal of 1.5 percent of gross annual retail electric energy sales by 2010. In May 2007, an abbreviated filing was submitted and subsequently approved by the MPUC, allowing the continuation of Minnesota Power'sPower’s 2006-2007 CIP biennial and related goals for one additional year, through 2008. For future program years, Minnesota Power will build upon current successful CIP’s in an effort to meet the newly established 1.5 percent energy-saving goal. Minnesota Power’s CIP investment goal was $3.1$3.2 million for 20042007 ($2.93.2 million for 20032006 and 2002)2005), with actual spending of $3.1$3.9 million in 20042007 ($5.03.8 million in 2003; $4.02006; $3.6 million in 2002)2005). These amounts satisfied current spending requirements and all prior
years' spending shortfalls.
In September 2004, Minnesota Power filed our Integrated Resource Plan (Resource
Plan), which predicts that energy demand by customers in our service territory
will increase at an average annual rate
Public Service Commission of 1.7% over the next decade. Growth of
20 MW to 30 MW per year primarily from residential and smaller commercial
expansion and a positive outlook from Large Power Customers in northeastern
Minnesota, such as taconite processing facilities and paper mills, is included
in the Resource Plan. Minnesota Power will also realize a reduction in
generating resource supply over the next three years, under the terms of a
long-term energy supply contract with Square Butte. The combination of increased
demand and reduced supply means Minnesota Power will need to secure additional
capacity and energy to serve our customers in future years. In the Resource
Plan, we provide several options designed to meet the predicted growing demand
in the region. The options range from purchasing additional power to building
new energy generation facilities. In January 2005, at the DOC's request,
Minnesota Power filed a supplement to the main filing that described a
"representative" resource plan for the DOC's analysis. This plan is considered
preliminary according to the supplemental filing, since Minnesota Power is still
in the process of gathering and analyzing information on potential resources for
actual resource decision-making.
ALLETE 2004 Form 10-K Page 10
A Request for Proposal (RFP) to external bidders for additional supply was
issued by Minnesota Power in October 2004. In December 2004, Minnesota Power
received bids for renewable and non-renewable resources, as well as short- and
long-term purchase offers. All RFP bids are being reviewed for completeness and
compliance with our requirements. A simultaneous, though separate, analysis of
Minnesota Power's self-build and turnkey plant options is also occurring to
arrive at a refined list of those options. Once the RFP bids and
self-build/turnkey options are screened to identify the best choices among them,
a portfolio analysis process will occur, looking at combinations of supply
alternatives to meet our forecasted resource need. We will continue to work with
state regulators and other stakeholders over the next several months to further
develop the Resource Plan and anticipate that the MPUC will formally consider
the Resource Plan during 2005.
PUBLIC SERVICE COMMISSION OF WISCONSIN.Wisconsin. SWL&P's&P’s current electric retail rates are based on a September 2001December 2006 PSCW retail rate order that became effective January 1, 2007, and allows for a 12.25%an 11.1 percent return on common equity and resultedequity. Current rates reflect a 2.8 percent average increase in an average rate decrease of 3.4%.
In June 2004, SWL&P filed an application with the PSCW for authority to increase retail utility rates an average of 6.1%. This average increase is comprised of a
4.0%for SWL&P customers (a 2.8 percent increase in electric rates, a 7.0%1.4 percent increase in natural gas rates and a 12.1%an 8.6 percent increase in water rates.rates). SWL&P originally requested an average increase in retail utility rates of 5.2 percent in its 2006 application. The proposed increases areapproved rates were lower than originally requested due to increased operatingthe subsequent removal of costs primarily pension, insurance, gross receipts taxfor a new water tower and parent companyelectric substation from the original request. Both of these projects are now estimated to be in service costs.in late 2008 because of delays in obtaining all the necessary construction approvals. SWL&P is requestinganticipates filing for another rate increase request in 2008 that would go into effect in 2009. Previously, SWL&P’s retail rates were based on a 12.25%2005 PSCW retail order that allowed for an 11.7 percent return on common equity. Hearings
took place
Minnesota Legislation
Renewable Energy. In February 2007, Minnesota enacted a law requiring Minnesota Power to generate or procure 25 percent of our energy through renewable energy sources by 2025. The legislation also requires Minnesota Power to meet interim milestones of 12 percent by 2012, 17 percent by 2016, and 20 percent by 2020. The legislation allows the MPUC to modify or delay a standard obligation if implementation will cause significant ratepayer cost or technical reliability issues. If a utility is not in Januarycompliance with a standard, the MPUC may order the utility to construct facilities, purchase renewable energy or purchase renewable energy credits. Minnesota Power was developing and making renewable supply additions as part of its generation planning strategy prior to this legislation and this activity continues. Minnesota Power believes it will meet the requirements of this legislation.
Energy–Regulated Utility (Continued)
Minnesota Legislation (Continued)
Greenhouse Gas Reduction. In 2007, Minnesota passed legislation establishing non-binding targets for carbon dioxide reductions. This legislation establishes a goal of reducing statewide greenhouse gas (GHG) emissions across all sectors reducing those emissions to a level at least 15 percent below 2005 levels by 2015, at least 30 percent below 2005 levels by 2025, and a final orderat least 80 percent below 2005 levels by 2050. Minnesota is anticipatedalso participating in the first halfMidwestern Greenhouse Gas Accord, a regional effort to develop a multi-state approach to GHG emission reductions.
We cannot predict the nature or timing of 2005.
In December 2003,any additional GHG legislation or regulation. Although we are unable to predict the PSCW unanimously approvedcompliance costs we might incur, the revised $420 million cost
estimate for the Wausau-to-Duluth electric transmission line. Minnesota Power
and transmission planners throughout the regioncosts could have a material impact on our financial results.
Competition
We believe the 220-mile, 345-kV
transmission line is necessary. Minnesota Power has been actively involved inoverall impact of the permitting. Construction activities in Minnesota began in January 2004.
Minnesota Power does not intend to finance or own the proposed line.
COMPETITION
INDUSTRY RESTRUCTURING. State efforts across the country to restructureEPAct 2005 on the electric utility industry have slowed. Legislation or regulation that would
allow retail customer choicehas been positive and are continuing to evaluate the effects on our business as this legislation is being implemented. This federal legislation is designed to bring more certainty to energy markets in which ALLETE participates, as well as to provide investment incentives for energy efficiency, energy infrastructure (such as electric transmission lines) and energy production. The FERC has the responsibility of their electric service provider has not gained
momentum in either Minnesota or Wisconsin.
At the national level, the FERC continues in its efforts to have companies join
an RTO. FERC's sweeping Standard Market Design rulemaking, renamed Wholesale
Market Platform, appears to have stalled, although FERC remains committed to
implementing mostnumerous new standards as a result of the rule in a more piecemeal fashion. Minnesota Power
supportspromulgation of the creationEPAct 2005. To date the FERC’s regulatory efforts under the EPAct 2005 appear to be generally positive for the utility industry. The PUHCA 1935 repeal may also allow an acceleration of a robust wholesale electric market.
Potential federal energy legislation would seekmerger activity, as well as spawn moves by state regulators to maintain reliability,
increase investments in new transmission capacityadopt PUHCA-like regulations, although both events are speculative and energy supply, and address
wholesale price volatility, while encouraging wholesale competition. These types
of provisions remain the subject of significant controversy.difficult to predict. We cannot predict the timing or substance of any future legislation or regulation.
FRANCHISES
Franchises
Minnesota Power holds franchises to construct and maintain an electric distribution and transmission system in 9091 cities and towns located within its electric service territory. SWL&P holds similar franchises for electric, natural gas and/or water systems in 15 cities and towns within its service territory. The remaining cities and towns served do not require a franchise to operate within their boundaries. Our exclusive service territories are established by state regulatory agencies.
NONREGULATED ENERGY OPERATIONS
Energy – Nonregulated Energy Operations
ALLETE’s nonregulated energy operations include our coal mining activities in North Dakota, approximately 50 MW of nonregulated generation and Minnesota land sales.
BNI COAL owns andCoal operates a lignite mine in North Dakota. BNI Coal is the
lowest-costa low-cost supplier of lignite in North Dakota, producing about 4 million tons annually. Two electric generating cooperatives, Minnkota Power and Square Butte, presently consume virtually all of BNI Coal'sCoal’s production of lignite under cost-plus fixed fee,a fixed-fee coal supply agreements expiring in 2027.extending through 2026. (See Item 1 - Fuel and Note 11.8.) The mining process disturbs and reclaims approximately 210 acres per year. The law requiresLaws require that the reclaimed land be at least as productive as it was prior to mining. That means if the land we mine once grew crops, it must be
able to do so again after reclamation. The average cost to reclaim one acre of land averagesis about $15,000, and can runhowever, it could be as high as $30,000. BNI Coal hasReclamation costs are included in the equipment necessary for the reclamation process. In September 2004, BNI Coal
entered into a master lease agreement with Farm Credit Leasing Services
Corporation (Farm Credit). Under this new agreement, BNI Coal leases a new
dragline that went into operation in October 2004. BNI Coal is obligatedcost of coal passed through to make
lease payments totaling $2.8 million annually for the 23-year lease term, which
expires in 2027. BNI Coal will have the option at the end of the lease term to
renew the lease at a fair market rental, to purchase the dragline at fair market
value, or to surrender the dragline to Farm Credit and pay a $3.0 million
termination fee.customers. With lignite reserves of an estimated 600 million tons, combined
with new dragline equipment, BNI Coal has ample capacity to expand production.
Page 11
Nonregulated generation consists of approximately 50 MW of generation. In 2007, we sold 0.2 million MWh of nonregulated generation (0.2 million in 2006; 1.5 million in 2005). Effective January 1, 2006, Taconite Harbor was redirected from our Nonregulated Energy Operations segment to our Regulated Utility segment in accordance with an update to the Company’s 2004 Resource Plan, as approved by the MPUC.
Nonregulated Power Supply | Unit No. | Year Installed | Year Acquired | Net Capability |
| | | | MW |
Steam | | | | |
Wood-Fired (a) | | | | |
Cloquet Energy Center | 5 | 2001 | 2001 | 22 |
in Cloquet, MN | | | | |
Rapids Energy Center (b) | 6 & 7 | 1969, 1980 | 2000 | 29 |
in Grand Rapids, MN | | | | |
Hydro | | | | |
Conventional Run-of-River | | | | |
Rapids Energy Center (b) | 4 & 5 | 1917 | 2000 | 1 |
in Grand Rapids, MN | | | | |
(b) | The net generation is primarily dedicated to the needs of one customer. |
ALLETE
20042007 Form 10-K
NONREGULATED GENERATION.Energy – Nonregulated generation is primarily non-rate base
generation sold at market-based rates to the wholesale market. In addition, we
have 18,600 acres of land acquired in 2001 at the time we purchasedEnergy Operations (Continued)
Taconite Harbor. Taconite Harbor from LTV Steel Mining Co., which is available for sale. (See Regulated
Utility - Federal Energy Regulatory Commission for MISO Day 2 discussion.)
TACONITE HARBOR. In 2002, we commenced operation offacility has operated as a rate-based asset within the Minnesota retail jurisdiction since January 1, 2006. Prior to January 1, 2006, the Taconite Harbor generating facilities, which we purchased in 2001. Thefacility was operated as nonregulated generation output is
primarily being sold in the wholesale market and is sold in limited
circumstances tofacility. (See Energy – Regulated Utility – Minnesota Power's utility customers.
KENDALL COUNTY. In 1999, Public Utilities Commission.)
Rainy River Energy entered into a 15-year power
purchase agreement (Kendall County). The Kendall County agreement includes the
purchase of the output of one entire unit (approximately 275 MW) of a four-unit
(approximately 1,100 MW) natural gas-fired combined cycle generation facility
located near Chicago, Illinois. Construction of the generation facility was
completed in 2002. Rainy River Energy's obligation to pay fixed capacity related
charges began May 1, 2002 and would end in September 2017, unless assigned as
described below. We currently have 130 MW of long-term capacity and energy sales
contracts for the Kendall County generation, with 50 MW expiring in April 2012
and 80 MW expiring in September 2017.
In December 2004, Rainy River Energy entered into an agreement to assign its
Kendall County agreement to Constellation Energy Commodities. Under the terms of
the agreement, Rainy River Energy will pay Constellation Energy Commodities $73
million in cash (approximately $47 million after taxes) to assume the Kendall
County agreement. The proposed transaction is subject to the approvals of
LSP-Kendall Energy, the owner of the energy generation facility, as well as of
its project lenders and the FERC. Pending these approvals, the transaction is
scheduled to close in April 2005. The long-term capacity and energy sales
contracts will also be transferred to Constellation Energy Commodities at
closing.
RAINY RIVER ENERGY is has been engaged in the acquisition and development of nonregulated generation and wholesale power marketing. (See Note 10.)
Rainy River Energy is a party to the
15-year Kendall County agreement that is expected to be assigned in April 2005.
(See Nonregulated GenerationCorporation - Kendall County.)
RAINY RIVER ENERGY CORPORATION - WISCONSINWisconsin continues to study the feasibility of the construction of a natural gas-fired electric generating facility in Superior,northwestern Wisconsin. In
Minnesota Land. We have about 15,000 acres of land in northern Minnesota, available for sale. We acquired the land in 2001 when we purchased Taconite Harbor from LTV Steel Mining Co.
Energy – Investment in ATC
At December 31, 2007, we had an approximate 8 percent ownership interest in ATC. ATC is a Wisconsin-based public utility that owns and maintains electric transmission assets in parts of Wisconsin, Michigan, Minnesota and Illinois. ATC provides transmission service under rates regulated by the FERC that are set in accordance with the
PSCW's final order approvingFERC’s policy of establishing the
project,independent operation and ownership of, and investment in, transmission facilities. (See Note 6.) Our Wisconsin subsidiary, Rainy River Energy Corporation - Wisconsin,
undertook preliminary site
preparation work in late 2003.
In 2004, we sold 1.5 million MWh of nonregulated generation (1.5has invested $60 million in
2003; 1.2 million in 2002).
UNIT YEAR YEAR NET
NONREGULATED POWER SUPPLY NO. INSTALLED ACQUIRED CAPABILITY
- ------------------------------------------------------------------------------------------------------------------------
MW
Steam
Coal-Fired
Taconite Harbor Energy Center 1, 2 & 3 1957, 1957, 1967 2001 200
in Taconite Harbor, MN
Cloquet Energy Center 5 2001 2001 23
in Cloquet, MN
Rapids Energy Center 6 & 7 1980 2000 29
in Grand Rapids, MN
- ------------------------------------------------------------------------------------------------------------------------
Hydro
Conventional Run-of-River
Rapids Energy Center 4 & 5 1917 2000 1
in Grand Rapids, MN
- ------------------------------------------------------------------------------------------------------------------------
Power Purchase Agreement
Kendall County (Rainy River Energy) 3 2002 2002 275
located southwest of Chicago, IL
- ------------------------------------------------------------------------------------------------------------------------
The net generation is primarily dedicated to the needs of one customer.
Expected to be transferred in April 2005.
ALLETE 2004 Form 10-K Page 12
REAL ESTATE
ATC.
Real Estate
ALLETE Properties is our real estate business that has operated in Florida since 1991. ALLETE Properties acquires real estate portfolios and large land tracts at bulk prices, adds value through entitlements and/or infrastructure improvements, and resells the property over time to developers, end-users and investors. ALLETE Properties is focused on acquiring vacant land in Florida and other parts of the southeast United States. Management at ALLETE Properties uses their business relationships, understanding of real estate markets and expertise in the land development and sales processes to provide revenue and earnings growth opportunities to ALLETE.
ALLETE Properties is headquartered in Fort Myers, Florida, the location of its southwest Florida regional office. We also have a regional office in Palm Coast, Florida, which oversees northeast Florida operations.
Southwest Florida operations consist of land sales and a third-party brokerage businesses,business, with limited land development activities. Inventory includes commercialresidential and residentialnon-residential land located in Lehigh Acres and Cape Coral. The propertyinventory represents the remaining properties acquired in 1991 from the Resolution Trust Corporation and in 1999 from Avatar Properties, Inc. The operation also generates rental income from a 186,000 square foot retail shopping center located in Winter Haven, Florida. The center is anchored by Burdines-Macy'sMacy’s and Belk'sBelk’s department stores, along with Staples.
Northeast Florida operations focus on land sales and development activities. Development activities involve mainly zoning, permitting, platting and master infrastructure construction. Development costs are financed through a combination of community development districts,district bonds, bank loans and companyinternally-generated funds. Our three major development projects include Town Center at Palm Coast, Palm Coast Park and Ormond Crossings.
Town Center. Town Center, atwhich is located in the city of Palm Coast, is a mixed-use planned development with a neo-traditional downtown design.core area. Surrounded by major arterial roads, including Interstate 95, Town Center is adjacent to the development was selected asFlorida Hospital-Flagler, the siteFlagler County Airport and the Flagler Palm Coast High School. Sites have also been set aside for the City of Palm
Coast'sa new city hall, a community center, an arts and entertainment center, and other public uses. At build-out, Town Center is expected to include approximately 3,200 residential units including lodging rooms and assisted living units, and 3.8 million square feet of various types of non-residential space. Market conditions will determine how quickly Town Center builds out.
Construction of the major infrastructure improvements at Town Center was substantially complete at the end of 2006. Improvements include 3.6 miles of roads, a master storm water management system, underground utilities, street lights, sidewalks, bike paths, and extensive landscaping. To date, our marketing program has targeted a blend of office, retail commercial, residential, mixed-use and institutional project developers. In April 2007, Palm Coast Center, LLC and Target Corporation closed on a 52 acre commercial site and immediately began construction of a 424,000 square foot retail power center. An 85,000 square foot retail center anchored by a Publix grocery store opened in 2007.
Real Estate (Continued)
Pending land sales under contract for properties at Town Center totaled $18.9 million at December 31, 2007. We have the opportunity to receive participation revenue as part of one of these sales contracts.
In March 2005, the Town Center District issued $26.4 million of tax-exempt, 6% Capital Improvement Revenue Bonds, Series 2005, which are payable through property tax assessments on the land owners over 31 years (by May 1, 2036). The bonds were primarily used to pay for the construction of a portion of the major infrastructure improvements at Town Center. (See Note 8.)
Palm Coast Park. Palm Coast Park, which is located in the city of Palm Coast, is a 4,700-acre mixed-use development bisected by a six-mile segment of U.S. Highway 1 about one mile from an existing Interstate 95 interchange and bounded on the west by a Florida East Coast Railroad line. Major infrastructure construction at Palm Coast Park was substantially complete by the end of 2007. At build-out, Palm Coast Park is expected to include approximately 4,000 residential units, 3.2 million square feet of various types of non-residential space and certain public facilities. Market conditions will determine how quickly Palm Coast Park builds out. Land sales at Palm Coast Park commenced in August 2006, and in June 2007, LRCF Palm Coast, LLC (a subsidiary of Lowe Enterprises) closed on the first phase of its Sawmill Creek project.
Pending land sales under contract for properties at Palm Coast Park totaled $31.9 million at December 31, 2007. We have the opportunity to receive participation revenue as part of these sales contracts.
In May 2006, the Palm Coast Park District issued $31.8 million of tax-exempt, 5.7% Special Assessment Bonds, Series 2006, which are payable through property tax assessments on the land owners over 31 years (by May 1, 2037). The bonds were primarily used to pay for the construction of the major infrastructure improvements at Palm Coast Park and to mitigate traffic and environmental impacts. (See Note 8.)
ALLETE Properties is funding certain platting and permitting costs; however, the majority of ongoing and future development costs may be funded by Palm Coast Park District bond proceeds. We anticipate that the Palm Coast Park District will need to issue additional bonds to pay for the development of retail commercial, office and industrial lots.
Ormond Crossings. Ormond Crossings is an approximately 6,000-acre mixed-use development that is located in both the city of Ormond Beach in Volusia County and unincorporated Flagler County. The site is bisected by Interstate 95 and a Florida East Coast Railroad line and is adjacent to the local hospital, county airport and
high school. At build-out, the development is expected to include 2,950
residential units, 2.2 million square feetcity of commercial space, and 1.4 million
square feet of office space. Actual build-out will depend on future market
conditions. All major land use approvals for the project have been received.
Platting, infrastructure construction and marketing efforts continue.
Palm Coast Park is a mixed-use, planned development located in northwest Palm
Coast along U.S. Highway 1, one mile south of its intersection with Interstate
95, with major rail line access. At build-out, the project is expected to
include 3,600 residential units, 1.6 million square feet of commercial space,
800,000 square feet of office space and 800,000 square feet of industrial use.
Actual build-out will depend on future market conditions. In December 2004, we
received development order approval for the project. Platting and infrastructure
design are proceeding.Ormond Beach airport. Ormond Crossings is a mixed-use, planned development located along Interstate
95, at its interchange with U.S. Highway 1, in northwest Ormond Beach. This
property has three miles of frontage on the east and west sides of Interstate 95 is adjacent toand will have two main entrances each within a mile from an existing U.S. Highway 1 and Interstate 95 interchange.
Planning, engineering design and permitting of the local airportmaster infrastructure are ongoing. Density of the residential and has access to a major railroad line. In
2004,non-residential components of the property was annexed intoproject will be determined based on market and traffic mitigation cost considerations. We estimate the Cityfirst two phases of Ormond BeachCrossings will include 2,500–3,200 residential units and land-use
approvals are in progress. Once approvals are received,2.5–3.5 million square feet of various types of non-residential space.
Ormond Crossings will also include an approximately 2,000 acre regionally significant wetlands mitigation bank that is expected to be fully permitted by the project build-out
mix canSt. Johns River Water Management District and the U.S. Army Corps of Engineers by mid-2009. Wetland mitigation credits will be estimated.used at Ormond Crossings and will be available for sale to other developers. Market conditions will determine how quickly Ormond Crossings builds out.
Other Land. In addition to the major development projects, land inventories in Florida include 5,200approximately 1,600 acres of other property. Several smaller development projects are under way to plat these properties, andadd infrastructure, modify and enhance existing zonings.
entitlements.
Property sale prices may vary depending on location; physical characteristics; parcel size; whether parcels are sold as raw land, partially developed land or individually developed lots; degree and status of entitlement; and whether the land is ultimately purchased for residential commercial or other form ofnon-residential development. Certain contracts allow us to receive participation revenue from land sales to third parties if various formula-based criteria are achieved.
Seller Financing
ALLETE Properties
occasionallysometimes provides seller
financing, andfinancing. At December 31, 2007, outstanding finance receivables were
$9.7$15.3 million,
at December 31, 2004, with maturities
ranging up to
ten5 years.
OutstandingThese finance receivables accrue interest at market-based
rates.
SUMMARY OF DEVELOPMENT PROJECTS TOTAL RESIDENTIAL COMMERCIAL OFFICE INDUSTRIAL
AT DECEMBER 31, 2004 OWNERSHIP ACRES UNITS SQ. FT. SQ. FT. SQ. FT.
- --------------------------------------------------------------------------------------------------------------------------------
Town Center at Palm Coast 80% 1,550 2,950 2,175,000 1,350,000 -
Palm Coast Park 100% 4,705 3,600 1,600,000 800,000 800,000
Ormond Crossings 100% 5,850 - - - -
- --------------------------------------------------------------------------------------------------------------------------------
12,105 6,550 3,775,000 2,150,000 800,000
- --------------------------------------------------------------------------------------------------------------------------------
Acreage amounts are approximate and shown on a gross basis, including wetlands and minority interest. Acreage amounts may
vary due to platting or surveying activity. Wetland amounts vary by property and are often not formally determined prior
to sale.
Estimated and includes minority interest. The actual property breakdown at full build-out may be different than the
estimates.
Units and square footage have not been determined.
Page 13 rates and are collateralized by the financed properties.
ALLETE
20042007 Form 10-K
SUMMARY OF OTHER LAND INVENTORIES
AT DECEMBER 31, 2004 OWNERSHIP TOTAL MIXED USE RESIDENTIAL COMMERCIAL AGRICULTURAL
- ------------------------------------------------------------------------------------------------------------------------
ACRES
Palm Coast Holdings 80% 3,099 2,040 513 291 255
Lehigh 80% 1,082 840 140 93 9
Cape Coral 100% 104 - 1 103 -
Other 100% 908 - - - 908
- ------------------------------------------------------------------------------------------------------------------------
5,193 2,880 654 487 1,172
- ------------------------------------------------------------------------------------------------------------------------
Acreage amounts are approximate and shown on a gross basis, including wetlands and minority interest. Acreage
amounts may vary due to platting or surveying activity. Wetland amounts vary by property and are often not
formally determined prior to sale. The actual property breakdown at full build-out may be different than the
estimates.
REGULATION
Real Estate (Continued)
Regulation
A substantial portion of our development properties in Florida isare subject to federal, state and local regulations, and restrictions that may impose significant costs or limitations on our ability to develop the properties. Much of our property is vacant land and some is located in areas where development may affect the natural habitats of various protected wildlife species or in sensitive environmental areas such as wetlands.
Development of real property in Florida entails an extensive approval process involving overlapping regulatory jurisdictions. Real estate projects must generally comply with the provisions of the Local Government Comprehensive Planning and Land Development Regulation Act (Growth Management Act). In
addition, development projects that exceed certain specified regulatory
thresholds require approval of a comprehensive Development of Regional Impact
(DRI) application. The Growth Management Act, which requires counties and cities to adopt comprehensive plans guiding and controlling future real property development in their respective jurisdictions. In addition, development projects that exceed certain specified regulatory thresholds require approval of a comprehensive DRI application. The DRI review process includes an evaluation of a project'sproject’s impact on the environment, infrastructure and government services, and requires the involvement of numerous state and local environmental, zoning and community development agencies. Compliance with the Growth Management Act and the DRI process is usually lengthy and costly.
COMPETITION
Competition
The real estate industry is very competitive. Our properties are located in
Florida. We are focused on acquiring additional vacant land in Florida
whichand other parts of the southeast United States. This region continues to attract competitive real estate operations at many different levels in the land development pipeline. Competitors include local and
out of stateout-of-state institutional investors, real estate investment trusts and real estate operators, among others. These competitors, both public and private,
alike, compete with us in seeking real estate for acquisition, resources for development and sales to prospective buyers. Consequently, competitive market conditions may influence the timing and profitability of our real estate transactions.
ALLETE 2004 Form 10-K Page 14
OTHER
Other
Our Other segment consists of our telecommunications business, investments in emerging technologies related to the electric utility industry, and earnings on cash and general corporate charges and interest not specifically related to any
one business segment. General corporate charges include employee salaries and
benefits, as well as legal and other outside service fees.
ENVENTIS TELECOM is an integrated data services provider offering fiber
optic-based communication and advanced data services to businesses and
communities in the Upper Midwest. Enventis Telecom provides converged IP (or
Internet Protocol) services that allow all communications (voice, video and
data) to use the same fiber optic-based delivery technology. Enventis Telecom
owns or has rights to approximately 1,600 route miles of fiber optic cable.
These route miles contain multiple fibers that total approximately 47,000 fiber
miles. We also have extensive local fiber optic rings that directly connect
Enventis Telecom network with its larger clients (health care, government,
education, etc.). Other local fiber rings connect Enventis Telecom's network to
the local telephone company's central offices, from which locations Enventis
Telecom can utilize the telephone company's connections to access our smaller
clients. Enventis Telecom also owns optronic and data switching equipment that
is used to "light up" the fiber optic cable. We serve customers from facilities
that are primarily leased from third parties. Enventis Telecom has offices in
Duluth, Rochester, Plymouth and Bloomington, Minnesota. Enventis Telecom has a
strong business relationship with Cisco Systems, Inc. and is recognized by Cisco
Systems as a Gold Partner. Enventis Telecom is a regional leader in deploying
leading edge technologies such as Voice over Internet (VoIP) technology and IP
Call Centers.
EMERGING TECHNOLOGY PORTFOLIO. short-term investments.
Emerging Technology Portfolio. As part of our emerging technology portfolio, we have several minority investments in venture capital funds and direct investments in privately-held, start-up companies. Since 1985, we have invested in start-up companies, which are developing technologies that may be utilized by the electric utility industry. We are committed to invest up to an additional $4.5$1.0 million at various times through 2007in 2008 and do not have plans to make any additional investments. The investments were first made through emerging technology funds (Funds) initiated by other electric utilities and us. WeDue to the distribution of investments from matured venture capital funds, we also have also madedirect investments directly in privately-held companies. Companies in the Funds'Funds’ portfolios may complete IPOs, and the Funds may, in some instances, distribute publicly tradable shares to us. Some restrictions on sales may apply, including, but not limited to, underwriter lock-up periods that typically extend for 180 days following an IPO. As companies included(See Note 6.)
Discontinued Operations. In the past three years, we also had business operations in the water and telecommunications industries. (See Note 13.)
Sale of Water Services Businesses. In early 2005, we completed the exit from our Water Services businesses with the sale of our wastewater assets in Georgia.
Sale of Enventis Telecom. In December 2005, we sold all the stock of our telecommunications subsidiary, Enventis Telecom for $35.5 million. The transaction resulted in an after-tax loss of $3.6 million, which was reported in our emerging technology portfolio are sold, we will recognize a gain or loss.
We account for our investment in venture capital funds under2005 loss from discontinued operations. Net cash proceeds realized from the equity method
and account for our direct investment in privately-held companies under the cost
method. The total carrying value of our emerging technology portfolio was $13.6
million at December 31, 2004, down $23.9 million from December 31, 2003. The
decline was primarily due to a change to the equity method of accounting for the
venture capital funds (see Note 14) and impairments related to investments in
privately-held companies. Our policy is to review these investments quarterly
for impairment by assessing such factors as continued commercial viability of
products, cash flow and earnings. Any impairment would reduce the carrying value
of the investment. In 2004, we recorded $6.5 million ($4.1sale were approximately $29 million after tax)transaction costs, repayment of impairment losses primarily related to direct investments in certain
privately-held, start-up companies whose future business prospects have
diminished significantly. Recent developments at these companies indicated that
future commercial viability is unlikely, as is new financing necessary to
continue development.
ENVIRONMENTAL MATTERS
debt and payment of income taxes.
Environmental Matters
Our businesses are subject to regulation of environmental matters by various federal, state and local authorities concerning environmental matters.authorities. We consider our businesses to be in substantial compliance with thosecurrently applicable environmental regulations currently
applicable to their operations and believe all necessary permits to conduct such operations have been obtained. WeDue to future stricter environmental requirements through legislation and/or rulemaking, we anticipate that potential expenditures for environmental matters will be material in the future, due to stricter
environmental requirements through legislation and/or rulemakings that are
expected toand will require significant capital investments. (See Item 7 – Capital Requirements.) We are unable to predict if and when any such stricter environmental requirements will be imposed and the impact they will have on the Company. We review environmental matters on a quarterly basis. Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. These accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in the balance sheet at undiscounted amounts and exclude claims for recoveries from insurance or other third parties. Costs related to environmental contamination treatment and cleanup are charged to expense unless recoverable in rates from customers.
AIR. CLEAN AIR ACT.
Environmental Matters (Continued)
Air. Clean Air Act. Minnesota Power'sPower’s generating facilities mainly burn low-sulfur western sub-bituminous coal and thecoal. Square Butte, generating facility, located in North Dakota, burns lignite coal. All of these facilities are equipped with pollution control equipment such as scrubbers, baghousesbag houses or electrostatic precipitators. Permitted emission requirements are currently being met. The federal Clean Air Act Amendments of 1990 (Clean Air Act) established the acid rain program which created emission allowances for sulfur dioxide.SO2 and system wide averaging NOX limits. Each allowance is currently an authorization to emit one ton of sulfur dioxide,SO2, and each utility must have sufficient allowances to cover its annual emissions. Emission requirements are
currently being met by all of Minnesota Power's generating facilities. Most
Minnesota Power facilities
Page 15 ALLETE 2004 Form 10-K
have surplus sulfur dioxide emission allowances. Taconite Harborhas adequate SO2 allowances for its operations and is in compliance with applicable NOX limits. Square Butte is meeting its sulfur dioxide emission allowance requirements by annually purchasing
allowances, since it receives no allowance allocation. The Square Butte
generating facility is meeting its sulfur dioxide SO2 emission allowance requirements through increased use of its existing scrubbers.
In accordance with thescrubber.
EPA Clean Air Act, the EPA has established nitrogen oxide
limitations for electric generating units. To meet nitrogen oxide limitations,
Minnesota Power installed advanced low-emission burner technology and associated
control equipment to operate the Boswell and Laskin facilities at or below the
compliance emission limits. Nitrogen oxide limitations at Taconite Harbor and
Square Butte are being met by combustion tuning.
MERCURY EMISSIONS.Interstate Rule. In December 2000,March 2005, the EPA announced its decision to regulate
mercurythe final Clean Air Interstate Rule (CAIR) that reduces and permanently caps emissions from coalof SO2, NOX and oil-fired power plants under Section 112particulates in the eastern United States. The CAIR includes Minnesota as one of the Clean Air Act. Section 112 will require all such power plants28 states it considers as “significantly contributing” to air quality standards non-attainment in other downwind states. The CAIR has been challenged in the United
States to adherecourt system, which may delay implementation or modify provisions in the rules. Minnesota Power is participating in the legal challenge to the EPA maximum achievable control technology standards for
mercury.CAIR. However, if the CAIR does go into effect, Minnesota Power expects to be required to:
(1) | make emissions reductions (See AREA and Boswell Unit 3 Emission Reduction Plans for discussion of current emission reduction initiatives); |
(2) | purchase SO2 and NOX allowances through the EPA’s cap-and-trade system (See CAIR Phase I NOX Allowance Purchases below); and/or |
(3) | use a combination of both (1) and (2). |
CAIR will be implemented over two phases. Phase I begins in 2009 and Phase II in 2015. The EPA issuedwill allocate an emissions budget to each CAIR-affected state for SO2 and NOX that will result in significant emission reductions. The emissions budgets are reduced from Phase I to Phase II. States can choose to implement the EPA’s proposed model program or develop their own subject to EPA approval. The MPCA has indicated that it plans to adopt the EPA’s Federal Implementation Plan. Minnesota Power is implementing a proposed rulebalanced environmental plan making significant capital investments with the AREA and Boswell Unit 3 emission reduction retrofits in December 2003. Final regulations
defining control requirements are planned for March 2005. The proposed rule
offers two different typesefforts to comply with CAIR Phase I and purchasing emission allowances as necessary. In spite of regulation: (1) imposition of an annual average
mercury emission limitation applied at each unit or facility average under
Section 112; and (2) imposition of a cap and trade program under Section 111,
where an allocation of mercury credits would be assigned and utilities would
need to provide for a combination of emission reductions and credit purchases to
demonstrate compliance. The EPA has solicited comments about these approaches.
In either approach, continuous monitoring of mercury stack emissions is requiredefforts, Minnesota Power expects to be in service around 2008. Minnesota Power's preliminary estimates suggesta short position relative to NOX allowances beginning in 2009, and is anticipating purchasing NOX allowances as needed during Phase I of CAIR.
EPA Clean Air Mercury Rule. In March 2005, the EPA also announced the final Clean Air Mercury Rule (CAMR) that allwould have reduced and permanently capped emissions of our affected facilities can be outfitted with continuous mercury
emission monitors for under $2 million. Our unitelectric utility mercury emissions tests
indicate that all of our units are expected to comply within the proposed unit
specific target emission rate without significant additional cost. Cost
estimates about mercury cap and trade program impacts are premature at this
time. The EPA is still reviewing comments about this proposed alternative
program and associated final mercury credit allocations to units that have not
yet been defined.
NEW SOURCE REVIEW RULES. In December 2002,continental United States. On February 8, 2008 the EPA issued changes to the
existing New Source Review rules. These rules changed the procedures for MPCA
review of projects at our electric generating facilities. In October 2003, the
EPA announced changes clarifying the application of certain sections of the New
Source Review rules. These changes are not expected to have a material impact on
Minnesota Power. In December 2003, the U.S.United States Court of Appeals for the District of Columbia Circuit stayedoverturned the CAMR and remanded the rulemaking to the EPA for reconsideration. The Court’s decision is subject to appeal. It is uncertain how the EPA will respond; and therefore it is also uncertain whether mercury emission reductions expected as a result of implementing AREA Plan expenditures at Taconite Harbor, and implementation of the October 2003 rule pending
their further review,2006 Minnesota Mercury Emission Reduction Law which is expected in 2006. Subsequently,applies to Boswell Units 3 and 4, will meet the EPA has
announced they are accepting further public comments on the proposed New Source
Review rule revisions.
The EPA is pursuing an industry-wide investigation assessing complianceEPA’s reformed mercury regulations. (See Minnesota Mercury Emission Law.) Cost estimates for complying with the
New Source Review and the New Source Performance Standards (emissions standards
that apply to new and changed units) offuture mercury regulations under the Clean Air Act are therefore premature at electric generating
stations. There is also ongoing litigation involving the EPAthis time.
Minnesota Mercury Emission Law. This legislation requires Minnesota Power to file mercury emission reduction plans for its Boswell Units 3 and other electric
utilities for alleged violations of these rules. It is expected that the outcome
of some of the cases could provide the utility industry direction on this topic.
We are unable to predict what actions, if any, may be required.
In June 2002, Minnkota Power, the operator of Square Butte, received a Notice of
Violation from the EPA regarding alleged New Source Review violations at the
M.R. Young Station, which includes the Square Butte generating unit.4. The EPA
claims certain capital projects completed by Minnkota Power should have been
reviewed pursuant to the New Source Review regulations, potentially resulting in
new air permit operating conditions. DiscussionsBoswell Unit 3 emission reduction plan was filed with the EPA are ongoing and we
are unable to predict the outcome or cost impacts. If Square ButteMPCA in October 2006. Minnesota Power is required to make significant capital expendituresinstall mercury emission reduction technology and equipment by December 31, 2010. (See AREA and Boswell Unit 3 Emission Reduction Plans in Item 1 Energy – Regulated Utility.) The next step will be to complyfile a mercury emissions reduction plan for Boswell Unit 4 by July 1, 2011, with EPA requirements, we
expect such capital expenditures to be debt financed. Our future cost of
purchased power would include our pro rata share of this additional debt
service. (See Note 11.)
WATER.implementation no later than December 31, 2014.
Water. The Federal Water Pollution Control Act requires National Pollutant
Discharge Elimination System (NPDES)NPDES permits to be obtained from the EPA (or, when delegated, from individual state pollution control agencies) for any wastewater discharged into navigable waters. Minnesota Power hasWe have obtained all necessary NPDES permits, including NPDES storm water permits for applicable facilities, to conduct its electricour operations. FERC LICENSES. Minnesota Power holds FERC licenses authorizing the ownershipWe are in material compliance with these permits.
Solid and operation of seven hydroelectric generating projects with a total generating
capacity of about 115 MW. In June 1996, Minnesota Power filed in the U.S. Court
of Appeals for the District of Columbia Circuit a petition for review of the
license as issued by the FERC for Minnesota Power's St. Louis River Hydro
Project. Separate petitions for review were also filed by the U.S. Department of
the Interior and the Fond du Lac Band of Lake Superior Chippewa (Fond du Lac
Band), two intervenors in the licensing proceedings. Beginning in 1996, and most
recently in February 2005, Minnesota Power filed requests with the FERC for
extensions of time to comply with certain plans and studies required by the
license that might conflict with settlement discussions. The Fond du Lac Band,
the U.S. Department of the Interior and Minnesota Power have reached a
settlement agreement for the St. Louis River Hydro Project. This settlement must
be approved by the FERC. Upon approval, the FERC would then amend the project
license to reflect the conditions of the settlement agreement. Minnesota Power
submitted an application for amendment of the FERC license, based upon the terms
and conditions of the settlement agreement in November 2004. In addition to a
one-time retroactive payment of approximately $600,000, the Company estimates
that it will spend $100,000 to $250,000 per year for the use of tribal lands, to
fund fishery and natural resource enhancements by the Fond du Lac Band and the
Minnesota Department of Natural Resources, and to conduct a mercury study under
the terms of the settlement.
ALLETE 2004 Form 10-K Page 16
CLEAN WATER ACT - AQUATIC ORGANISMS. In July 2004, the EPA issued Section 316(b)
Phase II Rule of the Clean Water Act to ensure that the location, design,
construction and capacity of cooling water intake structures at electric
generating facilities reflect the best technology available to protect aquatic
organisms from being killed or injured by impingement (being pinned against
screens or other parts of a cooling water intake structure) or entrainment
(being drawn into cooling water systems and subjected to thermal, physical or
chemical stresses). It requires electric generating facilities that withdraw
more than 50 million gallons of cooling water per day and that use 25% of
withdrawn water for cooling purposes only to reduce fish impingement by 80% to
95% and fish entrainment by 60% to 90%. The new rule for fish impingement
requirements apply to the Boswell, Laskin, Hibbard and Square Butte generating
facilities. The impingement and entrainment requirements apply to Taconite
Harbor because it is located on Lake Superior. The rule requires biological
studies and engineering analyses to be performed within the 2005 to 2008 time
frame. The estimated total cost of these studies for our facilities is expected
to be in the range of $0.5 million to $1.0 million. If modifications and/or
installation of intake structure technology (wedge-wire screens, fine mesh
traveling screens, etc.) are needed, these capital costs are not expected to be
incurred until 2009 to 2011. Due to the flexibility of compliance options and
litigation activities related to the new rule, it is not possible to estimate
the capital expenditures that may be required.
SOLID AND HAZARDOUS WASTE.Hazardous Waste. The Resource Conservation and Recovery Act of 1976 regulates the management and disposal of solid wastes and hazardous wastes. As a
result of this legislation, the EPA has promulgated various hazardous waste
rules. Minnesota Power isWe are required to notify the EPA of hazardous waste activity and, consequently, routinely submitssubmit the necessary annual reports to the EPA. The MPCAToxic Substances Control Act regulates the management and the
Wisconsin Departmentdisposal of Natural Resources (WDNR) are responsible for
administering solid and hazardous waste rules on the state level with oversight
by the EPA.
PCB INVENTORIES.materials containing polychlorinated biphenyl (PCB). In response to the EPA Region V'sV’s request for utilities to participate in the Great Lakes Initiative by voluntarily removing remaining polychlorinated biphenyl (PCB)PCB inventories, Minnesota Power has scheduled
replacement ofreplaced its PCB capacitor banks andby 2005. PCB-contaminated oil in substation equipment was replaced by the end of 2005.
The total cost is expected to be about $2 million, of which $1.5 million was
spent through December 31, 2004.
June 2007. We are in material compliance with these rules. Environmental Matters (Continued)
SWL&P MANUFACTURED GAS PLANT.Manufactured Gas Plant. In May 2001, SWL&P received notice from the WDNR that the City of Superior had found soil contamination on property adjoining a former Manufactured Gas Plant (MGP) site owned and operated by SWL&P's
predecessors&P from 1889 to 1904. The WDNR requested SWL&P to initiate an
environmental investigation. The WDNR also issued SWL&P a Responsible Party
letterA report submitted in February 2002. The environmental investigation is under way. In
February 2003 SWL&P submitted a Phase II environmental site investigation
report to the WDNR. This report identified some MGP-like chemicals that were found in the soil near the former plant site. During MarchThe final Phase II report was issued on June 7, 2007, confirming our understanding of the issues involved. The final Phase II Report and April 2003,
sediment samplesRisk Assessment were taken from nearby Superior Bay. The reportsent to the WDNR for review on June 18, 2007. A remediation plan was developed during the resultslast quarter of this sampling was completed2007 and sentwill be submitted to the WDNR during the first quarter of 2004. The next phase of the investigation is to determine any impact to soil or
ground water between the former MGP site and Superior Bay. The site work for
this phase of the investigation was performed during October 2004, and the final
report is expected to be sent to the WDNR during the first quarter of 2005. It
is anticipated that additional site investigation will be needed during 2005.2008. Although it is not possible to fully quantify the potential clean-up cost until the investigationWDNR’s review is completed, a $0.5 million liability was recorded in December 2003 to address the known areas of contamination. We haveThe Company has recorded a corresponding dollar amount as a regulatory asset to offset this liability. The PSCW has approved SWL&P's deferralthe collection through rates of these MGP environmental$0.3 million of site investigation and
potential clean-up costs for future recovery in rates, subject to a regulatory
prudency review.that had been incurred through 2005. ALLETE maintains pollution liability insurance coverage that includes coverage for SWL&P. A claim has been filed with respect to this matter. The insurance carrier has issued a reservation of rights letter and we continuethe Company continues to work with the insurer to determine the availability of insurance coverage.
EMPLOYEES
Employees
At December 31, 2004,2007, ALLETE had approximately 1,500 employees, of which 1,400 were full-time.
Minnesota Power and SWL&P and Enventis Telecom have 621an aggregate 622 employees who are members of the International Brotherhood of Electrical Workers (IBEW), Local 31. A
two-yearThe labor agreement between Minnesota Power andwith IBEW Local 31 which includes
Enventis Telecom, is in effect throughexpires on January 31, 2006, as is the agreement
with SWL&P. The agreements provided wage increases of 3.25% in each of the two
contract years.
2009.
BNI Coal has 9597 employees who are members of the IBEW Local 1593. BNI Coal and IBEW Local 1593 have a labor agreement which expires on March 31, 2005. Negotiations
are under way for2008. BNI expects to have a new labor agreement in place on, or before, the expiration of the existing contract.
Page 17
Availability of Information
ALLETE
2004makes its SEC filings, including its annual report on Form 10-K,
EXECUTIVE OFFICERS OF THE REGISTRANT
quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, available free of charge on ALLETE’s Website www.allete.com, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC.
Executive Officers of the Registrant
EXECUTIVE OFFICERS INITIAL EFFECTIVE DATE
- --------------------------------------------------------------------------------------------------------------------------
DONALDExecutive Officers | Initial Effective Date |
| |
Donald J. SHIPPAR,Shippar, Age 5558 | |
Chairman, President and Chief Executive Officer - ALLETE | January 1, 2006 |
President and Chief Executive Officer | January 21, 2004 |
Executive Vice President -– ALLETE and President -– Minnesota Power | May 13, 2003 |
President and Chief Operating Officer -– Minnesota Power | January 1, 2002
DEBORAH |
| |
Deborah A. AMBERG,Amberg, Age 3942 | |
Senior Vice President, General Counsel and Secretary | January 1, 2006 |
Vice President, General Counsel and Secretary | March 8, 2004
WARREN L. CANDY, |
| |
Steven Q. DeVinck, Age 55
Senior Vice 48 | |
Controller | July 12, 2006 |
| |
Laura A. Holquist, Age 46 | |
President - Utility Operations February 1, 2004
LAURA A. HOLQUIST, Age 43
President -– ALLETE Properties, LLC | September 6, 2001
DAVID J. MCMILLAN, |
| |
Mark A. Schober, Age 43
Senior Vice President - Marketing and Public Affairs October 2, 2003
MARK A. SCHOBER, Age 49
Senior Vice President and Controller February 1, 2004
Vice President and Controller April 18, 2001
Controller March 1, 1993
DONALD W. STELLMAKER, Age 47
Treasurer July 24, 2004
TIMOTHY J. THORP, Age 50
Vice President - Investor Relations July 1, 2004
Vice President - Investor Relations and Corporate Communications November 16, 2001
JAMES K. VIZANKO, Age 51
52 | |
Senior Vice President and Chief Financial Officer | July 24, 2004
1, 2006 |
Senior Vice President Chief Financial Officer and Treasurer January 21,Controller | February 1, 2004
Vice President, Chief Financial Officer and Treasurer August 28, 2001
|
Vice President and Treasurer Controller | April 18, 2001
Treasurer March 1, 1993
CLAUDIA SCOTT WELTY, |
| |
Donald W. Stellmaker, Age 52
50 | |
Treasurer | July 24, 2004 |
| |
Claudia Scott Welty, Age 55 | |
Senior Vice President and Chief Administrative Officer | February 1, 2004 |
All of the executive officers have been employed by us for more than five years in executive or management positions. Prior to election to the positions shown above, the following executives held other positions with the Company during the past five years.
MR. SHIPPAR was chief operating officer of Minnesota Power.
MS. AMBERG was a senior attorney.
MR. CANDY was a vice president of Minnesota Power.
MS. HOLQUIST was senior vice president of MP Real Estate Holdings, Inc.,
and vice president and chief financial officer of Lehigh Acquisition
Corporation.
MR. MCMILLAN was senior vice president strategic accounts and governmental
affairs, and a vice president of Minnesota Power.
MR. STELLMAKER was director of financial planning, and manager of corporate
finance, planning and budgets.
MR. THORP was director of investor relations.
MS. WELTY was vice president strategy and technology development.
| Ms. Amberg was a Senior Attorney. |
| Mr. DeVinck was Director of Nonutility Business Development, and Assistant Controller. |
| Mr. Stellmaker was Director of Financial Planning. |
| Ms. Welty was Vice President Strategy and Technology Development. |
There are no family relationships between any of the executive officers. All officers and directors are elected or appointed annually.
The present term of office of the executive officers listed above extends to the first meeting of our Board of Directors after the next annual meeting of shareholders. Both meetings are scheduled for May 10, 2005.
13, 2008.
ALLETE
20042007 Form 10-K
Page 18
ITEM 2. PROPERTIES
Item 1A. Risk Factors
Readers are cautioned that forward-looking statements, including those contained in this Form 10-K, should be read in conjunction with our disclosures under the heading: “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995” located on page 5 of this Form 10-K and the factors described below. The risks and uncertainties described in this Form 10-K are not the only ones facing our Company. Additional risks and uncertainties that we are not presently aware of, or that we currently consider immaterial, may also affect our business operations. Our business, financial condition or results of operations could suffer if the concerns set forth below are realized.
Our Regulated Utility results of operations could be negatively impacted if our Large Power Customers experience an economic down cycle or fail to compete effectively in the global economy.
Our 12 Large Power Customers accounted for approximately 34 percent of our 2007 consolidated operating revenue (one of these customers accounted for 12 percent of consolidated revenue). These customers are involved in cyclical industries that by their nature are adversely impacted by economic downturns and are subject to strong competition in the global marketplace. An economic downturn or failure to compete effectively in the global economy could have a material adverse effect on their operations and, consequently, could negatively impact our results of operations.
Our Regulated Utility is subject to extensive governmental regulations that may have a negative impact on our business and results of operations.
We are subject to prevailing governmental policies and regulatory actions, including those of the United States Congress, state legislatures, the FERC, the MPUC and the PSCW. These governmental regulations relate to allowed rates of return, financings, industry and rate structure, acquisition and disposal of assets and facilities, operation and construction of plant facilities, recovery of purchased power and capital investments, and present or prospective wholesale and retail competition (including but not limited to transmission costs). These governmental regulations significantly influence our operating environment and may affect our ability to recover costs from our customers. We are required to have numerous permits, approvals and certificates from the agencies that regulate our business. We believe the necessary permits, approvals and certificates have been obtained for existing operations and that our business is conducted in accordance with applicable laws; however, we are unable to predict the impact on our operating results from the future regulatory activities of any of these agencies. Changes in regulations or the imposition of additional regulations could have an adverse impact on our results of operations.
Our ability to obtain rate adjustments to maintain current rates of return depends upon regulatory action under applicable statues and regulations, and we cannot assure that rate adjustments will be obtained or current authorized rates of return on capital will be earned. Minnesota Power and SWL&P from time to time file rate cases with federal and state regulatory authorities. In future rate cases, if Minnesota Power and SWL&P do not receive an adequate amount of rate relief, rates are reduced, increased rates are not approved on a timely basis or costs are otherwise unable to be recovered through rates, we may experience an adverse impact on our financial condition, results of operations and cash flows. We are unable to predict the impact on our business and operations results from future regulatory activities of any of these agencies.
Our Regulated Utility could be significantly impacted by initiatives designed to reduce the impact of greenhouse gas (GHG) emissions such as carbon dioxide from our generating facilities.
Proposals for voluntary initiatives and mandatory controls are being discussed within Minnesota, among a group of midwestern states that includes Minnesota, in the United States Congress and worldwide to reduce GHGs such as carbon dioxide, a by-product of burning fossil fuels. We currently use coal as the primary fuel in 94 percent of the energy produced by our generating facilities.
We cannot be certain whether new laws or regulations will be adopted to reduce GHGs and what affect any such laws or regulations would have on us. If any new laws or regulations are implemented, they could have a material effect on our results of operations, particularly if implementation costs are not fully recoverable from customers.
Our Regulated Utility has established a goal to reduce overall GHG emissions associated with electric generation and delivery. We plan to expand our renewable energy production, expand customer conservation and process efficiency improvements, select low GHG emitting resources to meet new generation needs, and expand the use of renewable generation resources through dispatching those units based on their environmental performance.
We are participating in research and study initiatives to mitigate the potential impact carbon emissions regulation to our business. There is no assurance that our current reduction efforts will mitigate the impact of any new regulations.
Risk Factors (Continued)
The cost of environmental emission allowances could have a negative financial impact on our Regulated Utility Operations.
Minnesota Power is subject to numerous environmental laws and regulations which require us to purchase environmental emissions allowances which could increase our cost of operations and expose us to emission price fluctuations. We are unable to predict emission allowance pricing or regulatory recovery of these costs. We will be pursuing a current cost recovery mechanism with the MPUC and FERC.
Our Regulated Utility and Nonregulated Energy Operations pose certain environmental risks which could adversely affect our results of operations and financial condition.
We are subject to extensive environmental laws and regulations affecting many aspects of our present and future operations, including air quality, water quality, waste management, reclamation and other environmental considerations. These laws and regulations can result in increased capital, operating and other costs, as a result of compliance, remediation, containment and monitoring obligations, particularly with regard to laws relating to power plant emissions. These laws and regulations generally require us to obtain and comply with a wide variety of environmental licenses, permits, inspections and other approvals. Both public officials and private individuals may seek to enforce applicable environmental laws and regulations. We cannot predict the financial or operational outcome of any related litigation that may arise.
There are no assurances that existing environmental regulations will not be revised or that new regulations seeking to protect the environment will not be adopted or become applicable to us. Revised or additional regulations, which result in increased compliance costs or additional operating restrictions, particularly if those costs are not fully recoverable from customers, could have a material effect on our results of operations.
We cannot predict with certainty the amount or timing of all future expenditures related to environmental matters because of the difficulty of estimating such costs. There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all potentially responsible parties.
The operation and maintenance of our generating facilities in our Regulated Utility and Nonregulated Energy Operations involve risks that could significantly increase the cost of doing business.
The operation of generating facilities involves many risks, including start-up risks, breakdown or failure of facilities, the dependence on a specific fuel source, or the impact of unusual or adverse weather conditions or other natural events, as well as the risk of performance below expected levels of output or efficiency, the occurrence of any of which could result in lost revenue, increased expenses or both. A significant portion of Minnesota Power’s facilities were constructed many years ago. In particular, older generating equipment, even if maintained in accordance with good engineering practices, may require significant capital expenditures to keep operating at peak efficiency. This equipment is also likely to require periodic upgrading and improvements due to changing environmental standards and technological advances. (See Item I – Environmental Matters.) Minnesota Power could be subject to costs associated with any unexpected failure to produce power, including failure caused by breakdown or forced outage, as well as repairing damage to facilities due to storms, natural disasters, wars, terrorist acts and other catastrophic events. Further, our ability to successfully and timely complete capital improvements to existing facilities or other capital projects is contingent upon many variables and subject to substantial risks. Should any such efforts be unsuccessful, we could be subject to additional costs and/or the write-off of our investment in the project or improvement.
Our Regulated Utility and Nonregulated Energy Operations must have adequate and reliable transmission and distribution facilities to deliver electricity to its customers.
Minnesota Power depends on transmission and distribution facilities owned by other utilities, and transmission facilities primarily operated by MISO, as well as its own such facilities, to deliver the electricity we produce and sell to our customers, and to other energy suppliers. If transmission capacity is inadequate, our ability to sell and deliver electricity may be hindered, we may have to forego sales or we may have to buy more expensive wholesale electricity that is available in the capacity-constrained area. The cost to acquire or provide service may exceed the cost to serve other customers, resulting in lower gross margins. In addition, any infrastructure failure that interrupts or impairs delivery of electricity to our customers could negatively impact the satisfaction of our customers with our service.
Risk Factors (Continued)
In our Regulated Utility and Nonregulated Energy Operations the price of electricity and fuel may be volatile.
Volatility in market prices for electricity and fuel may result from:
| · | severe or unexpected weather conditions; |
| · | changes in electricity usage; |
| · | transmission or transportation constraints, inoperability or inefficiencies; |
| · | availability of competitively priced alternative energy sources; |
| · | changes in supply and demand for energy; |
| · | changes in power production capacity; |
| · | outages at Minnesota Power’s generating facilities or those of our competitors; |
| · | changes in production and storage levels of natural gas, lignite, coal, crude oil and refined products; |
| · | natural disasters, wars, sabotage, terrorist acts or other catastrophic events; and |
| · | federal, state, local and foreign energy, environmental, or other regulation and legislation. |
Since fluctuations in fuel expense related to our regulated utility operations are passed on to customers through our fuel clause, risk of volatility in market prices for fuel and electricity mainly impacts our nonregulated operations at this time.
We are dependent on good labor relations.
We believe our relations to be good with our approximately 1,500 employees. Failure to successfully renegotiate labor agreements could adversely affect the services we provide and our results of operations. Approximately 600 of our employees are members of either the International Brotherhood of Electrical Workers Local 31 or Local 1593. The labor agreement with Local 31 at Minnesota Power and SWL&P expires on January 31, 2009, and the labor agreement with Local 1593 at BNI Coal expires on March 31, 2008.
A downturn in economic conditions could adversely affect our real estate business.
The ability of our real estate business to generate revenue is directly related to the Florida real estate market, the national and local economy in general and changes in interest rates. While conditions in the Florida real estate market may fluctuate over time, continued demand for land is dependent on long-term prospects for strong, in-migration population expansion.
We are exposed to risks associated with real estate development.
Our real estate development activities entail risks that include construction delays or cost overruns, which may increase project development costs. In addition, the effects of the rebuilding efforts due to destructive weather, including hurricanes, could cause increased prices for construction materials and create labor shortages which could increase our development costs.
Our real estate development activities require significant expenditures. We obtain funds for our expenditures through cash flow from operations and financings, including the financings of the community development districts in which our development projects are located. We cannot be certain that the funds available from these sources will be sufficient to fund our required or desired expenditures for development. If we are unable to obtain sufficient funds, we may have to defer or otherwise limit our development activities.
Risk Factors (Continued)
Our real estate business is subject to extensive regulation through Florida laws regulating planning and land development which makes it difficult and expensive for us to conduct our operations.
Development of real property in Florida entails an extensive approval process involving overlapping regulatory jurisdictions. Real estate projects must generally comply with the provisions of the Local Government Comprehensive Planning and Land Development Regulation Act (Growth Management Act). In addition, development projects that exceed certain specified regulatory thresholds require approval of a comprehensive DRI application.
The Growth Management Act requires counties and cities to adopt comprehensive plans guiding and controlling future real property development in their respective jurisdictions. After a local government adopts its comprehensive plan, all development orders and development permits must be consistent with the plan. Each plan must address such topics as future land use, capital improvements, traffic circulation, sanitation, sewage, potable water, drainage and solid waste disposal.
The Growth Management Act, in some instances, can significantly affect the ability of developers to obtain local government approval in Florida. In many areas, infrastructure funding has not kept pace with growth. As a result, substandard facilities and services can delay or prevent the issuance of permits. Consequently, the Growth Management Act could adversely affect the cost and our ability to develop future real estate projects.
The DRI review process includes an evaluation of a project’s impact on the environment, infrastructure and government services, and requires the involvement of numerous state and local environmental, zoning and community development agencies. The DRI approval process is usually lengthy and costly, and conditions, standards or requirements may be imposed on a developer with respect to a particular project, which may materially increase the cost of the project.
Changes in the Growth Management Act or DRI review process or the enactment of new laws regarding the development of real property could adversely affect our ability to develop future real estate projects.
Competition could adversely affect our real estate business.
Over the past few years, we have experienced an increase in competition for suitable land in the southeast United States real estate market. The availability of undeveloped land for purchase that meets our internal criteria depends on a number of factors outside our control, including land availability in general, competition with other developers and land buyers for desirable property, inflation in land prices, zoning, allowable development density and other regulatory requirements. Our long-term ability to acquire land suitable for development at reasonable prices in locations where we feel there is a viable market is crucial in maintaining our business success.
If we are not able to retain our executive officers and key employees, we may not be able to implement our business strategy and our business could suffer.
The success of our business heavily depends on the leadership of our executive officers, all of whom are employees-at-will and none of whom are subject to any agreements not to compete. If we lose the service of one or more of our executive officers or key employees, or if one or more of them decides to join a competitor or otherwise compete directly or indirectly with us, we may not be able to successfully manage our business or achieve our business objectives. We may have difficulty in retaining and attracting customers, developing new services, negotiating favorable agreements with customers and providing acceptable levels of customer service.
Item 1B. | Unresolved Staff Comments |
None.
Properties are included in the discussion of our businessbusinesses in Item 1 and are incorporated by reference herein.
ITEM 3. LEGAL PROCEEDINGS
Material legal and regulatory proceedings are included in the discussion of our businessbusinesses in Item 1 and are incorporated by reference herein.
We are involved in litigation arising in the normal course of business. Also in the normal course of business, we are involved in tax, regulatory and other governmental audits, inspections, investigations and other proceedings that involve state and federal taxes, safety, compliance with regulations, rate base and cost of service issues, among other things. WhileWe do not expect the resolutionoutcome of suchthese matters couldto have a material effect on earnings and cash flows in the year of
resolution, none of these matters are expected to change materially our present
liquidity position, nor have a material adverse effect on our financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
position, results of operations or cash flows.
Item 4. | Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of security holders during the fourth quarter of
2004.
Page 19 ALLETE 2004 Form 10-K
PART2007.
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our common stock is listed on the NYSE under the symbol ALE. We have paid dividends without interruption on our common stock since 1948. A quarterly dividend of $0.30$0.43 per share on our common stock will be paid on March 1, 20052008, to the holders of record on February 15, 2005. Our common stock is
listed on the New York Stock Exchange under the symbol ALE and our CUSIP number
is 018522300 (formerly 018522102). Dividends paid2008.
The following table shows dividends declared per share, and the high and low prices for our common stock for the periods indicated as reported by the New
York Stock Exchange on its NYSEnet website, are in the accompanying chart.
The amount and timing of dividends payable on our common stock are within the
sole discretion of our Board of Directors. In 2004, we paid out 77% of our per
share earnings in dividends.
Our Articles of Incorporation, and Mortgage and Deed of Trust contain
provisions, which under certain circumstances would restrict the payment of
common stock dividends. As of December 31, 2004, no retained earnings were
restricted as a result of these provisions. NYSE:
| 2007 | 2006 |
| Price Range | Dividends | Price Range | Dividends |
Quarter | High | Low | Declared | High | Low | Declared |
| | | | | | |
First | $49.69 | $44.93 | $0.4100 | $47.81 | $42.99 | $0.3625 |
Second | 51.30 | 45.39 | 0.4100 | 48.55 | 44.34 | 0.3625 |
Third | 50.05 | 38.60 | 0.4100 | 49.30 | 43.26 | 0.3625 |
Fourth | 46.48 | 38.17 | 0.4100 | 47.84 | 42.55 | 0.3625 |
Annual Total | | | $1.640 | | | $1.450 |
Dividend Payout Ratio | | | 53% | | | 53% |
At February 1,
2005,2008, there were approximately
33,00031,000 common stock shareholders of record.
2004 2003
--------------------------------------------------------------------------------------------
PRICE RANGE DIVIDENDS PRICE RANGE DIVIDENDS
QUARTER HIGH LOW PAID HIGH LOW PAID
- -----------------------------------------------------------------------------------------------------------------------------
First $35.52 $30.00 $0.8475 $24.05 $18.75 $0.8475
Second 36.71 31.62 0.8475 26.70 20.50 0.8475
Third 27.86 25.45 0.8475
July 1 - Sept. 20 33.70 26.02 0.8475
Sept. 21 - Sept. 30 32.54 30.76 -
Fourth 37.46 32.20 0.3000 31.00 27.05 0.8475
- -----------------------------------------------------------------------------------------------------------------------------
Annual Total $2.8425 $3.39
- -----------------------------------------------------------------------------------------------------------------------------
Price ranges prior to September 21, 2004 are not comparable due to the spin-off of Automotive Services on September 20,
2004 (see Note 3) and do not reflect the one-for-three reverse stock split (see Note 9).
Adjusted for the September 20, 2004 one-for-three reverse stock split.
TOTAL NUMBER MAXIMUM
OF SHARES NUMBER OF
PURCHASED AS SHARES THAT
PART OF MAY YET BE
TOTAL PUBLICLY PURCHASED
ALLETE COMMON STOCK REPURCHASES NUMBER OF AVERAGE ANNOUNCED UNDER THE
FOR THE QUARTER ENDED SHARES PRICE PAID PLANS OR PLANS OR
DECEMBER 31, 2004 PURCHASED PER SHARE PROGRAMS PROGRAMS
- -----------------------------------------------------------------------------------------------------------------------
For the Calendar Month
October 80,600 $33.65 - -
November 669,578 $35.05 - -
December 262,600 $35.93 - -
- -----------------------------------------------------------------------------------------------------------------------
1,012,778 $35.16 - -
- -----------------------------------------------------------------------------------------------------------------------
Reflected shares of ALLETE common stock repurchased pursuant to the ALLETE Retirement Savings and Stock Ownership
Plan in connection with the spin-offof ADESA. (See Note 17.)
Common Stock Repurchases. We did not repurchase any ALLETE 2004common stock during the fourth quarter of 2007.
ALLETE 2007 Form 10-K
Page 20
ITEM Item 6. SELECTED FINANCIAL DATA
Selected Financial Data
Financial results by segment for the periods presented were impacted by the integration of our Taconite Harbor facility into the Regulated Utility segment effective January 1, 2006. We have operated the Taconite Harbor facility as a rate-based asset within the Minnesota retail jurisdiction since January 1, 2006. Prior to January 1, 2006, we operated our Taconite Harbor facility as nonregulated generation (non-rate base generation sold at market-based rates primarily to the wholesale market). Historical financial results of Taconite Harbor for periods prior to the 2006 redirection are included in our Nonregulated Energy Operations segment.
Operating results of our Water Services businesses our Automotive Services
business, and our retail storestelecommunications business are included in discontinued operations, and accordingly, amounts have been adjustedrestated for all periods presented. (See Note 3.13.) Common share and per share amounts have also been adjusted for all periods to reflect our September 20, 2004, one-for-three common stock reverse split.
| 2007 | | 2006 | | 2005 | | 2004 | | 2003 | |
| | | | | | | | | | |
Operating Revenue | $841.7 | | $767.1 | | $737.4 | | $704.1 | | $659.6 | |
Operating Expenses | 708.0 | | 626.4 | | 692.3 | (d) | 603.2 | | 561.9 | |
Income from Continuing Operations Before Change in Accounting Principle | 87.6 | | 77.3 | | 17.6 | (d) | 38.5 | | 29.2 | |
Income (Loss) from Discontinued Operations – Net of Tax | – | | (0.9) | | (4.3) | | 73.7 | | 207.2 | (f) |
Change in Accounting Principle – Net of Tax | – | | – | | – | | (7.8) | (b) | – | |
Net Income | 87.6 | | 76.4 | | 13.3 | | 104.4 | | 236.4 | |
Common Stock Dividends | 44.3 | | 40.7 | | 34.4 | | 79.7 | | 93.2 | |
Earnings Retained in (Distributed from) Business | $43.3 | | $35.7 | | $(21.1) | | $24.7 | | $143.2 | |
Shares Outstanding – Millions | | | | | | | | | | |
Year-End | 30.8 | | 30.4 | | 30.1 | | 29.7 | | 29.1 | |
Average (c) | | | | | | | | | | |
Basic | 28.3 | | 27.8 | | 27.3 | | 28.3 | | 27.6 | |
Diluted | 28.4 | | 27.9 | | 27.4 | | 28.4 | | 27.8 | |
Diluted Earnings (Loss) Per Share | | | | | | | | | | |
Continuing Operations | $3.08 | | $2.77 | | $0.64 | (d) | $1.35 | (e) | $1.05 | |
Discontinued Operations | – | | (0.03) | | (0.16) | | 2.59 | | 7.47 | (f) |
Change in Accounting Principle | – | | – | | – | | (0.27) | | – | |
| $3.08 | | $2.74 | | $0.48 | | $3.67 | | $8.52 | |
Total Assets | $1,644.2 | | $1,533.4 | (a) | $1,398.8 | | $1,431.4 | | $3,101.3 | |
Long-Term Debt | 410.9 | | 359.8 | | 387.8 | | 389.4 | | 513.9 | |
Return on Common Equity | 12.4% | | 12.1% | | 2.2% | (d) | 8.3% | | 17.7% | |
Common Equity Ratio | 63.7% | | 63.1% | | 60.7% | | 61.7% | | 64.4% | |
Dividends Declared per Common Share | $1.6400 | | $1.4500 | | $1.2450 | | $2.8425 | | $3.3900 | |
Dividend Payout Ratio | 53% | | 53% | | 259% | (d) | 77% | | 40% | |
Book Value Per Share at Year-End | $24.11 | | $21.90 | | $20.03 | | $21.23 | | $50.18 | |
Capital Expenditures by Segment | | | | | | | | | | |
Regulated Utility Operations | $220.6 | | $107.5 | | $46.5 | | $41.7 | | $42.2 | |
Non Regulated Utility | 3.3 | | 1.9 | | 12.1 | | 15.7 | | 26.5 | |
Real Estate (h) | – | | – | | – | | – | | – | |
Other | – | | – | | – | | 0.4 | | – | |
Discontinued Operations | – | | – | | 4.5 | | 21.4 | | 67.6 | |
Total Capital Expenditures | $223.9 | | $109.4 | | $63.1 | | $79.2 | | $136.3 | |
Current Cost Recovery (g) | $145 | | $27 | | – | | – | | – | |
2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
MILLIONS
BALANCE SHEET
Assets
Current Assets $ 366.1 $ 223.3 $ 190.7 $ 320.4 $ 266.2
Discontinued Operations - Current 2.0 476.7 471.4 575.1 464.8
Property, Plant(a) | Included $86.1 million of assets and Equipment 883.1 919.3 880.5 877.3 792.4
Investments 124.5 175.7 170.9 155.4 116.5$107.6 million of liabilities reflecting the adoption of SFAS 158 “Employers’ Accounting for Defined Benefit Pension and Other Assets 52.8 59.0 62.0 67.6 60.1
Discontinued Operations - Other 2.9 1,247.3 1,371.7 1,286.7 1,214.0
- ----------------------------------------------------------------------------------------------------------------------------
$1,431.4 $3,101.3 $3,147.2 $3,282.5 $2,914.0
- ----------------------------------------------------------------------------------------------------------------------------
LiabilitiesPostretirement Plans.” (See Notes 2 and Shareholders' Equity
Current Liabilities $ 96.7 $ 185.5 $ 438.7 $ 343.7 $ 430.3
Discontinued Operations - Current 12.0 340.7 299.5 360.8 276.7
Long-Term Debt 390.2 514.7 567.7 836.0 720.5
Mandatorily Redeemable Preferred Securities - - 75.0 75.0 75.0
Other Liabilities 302.0 305.4 296.4 274.8 261.4
Discontinued Operations - 294.8 237.5 248.4 249.3
Shareholder's Equity 630.5 1,460.2 1,232.4 1,143.8 900.8
- ----------------------------------------------------------------------------------------------------------------------------
$1,431.4 $3,101.3 $3,147.2 $3,282.5 $2,914.0
- ----------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
Operating Revenue
Regulated Utility $555.0 $510.0 $497.9 $535.0 $528.0
Nonregulated Energy Operations 106.8 106.6 84.7 50.4 49.0
Real Estate 41.9 42.6 33.6 61.1 52.5
Other 47.7 33.1 26.8 23.7 2.4
- ----------------------------------------------------------------------------------------------------------------------------
751.4 692.3 643.0 670.2 631.9
- ----------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel and Purchased Power 287.9 252.5 234.8 230.7 229.0
Operating and Maintenance 285.1 263.1 250.9 254.1 227.3
Depreciation 49.7 51.2 48.9 46.2 46.7
Taxes Other than Income 28.9 29.4 30.2 24.9 33.3
- ----------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 651.6 596.2 564.8 555.9 536.3
- ----------------------------------------------------------------------------------------------------------------------------
Operating Income from Continuing Operations 99.8 96.1 78.2 114.3 95.6
- ----------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest Expense (31.8) (50.6) (49.3) (47.7) (43.8)
Other (12.1) 2.5 8.1 16.6 29.2
Income from Investment16.) |
(b) | Reflected the cumulative effect on prior years (to December 2003) of changing to the equity method of accounting for investments in ACE Limited - - - - 48.0
- ----------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (43.9) (48.1) (41.2) (31.1) 33.4
- ----------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations
Before Income Taxes 55.9 48.0 37.0 83.2 129.0
Income Tax Expense 16.8 18.2 12.3 29.1 42.0
- ----------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before
Changelimited liability companies included in Accounting Principle 39.1 29.8 24.7 54.1 87.0
Income from Discontinued Operations - Net of Tax 73.1 206.6 112.5 84.6 61.6
Change in Accounting Principle - Net of Tax (7.8) - - - -
- ----------------------------------------------------------------------------------------------------------------------------
Net Income 104.4 236.4 137.2 138.7 148.6
Preferred Dividends - - - - 0.9
- ----------------------------------------------------------------------------------------------------------------------------
Earnings Available for Common Stock 104.4 236.4 137.2 138.7 147.7
Common Stock Dividends 79.7 93.2 89.2 81.8 74.5
- ----------------------------------------------------------------------------------------------------------------------------
Retained in Business $ 24.7 $143.2 $48.0 $56.9 $73.2
- ----------------------------------------------------------------------------------------------------------------------------
Seeour emerging technology portfolio. (See Note 14.
6.) |
Page 21 ALLETE 2004 Form 10-K
2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Shares Outstanding - Million
Year-End 29.7 29.1 28.5 28.0 24.9
Average
Basic 28.3 27.6 27.0 25.3 23.3
Diluted 28.4 27.8 27.2 25.5 23.4
Diluted Earnings (Loss) Per Share
Continuing Operations $1.37 $1.08 $0.91 $2.12 $3.69
Discontinued Operations 2.57 7.44 4.13 3.32 2.63
Change in Accounting Principle (0.27) - - - -
- ----------------------------------------------------------------------------------------------------------------------------
$3.67 $8.52 $5.04 $5.44 $6.32
- ----------------------------------------------------------------------------------------------------------------------------
Return on Common Equity 8.3% 17.7% 11.4% 13.3% 17.1%
Common Equity Ratio 61.7% 64.4% 51.7% 49.9% 46.3%
Dividends Paid Per Share $2.8425 $3.39 $3.30 $3.21 $3.21
Dividend Payout 77% 40% 66% 59% 51%
Book Value Per Share at Year-End $21.23 $50.18 $43.24 $40.85 $36.18
Employees 1,515 13,115 14,181 13,763 12,633
Net Income (Loss)
Regulated Utility $ 42.8 $ 37.9 $ 50.4 $ 49.4 $ 43.4
Nonregulated Energy Operations (0.3) 3.7 (8.7) 0.7 1.3
Real Estate 14.7 14.1 11.2 20.8 12.9
Other (18.1) (25.9) (28.2) (16.8) 29.4
- ----------------------------------------------------------------------------------------------------------------------------
Continuing Operations 39.1 29.8 24.7 54.1 87.0
Discontinued Operations 73.1 206.6 112.5 84.6 61.6
Change in Accounting Principle (7.8) - - - -
- ----------------------------------------------------------------------------------------------------------------------------
$104.4 $236.4 $137.2 $138.7 $148.6
- ----------------------------------------------------------------------------------------------------------------------------
Average Electric Customers - Thousands 150.1 148.2 146.8 145.7 144.0
Electric Sales - Millions of MWh
Regulated Utility 11.2 11.1 11.1 10.9 11.7
Nonregulated Energy Operations 1.5 1.5 1.2 0.2 0.2
Company Use and Losses 0.9 0.7 0.7 0.7 0.6
- ----------------------------------------------------------------------------------------------------------------------------
13.6 13.3 13.0 11.8 12.5
- ----------------------------------------------------------------------------------------------------------------------------
Power Supply - Millions of MWh
Regulated Utility
Steam Generation 6.5 7.1 7.2 6.9 6.4
Hydro Generation 0.5 0.4 0.5 0.5 0.5
Long-Term Purchases - Square Butte 2.0 2.3 2.3 1.9 2.3
Purchased Power 3.0 1.9 1.8 2.3 3.1
- ----------------------------------------------------------------------------------------------------------------------------
12.0 11.7 11.8 11.6 12.3
- ----------------------------------------------------------------------------------------------------------------------------
Nonregulated Energy Operations
Steam 1.2 1.2 0.8 - -
Hydro 0.1 0.1 0.1 0.2 0.2
Purchased Power 0.3 0.3 0.3 - -
- ----------------------------------------------------------------------------------------------------------------------------
1.6 1.6 1.2 0.2 0.2
- ----------------------------------------------------------------------------------------------------------------------------
13.6 13.3 13.0 11.8 12.5
- ----------------------------------------------------------------------------------------------------------------------------
Coal Sold - Millions of Tons 4.2 4.3 4.6 4.1 4.4
Capital Expenditures - Millions
Continuing Operations $63.0 $ 73.6 $ 86.6 $ 59.9 $ 64.1
Discontinued Operations 16.2 62.7 114.6 89.3 104.6
- ----------------------------------------------------------------------------------------------------------------------------
$79.2 $136.3 $201.2 $149.2 $168.7
- ----------------------------------------------------------------------------------------------------------------------------
(c) | Excludes unallocated ESOP shares. |
(d) | Impacted by a $50.4 million, or $1.84 per share, charge related to the assignment of the Kendall County power purchase agreement (See Note 10.), a $2.5 million, or $0.09 per share, deferred tax benefit due to comprehensive state tax planning initiatives, and a $3.7 million, or $0.13 per share, current tax benefit due to a positive resolution of income tax audit issues. |
(e) | Included a $10.9 million, or $0.38 per share, after-tax debt prepayment cost incurred as part of ALLETE'sALLETE’s financial restructuring in preparation for the spin-off of ADESAthe Automotive Services business and an $11.5 million, or $0.41 per share, gain on the sale of ADESA shares related to ALLETE's Retirement Savings and Stock Ownership Plan.
the Company’s ESOP (see Note 16). |
(f) | Included a $71.6 million, or $2.59 per share, gain on the sale of the Water Services businesses. Included a $5.5 million, or $0.20 per share, charge related to the indefinite delay |
(g) | Estimated current capital expenditures recoverable outside of a generation projectrate case. |
(h) | Excludes capitalized improvements on our development projects, which are included in Superior, Wisconsin.
Included an $11.1 million, or $0.45 per share, gain on the sale of the Company's largest single real estate
transaction ever.
Included a $30.4 million, or $1.32 per share, gain on the sale of 4.7 million shares of ACE Limited.
inventory. (See Note 6.) |
ALLETE
20042007 Form 10-K
Page 22
ITEMItem 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and notes to those statements and the other financial information appearing elsewhere in this report. In addition to historical information, the following discussion and other parts of this report contain forward-looking information that involves risks and uncertainties. EXECUTIVE SUMMARY
Readers are cautioned that forward-looking statements should be read in conjunction with our disclosures in this Form 10-K under the headings: “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995” located on page 5 and “Risk Factors” located in Item 1A. The risks and uncertainties described in this Form 10-K are not the only ones facing our Company. Additional risks and uncertainties that we are not presently aware of, or that we currently consider immaterial, may also affect our business operations. Our business, financial condition or results of operations could suffer if the concerns set forth in this Form 10-K are realized.
Overview
ALLETE went throughis a significant transformationdiversified company that has provided fundamental products and services since 1906. These include our former operations in 2004,the water, paper, telecommunications and automotive industries and the core Energy and Real Estate businesses we operate today.
Energy is comprised of Regulated Utility, Nonregulated Energy Operations and Investment in ATC.
| · | Regulated Utility includes retail and wholesale rate regulated electric, natural gas and water services in northeastern Minnesota and northwestern Wisconsin under the jurisdiction of state and federal regulatory authorities. |
| · | Nonregulated Energy Operations includes our coal mining activities in North Dakota, approximately 50 MW of nonregulated generation and Minnesota land sales. |
| · | Investment in ATC includes our equity ownership interest in ATC. |
Real Estate includes our Florida real estate operations.
Other includes our investments in emerging technologies, and earnings on cash and short-term investments.
We are committed to earning a financial return that rewards our shareholders, allows for reinvestment in our businesses, and sustains our growth. We strive to grow earnings and dividends that will result in a total shareholder return that is superior to that of similar companies. Our goal is to earn a financial return that will allow us to provide dividend increases while at the same time performed exceptionally well.fund our growth initiatives.
2007 Financial Overview
(See Note 1. Business Segments for financial results by segment.)
Net income for 2007 was $87.6 million, or $3.08 per diluted share ($76.4 million, or $2.74 per diluted share for 2006; $13.3 million, or $0.48 per diluted share for 2005). Net income for 2007 was up $11.2 million from 2006 reflecting:
Regulated Utility contributed income of $54.9 million in 2007 ($46.8 million in 2006; $45.7 million in 2005). The increase in earnings for 2007 reflects:
| · | increased electric sales to residential, commercial and municipal customers; |
| · | continued strong demand from our industrial customers; |
| · | rate increases, effective January 1, 2007, at SWL&P; |
| · | commencement of current cost recovery on AREA project environmental capital expenditures; |
| · | higher AFUDC related to increased capital expenditures; |
| · | increased operations and maintenance expense, relating to outages and salary and wage increases; and |
| · | a lower effective tax rate. |
Nonregulated Energy Operations reported income of $3.5 million in 2007 ($3.7 million in 2006; a loss of $48.5 million in 2005), reflecting a $1.2 million after tax gain on land sold that was part of our purchase of Taconite Harbor and higher lease lot revenue due to newly developed lots. The increases were partially offset by lower income from BNI Coal, reflecting lower coal sales in 2007.
Investment in ATC contributed income of $7.5 million in 2007 ($1.9 million in 2006). Our initial investment in ATC began in May 2006. We are stronger asreached our approximate 8 percent ownership in February 2007.
Real Estate contributed income of $17.7 million in 2007 ($22.8 million in 2006; $17.5 million in 2005). Income was lower in 2007 than in 2006 due to a result,weaker real estate market in 2007.
Other reflected net income of $4.0 million in 2007 ($2.1 million in 2006; $2.9 million in 2005). The increase in 2007 included a state tax audit settlement for $1.5 million and the release from what we have
accomplished, we are poiseda loan guarantee for substantial earnings growthNorthwest Airlines of $0.6 million after tax.
Overview (Continued)
Financial results for continuing operations in 2005 excluding
an anticipated one-timewere significantly impacted by a $77.9 million ($50.4 million after tax, or $1.84 per share) charge relateddue to the Kendall County agreement. (See -
Outlook.) Two significant strategic objectives were achieved--the spin-offassignment of
our Automotive Services business and the sale of our Water Services businesses.
On September 20, 2004, we spun off our Automotive Services business by
distributing to ALLETE shareholders all of ALLETE's shares of ADESA common
stock. In June 2004, our Automotive Services business, doing business as ADESA,
Inc. (NYSE: KAR), completed an IPO through the issuance and sale of 6.3 million
shares of its common stock. This represented 6.6% of ADESA's common stock
outstanding. ALLETE owned the remaining 93.4% of ADESA until the spin-off was
completed. (See Note 3.) ADESA's SEC filings are available through the SEC's
website at www.sec.gov.
In mid-2004, we completed the sales of our North Carolina water and wastewater
assets, and the remaining 72 water and wastewater systems in Florida. In early
2005, we sold our wastewater services business in Georgia. The net cash proceeds
from the sale of all water and wastewater assets in 2003 and 2004, after
transaction costs, retirement of most Florida Water debt and payment of income
taxes, were approximately $300 million.
Using a combination of internally generated funds, proceeds from the sale of our
Water Services assets and proceeds received from ADESA, we repaid $183.1 million
in outstanding debt in 2004 ($356.5 million of debt and $75 million of
mandatorily redeemable preferred securities in 2003), which significantly
strengthened our balance sheet and reduced interest expense in 2004. Our debt to
total capital ratio was 38% at December 31, 2004.
Income from continuing operations represents the activities that are part of
ALLETE subsequent to the spin-off of ADESA and the sale of our Water Services
businesses. REGULATED UTILITY includes retail and wholesale rate-regulated
electric, water and gas services in northeastern Minnesota and northwestern
Wisconsin under the jurisdiction of state and federal regulatory authorities.
NONREGULATED ENERGY OPERATIONS includes nonregulated generation (non-rate base
generation sold at market-based rates to the wholesale market) consisting
primarily of generation from Taconite Harbor in northern Minnesota and
generation secured through the Kendall County power purchase agreement.agreement to Constellation Energy Commodities (Kendall County Charge). (See Note 10.)
Financial results by segment from 2005 and 2006 presented and discussed in this Form 10-K were impacted by the integration of our Taconite Harbor facility into the Regulated Utility segment effective January 1, 2006. We have operated the Taconite Harbor facility as a rate-based asset within the Minnesota retail jurisdiction since January 1, 2006. Prior to January 1, 2006, we operated our Taconite Harbor facility as nonregulated generation. Historical financial results of Taconite Harbor for periods prior to the 2006 redirection are included in our Nonregulated Energy Operations also includessegment.
Kilowatthours Sold | 2007 | 2006 | 2005 |
Millions | | | |
| | | |
Regulated Utility | | | |
Retail and Municipals | | | |
Residential | 1,141 | 1,100 | 1,102 |
Commercial | 1,373 | 1,335 | 1,327 |
Industrial | 7,054 | 7,206 | 7,130 |
Municipals | 1,008 | 911 | 877 |
Other | 84 | 79 | 79 |
Total Retail and Municipals | 10,660 | 10,631 | 10,515 |
Other Power Suppliers | 2,157 | 2,153 | 1,142 |
Total Regulated Utility | 12,817 | 12,784 | 11,657 |
Nonregulated Energy Operations | 249 | 240 | 1,521 |
Total Kilowatthours Sold | 13,066 | 13,024 | 13,178 |
Real Estate | 2007 | 2006 | 2005 |
Revenue and Sales Activity (a) | Quantity | Amount | Quantity | Amount | Quantity | Amount |
Dollars in Millions | | | | | | |
| | | | | | |
Revenue from Land Sales | | | | | | |
Town Center Sales | | | | | | |
Non-residential Sq. Ft. | 540,059 | $15.0 | 401,971 | $10.8 | 643,000 | $15.2 |
Residential Units | 130 | 1.6 | 773 | 12.9 | – | – |
Palm Coast Park | | | | | | |
Non-residential Sq. Ft. | 40,000 | 2.0 | – | – | – | – |
Residential Unit | 606 | 13.2 | 200 | 3.0 | – | – |
Other Land Sales | | | | | | |
Acres (b) | 483 | 10.6 | 732 | 24.4 | 1,102 | 38.1 |
Lots | – | – | – | – | 7 | 0.4 |
Contract Sales Price (c) | | 42.4 | | 51.1 | | 53.7 |
Revenue Recognized from | | | | | | |
Previously Deferred Sales | | 3.1 | | 9.7 | | – |
Deferred Revenue | | (1.2) | | (3.8) | | (10.0) |
Adjustments (d) | | – | | (0.9) | | (1.7) |
Revenue from Land Sales | | 44.3 | | 56.1 | | 42.0 |
Other Revenue | | 6.2 | | 6.5 | | 5.5 |
| | $50.5 | | $62.6 | | $47.5 |
(a) | Quantity amounts are approximate until final build-out. |
(b) | Acreage amounts are shown on a gross basis, including wetlands and minority interest. |
(c) | Reflected total contract sales price on closed land transactions. Land sales are recorded using a percentage-of-completion method. (See Critical Accounting Estimates and Note 2.) |
(d) | Contributed development dollars, which are credited to cost of real estate sold. |
2007 Compared to 2006
(See Note 1. Business Segments for financial results by segment.)
Regulated Utility
Operating revenue increased $84.6 million, or 13.2 percent, from 2006, primarily due to increased fuel clause recoveries, increased kilowatthour sales to residential, commercial and municipal customers, increased power marketing prices, and rate increases at SWL&P.
Fuel clause recoveries increased $63.3 million in 2007 as a result of increased purchased power expenses (see Fuel and Purchased Power Expense discussion below).
Revenue recovered through current cost recovery related to AREA Plan expenditures represented $3.2 million in 2007 ($0.1 million in 2006).
Revenue from sales to other power suppliers increased $3.6 million, or 3.8 percent, from 2006, primarily due to a 3.6 percent increase in the price per kilowatthour.
New rates at SWL&P, which became effective January 1, 2007, reflect a 2.8 percent increase in electric rates, a 1.4 percent increase in gas rates and an 8.6 percent increase in water rates. These rate increases resulted in a $1.7 million increase in operating revenue.
Revenue from electric sales to taconite customers accounted for 24 percent of consolidated operating revenue in each 2007 and 2006. Revenue from electric sales to paper and pulp mills accounted for 9 percent of consolidated operating revenue in each of 2007 and 2006. Revenue from electric sales to pipelines accounted for 7 percent of consolidated operating revenue in 2007 (6 percent in 2006).
Overall, kilowatthour sales were flat in 2007. Combined residential, commercial and municipal kilowatthour sales increased 181.0 million, or 5.3 percent, from 2006, while industrial kilowatthour sales decreased by 152.1 million, or 2.1 percent. The increase in residential, commercial and municipal kilowatthour sales was primarily because of two existing municipal customers converting to full-energy requirements and a 9.2 percent increase in Heating Degree Days (primarily in February). The reduction in industrial kilowatthour sales was primarily due to an idle production line and production delays at one of our taconite customers. In September 2007, the affected taconite customer resumed production on the idle line. Minor fluctuations in industrial kilowatthour sales generally do not have a large impact on revenue due to a fixed demand component of revenue that is less sensitive to changes in kilowatthours sales.
Operating expenses increased $76.9 million, or 14.1 percent, from 2006.
Fuel and Purchased Power Expense increased $65.9 million, or 23.4 percent, from 2006 primarily due to a $61.4 million increase in purchased power reflecting a 45.1 percent increase in market purchases and an 11.0 percent increase in market prices. The increase in purchased power was primarily due to the following outages at our generating facilities:
| · | scheduled outage at Boswell Unit 3; |
| · | scheduled outages at Laskin Unit 1 and Taconite Harbor Unit 2 relating to AREA Plan environmental upgrades; and |
| · | unscheduled outages at Boswell Unit 4. |
Boswell Unit 4 completed generator repairs and returned to service in May 2007. Substantially all of the costs of the replacement coils were covered under the original manufacturer’s warranty.
Lower Square Butte entitlement (See Note 8) and output contributed to higher purchased power expense. Square Butte generation was lower in the fourth quarter of 2007 reflecting a major scheduled outage.
Replacement purchased power costs are recovered through the fuel adjustment clause in Minnesota.
Operating and Maintenance Expense increased $11.4 million, or 5.2 percent, from 2006, due to a $9.0 million increase in plant maintenance primarily due to planned and unscheduled outages and salary and wage increases.
Depreciation Expense decreased $0.4 million from 2006, primarily due to the life extension of Boswell Unit 3, mostly offset by higher depreciable asset balances.
Interest Expense increased $0.8 million, or 4.0 percent, from 2006, primarily due to higher debt balances reflecting increased construction activity. The increase was partially offset by the capitalization of more AFUDC-Debt.
Other income increased $3.2 million from 2006, primarily due to higher earnings from the capitalization of AFUDC-Equity reflecting increased construction activity.
2007 Compared to 2006 (Continued)
Nonregulated Energy Operations
Operating revenue increased $2.0 million, or 3.1 percent, from 2006, primarily due to higher coal mining activitiesrevenue realized under a cost-plus contract. This increase reflects a 12.2 percent increase in North
Dakota. REAL ESTATE includesthe delivered price per ton due to higher coal production expenses (see Operating expenses below), partially offset by lower sales volume.
Operating expenses increased $4.3 million, or 7.0 percent, from 2006, reflecting higher coal production expense and higher property taxes. The increase in property taxes is primarily due to higher assessed market values on our Minnesota land, while the increase in coal operating expenses is due to higher fuel costs, tire and dragline repairs.
Interest Expense decreased $1.3 million from 2006, reflecting lower interest on income tax accruals.
Other income increased $1.7 million from 2006, reflecting higher gains on Minnesota land sales and higher lease lot revenue due to leasing newly developed lots.
Investment in ATC
Equity Earnings increased $9.6 million in 2007, resulting from our pro-rata share of ATC’s earnings as discussed in Note 3. Our initial investment in ATC began in May 2006. We reached our approximate 8 percent ownership in February 2007.
Real Estate
Operating revenue decreased $12.1 million, or 19.3 percent, from 2006, due to a weaker real estate market in 2007, and less recognition of deferred revenue, accounted for under the percentage-of-completion method, as major infrastructure reached substantial completion at Town Center in 2006 and at Palm Coast Park in 2007. Revenue from land sales in 2007 was $44.3 million, which included $3.1 million in previously deferred revenue. In 2006, revenue from land sales was $56.1 million which included $9.7 million in previously deferred revenue. At December 31, 2007, revenue of $3.7 million ($5.6 million at December 31, 2006) was deferred and will be recognized on a percentage-of-completion basis.
Sales at Town Center consisted of 540,059 non-residential square feet (401,971 square feet in 2006), and 130 residential units (773 units in 2006). Palm Coast Park sales included 40,000 non-residential square feet (none in 2006) and 606 residential units (200 units in 2006). In 2007, 483 acres of other land were sold (732 acres in 2006).
Operating expenses increased $0.6 million, or 3.1 percent from 2006, reflecting community development district property tax assessments previously capitalized at Town Center during major infrastructure construction partially offset by lower cost of sales due to the decrease in land sales.
Interest expense increased $0.5 million from 2006. Interest capitalization was reduced in 2007 as the major infrastructure construction at Town Center was substantially completed at the end of 2006.
Minority Interest participation was down due to lower earnings.
Other
Interest expense decreased $2.8 million from 2006, primarily due to more interest charged to the regulated utility in 2007 as a result of increased capital expenditures and interest on additional taxes owed on the gain on sale of our Florida real estate operations. OTHER includes
our telecommunications activities, investmentsWater assets in emerging technologies,
earnings2006.
Other income decreased $1.4 million from 2006, reflecting lower investment income as a result of lower average balances in 2007, partially offset by the release from a loan guarantee for Northwest Airlines of $1.0 million.
Income Taxes
For the year ended December 31, 2007, the effective tax rate on cash, and general corporate charges and interest not specifically
related to any one business segment. General corporate charges include employee
salaries and benefits, as well as legal and other outside service fees.
Incomeincome from continuing operations before minority interest was 34.8 percent (36.1 percent for December 31, 2006). The decrease in the change in accounting principleeffective rate compared to last year was $39.1 million, or $1.37 per diluted share, for 2004 ($29.8 million, or $1.08 per
diluted share, for 2003; $24.7 million, or $0.91 per diluted share, for 2002).
Strong earnings in 2004 were attributedprimarily due to increased sales to our industrial
customers,a tax benefit realized as a result of theira state income tax audit settlement ($1.5 million), higher production levels,AFUDC-Equity, and a significant
reductionlarger domestic manufacturing deduction taken in interest expense2007 compared to 2006. The effective rate of 34.8 percent for the year ended December 31, 2007, deviated from the statutory rate (approximately 40 percent) due to lower debt balances. The following
significant factors impact the comparisons between years:
- DEBT PREPAYMENT COST. In 2004, we incurred a $10.9state income tax audit settlement, deductions for Medicare health subsidies and domestic manufacturing production, AFUDC-Equity and investment tax credits.
2006 Compared to 2005
Regulated Utility
Operating revenue was up $63.6 million, or $0.38 per
share, after-tax debt prepayment cost as part of ALLETE's financial
restructuring in preparation for the spin-off of ADESA.
- GAIN ON ADESA SHARES. In 2004, we recognized an $11.511 percent, from 2005, reflecting increased kilowatthour sales and increased fuel clause recoveries. Electric sales increased 1,127 million kilowatthours, or $0.41
per share, gain on the sale of ADESA shares related to our ESOP. (See
Note 17.)
- CHARGE. In 2002, Nonregulated Energy Operations incurred a $5.5 million,
or $0.20 per share, after-tax charge related10 percent, mostly due to the indefinite delayaddition of a generation projectTaconite Harbor wholesale power obligations to the Regulated Utility segment effective January 1, 2006. In 2006, the majority of Taconite Harbor sales are reflected in Superior, Wisconsin.
In total, net incomesales to other power suppliers. Sales to other power suppliers were 2,153 million kilowatthours and diluted earnings per share for 2004 decreased 56%$94.3 million (1,142 million kilowatthours and 57%, respectively, from 2003. The decrease was primarily attributable to reduced
earnings from discontinued operations, which included both Water Services and
Automotive Services. The decrease also reflected a $7.8 million non-cash
after-tax charge for a change in accounting principle related to investments in
our emerging technology portfolio. (See Note 14.) Gains recognized in 2003 on
the sale of substantially all of our water and wastewater systems in Florida
contributed to higher earnings in 2003, as did a full year of Automotive
Services operations.
Page 23 ALLETE 2004 Form 10-K
2004 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------
MILLIONS EXCEPT PER SHARE AMOUNTS
Operating Revenue
Regulated Utility $555.0 $510.0 $497.9
Nonregulated Energy Operations 106.8 106.6 84.7
Real Estate 41.9 42.6 33.6
Other 47.7 33.1 26.8
- ---------------------------------------------------------------------------------------------------------------------------
$751.4 $692.3 $643.0
- ---------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Regulated Utility $468.2 $430.2 $403.7
Nonregulated Energy Operations 107.6 100.8 100.6
Real Estate 16.5 18.2 15.5
Other 59.3 47.0 45.0
- ---------------------------------------------------------------------------------------------------------------------------
$651.6 $596.2 $564.8
- ---------------------------------------------------------------------------------------------------------------------------
Interest Expense
Regulated Utility $18.5 $20.4 $20.6
Nonregulated Energy Operations 1.5 1.8 0.3
Real Estate 0.3 0.2 -
Other 11.5 28.2 28.4
- ---------------------------------------------------------------------------------------------------------------------------
$31.8 $50.6 $49.3
- ---------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Regulated Utility $ 0.1 $2.9 $7.7
Nonregulated Energy Operations 0.6 1.9 0.6
Real Estate - - -
Other (12.8) (2.3) (0.2)
- ---------------------------------------------------------------------------------------------------------------------------
$(12.1) $2.5 $8.1
- ---------------------------------------------------------------------------------------------------------------------------
Net Income (Loss)
Regulated Utility $ 42.8 $ 37.9 $ 50.4
Nonregulated Energy Operations (0.3) 3.7 (8.7)
Real Estate 14.7 14.1 11.2
Other (18.1) (25.9) (28.2)
- ---------------------------------------------------------------------------------------------------------------------------
Continuing Operations 39.1 29.8 24.7
Discontinued Operations 73.1 206.6 112.5
Change in Accounting Principle (7.8) - -
- ----------------------------------------------------------------------------------------------------------------- ---------
$104.4 $236.4 $137.2
- ---------------------------------------------------------------------------------------------------------------------------
Diluted Average Shares of Common Stock 28.4 27.8 27.2
- ---------------------------------------------------------------------------------------------------------------------------
Diluted Earnings (Loss) Per Share of Common Stock
Continuing Operations $1.37 $1.08 $0.91
Discontinued Operations 2.57 7.44 4.13
Change in Accounting Principle (0.27) - -
- ---------------------------------------------------------------------------------------------------------------------------
$3.67 $8.52 $5.04
- ---------------------------------------------------------------------------------------------------------------------------
Return on Common Equity 8.3% 17.7% 11.4%
- ---------------------------------------------------------------------------------------------------------------------------
ALLETE 2004 Form 10-K Page 24
2004 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
MILLIONS
Kilowatthours Sold
Regulated Utility
Retail and Municipals
Residential 1,053 1,065 1,044
Commercial 1,282 1,286 1,257
Industrial 7,071 6,558 6,946
Municipals 823 842 820
Other 79 79 78
- -------------------------------------------------------------------------------------------------------------------------
10,308 9,830 10,145
Other Power Suppliers 918 1,314 987
- -------------------------------------------------------------------------------------------------------------------------
11,226 11,144 11,132
Nonregulated Energy Operations 1,496 1,462 1,149
- -------------------------------------------------------------------------------------------------------------------------
12,722 12,606 12,281
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME
REGULATED UTILITY contributed net income of $42.8$52.8 million in 2004 ($37.9 million
in 2003; $50.4 million in 2002)2005). The 13% increase in 2004 net income from 2003
reflected an 8% increase in kilowatthourAbsent the inclusion of pre-existing Taconite Harbor wholesale energy sales obligations, sales to our industrial customers.
Higher expensesother power suppliers were down reflecting less excess energy available for pension, and increased costs associated with maintenancesale due to more planned outages at Company generating facilities and a scheduled outage at the Square
Butte generating facility, were partially offset by lower depreciation and
interest expense. Overall, regulated utility kilowatthour sales in 2004 were
similar to 2003 and 2002. In 2004, a 5% increase in2006 than 2005. Electric sales to retail and municipal customers reducedincreased 116 million kilowatthours, or 1 percent, and $23.5 million, mainly due to strong demand from industrial customers. Fuel clause recoveries were higher in 2006 as a result of increased fuel and purchased power expenses in 2006. Natural gas revenue was down $2.8 million from 2005 reflecting decreased usage due to warmer weather in 2006.
Operating expenses were up $57.8 million, or 12 percent, from 2005.
Fuel and Purchased Power Expense. Fuel and purchased power expense was up $38.0 million from 2005, reflecting the energyinclusion of Taconite Harbor operations beginning in 2006 ($22.8 million) and increased purchased power expense due to higher prices paid for purchased power, less Company hydro generation available for saleas a result of below normal precipitation levels, and planned maintenance at Company generating facilities in 2006.
Other Operating Expenses. Other operating expenses were up $19.8 million from 2005. Employee compensation was up $7.3 million primarily due to other power
suppliers. In addition, Regulated Utility net incomethe inclusion of Taconite Harbor, annual wage increases and the inclusion of union employees in 2004 also reflectedour results sharing compensation awards program. Depreciation expense increased $4.8 million primarily due to the absenceinclusion of equity income from Split Rock Energy,Taconite Harbor and a joint venture which we
terminatedfull year of depreciation of projects capitalized in March 20042005. Plant maintenance expense increased $4.7 million reflecting the inclusion of Taconite Harbor maintenance in 2006 ($1.7 million in 2003; $4.3 million in 2002). Equity
income from Split Rock Energy in 2003 included4.0 million), increased planned maintenance expense at Boswell Unit 4 ($1.6 million) and increased equipment fuel expenses ($0.9 million) partially offset by a $2.3 million charge to exit the
joint venture. In 2002, a $2.3 million one-time deferral of costs recoverable
through the regulated utility fuel clause increased income.
NONREGULATED ENERGY OPERATIONS reported a $0.3 million net loss in 2004 (net
income of $3.7 million in 2003; an $8.7 million net loss in 2002). The decrease in 2004 net incomemaintenance expense at Boswell Unit 3 ($1.8 million). In 2005, planned maintenance was performed at Boswell Unit 3 while the unit was down due to a cooling tower failure. Pension expense increased $2.2 million primarily due to a reduction in net income at Taconite
Harbor and a one-time costthe discount rate (5.50 percent in 2006; 5.75 percent in 2005). Insurance expense was up $1.0 million due to terminate a transmission contract relatedincreased premiums. Vegetation management expense was up $0.7 million due to more completed in 2006. Property taxes were up $0.7 million due to higher mill rates in 2006. Purchased natural gas expense was down $2.7 million due to decreased natural gas sales.
Interest expense was up $2.8 million, or 16 percent, from 2005, reflecting the Kendall County power purchase agreement. Net income atinclusion of Taconite Harbor in 2004
decreased, primarily2006 partially offset by lower effective interest rates (5.92 percent in 2006; 6.07 percent in 2005).
Nonregulated Energy Operations
Operating revenue was down $48.9 million, or 43 percent, from 2005 due to costs associated with a scheduled maintenance outage
in 2004 and increased costs for sulfur dioxide emission allowances. In addition,
wholesale power prices were lower in 2004. Generation atthe absence of revenue from Taconite Harbor first
came online at various times during the first half of 2002. Wholesale power
prices were higher($55.1 million in 2003 compared to 2002.
Generation secured through the2005) and Kendall County power purchase agreement began($3.1 million in May 2002. An after-tax loss2005). Effective January 1, 2006, Taconite Harbor is reported as part of approximately $8 million, whichRegulated Utility. Kendall County operations ceased to be included a $0.7
million cost to terminate a transmission contract, was recognized in 2004. In
December 2004, we entered into an agreement to assign thiswith our operations effective April 1, 2005, when the Company assigned the power purchase agreement to Constellation Energy Commodities. (See Outlook.)Coal revenue, realized under cost plus a fixed fee agreements, was up $3.7 million from 2005 reflecting a 16 percent increase in the delivery price per ton due to higher reimbursable coal production expenses (see Operating expenses below). In 2002,2006, tons of coal sold were down 7 percent from 2005 in part due to an outage at Minnkota Power’s Unit 1 in 2006.
Operating expenses were down $125.2 million, or 67 percent, from 2005 reflecting the absence of a $5.5$77.9 million charge related to the indefinite delayassignment of a generation
project in Superior, Wisconsin, reduced income, while 2003 reflected a $0.5
million reduction in the 2002 chargeKendall County power purchase agreement to Constellation Energy Commodities on April 1, 2005, expenses related to that project.
REAL ESTATE contributed net income of $14.7Taconite Harbor ($49.3 million in 20042005) and other expenses related to Kendall County ($14.16.3 million in 2003; $11.2 million in 2002). A strong southwest Florida real estate market
starting in the fall of 2003 and continuing into 2004 was the main reason for
higher net income in 2004 and 2003, as well as an increase in the number and the
profitability of real estate sales. The timing of the closing of real estate
sales varies from period2005) that were incurred prior to period and impacts comparisons between years.
OTHER reflected a net loss of $18.1 million in 2004, down from a $25.9 million
net loss in 2003 ($28.2 million net loss in 2002). A $9.8 million reduction in
interest expense resulting from lower debt balances was the main reason for the
improvement in 2004. Financial results for 2004 also included an $11.5 million
gain on the sale of ADESA stockApril 1, 2005. Expenses related to our ESOP (see Note 17)coal operations were up $3.4 million reflecting increased equipment lease costs ($1.3 million), a $10.9
million debt prepayment cost associated with the retirement of long-term debt as
a part of our financial restructuring in preparation for the spin-off of ADESA
(see Note 8)higher fuel expenses ($0.6 million) and $4.1 million of impairment losses related to our emerging
technologies portfolio. In addition, $1.6 million of equity losses on emerging
technology funds were recognized in 2004. In 2003, we reported net losses on the
sale of shares we held directly in publicly-traded, emerging technology
investments. Financial results for 2002 included net gains on the sale of
certain emerging technology investmentsincreased parts and losses related to our trading
securities portfolio, which was liquidated during the second half of 2002.
Page 25 ALLETE 2004 Form 10-K
DISCONTINUED OPERATIONS includes our Automotive Services business that was spun
off on September 20, 2004, our Water Services businesses, the majority of which
were sold in 2003, costs incurred by ALLETE associated with the spin-off of
ADESA, and our retail stores, which we exited in 2002.
Automotive Services contributed net income of $74.4 million in 2004supplies ($113.6
million in 2003; $88.2 million in 2002)0.9 million). Net income in 2004
Interest expense was down $39.2
million from 2003, reflecting a 6.6% reduction in our ownership of ADESA since
the June 2004 IPO and the absence of ADESA operations since the spin-off on
September 20, 2004. Net income in 2004 was also down due to debt prepayment
costs related to the early redemption of ADESA debt in August 2004, ALLETE's
costs associated with the business separation, and additional corporate charges
and separation expenses incurred by ADESA as it prepared to be a stand-alone,
publicly-traded company. In addition, 2004 net income included $4.1 million of
charges in connection with a lawsuit related to ADESA's vehicle import business.
Net income in 2003 reflected strong vehicle sales, fee increases, the
introduction and expansion of service offerings, lower interest expense due to
lower debt balances at the time, gains on sale of property and strong receivable
portfolio management at the floorplan financing business. Net income in 2003
also included a $1.3 million recovery from the settlement of a lawsuit
associated with ADESA's vehicle transport business. Net income in 2002 included
a $2.7 million exit charge related to ADESA's vehicle transport business.
Water Services financial results were a $1.3 million net loss in 2004 (net
income of $93.0 million in 2003; net income of $25.5 million in 2002). Net
income in 2004 decreased $94.3 million from 2003, primarily because 2003
included the sale of substantially all of our water and wastewater systems
serving various counties and communities in Florida. A $71.6 million after-tax
gain was recognized on the sale of these systems in 2003, net of all selling,
transaction and employee termination benefit expenses, as well as impairment
losses on certain remaining assets at the time. Gains in 2004 from the sale of
our North Carolina assets and the remaining systems in Florida were offset by an
adjustment to gains reported in 2003, resulting in an overall net loss of $0.5
million in 2004. The adjustment to gains reported in 2003 resulted primarily
from an arbitration award in December 2004 relating to a gain-sharing provision
on a system sold in 2003. Net income was also down from 2003, due to the absence
of operations from water and wastewater systems sold. The majority of Florida
systems were sold in the fourth quarter of 2003. North Carolina assets were sold
in June 2004.
Financial results for 2002 included a $1.2 million loss related to our retail
stores, primarily due to an exit charge.
CHANGE IN ACCOUNTING PRINCIPLE reflected the cumulative effect on prior years
(to December 31, 2003) of changing to the equity method of accounting for
investments in limited liability companies included in our emerging technology
portfolio. (See Note 14.)
2004 COMPARED TO 2003
REGULATED UTILITY
OPERATING REVENUE was up $45.0$3.3 million, or 9%, in 2004, primarily due to
higher fuel clause recoveries resulting from increased purchased power
costs (see operating expenses below) and increased retail sales. Overall,
regulated utility kilowatthour sales were similar to 2003 (up 1%) as a 5%
increase in sales to retail and municipal customers reduced the energy
available for sale to other power suppliers. Much of the increase in retail
and municipal electric sales was attributable to large industrial
customers, due to their higher production levels in 2004. Outages at
Company generating facilities and a scheduled maintenance outage at the
Square Butte generating facility (see operating expenses) also contributed
to less energy being available for sale to other power suppliers.
OPERATING EXPENSES in total were up $38.0 million, or 9%, in 2004,
primarily due to a $34.3 million increase in fuel and purchased power
expense. Increased purchased power was necessitated by outages at Company
generating facilities and the Square Butte generating facility. In February
2004, we experienced a generator failure at our 534-MW Boswell Unit 4. Unit
4 came back into service in June 2004. As a result of the failure, we
replaced significant components of the generator at a capital cost of
approximately $6 million. The majority of the replacement cost was covered
by insurance, subject to a deductible of $1 million. We entered into power
purchase agreements to replace the power lost during the Unit 4 outage. The
cost of this additional power was recovered through the regulated utility
fuel adjustment clause in Minnesota. While Unit 4 was down, some work
originally planned for 2005 and 2006 was done during the outage to minimize
future outages. This outage did not have a material impact on our results
of operations. Two multi-week scheduled maintenance outages also took place
at our 55-MW Laskin Unit 1 and at the Square Butte generating facility.
Operating and maintenance expense was $3.2 million higher in 2004,
primarily due to outages at our generating facilities. Our pro rata share
of the Square Butte maintenance outage costs was approximately $5 million.
In addition, 2004 reflected a $4.4 million increase in pension expense and
a $1.7 million decrease in depreciation expense. In 2004, the MPUC approved
longer depreciable lives for certain Company generating assets.
INTEREST EXPENSE was down $1.9 million from 2003, due to lower debt
balances in 2004.
ALLETE 2004 Form 10-K Page 26
2004 COMPARED TO 2003 (CONTINUED)
REGULATED UTILITY (CONTINUED)
OTHER INCOME (EXPENSE) reflected $2.8 million less income in 2004,50 percent, primarily due to the absence of Taconite Harbor in 2006.
Other income (expense) reflected $0.5 million more income in 2006 due to increased Minnesota land sales.
Investment in ATC
Other income (expense) reflected $3.0 million of income in 2006 from our equity investment in net incomeATC, resulting from Split Rock
Energy. Minnesota Power withdrewour share of ATC’s earnings.
2006 Compared to 2005 (Continued)
Real Estate
Operating revenue was up $15.1 million, or 32 percent, from Split Rock Energy trading activities,
effective November 1, 2003, and terminated2005, due to the joint venture in March 2004.
NONREGULATED ENERGY OPERATIONS
OPERATING REVENUE in 2004 was similar to 2003 as a 2% increase in
kilowatthourrecognition of revenue from prior land sales at our Town Center development project, which are accounted for under the percentage-of-completion method. Revenue from land sales was offset by lower wholesale prices. Kilowatthour$56.1 million in 2006 which included $9.7 million of previously deferred revenue. In 2005, revenue from land sales was $42.0 million. Sales at Town Center represented 773 residential units and the rights to build up to 401,971 square feet of non-residential space in 2006 (643,000 non-residential square feet in 2005). Sales at Palm Coast Park represented 200 residential units in 2006. In 2006, 732 acres of other land were sold (1,102 acres and 7 lots in 2005). The first land sales for Town Center were recorded in June 2005 and the first land sales at Palm Coast Park were recorded in August 2006. At December 31, 2006, revenue of $5.6 million ($11.5 million at December 31, 2005) was deferred and will be recognized on a percentage-of-completion basis as development obligations are completed.
Operating expenses were up 8% at Taconite Harbor despite a fourth quarter 2004 scheduled
maintenance outage, while kilowatthour sales at Kendall County were down
26% from 2003.
OPERATING EXPENSES were up $6.8$2.9 million, or 7%, in 2004, due to $1.3
million of costs associated with17 percent, from 2005 reflecting a scheduled maintenance outage at Taconite
Harbor, a $1.2 million transmission contract termination charge to exit the
Kendall County agreement and a $0.9$1.6 million increase in coststhe cost of real estate sold ($10.2 million in 2006; $8.6 million in 2005) due to the recognition of the cost of real estate sold at our Town Center development project which were previously deferred under the percentage-of-completion method. Selling expenses increased $0.6 million due to higher broker commission in 2006 and recognition of prior year’s selling expenses at our Town Center development project which were previously deferred under the percentage-of-completion method. Property tax expense was $0.2 million higher in 2006 due to increased assessment values and higher rates. At December 31, 2006, cost of real estate sold totaling $1.3 million ($2.2 million at December 31, 2005) and selling expenses of $0.2 million ($0.3 million at December 31, 2005), primarily related to Town Center land sales, were deferred until development obligations are completed.
Other
Operating expenses were down $1.4 million, or 29 percent, from 2005, reflecting lower general and administrative expenses in 2006.
Interest expense was up $1.6 million, or 70 percent, from 2005, reflecting interest on additional taxes owed on the gain on the sale of our Florida Water assets and state tax audits, and higher variable rates in 2006.
Other income (expense) reflected $9.9 million more income in 2006 due to a $4.4 million increase in earnings on cash and short-term investments due to higher rates and higher average balances in 2006, the absence of $5.1 million of impairments related to certain investments in our emerging technology portfolio recorded in 2005 and the absence of a $1.0 million charge recognized in 2005 for sulfur
dioxide emission allowances. Expensesthe probable payment under our guarantee of Northwest Airlines debt.
Discontinued Operations
Discontinued operations includes our Water Services businesses that we sold over a three-year period from 2003 to 2005 and our telecommunications business, which we sold in 2003December 2005. There were no losses recognized in discontinued operations in 2007 (a $0.9 million loss in 2006; $4.3 million loss in 2005).
In 2006, discontinued operations reflected a $0.9 million reductionloss resulting from additional legal and administrative expenses related to exiting the Water Services businesses (a $2.5 million loss in costs accrued in 20022005). In 2005, administrative and other expenses were incurred to support Florida Water transfer proceedings. A $1.0 million rate-base settlement charge related to the indefinite delaysale of a
generation project63 of Florida Water systems to Aqua Utilities Florida, Inc. was also recorded in Superior, Wisconsin.
OTHER INCOME (EXPENSE) reflected $1.3 million of less income2005. Our wastewater assets in 2004. The
decrease was attributable to a reduction in gains on prior Minnesota land
sales due to an MPUC required land reevaluation.
REAL ESTATE
OPERATING REVENUE was down $0.7 million, or 2%, in 2004. In 2004, we sold
1,479 acres and 211 lots for $35.8 million (1,394 acres and 265 lots for
$36.0 million in 2003). At December 31, 2004, total land sales under
contractGeorgia were $71 million, of which $30 million were for properties in the
Town Center development project at Palm Coast. Revenue in 2003 also
included the recovery of a partially reserved receivable.
OPERATING EXPENSES were down $1.7 million, or 9%, in 2004 because the cost
of property sold in 2004 was lower than in 2003. Cost of sales in 2004 was
$6.5 million ($7.9 million in 2003).
OTHER
OPERATING REVENUE was up $14.6 million, or 44%, in 2004, reflecting
increased revenue fromFebruary 2005.
Financial results for our telecommunications business reflected a loss of $1.8 million in 2005. In 2005, we recorded a $3.6 million loss on the sale of this business.
Income Taxes
For the year ended December 31, 2006, the effective tax rate from continuing operations before minority interest was 36.1 percent (2.5 percent benefit for the year ended December 31, 2005). The increase in the effective rate compared to 2005 was primarily due to
more
equipment sales.
OPERATING EXPENSES were up $12.3 million, or 26%,the lower income from continuing operations in
2004, mostly due to
higher cost of goods sold associated with increased sales at our
telecommunications business. Corporate charges were down $2.2 million
($12.6 million in 2004; $14.8 million in 2003). Lower corporate charges2005 as a result of the
spin-off of Automotive ServicesKendall County Charge, and
an insurance refund
partially offset higher incentive compensation and benefit costs, and
expenses relatedone-time tax benefits realized in 2005 for adjustments to
the reverse stock split.
INTEREST EXPENSE (not specifically related to any one business segment) was
down $16.8 million from 2003 ($11.2 million in 2004; $28.0 million in
2003), primarily due to lower debt balances. We repaid $25 million of 6
1/4% First Mortgage Bonds in July 2003; $50 million of 7 3/4% First
Mortgage Bonds in November 2003; $75 million of mandatorily redeemable
preferred securities in December 2003; $3.5 million of Industrial
Development Revenue Bonds in January 2004; and $125 million of 7.80% Senior
Notes in July 2004. In addition, $111 million of Pollution Control
Refunding Revenue Bonds were refinanced at a lower rate in August 2004 and
a $250 million credit agreement entered into in July 2003 was paid off
early ($197 million in 2003; $53 million in April 2004). A combination of
internally-generated funds, proceeds from the sale of our
Water Servicesdeferred tax assets and
proceeds received from ADESA were used to repay the debt.
OTHER INCOME (EXPENSE) reflected $10.5 million of additional expense in
2004, primarily due to an $18.5 million debt prepayment cost related to the
early redemption of $125 million in senior notes in 2004 and $6.5 million
of impairment losses recorded related to our emerging technology
investments. In addition, $1.7 million of equity losses on emerging
technology funds were recognized in 2004. These decreases were partially
offset by an $11.5 million gain on the sale of ADESA shares held in our
ESOP. (See Note 17.) In 2003, we recognized $3.5 million of losses related
to the sale of shares we held directly in publicly-traded emerging
technology investments.
Page 27 ALLETE 2004 Form 10-K
2003 COMPARED TO 2002
REGULATED UTILITY
OPERATING REVENUE was up $12.1 million, or 2%, in 2003, mainly due to
higher fuel clause recoveries and natural gas prices. Regulated utility
kilowatthour sales were similar to 2002. Fuel clause recoveries increased,
due to higher purchased power costs.
OPERATING EXPENSES were up $26.5 million, or 7%, in 2003, primarily due to
a $5.8 million increase in fuel and purchased power expense, a $4.4 million
increase in natural gas expense and a $4.8 million increase in employee
pension and benefit expenses. Higher purchased power costs resulted from
both increased wholesale prices and quantities purchased. Planned
maintenance outages at our generating stations and lower output from our
hydro facilitiesliabilities as a result of drier weather necessitated higher
quantitiescomprehensive state tax planning initiatives, and positive resolution of purchased power in 2003. Natural gas expenseaudit issues. The effective rate of 36.1 percent for the year ended December 31, 2006, was higher in
2003, due to increased prices. Expenses for pension and post-retirement
health benefits increased, mainly due to lower discount rates and expected
rates of return on plan assets. Operating expenses in 2002 included a $4
million one-time deferral of costs recoverable through the utility fuel
adjustment clause.
OTHER INCOME (EXPENSE) reflected $4.8 million less income in 2003,
primarily due to less equity income from our joint venture in Split Rock
Energy ($2.9 million in 2003; $7.3 million in 2002). Our 2003 equity in net
income from Split Rock Energy reflected a $2.3 million charge accrued at
the time we reached an agreement to withdraw from this joint venture.
NONREGULATED ENERGY OPERATIONS
OPERATING REVENUE was up $21.9 million, or 26%, in 2003, primarily due to
increased sales of nonregulated generation from our Taconite Harbor
facility and improved wholesale power prices. Increased sales of
nonregulated generation resulted from Taconite Harbor being available for a
full 12 months in 2003. Taconite Harbor generation first came online at
various times during the first half of 2002.
OPERATING EXPENSES were up $0.2 million, or less than 1%,the combined state and federal statutory rate because of investment tax credits, deductions for Medicare health subsidies, depletion and the expected use of state capital loss carryforwards.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in
2003, mainly
dueconformity with GAAP requires management to
fuelmake various estimates and
purchased power expenses for nonregulated generationassumptions that
came online duringaffect amounts reported in the
first half of 2002. Purchased power expense in 2003
includedconsolidated financial statements. These estimates and assumptions may be revised, which may have a
full 12 months of demand charges related to the Kendall County
power purchase agreement, while 2002 included only eight months. Operating
expenses in 2002 included a $9.5 million charge related to the indefinite
delay of the generation project in Superior, Wisconsin.
INTEREST EXPENSE was up $1.5 million, predominantly due to more interest
capitalized in 2002.
REAL ESTATE
OPERATING REVENUE was up $9 million, or 27%, in 2003, as a result of more
land sales. In 2003, we sold 1,394 acres and 265 lots for $36.0 million
(641 acres and 1,425 lots for $29.9 million in 2002). Revenue in 2003 also
included the recovery of a partially reserved receivable.
OPERATING EXPENSES were up $2.7 million, or 17%, in 2003 because the cost
of property sold in 2003 and selling expenses were higher than in 2002.
Cost of sales in 2003 was $7.9 million ($6.8 million in 2002).
OTHER
OPERATING REVENUE was up $6.3 million, or 24%, in 2003, reflecting
increased revenue from our telecommunications business, due to more
equipment sales.
OPERATING EXPENSES were up $2.0 million, or 4%, in 2003, reflecting higher
cost of goods sold associated with increased sales at our
telecommunications business, partially offset by a $2.2 million decrease in
corporate charges ($14.8 million in 2003; $17.0 million in 2002).
INTEREST EXPENSE was down $0.2 million, or less than 1%, in 2003 and
reflected interest expense not specifically related to any one business
segment ($28.0 million in 2003; $28.2 million in 2002).
OTHER INCOME (EXPENSE) reflected $2.1 million less income in 2003,
primarily due to a $3.5 million loss related to the sale of shares the
Company held directly in publicly-traded emerging technology investments.
In 2002, we recognized a $3.3 million gainmaterial effect on the
sale of certain emerging
technology investments, which was more than offset by losses on our trading
securities portfolio that was liquidated during the second half of 2002.
ALLETE 2004 Form 10-K Page 28
CRITICAL ACCOUNTING POLICIES
Certain accounting measurements under applicable generally accepted accounting
principles involve management's judgment about subjective factorsconsolidated financial statements. Actual results may differ from these estimates and estimates,
the effects of which are inherently uncertain.assumptions. These policies are revieweddiscussed with the audit committeeAudit Committee of our Board of Directors on a regular basis. The following summarizes those accounting measurementsrepresent the policies we believe are most critical to our reportedbusiness and the understanding of our results of operationsoperations.
Real Estate Revenue and financial condition.
IMPAIRMENT OF LONG-LIVED ASSETS. We annually review our assets for impairment.
SFAS 144, "Accounting for the Impairment and Disposal of Long-Lived Assets," is
the basis for these analyses. Judgments and uncertainties affecting the
application of accounting for asset impairment include economic conditions
affecting market valuations, changes in our business strategy, and changes in
our forecast of future operating cash flows and earnings.Expense Recognition. We account for our long-lived assetssales of real estate in accordance with SFAS 66, “Accounting for Sales of Real Estate.” Revenue from residential and non-residential properties is recorded at depreciated historical cost. A
long-lived asset is tested for recoverability whenever eventsthe time of closing using the full profit recognition method, provided that cash collections are at least 20 percent of the contract price and the other requirements of SFAS 66 are met. However, if we are obligated to perform significant development activities subsequent to the date of the sale, we recognize revenue using the percentage-of-completion method. This method of accounting requires that we recognize gross profit based upon the relationship of development costs incurred to the total estimated development costs of the parcels. During each reporting period, we must estimate the total costs to be incurred until project completion, including development overhead and interest capitalization costs. These total cost estimates will impact the recognition of profit on sales. The costs are allocated to each lot or changes in
circumstances indicate that its carrying amount may not be recoverable. We would
recognize an impairment loss only ifparcel based on the carryingrelative sales value method. These estimates affect the amount of costs relieved as each lot is sold and incorrect estimates may result in a long-lived assetmisstatement of the cost of real estate sold. Additionally, we must estimate the selling price of each individual lot or parcel that is not recoverableincluded in inventory for inclusion in the inventory cost model. If the estimated selling prices of the lots are inaccurate, a material difference in the timing of recording cost of real estate sold for the lots sold could occur.
We record land held for sale at the lower of cost or fair value, which is determined by the evaluation of individual land parcels. Real estate costs include the cost of land acquired, subsequent development costs and costs of improvements, capitalized development period interest, real estate taxes and payroll costs of certain employees devoted directly to the development effort. Based on the relative sales value of the parcels within each development project, we capitalize the real estate costs incurred to the cost of real estate parcels in accordance with SFAS 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects.” When real estate is sold, we include the actual costs incurred and the estimate of future completion costs allocated to the parcel(s) sold, based upon the relative sales value method in the cost of real estate sold. We include land held for sale in Investments on our consolidated balance sheet (See Note 6). In certain cases, we pay fees or construct improvements to mitigate offsite traffic impacts. In return, we receive traffic impact fee credits as a result of some of these expenditures. We recognize revenue from its undiscounted cash flows. Management judgmentthe sale of traffic impact fee credits when payment is involved in both decidingreceived. Certain contracts allow us to receive participation revenue from land sales to third parties if testing for recoverabilityvarious formula-based criteria are achieved. We recognize participation revenue when there is necessarya contractual obligation to receive this revenue.
Pension and in
estimating undiscounted cash flows. As of December 31, 2004, no write-downs were
required.
PENSION AND POSTRETIREMENT HEALTH AND LIFE ACTUARIAL ASSUMPTIONS.Postretirement Health and Life Actuarial Assumptions. We account for our pension and postretirement benefit obligations in accordance with the provisions of SFAS 87, "Employers'158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” SFAS 87, “Employers’ Accounting for Pensions,"” and SFAS 106, "Employers'“Employers’ Accounting for Postretirement Benefits Other Than Pensions."” These standards require the use of assumptions in determining theour obligations and annual cost.cost of our pension and postretirement benefits. An important actuarial assumption for pension and other postretirement benefit plans is the expected long-term rate of return on plan assets. In establishing this assumption, we consider the diversification and allocation of plan assets, the actual long-term historical performance for the type of securities invested in, the actual long-term historical performance of plan assets and the impact of current economic conditions, if any, on long-term historical returns. Our pension asset allocation is approximately 70%61 percent equity, 25 percent debt, 9 percent private equity, 2 percent real estate and 30% fixed-rate3 percent other securities. Equity securities consist of a mix of market capitalization sizes and also include investments in real estateboth domestic and venture
capital.international securities. We currently use an expected long-term rate of return of 9%9 percent in our actuarial determination of our pension actuarial study.and other postretirement expense. We annually review our expected long-term rate of return assumption and will adjust it to respond to any changing market conditions. A 1/2%one-quarter percent decrease in the expected long-term rate of return would increase the annual expense for pension and other postretirement benefits by approximately $1$1.5 million, after tax; likewise,pre-tax; conversely, a 1/2%one-quarter percent increase in the expected long-term rate of return would decrease the annual expense by approximately $1$1.5 million, after tax.pre-tax.
For plan valuation purposes, we currently use a discount rate of 6.25 percent. The discount rate is determined considering high-quality long-term corporate bond rates at the valuation date. The discount rate is compared to the Citigroup Pension Discount Curve adjusted for ALLETE’s specific cash flows. We believe the adjusted discount curve used in this comparison does not materially differ in duration and cash flows for our pension obligation. The Audit Committee of the Board of Directors annually reviews and approves the rate of return and discount rate estimates used for pension valuation and accounting purposes. (See Note 1615.)
Critical Accounting Estimates (Continued)
Regulatory Accounting. Our regulated utility operations are subject to the provisions of SFAS 71, “Accounting for additional detailthe Effects of Certain Types of Regulation”. SFAS 71 requires us to reflect the effect of regulatory decisions in our financial statements. Regulatory assets or liabilities arise as a result of a difference between GAAP. and the accounting principles imposed by the regulatory agencies. Regulatory assets represent incurred costs that have been deferred as they are probable for recovery in customer rates. Regulatory liabilities represent obligations to make refunds to customers and amounts collected in rates for which the related costs have not yet been incurred.
We recognize regulatory assets and liabilities in accordance with applicable state and federal regulatory rulings. The recoverability of regulatory assets is periodically assessed by considering factors such as, but not limited to, changes in regulatory rules and rate orders issued by applicable regulatory agencies. The assumptions and judgments used by regulatory authorities may have an impact on the recovery of costs, the rate of return on invested capital, and the timing and amount of assets to be recovered by rates. A change in these assumptions may result in a material impact on our pension and
postretirement health and life plans.results of operations. (See Note 5.)
VALUATION OF INVESTMENTS.
Valuation of Investments. As part of our emerging technology portfolio, we have several minority investments in venture capital funds and direct investments in privately-held, start-up companies. We account for our investment in venture capital funds under the equity method and account for our direct investmentinvestments in privately-held companies under the cost method.method because of our ownership percentage. These investments are included in Investments on our consolidated balance sheet. Our policy is to quarterly review these investments for impairment on a quarterly basis by assessing such factors as continued commercial viability of products, cash flow and earnings. Any impairment would reduce the carrying value of the investment and be recognized as a loss. In 2004,2007, we recorded $6.5 million pretax ofan impairment lossesloss on these investments ($0 in
2003; $1.5of $0.5 million pretax (none in 2002)2006). PROVISION FOR ENVIRONMENTAL REMEDIATION. Our businesses are subject to
regulation by various federal, state and local authorities concerning
environmental matters. We review environmental matters on a quarterly basis.
Accruals for environmental matters are recorded when it is probable that a
liability has been incurred and the amount of the liability can be reasonably
estimated, based on current law and existing technologies. These accruals are
adjusted periodically as assessment and remediation efforts progress, or as
additional technical or legal information becomes available. Accruals for
environmental liabilities are included in the balance sheet at undiscounted
amounts and exclude claims for recoveries from insurance or other third parties.
Costs related to environmental contamination treatment and cleanup are charged
to expense. We do not currently anticipate that potential expenditures for
environmental matters will be material; however, if we become subject to more
stringent remediation at known sites, if we discover additional contamination or
previously unknown sites, or if we become subject to related personal or
property damage, we could incur material costs in connection with our
environmental remediation.
TAXATION.(See Note 6.)
Taxation. We are required to make judgments regarding the potential tax effects of various financial transactions and our ongoing operations to estimate our obligations to taxing authorities. These tax obligations include income, real estate and use taxes. Judgments related to income taxes require the recognition in our financial statements of the largest tax benefit of a tax position that is “more-likely-than-not” to be sustained on audit. Tax positions that do not meet the “more-likely-than-not” criteria are reflected as a tax liability. These judgments include reserves for potential adverse outcomes regarding tax positions that we have taken. We must also assess our ability to generate capital gains to realize tax benefits associated with capital losses expected to be generated in future periods. Capital losses may be deducted only to the extent of capital gains realized during the year of the loss or during the three prior or five succeeding years.years for federal purposes, and fifteen succeeding years for Minnesota purposes. As of December 31, 2004,2007, we have, where appropriate, recorded ana valuation allowance against our deferred tax assets associated with impairment losses, which will becomerealized capital losses whenand impairments to reduce the deferred tax assets to the amount we estimate is more likely than not to be realized in accordance with FIN 48, “Accounting for income tax purposes.Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109”. While we believe the resulting tax reserve balances as of December 31, 20042007, reflect the most likely probable expected outcome of these tax matters in accordance with SFAS 5, "Accounting for
Contingencies," and SFAS 109, "Accounting“Accounting for Income Taxes,"” the ultimate outcomeamount of such matterscapital losses resulting in tax benefits could result in additional adjustments to our
consolidated financial statements and such adjustments could be material.
Page 29 ALLETE 2004 Form 10-K
OUTLOOK
In the last 10 years, our average annual total shareholder return is 16%.
Approximately 4% of this average was attributed to dividends. A $100 investment
in ALLETE stock at the end of 1994 would have been worth $439 at the end of
2004, assuming reinvestment of dividends and shares received in the ADESA
distribution were sold and reinvested in ALLETE. By comparison, the Standard &
Poor's 500 Index averaged 12% for the same period, of which approximately 2% of
the average was attributed to dividends. A $100 investment in the Standard &
Poor's 500 Index at the end of 1994 would have been worth $312 at the end of
2004, assuming reinvestment of dividends.
Having completed the spin-off of our Automotive Services business and the sale
of our Water Services businesses, our transformation in 2004 has made us a
stronger company and positioned us for substantial growth in 2005.
2005 EARNINGS GUIDANCE. We expect ALLETE's earnings per share from continuing
operations to grow by 45% to 50% in 2005. The growth is expected to come from
continued strong real estate sales, lower interest expense and the transfer of
the Kendall County purchased power agreement. The earnings expectation excludes
an anticipated one-time charge related to the Kendall County agreement.
The ESOP has been using proceedsdiffer from the salenet amount of ADESA stock to purchase ALLETE
common stock on the open market. Pursuant to AICPA Statement of Position 93-6,
"Employers' Accounting for Employee Stock Ownership Plans," unallocated ALLETE
common stock currently held and purchased by the ESOP will be treated as
unearned ESOP shares and not considered as outstanding for earnings per share
computations. ESOP shares are included in earnings per share computations after
they are allocated to participants. Atdeferred tax assets at December 31, 2004, the ESOP had purchased
1.0 million shares of 2007. ALLETE common stock2007 Form 10-K
Outlook
ALLETE is committed to earning a financial return that rewards our shareholders, allows for reinvestment in our businesses and had $30.3 million of restricted
cash. During January 2005, the ESOP purchased an additional 0.5 million shares
of ALLETE common stock and had $8.9 million of restricted cash at January 31,
2005. (See Note 17.)
REGULATED UTILITY AND NONREGULATED ENERGY OPERATIONS. Over the next five years,sustains growth. New opportunities have arisen which we believe electric utilities will face three major issues: ongoing changes inallow us to achieve our long term earnings growth goals through our existing businesses. Our Regulated Utility expects to make significant investments to comply with renewable and environmental requirements, maintain its existing low-cost generation fleet and strengthen and enhance the regional transmission structure; the probable enactment of stricter
environmental regulations;grid. In addition, we expect kilowatt-hour sales growth from existing and possible federal legislation impacting the
structure and organization of the electric utility industry. The FERC may
consolidate transmission regions, which could impact states' transmission
regulation rights and create a more standardized wholesale power market to
oversee how transmission prices are determined. As part of this larger policy
effort, MISO will launch day-ahead and real-time energy market operations on
April 1, 2005. We are not yet able to predict the impact of the soon-to-be
initiated MISO Day 2 market on the Company's operations. We have been diligently
participating with MISO in market launch preparations and tests, andpotential new customers. Earnings from our systems
and procedures for operating within the new market are in place. Stricter
environmental requirements through legislation and/or rulemakingsATC investment are expected to require significantgrow as we anticipate making additional investments to fund our pro-rata share of ATC’s capital investments in the 2008 to 2012 timeframe. The
expenditures will relate to new emission controls on existing generating units.
Congress is expected to take up energy legislation in 2005. Repeal of the Public
Utility Holding Company Act (PUHCA) is likelyexpansion program. We expect net income from Real Estate to be oneapproximately 10 percent to 20 percent of total ALLETE consolidated net income over the electric utility
sector reforms addressednext several years.
We will focus our business development activities on growth opportunities in, the bill. PUHCA imposes geographic restrictions on
large electric and gas utility operations and limits diversification into
non-utilityor complementary to, our core businesses. More electric industry consolidation could occur and new
players could enter the industry if PUHCA is repealed. We believe that current weak market conditions will present an opportunity to add to our Regulated Utility and Nonregulated Energy Operations businesses
are well positioned to successfully deal with the issues we have described and
to compete successfully. Our access to and ownershipportfolio of low-cost power areproperties for sale at our greatest strengths. We anticipate securing additional competitive resources for
our forecasted load growth.Real Estate operations. We anticipate that we will have ready access to sufficient funds for capital for general business purposes. We believe electric industry
deregulation is unlikely in Minnesota or Wisconsininvestments and acquisitions.
Earnings Guidance. In 2008, we expect ALLETE’s diluted earnings per share from continuing operations to be in the next five years.
REGULATED UTILITY STRATEGY. Werange of $2.70 to $2.90. This guidance reflects:
Regulated Utility
| · | New FERC-approved wholesale rates effective March 1, 2008; |
| · | Minnesota Power’s intention to file a retail rate case with the MPUC in mid-2008, with interim rates in effect 60 days later; |
| · | Minnesota Power’s expectation that electricity sales to industrial customers will continue at the current high levels during 2008; |
| · | increased revenue from current cost recovery riders related to the Company’s investments in environmental and renewable energy initiatives; |
| · | increased operation and maintenance expenses, including labor and benefit costs; |
| · | increased financing costs associated with the 2008 capital expenditure program; |
| · | anticipation of approximately $316 million in capital expenditures in 2008, about half of which will be invested in environmental and renewable energy initiatives; |
Investment in ATC
| · | the expectation of ALLETE investing an additional $5 to $7 million in ATC in 2008; |
Real Estate
| · | a continuation of the difficult market conditions; and |
| · | an expectation that net income in 2008 will be less than in 2007. |
Energy. As part of our strategy, we will leverage the strengths of our Regulated Utility business to improve the Company'sour strategic and financial outlook.outlook and seek growth opportunities in close proximity to existing operations in the Midwest. We believe electric industry deregulation is unlikely in Minnesota and Wisconsin in the next five years.
Minnesota Power expects significant rate base growth over the next several years as it makes capital expenditures to comply with renewable energy requirements and environmental mandates. In addition, significant investment will be made in our existing low-cost generation fleet to provide for continued future operations as we continue to believe ownership of low-cost generation is a competitive advantage. Minnesota Power will also look for transmission opportunities which strengthen and enhance the regional transmission grid and take advantage of our geographic location between sources of renewable energy and growing energy markets. Our capital investments will be recovered through a combination of current cost recovery riders and anticipated increased base electric rates. We also expect an average annual kilowatt-hour growth of approximately one percent from our existing customers, as well as up to 400 MW of additional growth from several potential new industrial customers planning projects in our service territory.
Our energy strategy is to be a leader in the movement toward renewable energy and cleaner power plants. We believe we can meet our customers’ electric energy needs for the next decade while achieving real reductions in total carbon emissions. We intend to aggressively pursue renewable energy resources and expect to comply with Minnesota’s 25 percent renewable energy mandate prior to the 2025 deadline.
Outlook (Continued)
Energy (Continued)
Integrated Resource Plan. On October 31, 2007, Minnesota Power filed its Integrated Resource Plan (IRP), a comprehensive estimate of future capacity needs within the Minnesota Power service territory. Minnesota Power believes it can meet the estimated future customer demand for the next decade while achieving real reductions in the emission of GHGs (primarily carbon dioxide).
Minnesota Power plans to meet expected loads through approximately 2020 by adding a significant amount of renewable generation and some supporting peaking generation. We do not plan to add new coal generation or enter into long-term power purchase agreements from coal-based generation resources without a GHG solution. We plan to add 300 to 500 megawatts of carbon-minimizing renewable energy to our generation mix. Besides the additional generation from renewable sources, Minnesota Power anticipates future supply will come from a combination of sources, including:
| · | "As-needed" peaking and intermediate generation facilities; |
| · | Expiration of wholesale contracts presently in place; |
| · | Short-term market purchases; |
| · | Improved efficiency of existing generation and power delivery assets; and |
| · | Expanded conservation and demand-side management initiatives. |
We do not anticipate the need for new base load system generation within the Minnesota Power service territory through approximately 2020, and we project a one percent average annual growth in electric usage from our existing customers over that time frame.
Mesaba Energy Project. On August 30, 2007, the MPUC issued an order denying Excelsior Energy Inc.’s request for a power purchase agreement with Xcel Energy to sell power from the Mesaba Energy Project (Mesaba Project). We participated in the MPUC proceeding to demonstrate the unnecessary costs the Mesaba Project would cause for our ratepayers and the negative energy policy impacts of a forced resource addition. The MPUC’s August 30, 2007, order states that the MPUC will explore in IRPs and resource acquisition proceedings whether all Minnesota utilities should participate in the Mesaba Project. Beyond the fact that we forecast no need for base load energy supply additions until late in the next decade, we object to the Mesaba Project because it does not include a GHG solution.
Climate Change. A key component of our energy strategy is a goal to reduce overall GHG emissions. While there continues to be debate about the causes and extent of global warming, certain scientific evidence suggests that emissions from fossil fuel generation facilities are a contributing factor. Minnesota Power has a long history of environmental stewardship.
We believe that future regulations may restrict the emissions of GHGs from our generation facilities. Several proposals on the Federal level to “cap” the amount of GHG emissions have been made. Other proposals consider establishing emissions allowances or taxes as economic incentives to address the GHG emission issue.
In 2007, Minnesota passed legislation establishing non-binding targets for GHG reductions. This legislation establishes a goal of reducing statewide GHG emissions across all sectors producing those emissions to a level at least 15 percent below 2005 levels by 2015, at least 30 percent below 2005 levels by 2025, and at least 80 percent below 2005 levels by 2050. Minnesota is also participating in the Midwestern Greenhouse Gas Accord, a regional effort to develop a multi-state approach to GHG emission reductions. We are proactively taking steps to strategically engage the GHG emission issue and the impact of climate change regulation on our business.
Minnesota Power is addressing this challenge by taking the following steps that also ensure reliable and environmentally compliant generation resources to meet our customer’s requirements.
| · | We will consider only carbon minimizing resources to supply power to our customers. We will not consider a new coal resource without a carbon emission solution. |
| · | We will aggressively pursue Minnesota’s Renewable Energy Standard by adding significant renewable resources to our portfolio of generation facilities and power supply agreements. |
| · | We will continue to improve the efficiency of coal-based generation facilities. |
| · | We plan to implement aggressive demand side conservation efforts. |
| · | We will continue to support research of technologies to reduce carbon emissions from generation facilities and support carbon sequestration efforts. |
| · | We plan to achieve overall carbon emission reductions while maintaining competitively priced electric service to our customers. |
Outlook (Continued)
Energy (Continued)
Renewable Generation Sources. The areas in which we operate have strong wind, water and biomass resources, and provide us with opportunities to develop a number of renewable forms of generation. Our electric service area in Northeastern Minnesota is well situated for delivery of renewable energy that is generated here and in adjoining regions. We intend to secure the most cost competitive and geographically advantageous renewable energy resources available. We believe that the demand for these resources is likely to grow, and the costs of the resources to generate renewable energy will continue to escalate. While we intend to maintain our disciplined approach to developing generation assets, we also believe that by acting sooner rather than later we can deliver lower cost power to our customers and maintain or improve our cost competitiveness among regional utilities. We will continue to work cooperatively with our customers, our regulators and the communities we serve to develop generation options that reflect the needs of our customers as well as the environment. We believe that our location and our proactive leadership in developing renewable generation provide us with a competitive advantage.
We have already begun executing this strategy. For more than a century, we have been Minnesota’s leading producer of renewable hydroelectric energy. By the second quarter of this year, we will evaluate growth opportunities through merger, acquisition or
assethave doubled our renewable generation capacity with wind additions in North Dakota and Minnesota. We will also continue to support research and development activity in carbon capture and storage technologies that will enable our region.
RESOURCE PLAN. industry to better manage GHG emissions associated with existing and future coal based generating assets.
Renewable Energy. In 2004,February 2007, Minnesota enacted a law requiring Minnesota Power to generate or procure 25 percent of our energy through renewable energy sources by 2025. The legislation also requires Minnesota Power to meet interim milestones of 12 percent by 2012, 17 percent by 2016, and 20 percent by 2020. The legislation allows the MPUC to modify or delay a standard obligation if implementation will cause significant ratepayer cost or technical reliability issues. If a utility is not in compliance with a standard, the MPUC may order the utility to construct facilities, purchase renewable energy or purchase renewable energy credits. Minnesota Power was developing and making renewable supply additions as part of its generation planning strategy prior to this legislation and this activity continues. Minnesota Power believes it will meet the requirements of this legislation.
In December 2006, we began purchasing the output from a 50-MW wind facility, Oliver Wind I, located in North Dakota, under a 25-year power purchase agreement with an affiliate of FPL Energy.
In May 2007, the MPUC approved a second 25-year wind power purchase agreement to purchase an additional 48-MW of wind energy from Oliver Wind II, an expansion of Oliver Wind I located in North Dakota. The MPUC also allowed current cost recovery for associated transmission upgrades. In November 2007, Oliver Wind II became operational and we began purchasing the output from the wind facility.
In May 2007, the MPUC approved a 20-year Community-Based Energy Development Project power purchase agreement. The 2.5-MW Wing River Wind project, with Wing River Wind, LLC, became operational July 2007.
In September 2007, the MPUC approved our site permit application and we began construction of the $50 million, 25-MW Taconite Ridge Wind I Facility, located in northeastern Minnesota. Minnesota Power filed an integrated resource plan (Resource Plan)a petition for current cost recovery on the Taconite Ridge Wind I Facility with the MPUC detailingin August 2007. In October 2007, the DOC recommended approval of Minnesota Power’s current cost recovery filing. The MPUC hearing regarding Minnesota Power’s current cost recovery filing is currently waiting scheduling. The Taconite Ridge Wind I Facility is expected to become operational in mid-2008.
We continue to investigate additional renewable energy resources including biomass, hydroelectric and wind generation that will help us meet the Minnesota 25 percent renewable energy standard. In particular, we are conducting a feasibility study for construction of a 25-MW biomass generating unit at Laskin, as well as looking at opportunities to expand biomass energy production at existing facilities. Additionally, we are pursuing a potential 10-MW expansion of our Fond du Lac hydroelectric station. We will make specific renewable project filings for regulatory approval as needed.
Outlook (Continued)
Energy (Continued)
In January 2008, Minnesota Power and Manitoba Hydro executed a term sheet for the purchase of surplus energy beginning in 2008 and an anticipated 250-MW capacity purchase to begin in about 2020. Minnesota Power anticipates the initial purchase of surplus energy will be about 100 MWs during high hydro production periods in the spring and fall. The 250-MW long-term purchase will require construction of hydroelectric facilities in Manitoba and major new transmission facilities between Canada and the United States. Minnesota Power and Manitoba Hydro have one year to complete negotiations and sign a definitive agreement. Each purchase is expected to require MPUC approval.
CapX 2020. Minnesota Power is a participant in the CapX 2020 project which represents an effort to ensure the electricity reliability of Minnesota and the surrounding region for the future. CapX 2020 started with the state's largest transmission owners, including electric cooperatives, municipals and investor-owned utilities, assessing the transmission system and projected growth in customer demand for electricity through 2020. Studies show that the region's transmission system will require major upgrades and expansion to accommodate increased electricity demand as well as support renewable energy expansion through 2020.
The CapX 2020 participants filed a Certificate of Need for three 345 kV lines and associated system interconnections with the MPUC in August 2007. Following a public process, the MPUC is expected to decide on the need for these 345 kV lines by early 2009. If the MPUC certifies need, it will then determine routes for the new lines in subsequent proceedings. Portions of the 345 kV lines will also require approvals by federal officials and by regulators in North Dakota, South Dakota and Wisconsin. A fourth line, a 230 kV line in north central Minnesota, is also among the CapX 2020 projects. A request for a Certificate of Need/Site Permit for this line is expected to be filed by mid-2008, with the MPUC decision on need and routing expected approximately one year later.
Minnesota Power may invest capital in two of the lines, a 250-mile 345 kV line between Fargo, North Dakota and Monticello, Minnesota, and a 70-mile 230 kV line between Bemidji and Grand Rapids, Minnesota. Our investment in these two lines would entail an estimated $60 million and $90 million, respectively. Upon receipt of the required Certificates of Need, we intend to file with the MPUC for current cost recovery of the expenditures related to our investment in the lines under a Minnesota Power transmission cost recovery tariff rider mechanism authorized by Minnesota legislation. For the utilities involved, the first four projects represent a combined investment of approximately $1.4 to $1.7 billion. Construction of the lines is targeted to begin in 2009 or 2010 and last approximately three to four years, but depends on the timing and outcome of regulatory need and routing decisions.
AREA and Boswell Unit 3 Emission Reduction Plans. In May 2006, the MPUC approved our filing for current cost recovery of expenditures to reduce emissions to meet pending federal requirements at Taconite Harbor and Laskin under the AREA Plan. The AREA Plan approval allows Minnesota Power to recover Minnesota jurisdictional costs for SO2, NOX and mercury emission reductions made at these facilities without a rate proceeding. Current cost recovery from retail customers will include a return on investment and recovery of incremental expense. The AREA Plan is expected to significantly reduce emissions from Taconite Harbor and Laskin, while maintaining a reliable and reasonably-priced energy demand projections and our energy
sourcing optionssupply to meet the projected demand overneeds of our customers. We believe that control and abatement technologies applicable to these plants have matured to the next 15 years. point where further significant air emission reductions can be attained in a relatively cost-effective manner. Current cost recovery filings are required to be made 90 days prior to the anticipated in-service date for the equipment at each unit, with rate recovery beginning the month following the in-service date.
Minnesota Power has completed installation of new equipment at Laskin and current cost recovery of AREA Plan costs has begun. The first of three Taconite Harbor unit installations was completed and placed back in-service in June 2007, with current cost-recovery began in July 2007. We anticipate cost recovery on the other Taconite Harbor units once work is completed and the units have been placed back in-service, which is expected in late 2008. As of December 31, 2007, we have spent $36 million of the anticipated $60 million in AREA Plan expenditures.
In May 2006, we announced plans to make emission reduction investments at our Boswell Unit 3 generating unit. Plans include reductions of particulate, SO2, NOX and mercury emissions to meet pending federal and state requirements. In late March 2007, the Resource Plan,Boswell Unit 3 project received the necessary construction permits. On October 26, 2007, the MPUC issued a written order approving Minnesota Power’s petition for current cost recovery for the Boswell Unit 3 emission reduction plan with some minor modifications and additional reporting requirements. MPUC approval authorized a cash return on construction work in progress during the construction phase in lieu of AFUDC-Equity and allows for a return on investment and current cost recovery of incremental operations and maintenance expenses once the unit is placed into service in late 2009. On December 26, 2007, the MPUC approved Boswell Unit 3’s rate adjustment for 2008. As of December 31, 2007, we predict that retail demand byhave spent $89 million of the anticipated $200 million in Boswell Unit 3 emission reduction plan expenditures.
Outlook (Continued)
Energy (Continued)
Rate Cases. We have and will continue to significantly increase our rate base. On December 28, 2007, we submitted a filing with the FERC seeking to increase electric rates for our wholesale customers. On February 8, 2008, the FERC approved our wholesale rate. Our wholesale customers consist of 16 municipalities in our service
territory will increase atMinnesota and two private utilities in Wisconsin, including SWL&P. The FERC authorized an average annual10 percent increase for wholesale municipal customers, a 12.5 percent increase for SWL&P, and an overall return on equity of 11.25 percent. The rate increase will go into effect on March 1, 2008, and on an annualized basis, the filing will generate approximately $7.5 million in additional revenue. We also anticipate filing a retail rate case with the MPUC in mid-2008. SWL&P also anticipates filing a retail rate case with the PSCW in 2008.
Industrial Customers. Electric power is a key component in the mining, paper production and pipeline industries. Approximately 50 percent of 1.7%our Regulated Utility kilowatthour sales are made to 2019. The Resource
Plan forecasts growth of 20 MW to 30 MW per year, primarily from residential and
smaller commercial expansion, and a positive outlook fromour Large Power Customers in northeastern Minnesota, such asthe taconite, processing facilitiespaper and paper
mills. We expect to realize a reduction in generating resource supply over the
next few years under the terms of our long-term energy supply contract with
Square Butte. The combination of increased demandspulp, and reduced supply means we
will need to secure additional base load energy to serve our customers in future
years.
The Resource Plan sets forth several options designed to meet our predicted
retail base load demand growth. Options range from purchasing additional power
to building new base load energy generation facilities. We will further analyze
portfolio alternatives for meeting our forecast and work with state regulators
and other stakeholders over the next several months to further develop the
Resource Plan. We anticipate that the MPUC will formally consider the Resource
Plan during 2005.
ALLETE 2004 Form 10-K Page 30
RATE CASE. In other regulatory activity, SWL&P filed a request with the PSCW in
2004 to increase retail rates. A ruling is anticipated during the first half of
2005. Minnesota Power does not expect to file a request to increase rates for
its retail utility operations during 2005. We will, however, continue to monitor
the costs of serving our retail customers and evaluate the need for a rate
filing in the future.
INDUSTRIAL CUSTOMERS. Approximately 50% of our regulated utility electric sales
is made to taconite producers, paper producers and oil pipeline operators.
During 2004, the multi-year domestic integrated-steel industry consolidation
began to reach operating fruition. Combined with improving markets, a
consolidated steel industry should continue to stabilize and potentially even
increase the demand for taconite as a raw material in steel production. industries.
Based on our research of the taconite industry, Minnesota taconite production for 20052008 is
again anticipated to be about 4141.5 million tons (41 million tons in 2004; 35
million tons in 2003;(production was 39 million tons in 2002)2007; 40 million tons in 2006 and 41 million tons in 2005). Although
The pulp and paper customers are projected to run near capacity in 2008. Capacity closures in North America and Europe, along with the current taconite
pellet market looks strong,strength of the taconite industry is cyclicalEuro and subjectCanadian dollar, should benefit Minnesota Power’s customers.
Our pipeline customers continued to several factors, which could dramatically change this forecast. Inoperate at or above historic pumping levels during 2007 and forecast operating at record pumping levels in 2008. As Western Canadian oil sands reserves continue to develop and expand, pipeline operators served by the event of
aCompany are executing expansion plans to transport additional crude oil supply to United States markets. We believe we are strategically positioned to serve these expanding pipeline facilities as Canadian supply continues to grow and displace domestic and imported Gulf Coast production.
Several natural resource-based companies have been making significant changeprogress developing new projects in northeastern Minnesota. These potential projects are in the taconite markets, we expect that any excess energy
not used by our retail customers will be marketed primarily toferrous and non-ferrous mining, paper, oil and steel related industries. They include the regional
wholesale market. Paper prices have also improved and we anticipate a more
profitable outlook for the domestic paper industry over the next few years.
Since 2001,Polymet Mining, Mesabi Nugget owned by Kobeand Minnesota Steel Ltd., Cleveland-Cliffs Inc and
Steel Dynamics, Inc., has been testing the technology of converting taconite
into pig iron at a pilot plant in Silver Bay, Minnesota. Environmental
permitting on a full-scale production plant in northeast Minnesota is under way
and such plant would be a significant energy user. In 2004, UPM-Kymmene, a Large
Power Customer, began a year-long economic and environmental study to assess the
feasibility of expanding its Blandin Paper mill in Grand Rapids, Minnesota. A
new paper machine would require an additional 100 MW of electricity by 2008. The
addition of these two potential major industrial energy users in northern
Minnesota is positive for the Company,Industry projects, as well as the communities we serve.
Our strong relationshipsKeewatin Taconite expansion. If some or all of these projects are completed, Minnesota Power could serve between 100 MW and 400 MW of new load.
In 2006, a contract for approximately 70 MW was executed with industrial customersPolyMet Mining, a new customer planning to start a copper, nickel and precious metals (non-ferrous) mining operation in late 2008. If PolyMet Mining receives all necessary environmental permits and achieves start-up, the contract will be fully implemented and would run through at least 2018. In April 2007, the MPUC approved our contract with PolyMet Mining.
In June 2007, a contract was executed with Mesabi Nugget, a company currently constructing an iron nugget facility near Hoyt Lakes, Minnesota. Iron nuggets, which typically consist of more than 94 percent iron (compared to taconite pellets at 63-65 percent iron), are uniqueideal in meeting the electric
industryrequirements of electric-arc furnaces producing steel. On February 7, 2008, the MPUC held a hearing on the contract and enable usadopted a motion approving the contract, subject to work closelythe issuance of a written order. Mesabi Nugget has received all necessary permits to begin construction and operations in 2008 and would be a 15-MW customer with themthe potential for further load growth. The Mesabi Nugget contract would run through at least 2017.
In February 2008, United States Steel announced its intent to help ensure their success.
We continuerestart a pellet line at its Keewatin Taconite processing facility. This pellet line, which has been idled since 1980, would be restarted and updated as part of a $300 million investment. It is anticipated to maintain these relationshipsbring about 3.6 million tons of additional pellet making capability to Northeastern Minnesota by 2011, pending successful approval of environmental permitting.
A new contract with this groupBlandin Paper was approved by the MPUC on February 4, 2008. The new contract carries forward the same contract term, cancellation provision and take-or-pay provisions of customers to help
retain a solid industrial base in our region. We continue to make investments to
maintainthe prior contract and improveonly changed the integrity of our generating, transmission and
distribution assets, and maintain environmental compliance.
FUEL CLAUSE.demand nomination feature.
Outlook (Continued)
Energy. (Continued)
Minnesota Fuel Clause. In June 2003, the MPUC initiated an investigation into the continuing usefulness of the fuel clause as a regulatory tool for electric utilities. TheOur initial stepscomments on the proposed scope and procedure of the investigation were to reviewfiled in July 2003. In November 2003, the clause'sMPUC approved the initial scope and procedure of the investigation. Subsequent comments were filed during 2004. The fuel clause docket then became dormant while the MISO Day 2 docket, which held many fuel clause considerations, became active. In March 2007, the MPUC solicited comments on whether the original purpose,
structurefuel clause investigation should continue and, rationale (including its current operation and relevanceif so, what issues should be pursued. We filed comments in today's regulatory environment), and then address its ongoing appropriateness
and other issuesApril 2007, suggesting that if the need forinvestigation continued, useit should focus on remaining key elements of the fuel adjustment clause, beyond the purchased power transactions examined in the MISO Day 2 proceeding, such as fuel purchases and outages. Additionally, we suggested that more specialized fuel clause issues be addressed in separate dockets on an as needed basis. The DOC filed a letter requesting that the parties to the docket update the record in this proceeding by the end of September 2007. Minnesota Power complied by filing additional comments, updating our previous filings in the fuel clause investigation docket to account for changes occurring since the investigation began in July 2003. Reply comments were filed in October 2007. The fuel clause investigation docket is shown.awaiting further action by the MPUC.
Fuel Clause Recovery of MISO Day 2 Costs. We filed a petition with the MPUC in February 2005 to amend our fuel clause to accommodate costs and revenue related to the day-ahead and real-time markets through which we engage in wholesale energy transactions in MISO (MISO Day 2). In December 2006, the MPUC issued an order allowing us and the other utilities involved in the MISO Day 2 proceeding to continue recovering MISO Day 2 charges through the Minnesota retail fuel clause except for MISO Day 2 administrative charges. On January 8, 2007, this order was challenged by the Minnesota OAG, through a request for reconsideration. The request was opposed by Minnesota Power and the other utilities, as well as MISO. The reconsideration request was denied by the MPUC. Upon denial of the reconsideration request, the OAG appealed the MPUC has not taken actionOrder in a filing with the Minnesota Court of Appeals. Oral argument in the case will be held on any proposalFebruary 27, 2008, and a decision would be expected approximately 90 days thereafter. The Company is unable to predict the outcome of this matter.
The December 2006 MPUC order, subject to appeal, granted deferred accounting treatment for three MISO Day 2 charge types that were determined to be administrative charges. Under the order, Minnesota Power refunded, through customer bills, approximately $2 million of administrative charges previously collected through the fuel clause between April 1, 2005, and December 31, 2006, and recorded these administrative charges as a regulatory asset. We were permitted to continue accumulating MISO Day 2 administrative charges after December 31, 2006, as a regulatory asset until we file our next rate case, at which time recovery for such charges will be determined. The balance of this regulatory asset was $3.7 million on December 31, 2007, and we consider regulatory recovery to be probable. This order removed the subject to refund requirement of the two interim orders, and included extensive fuel clause reporting requirements impacting our monthly and annual fuel clause filings with the MPUC. There was no impact on earnings as a result of this ruling. As a result of the MPUC’s December 2006 order allowing recovery of nearly all MISO Day 2 charges through the fuel clause, we rescinded our December 2005 Letter of Intent to Withdraw from MISO in December 2006.
Investment in ATC. Our Wisconsin subsidiary, Rainy River Energy Corporation – Wisconsin, has invested $60 million in ATC. As of December 31, 2007, our equity investment balance in ATC was $65.7 million, representing approximately an 8 percent ownership interest. (See Note 6.) We will have the opportunity to make additional investments in ATC through general capital calls based upon our pro-rata investment level in ATC. We expect to invest an additional $5 to $7 million in 2008.
Real Estate. Conditions in the Florida real estate market were very difficult in 2007. Market demand worsened throughout the year, consistent with conditions experienced throughout most of the rest of the country. While we are unable to predict when the outcome or impactFlorida real estate market will improve, we believe the long-term growth indicators for Florida real estate remain strong.
Substantially all of this proceeding at this time.
KENDALL COUNTY. To eliminate ongoing lossesour properties have key entitlements in place. With minimal leverage, low on-going carrying costs and a low inventory book basis, we expect that our Real Estate business will continue to be profitable, and an important contributor to ALLETE’s on-going earnings stream. We expect net income from capacity charges for generation
secured throughReal Estate to be approximately 10 percent to 20 percent of total ALLETE consolidated net income over the Kendall County power purchase agreement, in December 2004,
we entered into an agreement to assign this power purchase agreement to
Constellation Energy Commodities. Undernext several years. We believe the terms of the agreement, we will pay
Constellation Energy Commodities $73 million in cash (approximately $47 million
after taxes) to assume the power purchase agreement, which is in effect through
mid-September 2017. The proposed transaction is subject to the approvals of
LSP-Kendall Energy, as well as of its project lenders and the FERC. Pending
these approvals, the transaction is scheduled to close in April 2005. We
currently have approximately 130 MW of long-term capacity sales contracts for
the Kendall County generation, which will also be transferred to Constellation
Energy Commodities at closing.
TACONITE HARBOR. A majority of the output from our Taconite Harbor generating
unit is sold under long-term wholesale contracts through mid-2010. Remaining
Taconite Harbor energy is sold onnortheastern Florida market area where a shorter-term basis into the wholesale
market.
NONREGULATED ENERGY OPERATIONS STRATEGY. Following the anticipated disposition
of the Kendall County contractual position in April 2005, this business segment
will be composed of generating assets in northeastern Minnesota and BNI Coal in
North Dakota. Our strategy is to enhance the profitability of these operations
where possible and seek growth opportunities in close geographic proximity to
existing operations in Minnesota, North Dakota and Wisconsin.
REAL ESTATE. With an inventory of land in desirable Florida locations, ALLETE
Properties is poised for a growing and consistent contribution to earnings and
cash flow. A large portion of our real estate inventory is located will continue to experience above average long-term population growth, and our inventory of mixed-use land in Florida's
Flagler and Volusia Counties, an area with onethose areas will remain attractive to buyers.
ALLETE Properties plans to maximize the value of the fastest growing
populations in the United States. We expect this population growthproperty it currently owns through entitlement, infrastructure improvements and orderly sales of properties. In addition to continue,
which will increase the demand formanaging its current real estate inventory, ALLETE Properties is focused on identifying, acquiring, entitling and developing infrastructure on vacant land in Florida and other parts of the area.
We havesoutheast United States.
Outlook (Continued)
Real Estate (Continued)
Progress continues on our three major planned developments under way. They are development projects in Florida—Town Center, at Palm
Coast, which will be a new downtown for Palm Coast,Coast; Palm Coast Park, located in northwest Palm Coast,Coast; and Ormond Crossings, located in Ormond Beach along Interstate 95. As property within these developments is made available for sale,
we expect that these projects will contribute a significant amount of net income
for our real estate business.(See Item 1 – Business - Real Estate.) Other ongoing land sales and rental income at the retail shopping center in Winter Haven provide us with additional revenue.
Page 31
Summary of Development Projects For the Year Ended December 31, 2007 | Ownership | Total Acres (a) | Residential Units (b) | Non-residential Sq. Ft. (b, c) |
| | | | |
Town Center | 80% | | | |
At December 31, 2006 | | 1,356 | 2,222 | 2,705,310 |
Property Sold | | (99) | (130) | (540,059) |
Change in Estimate (a) | | (266) | 197 | 62,949 |
| | 991 | 2,289 | 2,228,200 |
| | | | |
Palm Coast Park | 100% | | | |
At December 31, 2006 | | 4,337 | 3,760 | 3,156,800 |
Property Sold | | (888) | (606) | (40,000) |
Change in Estimate (a) | | (13) | – | – |
| | 3,436 | 3,154 | 3,116,800 |
| | | | |
Ormond Crossings | 100% | | | |
At December 31, 2006 | | 5,960 | (d) | (d) |
Change in Estimate (a) | | 8 | | |
| | 5,968 | | |
| | 10,395 | 5,443 | 5,345,000 |
(a) | Acreage amounts are approximate and shown on a gross basis, including wetlands and minority interest. |
(b) | Estimated and includes minority interest. Density at build out may differ from these estimates. |
(c) | Depending on the project, non-residential includes retail commercial, non-retail commercial, office, industrial, warehouse, storage and institutional. |
(d) | A development order approved by the City of Ormond Beach includes up to 3,700 residential units and 5 million square feet of non-residential space. We estimate the first two phases of Ormond Crossings will include 2,500-3,200 residential units and 2.5-3.5 million square feet of various types of non-residential space.Density of the residential and non-residential components of the project will be determined based upon market and traffic mitigation cost considerations. Approximately 2,000 acres will be devoted to a regionally significant wetlands mitigation bank. |
Summary of Other Land Inventories For the Year Ended December 31, 2007 | Ownership | Total | Mixed Use | Residential | Non-residential | Agricultural |
Acres (a) | | | | | | |
| | | | | | |
Palm Coast Holdings | 80% | | | | | |
At December 31, 2006 | | 2,136 | 1,404 | 346 | 247 | 139 |
Property Sold | | (111) | (78) | – | (14) | (19) |
Change in Estimate (a) | | (1,160) | (964) | (239) | 96 | (53) |
| | 865 | 362 | 107 | 329 | 67 |
| | | | | | |
Lehigh | 80% | | | | | |
At December 31, 2006 | | 223 | – | 140 | 74 | 9 |
Change in Estimate (a) | | 6 | – | – | – | 6 |
| | 229 | – | 140 | 74 | 15 |
| | | | | | |
Cape Coral | 100% | | | | | |
At December 31, 2006 | | 30 | – | 1 | 29 | – |
Property Sold | | (8) | – | – | (8) | – |
| | 22 | – | 1 | 21 | – |
| | | | | | |
Other (b) | 100% | | | | | |
At December 31, 2006 | | 934 | – | – | – | 934 |
Property Sold | | (364) | – | – | – | (364) |
Change in Estimate (a) | | (113) | – | – | – | (113) |
| | 457 | – | – | – | 457 |
| | 1,573 | 362 | 248 | 424 | 539 |
(a) | Acreage amounts are approximate and shown on a gross basis, including wetlands and minority interest. |
(b) | Includes land located in Palm Coast, Florida not included in development projects. |
ALLETE
20042007 Form 10-K
ALLETE Properties plansOutlook (Continued)
Real Estate (Continued)
Town Center. Major construction continues at Town Center. In April 2007, Palm Coast Center, LLC and Target Corporation closed on a 52 acre commercial site and immediately began construction on a 424,000 square foot retail power center. An 85,000 square foot Publix grocery store anchored retail center opened in 2007, and an 84,000 square foot medical center is under construction along with a Hilton Garden Inn and a residential condominium project. Several other projects are in the permitting stage including a charter school, independent living facility, movie theater, office buildings and banks.
At build-out, Town Center is expected to maximizeinclude approximately 3,200 residential units including lodging rooms and assisted living units, and 3.8 million square feet of various types of non-residential space. Market conditions will determine how quickly Town Center builds out.
Palm Coast Park. Major infrastructure construction at Palm Coast Park was substantially complete by the valueend of 2007. At build-out, Palm Coast Park is expected to include approximately 4,000 residential units, 3.2 million square feet of various types of non-residential space and certain public facilities. Market conditions will determine how quickly Palm Coast Park builds out.
Ormond Crossings. Planning, engineering design and permitting of the master infrastructure are ongoing. Density of the residential and non-residential components of the project will be determined based upon market and traffic mitigation cost considerations. We estimate the first two phases of Ormond Crossing will include 2,500-3,200 residential units and 2.5–3.5 million square feet of various types of non-residential space.
Ormond Crossings will also include an approximately 2,000 acre regionally significant wetlands mitigation bank that is expected to be fully permitted by the St. Johns River Water Management District and the U.S. Army Corps of Engineers by mid-2009. Wetland mitigation credits will be used at Ormond Crossings and will be available for sale to other developers. Market conditions will determine how quickly Ormond Crossings builds out.
We have a diversified mix of residential and non-residential property it currently ownsunder contract and available for sale. At December 31, 2007, total pending land sales under contract were $55.2 million ($113.8 million at December 31, 2006) and are anticipated to close at various times through entitlement2012. Prices on these contracts range from $20 to $42 per non-residential square foot, $15,000 to $27,200 per residential unit and infrastructure improvements,$11,200 to $660,000 per acre for all other properties. Prices per acre are stated on a gross acreage basis and are dependent on the type and location of the properties sold. The majority of the other properties under contract are zoned non-residential or mixed use. Certain contracts allow us to receive participation revenue from land sales to third parties if various formula-based criteria are achieved.
Real Estate | | |
Pending Contracts (a, b) | | Contract |
At December 31, 2007 | Quantity (c) | Sales Price |
Dollars in Millions | | |
Town Center | | |
Non-residential Sq. Ft. | 304,000 | $9.6 |
Residential Units | 490 | 9.3 |
Palm Coast Park | | |
Non-residential Sq. Ft. | – | – |
Residential Units | 1,263 | 31.9 |
Other Land | | |
Acres | 123 | 4.4 |
Total Pending Land Sales Under Contract | | $55.2 |
(a) | For the year ended December 31, 2007, we had contract cancellations totaling $22.1 million. |
(b) | Pending contracts are contracts for which the due diligence period has ended, and the contract deposit is non-refundable subject to performance by the seller. |
(c) | Acreage amounts are approximate and shown on a gross basis, including wetlands and minority interest. Non-residential square feet and residential units are estimated and include minority interest. The actual property densities at build-out may differ from these estimates. |
Decreases in pending land sales under contract during 2007 are primarily due to closing two large sales during the second quarter of 2007 and contract cancellations totaling $22.1 million. In April 2007, Palm Coast Center, LLC and Target Corporation closed on a tract at Town Center for $12.6 million and in June 2007, LRCF Palm Coast, LLC (Lowe Enterprises) closed on the first phase of its Sawmill Creek project at Palm Coast Park for $13.1 million pursuant to revised contract terms.
Outlook (Continued)
Real Estate. (Continued)
If a purchaser defaults on a sales contract, the legal remedy is limited to terminating the contract and retaining the purchaser’s deposit. The property is then sell itavailable for resale. In many cases, contract purchasers incur significant costs during due diligence, planning, designing and marketing the property before the contract closes, therefore they have substantially more at market
prices. In addition to managing its currentrisk than the deposit.
As of December 31, 2007, we had $2.7 million of deferred profit on sales of real estate, inventory, ALLETE
Properties will focusbefore taxes and minority interest, on identifying, acquiringour balance sheet. All of the deferred profit relates to Town Center and entitling vacant landis expected to be recognized in 2008 as the coastal southeast United States.
OTHER.remaining development obligations are completed.
Other. We have the potential to recognize gains or losses on the sale of investments in our emerging technology portfolio. We plan to sell investments in our emerging technology portfolio as shares are distributed to us. Some restrictions on sales may apply, including, but not limited to, underwriter lock-up periods that typically extend for 180 days following an initial public offering. We have committed to make up to $1.0 million in additional investments in certain emerging technology holdings. The total future commitment was $4.5 million at December
31, 2004 and is expected to be invested at various times through 2007. We do not have plans to make any additional investments beyond this commitment.
DIVERSIFICATION.
Income Taxes. ALLETE’s aggregate federal and multi-state statutory tax rate is expected to be approximately 40 percent for 2008. On an ongoing basis, ALLETE has certain tax credits and other tax adjustments that will reduce the statutory rate to the expected effective tax rate. These tax credits and adjustments historically have included items such as investment tax credits, AFUDC-Equity, domestic manufacturer’s deduction, depletion, Medicare prescription reimbursement, as well as other items. The annual effective rate can also be impacted by such items as changes in income from operations before minority interest and income taxes, state and federal tax law changes that become effective during the year, business combinations and configuration changes, tax planning initiatives and resolution of prior years’ tax matters. We have a long history of both acquiringexpect our effective tax rate to be approximately 35 percent for 2008.
Liquidity and selling companies
in a variety of industries, and these activities have contributed significantly
to overall financial results. We will seek to diversify our earnings stream to
mitigate potential downside exposure to industrial customers in our Regulated
Utility business and to provide additional earnings growth.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW ACTIVITIES
A primary goal of our strategic plan is to improve cash flow from operations.
Our strategy includes growing our businesses both internally by expanding
facilities, services and operations (see Capital Requirements), and externally
through acquisitions.
Resources
Cash Flow Activities
We believe our financial condition is strong, as evidenced by cash and cash
equivalents of $194.1 million and a debt to total capital ratio of 38%36 percent at December 31, 2004. We continued to generate strong2007. Our cash and cash equivalents and short-term investments were $46.4 million at December 31, 2007.
Operating Activities. Cash flow from operating activities which amounted to $62.3was $123.1 million in 2004, excluding discontinued
operationsfor 2007 ($118.0142.5 million in 2003; $226.5for 2006; $53.5 million in 2002)for 2005). Cash flow from operating activities was lower in 2004,2007 than 2006 primarily due to a $6.7decrease in cash flow from operating assets and liabilities. Colder weather in December 2007 resulted in an increase in customer receivables of $14.7 million. Cash used for prepayments and other is higher in 2007 due to an $11.5 million outstanding receivable from
American Transmission Company for work onchange in deferred fuel costs yet to be recovered through future billings. The increase in deferred fuel costs are a result of higher purchased power expenses due to generation outages relating to the Duluth-to-Wausau transmission
line. This receivable was paidAREA Plan environmental retrofits, lower hydro generation, lower Square Butte entitlement and Square Butte’s major scheduled outage. Other current liabilities decreased primarily due to a reduction in January 2005. Cashaccrued taxes of $8.9 million. The decrease in cash flow from operating activities was partially offset by increased earnings from continuing operations of $11.2 million and a decrease in 2003 included the receiptcash used for discontinued operations of a $20.9 million outstanding receivable in 2002
related to a turbine generator sold following the indefinite delay of a
generation project in Superior, Wisconsin. $13.5 million.
Cash flow from operating activities was higher in 2002 included2006 than 2005, primarily due to the $77.9 million Kendall County Charge in 2005 and related $24.3 million federal tax refund received in 2006. Cash also increased $4.4 million in 2006 due to the collection of customer receivables which were up as a result of colder weather in December 2005. Other differences between 2006 and 2005 include an additional $9 million cash used for inventories in 2006 and the payment of approximately $13 million of 2005 accrued liabilities. Additional inventories primarily reflect coal purchases in anticipation of maintenance on coal handling equipment.
Investing Activities. Cash flow used for investing activities was $154.1 million for 2007 (cash flow used for investing activities of $154.7 million for 2006; cash flow from investing activities of $3.9 million for 2005). Activity within our short-term investment portfolio reflected increased net sales of short-term investments of $81.4 million compared to $12.4 million in 2006. The net proceeds from the liquidationsale of our trading securities portfolio;
the proceedsshort-term investments were used to pay down short-term debt.
Cash from investing activities, excluding discontinued operations, was higher in
2004, primarily due to $12.0 million received from Split Rock Energy upon
termination of the joint venture and lowerfund increased additions to property, plant and equipment, which vary from year to year depending on special projects.equipment. Additions to property, plant and equipment were higher in 2003 included expenses related2007 than 2006 by $111.7 million primarily due to BNI Coal's
dragline project; 2002 included expenses relatedincreased spending on major environmental construction projects. Cash invested in ATC decreased from $51.4 million in 2006 to $8.7 million in 2007.
Cash used for investing activities was higher in 2006 than 2005, primarily due to $51.4 million invested in ATC and a generation project$43.7 million increase in Superior, Wisconsin.
expenditures for property, plant and equipment due to major environmental construction projects. Activity within our short-term investment portfolio reflected net sales of short-term investments of $12.4 million compared to $32.3 million in 2005.
Liquidity and Capital Resources (Continued)
Cash Flow Activities (Continued)
Financing Activities. Cash flow from financing activities was $9.5 million for 2007 (cash used for financing activities excluding discontinued operations, reflected
significantwas $32.6 million for 2006; cash used for financing activities was $13.9 million for 2005). The increase in cash flows from financing activities resulted from additional long-term debt repaymentissued in all periods presented ($183.12007, which included $50.0 million of Senior unsecured notes and $6.0 million in 2004;
$431.5tax exempt bonds at SWL&P. The increase in new long-term debt was offset partially by the retirement of $20.0 in first mortgage bonds and $2.5 million in 2003; $171.5variable demand revenue refunding bonds. In 2007, $66.5 million in 2002)long-term debt was refinanced at lower rates.
Cash used for financing activities was higher in 2006 than 2005 primarily due to an additional $7.2 million in dividends paid as a result of more shares outstanding, a higher dividend rate and fewer shares of common stock issued under our long-term incentive compensation plan. In 2006, we refinanced $77.8 million of long-term debt at lower rates.
In 2006, our Town Center development project was financed with tax-exempt bonds issued by the Town Center District and a revolving development loan. In March 2005, the Town Center District issued $26.4 million of tax-exempt, 6% Capital Improvement Revenue Bonds, Series 2005, which are payable through property tax assessments on the land owners over 31 years (by May 1, 2036). A combinationThe bond proceeds (less capitalized interest, a debt service reserve fund and cost of internally-generated funds, proceeds from the sale of our Water Services assets
in 2003 and 2004, and proceeds received from ADESA in 2004issuance) were used to repaypay for the debt in 2003construction of a portion of the major infrastructure improvements at Town Center. The bonds are payable from and 2004. See Note 8 for additional detail on debt repaid.collateralized by the revenue derived from assessments imposed, levied and collected by the Town Center District. The reduction in 2002 debt was primarilyassessments represent an allocation of the repaymentcosts of commercial paper with
proceedsthe improvements, including bond financing costs, to the lands within the Town Center District benefiting from the liquidationimprovements. The assessments were billed to Town Center landowners effective November 2006. To the extent that we still own land at the time of the assessment, we will incur the cost of our trading securities portfolio.
WORKING CAPITAL.portion of these assessments, based upon our ownership of benefited property. At December 31, 2007, we owned approximately 69 percent of the assessable land in the Town Center District (73 percent at December 31, 2006). As we sell property, the obligation to pay special assessments passes to the new landowners. Under current accounting rules, these bonds are not reflected as debt on our consolidated balance sheet.
Our Palm Coast Park development project in Florida is being financed with tax-exempt bonds issued by the Palm Coast Park District. In May 2006, Palm Coast Park District issued $31.8 million of tax-exempt, 5.7% Special Assessment Bonds, Series 2006 which are payable through property tax assessments on the land owners over 31 years (by May 1, 2037). The bond proceeds (less capitalized interest, a debt service reserve fund and cost of issuance) were used to fund the construction of the major infrastructure improvements at Palm Coast Park, and to mitigate traffic and environmental impacts. The bonds are payable from and collateralized by the revenue derived from assessments imposed, levied and collected by the Palm Coast Park District. The assessments represent an allocation of the costs of the improvements, including bond financing costs, to the lands within the Palm Coast Park District benefiting from the improvements. The assessments will be billed to Palm Coast Park landowners effective November 2007. To the extent that we still own land at the time of the assessment, we will incur the cost of our portion of these assessments, based upon our ownership of benefited property. At December 31, 2007, we owned 86 percent of the assessable land in the Palm Coast Park District (97 percent at December 31, 2006). As we sell property, the obligation to pay special assessments passes to the new landowners. Under current accounting rules, these bonds are not reflected as debt on our consolidated balance sheet.
Working Capital. Additional working capital, if and when needed, generally is provided by the sale of commercial paper. Approximately 1We have 0.2 million original issue shares of our common stock are available for issuance through INVEST DIRECT,Invest Direct, our direct stock purchase and dividend reinvestment plan. We have bank lines of credit aggregating $111.5$170.0 million, the majority of which expire in January 2012. In January 2006, we renewed, increased and extended a committed, syndicated, unsecured revolving credit facility with LaSalle Bank National Association, as Agent, for $150 million (Line) with a maturity date of January 11, 2011. The Line was subsequently extended for an additional year in December 2007. These bank lines2006 and currently matures on January 11, 2012. At our request and subject to certain conditions, the Line may be increased to $200 million and extended for two additional 12-month periods. We may prepay amounts outstanding under the Line in whole or in part at our discretion. Additionally, we may irrevocably terminate or reduce the size of creditthe Line prior to maturity. The Line may be used for general corporate purposes, working capital and to provide creditliquidity in support forof our commercial paper program. The amount and timing of future sales of our securities will depend upon market conditions and our specific needs. We may sell securities to meet capital requirements, to provide for the retirement or early redemption of issues of long-term debt, to reduce short-term debt and for other corporate purposes.
Our lines of credit
Liquidity and long-term debt agreements contain various financial
covenants. The most restrictive of these covenants are discussed in Note 8.Capital Resources (Continued)
Securities
On December 10, 2007, ALLETE
2004 Form 10-K Page 32
SECURITIES
In March 2001, ALLETE, ALLETE Capital II and ALLETE Capital III, jointly filed a registration statement with the SEC, pursuant to Rule 415 under the Securities Act of 1933. The registration statement, which has been declared effective by
the SEC, relates to the possible issuance of a remaining aggregate amount of
$387 million of securities, which may include ALLETE common stock, first
mortgage bonds and other debt securities, and ALLETE Capital II and ALLETE
Capital III preferred trust securities. ALLETE also previously filed a
registration statement, which has been declared effective by the SEC,1933, relating to the possible issuance from time to time of $25 million ofALLETE common stock or first mortgage bonds and other debt
securities.bonds. The amount of securities issuable by ALLETE is established from time to time by its board of directors. We may sell all or a portion of the remainingabove-described registered securities if warranted by market conditions and our capital requirements. Any offer and sale of the above mentionedabove-mentioned securities will be made only by means of a prospectus meeting the requirements of the Securities Act of 1933 and the rules and regulations thereunder.
OFF-BALANCE SHEET ARRANGEMENTS
there under.
On February 1, 2007, we issued $60 million in principal amount of First Mortgage Bonds (Bonds), 5.99% Series due February 1, 2027, in the private placement market. We have the option to prepay all or a portion of the Bonds at our discretion, subject to a make-whole provision. Proceeds were used to retire $60 million in principal amount of First Mortgage Bonds, 7% Series on February 15, 2007.
On June 8, 2007, we issued $50 million of senior unsecured notes (Notes) in the private placement market. The Notes bear an interest rate of 5.99 percent and will mature on June 1, 2017. We have the option to prepay all or a portion of the Notes at our discretion, subject to a make-whole provision. We used the proceeds from the sale of the Notes to fund utility capital projects and for general corporate purposes.
On behalf of SWL&P, the City of Superior, Wisconsin, issued $6.4 million in principal amount of Collateralized Utility Revenue Refunding Bonds (Series A Bonds) and $6.1 million of Collateralized Utility Revenue Bonds (Series B Bonds) on October 3, 2007. The Series A Bonds bear an interest rate of 5.375% and will mature on November 1, 2021. The proceeds, together with other funds, were used to redeem $6.5 million of existing 6.125% bonds. The Series B Bonds bear an interest rate of 5.75% and will mature on November 1, 2037. The proceeds will be used to fund qualifying electric and gas projects.
On January 11, 2008, we accepted an offer from certain institutional buyers in the private placement market to purchase $60 million of First Mortgage Bonds (Bonds). The Bonds were issued on February 1, 2008, carry an interest rate of 4.86% and will mature on April 1, 2013. We have the option to prepay all or a portion of the Bonds at our discretion, subject to a make-whole provision. We intend to use the proceeds from the sale of the Bonds to fund utility capital expenditures and for general corporate purposes.
Financial Covenants
Our long-term debt arrangements contain customary covenants. In addition, our lines of credit and letters of credit supporting certain long-term debt arrangements contain financial covenants. The most restrictive covenant requires ALLETE to maintain a quarterly ratio of its Funded Debt to Total Capital of less than or equal to 0.65 to 1.00. Failure to meet this covenant could give rise to an event of default, if not corrected after notice from the lender, in which event ALLETE may need to pursue alternative sources of funding. Some of ALLETE’s debt arrangements contain “cross-default” provisions that would result in an event of default if there is a failure under other financing arrangements to meet payment terms or to observe other covenants that would result in an acceleration of payments due. As of December 31, 2007, ALLETE was in compliance with its financial covenants.
Off-Balance Sheet Arrangements
Off-balance sheet arrangements are discussed in Note 11.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
8.
Contractual Obligations and Commercial Commitments
Our long-term debt obligations, including long-term debt due within one year, represent the principal amount of bonds, notes and loans which are recorded on our consolidated balance sheet, plus interest. The following table below assumes the interest rate in effect at December 31, 20042007, remains constant through the remaining term. (See Note 7.)
Unconditional purchase obligations represent our Square Butte and Kendall County
power purchase agreements, and minimum purchase commitments under coal and rail contracts.
contracts, additional investment commitments in emerging technology funds and purchase obligations for capital expenditures related to the Taconite Ridge Wind Facility, AREA and Boswell Unit 3 environmental upgrade projects. (See Note 8.)
Under our power purchase agreement with Square Butte that extends through 2026, we are obligated to pay our pro rata share of Square Butte'sButte’s costs based on our entitlement to the output of Square Butte's 455 MWButte’s 455-MW coal-fired generating unit near Center, North Dakota. Our payment obligation is suspended if Square Butte fails to deliver any power, whether produced or purchased, for a period of one year. Square Butte'sButte’s fixed costs consist primarily of debt service. The following table
below reflects our share of future debt service based on our output entitlement of approximately 71%55 percent in 2005, 66%2008 and 50 percent thereafter. (See Note 8.)
Liquidity and Capital Resources (Continued)
Contractual Obligations and Commercial Commitments (Continued)
We have two wind power purchase agreements with an affiliate of FPL Energy to purchase the output from two wind facilities, Oliver Wind I and II located near Center, North Dakota. We began purchasing the output from Oliver Wind I, a 50-MW facility, in December 2006 and 60% thereafter. Upon compliance
withthe output from Oliver Wind II, a two-year advance notice requirement, Minnkota Power has48-MW facility in November 2007. Each agreement is for 25 years and provides for the option to
reduce our entitlement by approximately 5% annually, to a minimumpurchase of 50%. (See
Note 11.)
Underall output from the Kendall County agreement, we pay afacilities. There are no fixed capacity chargecharges, and we only pay for the
right, but not the obligation,energy as it is delivered to utilize one 275 MW generating unit near
Chicago, Illinois. We are responsible for arranging the natural gas fuel supplyus.
| Payments Due by Period |
Contractual Obligations | | Less than | 1 to 3 | 4 to 5 | After |
As of December 31, 2007 | Total | 1 Year | Years | Years | 5 Years |
Millions | | | | | |
Long-Term Debt (a) | $760.2 | $33.7 | $79.6 | $47.7 | $599.2 |
Operating Lease Obligations | 86.4 | 8.1 | 23.0 | 12.4 | 42.9 |
FIN 48 – Uncertain Tax Positions | 4.5 | 2.0 | 2.5 | – | – |
Unconditional Purchase Obligations | 407.7 | 114.2 | 64.7 | 28.8 | 200.0 |
| $1,258.8 | $158.0 | $169.8 | $88.9 | $842.1 |
(a) Includes interest and
are entitled to the electricity produced. Inassumes variable interest rates in effect at December
2004, we entered into
an agreement to assign this power purchase agreement to Constellation Energy
Commodities. Pending certain approvals, the proposed transaction is scheduled to
close in April 2005. The following table assumes the fixed capacity charge ends
April 1, 2005. (See Note 11.)
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------------
LESS THAN 1 TO 3 4 TO 5 AFTER
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
- -----------------------------------------------------------------------------------------------------------------------
MILLIONS
Long-Term Debt $ 593.7 $24.1 $229.2 $34.3 $306.1
Capital Lease Obligations - - - - -
Operating Lease Obligations 76.2 6.3 16.5 8.6 44.8
Unconditional Purchase Obligations 434.9 55.4 79.4 37.0 263.1
- -----------------------------------------------------------------------------------------------------------------------
$1,104.8 $85.8 $325.1 $79.9 $614.0
- -----------------------------------------------------------------------------------------------------------------------
In 2005, we31, 2007, remains constant through remaining term.
We expect to contribute approximately
$11 million to our defined benefit pension plans and $6 million to our postretirement health and life
plans. We are not required to make any contributions to our
defined benefit pension plans in
2005.2008. We are unable to predict contribution levels
to our defined benefit pension or postretirement health and life plans after
2005.
EMERGING TECHNOLOGY PORTFOLIO. We have investments in emerging technologies
through the minority investments in venture capital funds and privately-held,
start-up companies. We have committed to make additional investments in certain
emerging technology holdings. The total future commitment was $4.5 million at
December 31, 2004 ($4.8 million at December 31, 2003) and is expected to be
invested at various times through 2007. We do not have plans to make any
additional investments beyond this commitment.
Page 33 ALLETE 2004 Form 10-K
CREDIT RATINGS
2008.
Credit Ratings
Our securities have been rated by Standard & Poor'sPoor’s and by Moody's.Moody’s. Rating agencies use both quantitative and qualitative measures in determining a company'scompany’s credit rating. These measures include business risk, liquidity risk, competitive position, capital mix, financial condition, predictability of cash flows, management strength and future direction. Some of the quantitative measures can be analyzed through a few key financial ratios, while the qualitative ones are more subjective. The disclosure of these credit ratings is not a recommendation to buy, sell or hold our securities. Ratings are subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating.
CREDIT RATINGS STANDARDCredit Ratings | Standard & POOR'S MOODY'S
- ---------------------------------------------------------------------------------------------------------------------
Poor’s | Moody’s |
| | |
Issuer Credit Rating | BBB+ | Baa2 |
Commercial Paper | A-2 | P-2 |
Senior Secured | | |
First Mortgage Bonds A | A– | Baa1 |
Pollution Control Bonds A | A– | Baa1 |
Unsecured Debt | | |
Collier County Industrial Development Revenue Bonds – Fixed Rate | BBB -
- ---------------------------------------------------------------------------------------------------------------------
| – |
PAYOUT RATIO
Payout Ratio
In 2004,2007, we paid out 77% (40%53 percent (53 percent in 2003; 66%2006; 259 percent in 2002)2005) of our per share earnings in dividends. CAPITAL REQUIREMENTS
CONTINUING OPERATIONS. The payout ratio in 2005 was impacted by a $1.84 per diluted share charge resulting from our assignment of the Kendall County power purchase agreement to Constellation Energy Commodities in April 2005. (See Note 10.)
On January 24, 2008, our Board of Directors increased the dividend on ALLETE common stock by 5 percent, declaring a dividend of $0.43 per share payable on March 1, 2008, to shareholders of record at the close of business on February 15, 2008.
Capital Requirements
Continuing Operations. ALLETE’s projected capital expenditures for 2004 totaled $63.0 million
($73.6 millionthe years 2008 through 2012 are presented in 2003; $86.6 millionthe table below. In addition to non-regulated energy and real estate estimated capital expenditures (other), the table includes the estimated amount of capital expenditures related to the regulated utility for which we anticipate receiving current cost recovery. Actual capital expenditures may vary from the estimates due to changes in 2002). Expenditures for 2004 included
$41.7 million for Regulated Utility, $15.7 million for Nonregulated Energy
Operationsforecasted plant maintenance, regulatory decisions or approvals, future environmental requirements and $5.6 million for Other, which consisted of $5.2 million for our
telecommunications business and $0.4 million for general corporate purposes.
Except for BNI Coal's new dragline, which was funded with an operating lease,
internally-generated funds were the source of funding for these expenditures.
Capital expenditures are expected to be $61 million in 2005 and total about $500
million for 2006 through 2009. The 2005 amount includes $48 million for system
component replacement and upgrades within Regulated Utility, $11 million for
system component replacement and upgrades, and coal handling equipment within
Nonregulated Energy Operations and $2 million for telecommunication fiber within
Other. We expect to use internally-generated funds to fund all capital
expenditures. Although the regulations have not yet been finalized, we believe
that approximately halfbase load growth. A significant portion of the estimatedenvironmental capital expenditures and current cost recovery reflected in 2008 include expenditures for 2006 through 2009 may
be necessary for environmental upgrades at our generation facilities.
DISCONTINUED OPERATIONS. Capitalthe Boswell Unit 3 emission reduction and AREA Plan projects. (See Item 1 - AREA and Boswell Unit 3 Emission Reduction Plans.)
Capital Expenditures (a) | 2008 | 2009 | 2010 | 2011 | 2012 | Total |
Regulated Utility Operations | | | | | | |
| Base and Other | $121 | $136 | $173 | $158 | $151 | $739 |
| Current Cost Recovery (b) | | | | | | |
| | Environmental | 130 | 68 | 12 | – | 23 | 233 |
| | Renewable | 54 | 158 | 97 | 108 | 64 | 481 |
| | Transmission | 11 | 17 | 15 | 20 | 15 | 78 |
| Total Current Cost Recovery | 195 | 243 | 124 | 128 | 102 | 792 |
Regulated Utility Capital Expenditures | 316 | 379 | 297 | 286 | 253 | 1,531 |
Other (c) | | 7 | 1 | 5 | 4 | 4 | 21 |
Total Capital Expenditures | $323 | $380 | $302 | $290 | $257 | $1,552 |
| (a) | Actual and expected results will vary with time, regulatory requirements and company direction. |
| (b) | Estimated current capital expenditures recoverable outside of a rate case. |
| (c) | Excludes capitalized improvements on our real estate development projects, which are included in inventory. (See Note 6.) |
We intend to finance about one-half of this capital expenditure program from internally generated funds, about one-third with incremental debt and the remainder with additional equity.
Discontinued Operations. There were no capital additions for discontinued operations for
2004 totaled $16.2 million ($62.7in 2007 (none in 2006; $4.5 million in 2003; $114.6 million in 2002)2005).
Expenditures for 2004 included $13.1 million for Automotive Services capital
expenditures incurred prior to the September 2004 spin-off
Environmental and $3.1 million to
maintain our remaining Water Services businesses while they were in the process
of being sold.
ENVIRONMENTAL AND OTHER MATTERS
Other Matters
As previously mentioned in our Critical Accounting
PoliciesEstimates section, our businesses are subject to regulation
of environmental matters by various federal, state and local
authorities concerningauthorities. Due to future restrictive environmental
matters. Werequirements through legislation and/or rulemaking, we anticipate that potential expenditures for environmental matters will be material
in the future, due to
stricter environmental requirements through legislation and/or rulemakings that
are expected toand will require significant capital investments. We are unable to predict the outcome of the issues discussed in Note
11.
MARKET RISK
SECURITIES INVESTMENTS
Our securities investments include certain securities held for an indefinite
period of time, which are accounted for as available-for-sale securities.
Available-for-sale securities are recorded at fair value with unrealized gains
and losses included in accumulated other comprehensive income, net of tax.
Unrealized losses that are other than temporary are recognized in earnings.
ALLETE 2004 Form 10-K Page 34
8. (See Item 1 – Environmental Matters.)
Market Risk
Securities Investments
Available-for-Sale Securities. At December 31, 2004,2007, our available-for-sale securities portfolio consisted of securities in a grantor trust established to fund certain employee benefits. Our
available-for-sale securities portfolio had a fair value of $30.2 million at
December 31, 2004 ($25.5 million at December 31, 2003)benefits included in Investments, and a total unrealized
after-tax gain of $1.5 million at December 31, 2004 ($0.8 million at December
31, 2003). We use the specific identification methodvarious auction rate bonds and variable rate demand notes included as the basis for
determining the cost of securities sold. Our policy is to review on a quarterly
basis available-for-sale securities for other than temporary impairment by
assessing such factors as the continued viability of products offered, cash
flow, share price trends and the impact of overall market conditions. As a
result of our periodic assessments, we did not record any impairment write-down
on available-for-sale securities in 2004 or 2003.Short-Term Investments. (See Note 6.)
Emerging Technology Portfolio. As part of our emerging technology portfolio, we have several minority investments in venture capital funds and direct investments in privately-held, start-up companies. (See Note 6.)
Capital Requirements (Continued)
Interest Rate Risk
We account for our investmentare exposed to risks resulting from changes in venture capital funds under
the equity method and account for our direct investment in privately-held
companies under the cost method. The total carrying valueinterest rates as a result of our emerging
technology portfolio was $13.6 millionissuance of variable rate debt. We manage our interest rate risk by varying the issuance and maturity dates of our fixed rate debt, limiting the amount of variable rate debt, and continually monitoring the effects of market changes in interest rates. The table below presents the long-term debt obligations and the corresponding weighted average interest rate at December 31, 2004, down $23.9 million
from December 31, 2003. The decline was primarily due to a change to the equity
method of accounting for the venture capital funds (see Note 14) and impairments
related to investments in privately-held companies. Our basis in cost method
investments included in the emerging technology portfolio was $4.5 million
($11.0 million in 2003). Our policy is to review these investments quarterly for
impairment by assessing such factors as continued commercial viability of
products, cash flow and earnings. Any impairment would reduce the carrying value
of the investment. In 2004, we recorded $6.5 million ($4.1 million after tax) of
impairment losses related to direct investments in certain privately-held,
start-up companies whose future business prospects have diminished
significantly. Recent developments at these companies indicated that future
commercial viability is unlikely, as is new financing necessary to continue
development. We did not record any impairment loss on these investments in 2003
($1.5 million pretax in 2002).
2007.
| Principal Cash Flow by Expected Maturity Date |
Interest Rate Sensitive | | | | | | | | Fair |
Financial Instruments | 2008 | 2009 | 2010 | 2011 | 2012 | Thereafter | Total | Value |
Dollars in Millions | | | | | | | | |
| | | | | | | | |
Long-Term Debt | | | | | | | | |
Fixed Rate | $7.5 | $2.5 | $1.4 | $1.4 | $1.4 | $330.9 | $345.1 | $333.2 |
Average Interest Rate – % | 7.1 | 5.6 | 6.3 | 6.3 | 6.3 | 5.5 | 5.6 | |
| | | | | | | | |
Variable Rate | $4.3 | $8.2 | $3.6 | – | $1.7 | $59.8 | $77.6 | $77.7 |
Average Interest Rate – % (a) | 7.3 | 3.5 | 3.5 | – | 3.9 | 3.5 | 3.7 | |
INTEREST RATE SENSITIVE FINANCIAL INSTRUMENTS
PRINCIPAL CASH FLOW BY EXPECTED MATURITY DATE
-----------------------------------------------------------------------------------
FAIR
2005 2006 2007 2008 2009 THEREAFTER TOTAL VALUE
- -------------------------------------------------------------------------------------------------------------------------
DOLLARS IN MILLIONS
Long-Term Debt
Fixed Rate $0.9 $1.6 $115.9 $56.6 $1.3 $155.4 $331.7 $336.3
Average Interest Rate - % 7.1 6.2 7.1 7.0 6.7 5.4 6.3
Variable Rate $0.9 $0.8 $3.3 $0.8 $9.0 $45.5 $60.3 $60.4
Average Interest Rate - % 3.8 3.8 2.6 3.8 2.4 2.4 2.5
- -------------------------------------------------------------------------------------------------------------------------
(a) | Assumes rate in effect at December 31, 20042007, remains constant through remaining term. |
COMMODITY PRICE RISK
The interest rate on variable rate long-term debt is reset on a periodic basis reflecting current market conditions. Based on the variable rate debt outstanding at December 31, 2007, and assuming no other changes to our financial structure, an increase or decrease of 100 basis points in interest rates would impact the amount of pretax interest expense by $0.8 million. This amount was determined by considering the impact of a hypothetical 100 basis point change to the average variable interest rate on the variable rate debt held as of December 31, 2007.
Commodity Price Risk
Our regulated utility operations in Minnesota and Wisconsin incur costs for fuel (primarily coal), power and natural gas purchased for resale in our regulated service territories, and related transportation. Our regulated utilities'utilities’ exposure to price risk for these commodities is significantly mitigated by the current ratemaking process and regulatory environment, which generally allows a fuel clause surcharge if costs are in excess of those in our last rate filing. Conversely, costs below those in our last rate filing result in a rate credit. We seek to prudently manage our customers'customers’ exposure to price risk by entering into contracts of various durations and terms for the purchase of coal and power (in Minnesota), power and natural gas (in Wisconsin), and related transportation costs.
POWER MARKETING
Power Marketing
Our power marketing activities consist of (1) purchasing energy in the wholesale market for resale in our regulated service territories when retail energy requirements exceed generation output, and (2) selling excess available regulated utility generation and purchased power, as well as selling
nonregulated generation.
power.
From time to time, our regulated utility operations may have excess generation that is temporarily not required by retail and municipal customers in our regulated service territory. We actively sell this generation to the wholesale market to optimize the value of our generating facilities. This generation is generally sold in the spotMISO market or under short-term contracts at market prices.
We have approximately 500
Approximately 200 MW of
nonregulated generation
available for sale to
the wholesale markets. This primarily consists of about 200 MW atfrom our Taconite Harbor facility in northern Minnesota
and 275 MW obtained through a 15-year
power purchase agreement with an independent power producer at a facility in
Kendall County near Chicago, Illinois.
Page 35 ALLETE 2004 Form 10-K
Taconite Harbor's capability of approximately 200 MW has been sold through various short-term and long-term capacity and energy contracts. Short term, we
have approximately 116 MW of capacity and energy sales contracts, all of which
expire on April 30, 2005. Long term,Long-term, we have entered into two capacity and energy sales contracts totaling 175 MW (201 MW175-MW (201-MW including a 15%15 percent reserve), which arewere effective May 1, 2005, and expire on April 30, 2010. Both contracts contain fixed monthly capacity charges and fixed minimum energy charges. One contract provides for an annual escalator to the energy charge based on increases in our cost of coal, subject to a small minimum annual escalation. The other contract provides that the energy charge will be the greater of a fixed minimum charge or an amount based on the variable production cost of a combined-cycle, natural gas unit. Our exposure in the event of a full or partial outage at our Taconite Harbor facility is significantly limited under both contracts. When the buyer is notified at least two months prior to an outage, there is no exposure. Outages with less than two months'months’ notice are subject to an annual duration limitation typical of this type of contract. We also have a 50 MW50-MW capacity and energy sales contract that extends through April 2008, andwith formula pricing based on variable production cost of a 15 MW energy sales contract that
extends through May 2007. The 50 MW capacity and energy sales contract has fixed
pricing through January 2006 and market-based pricing thereafter.
Under the Kendall County agreement, which expires in September 2017, we pay a
fixed capacity charge for the right, but not the obligation, to capacity and
energy from a 275-MW generating unit. We are responsible for arranging thecombustion-turbine, natural gas fuel supply. To date, this power purchase agreement has resulted in
losses to us due to negative spark spreads (the differential between electric
and natural gas prices) in the wholesale power market and our resulting
inability to cover the fixed capacity charge on the unsold capacity (currently
145 MW). To eliminate ongoing losses from generation secured through the Kendall
County agreement, in December 2004, we entered into an agreement to assign this
power purchase agreement to Constellation Energy Commodities. Pending certain
approvals, the transaction is scheduled to close in April 2005. We currently
have approximately 130 MW of long-term capacity sales contracts for the Kendall
County generation, which will also be transferred to Constellation Energy
Commodities at closing.
NEW ACCOUNTING STANDARDS
unit.
New Accounting Standards
New accounting standards are discussed in Note 2.
------------------------
FACTORS THAT MAY AFFECT FUTURE RESULTS
READERS ARE CAUTIONED THAT FORWARD-LOOKING STATEMENTS, INCLUDING THOSE CONTAINED
IN THIS FORM 10-K, SHOULD BE READ IN CONJUNCTION WITH OUR DISCLOSURES UNDER THE
HEADING: "SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995" LOCATED ON PAGE 3 OF THIS FORM 10-K AND THE FACTORS DESCRIBED
BELOW. THE RISKS AND UNCERTAINTIES DESCRIBED IN THIS FORM 10-K ARE NOT THE ONLY
ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES THAT WE ARE NOT
PRESENTLY AWARE OF, OR THAT WE CURRENTLY CONSIDER IMMATERIAL, MAY ALSO AFFECT
OUR BUSINESS OPERATIONS. OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF
OPERATIONS COULD SUFFER IF THE CONCERNS SET FORTH BELOW ARE REALIZED.
IF OUR SIGNIFICANT CUSTOMERS ARE NEGATIVELY IMPACTED BY WORLD ECONOMICS, OUR
REVENUE MAY BE NEGATIVELY IMPACTED.
Our industrial customers are impacted by world economics that affect their
competitive position and profitability. Taconite producers, and paper and wood
products customers served by Minnesota Power compete in this world marketplace.
Their inability to compete in their global markets could have a material adverse
effect on their operations and continuation as a business. Any such failure
could have a material adverse effect on our results of operations and the
communities we serve.
OUR ENERGY BUSINESS IS SUBJECT TO INCREASED COMPETITION.
The independent power industry includes numerous strong and capable competitors,
many of which have extensive experience in the operation, acquisition and
development of power generation facilities. Our competition is based primarily
on price and reputation for quality, safety and reliability. The electric
utility and natural gas industries are also experiencing increased competitive
pressures as a result of consumer demands, technological advances, deregulation,
greater availability of natural gas-fired generation and other factors.
ALLETE
20042007 Form 10-K
Page 36
WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATIONS THAT MAY HAVE A NEGATIVE
IMPACT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
We are subject to prevailing governmental policies and regulatory actions,
including those of the United States Congress, state legislatures, the FERC, the
MPUC, the FPSC, the PSCW, and various local and county regulators, and city
administrators. These governmental regulations relate to allowed rates of
return, financings, industry and rate structure, acquisition and disposal of
assets and facilities, real estate development, operation and construction of
plant facilities, recovery of purchased power and capital investments, and
present or prospective wholesale and retail competition (including but not
limited to transmission costs). These governmental regulations significantly
influence our operating environment and may affect our ability to recover costs
from our customers. We are required to have numerous permits, approvals and
certificates from the agencies that regulate our business. We believe the
necessary permits, approvals and certificates have been obtained for existing
operations and that our business is conducted in accordance with applicable
laws; however, we are unable to predict the impact on operating results from the
future regulatory activities of any of these agencies. Changes in regulations or
the imposition of additional regulations could have an adverse impact on our
results of operations.
OUR REGULATED UTILITY AND NONREGULATED ENERGY OPERATIONS POSE CERTAIN
ENVIRONMENTAL RISKS WHICH COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
We are subject to extensive environmental laws and regulations affecting many
aspects of our present and future operations, including air quality, water
quality, waste management, reclamation and other environmental considerations.
These laws and regulations can result in increased capital, operating, and other
costs, as a result of compliance, remediation, containment and monitoring
obligations, particularly with regard to laws relating to power plant emissions.
These laws and regulations generally require us to obtain and comply with a wide
variety of environmental licenses, permits, inspections and other approvals.
Both public officials and private individuals may seek to enforce applicable
environmental laws and regulations. We cannot predict the financial or
operational outcome of any related litigation that may arise.
There are no assurances that existing environmental regulations will not be
revised or that new regulations seeking to protect the environment will not be
adopted or become applicable to us. Revised or additional regulations, which
result in increased compliance costs or additional operating restrictions,
particularly if those costs are not fully recoverable from customers, could have
a material effect on our results of operations.
We cannot predict with certainty the amount or timing of all future expenditures
related to environmental matters because of the difficulty of estimating such
costs. There is also uncertainty in quantifying liabilities under environmental
laws that impose joint and several liability on all potentially responsible
parties. (See Note 11.)
THE OPERATION AND MAINTENANCE OF OUR GENERATING FACILITIES INVOLVES RISKS THAT
COULD SIGNIFICANTLY INCREASE THE COST OF DOING BUSINESS.
The operation of generating facilities involves many risks, including start-up
risks, breakdown or failure of facilities, lack of sufficient capital to
maintain the facilities, the dependence on a specific fuel source, or the impact
of unusual or adverse weather conditions or other natural events, as well as the
risk of performance below expected levels of output or efficiency, the
occurrence of any of which could result in lost revenue and/or increased
expenses. A significant portion of Minnesota Power's facilities was constructed
many years ago. In particular, older generating equipment, even if maintained in
accordance with good engineering practices, may require significant capital
expenditures to keep it operating at peak efficiency. This equipment is also
likely to require periodic upgrading and improvement. Minnesota Power could be
subject to costs associated with any unexpected failure to produce power,
including failure caused by breakdown or forced outage, as well as repairing
damage to facilities due to storms, natural disasters, wars, terrorist acts and
other catastrophic events. Further, our ability to successfully and timely
complete capital improvements to existing facilities or other capital projects
is contingent upon many variables and subject to substantial risks. Should any
such efforts be unsuccessful, we could be subject to additional costs and/or the
write-off of our investment in the project or improvement.
WE MUST HAVE ADEQUATE AND RELIABLE TRANSMISSION AND DISTRIBUTION FACILITIES TO
DELIVER OUR ELECTRICITY TO OUR CUSTOMERS.
Minnesota Power depends on transmission and distribution facilities owned and
operated by other utilities, as well as its own such facilities, to deliver the
electricity it produces and sells to its customers, as well as to other energy
suppliers. If transmission capacity is inadequate, our ability to sell and
deliver electricity may be hindered, we may have to forgo sales or we may have
to buy more expensive wholesale electricity that is available in the
capacity-constrained area. The cost to provide service to these customers may
exceed the cost to serve other customers, resulting in lower gross margins. In
addition, any infrastructure failure that interrupts or impairs delivery of
electricity to our customers could negatively impact the satisfaction of our
customers with our service.
Page 37 ALLETE 2004 Form 10-K
THE PRICE OF ONE OF OUR MAJOR PRODUCTS, ELECTRICITY, AND/OR ONE OF OUR MAJOR
EXPENSES, FUEL, MAY BE VOLATILE.
Volatility in market prices for electricity and fuel may result from:
- severe or unexpected weather conditions;
- seasonality;
- changes in electricity usage;
- the current diminished liquidity in the wholesale power markets, as well as
any future illiquidity in these or other markets;
- transmission or transportation constraints, inoperability or
inefficiencies;
- availability of competitively priced alternative energy sources;
- changes in supply and demand for energy commodities;
- changes in power production capacity;
- outages at Minnesota Power's generating facilities or those of our
competitors;
- changes in production and storage levels of natural gas, lignite, coal, and
crude oil and refined products;
- natural disasters, wars, sabotage, terrorist acts and other catastrophic
events; and
- federal, state, local and foreign energy, environmental, and other
regulation and legislation.
Since fluctuations in fuel expense related to our regulated utility operations
are passed on to customers through our fuel clause, risk of volatility in market
prices for fuel and electricity mainly impacts our nonregulated operations at
this time.
WE ARE DEPENDENT ON GOOD LABOR RELATIONS.
We believe our relations to be good with our approximately 1,500 employees.
Approximately 700 of these employees are members of either the International
Brotherhood of Electrical Workers Local 31 or Local 1593. Failure to
successfully renegotiate labor agreements could adversely affect the services we
provide and our results of operations. The labor agreements with Local 31 expire
on January 31, 2006. The labor agreement with Local 1593 at BNI Coal ends on
March 31, 2005, and negotiations are under way for a new contract.
A DOWNTURN IN ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR REAL ESTATE
BUSINESS.
The ability of our real estate business to generate revenue is directly related
to the Florida real estate market, the national and local economy in general,
and changes in interest rates. While real estate market conditions have remained
healthy in our regions of development, continued demand for land is dependent on
long-term prospects for strong, in-migration population expansion.
Over the last several years, investors have increasingly utilized real estate as
an investment. Florida real estate has particularly benefited from this trend,
creating demand for our land. If this trend were to lessen, the demand for our
land could decline, potentially impacting selling prices.
WE ARE EXPOSED TO RISKS ASSOCIATED WITH REAL ESTATE DEVELOPMENT.
Our real estate development activities entail risks that include construction
delays or cost overruns, which may increase project development costs.
In addition, our real estate development activities require significant capital
expenditures. We obtain funds for our capital expenditures through cash flow
from operations and financings. We cannot be sure that the funds available from
these sources will be sufficient to fund our required or desired capital
expenditures for development. If we are unable to obtain sufficient funds, we
may have to defer or otherwise limit our development activities. If we are
unsuccessful in our selling efforts, we may not be able to recover these capital
expenditures.
OUR REAL ESTATE BUSINESS IS SUBJECT TO EXTENSIVE REGULATION, WHICH MAKES IT
DIFFICULT AND EXPENSIVE FOR US TO CONDUCT OUR OPERATIONS.
Development of real property in Florida entails an extensive approval process
involving overlapping regulatory jurisdictions. Real estate projects must
generally comply with the provisions of the Local Government Comprehensive
Planning and Land Development Regulation Act (Growth Management Act). In
addition, development projects that exceed certain specified regulatory
thresholds require approval of a comprehensive Development of Regional Impact
(DRI) application. Compliance with the Growth Management Act and the DRI process
is usually lengthy and costly and can be expected to materially affect our real
estate development activities.
ALLETE 2004 Form 10-K Page 38
The Growth Management Act requires counties and cities to adopt comprehensive
plans guiding and controlling future real property development in their
respective jurisdictions. After a local government adopts its comprehensive
plan, all development orders and development permits must be consistent with the
plan. Each plan must address such topics as future land use, capital
improvements, traffic circulation, sanitation, sewerage, potable water, drainage
and solid waste disposal. The local governments' comprehensive plans must also
establish "levels of service" with respect to certain specified public
facilities and services to residents. Local governments are prohibited from
issuing development orders or permits if facilities and services are not
operating at established levels of service, or if the projects for which permits
are requested will reduce the level of service for public facilities below the
level of service established in the local government's comprehensive plan. If
the proposed development would reduce the established level of services below
the level set by the plan, the development order will require that, at the
outset of the project, the developer either sufficiently improve the services to
meet the required level or provide financial assurances that the additional
services will be provided as the project progresses.
The Growth Management Act, in some instances, can significantly affect the
ability of developers to obtain local government approval in Florida. In many
areas, infrastructure funding has not kept pace with growth. As a result,
substandard facilities and services can delay or prevent the issuance of
permits. Consequently, the Growth Management Act could adversely affect our
ability to develop our real estate projects.
The DRI review process includes an evaluation of a project's impact on the
environment, infrastructure and government services, and requires the
involvement of numerous state and local environmental, zoning and community
development agencies. Local government approval of any DRI is subject to appeal
to the Governor and Cabinet by the Florida Department of Community Affairs, and
adverse decisions by the Governor or Cabinet are subject to judicial appeal. The
DRI approval process is usually lengthy and costly, and conditions, standards or
requirements may be imposed on a developer with respect to a particular project,
which may materially increase the cost of the project. The DRI approval process
is expected to have a material impact on our real estate development activities
in the future.
ENVIRONMENTAL AND OTHER REGULATIONS MAY HAVE AN ADVERSE EFFECT ON OUR REAL
ESTATE BUSINESS.
A substantial portion of our development properties in Florida is subject to
federal, state, and local regulations and restrictions that may impose
significant costs or limitations on our ability to develop our properties. Much
of our property is vacant land and some is located in areas where development
may affect the natural habitats of various protected wildlife species or in
sensitive environmental areas such as wetlands.
RISKS ASSOCIATED WITH ACQUISITIONS MAY HINDER OUR ABILITY TO INCREASE REVENUE
AND EARNINGS.
The energy industry is considered a mature industry in which low, single-digit
growth is expected in industry unit sales. Accordingly, our future growth
depends in large part on our ability to increase our volumes relative to our
competition, acquire additional businesses, replenish land inventories for our
real estate business, manage expansion, control costs in our operations,
introduce new services and consolidate future acquisitions into existing
operations. In pursuing a strategy of acquiring other businesses, we face risks
commonly encountered with growth through acquisitions. These risks include, but
are not limited to:
- incurring significantly higher capital expenditures and operating expenses;
- failing to assimilate the operations and personnel of the acquired
businesses;
- entering new, unfamiliar markets;
- potential undiscovered liabilities at acquired businesses;
- disrupting our ongoing business;
- diverting our limited management resources;
- failing to maintain uniform standards, controls and policies;
- impairing relationships with employees and customers as a result of changes
in management; and
- increasing expenses for accounting and computer systems, as well as
integration difficulties.
We may not adequately anticipate all of the demands that our growth will impose
on our systems, procedures and structures, including our financial and reporting
control systems, data processing systems and management structure. If we cannot
adequately anticipate and respond to these demands, our business could be
materially harmed.
Although we conduct what we believe to be a prudent level of investigation
regarding the operating condition of the businesses we purchase, in light of the
circumstances of each transaction, an unavoidable level of risk remains
regarding the actual operating condition of these businesses. Until we actually
assume operating control of such business assets, we may not be able to
ascertain the actual value of the acquired entity.
Page 39 ALLETE 2004 Form 10-K
WE CAN OFFER YOU NO ASSURANCES THAT WE WILL BE ABLE TO EXECUTE AN ACQUISITION
STRATEGY WITHOUT THE COSTS OF FUTURE ACQUISITIONS ESCALATING.
Although there are potential acquisition candidates that fit our acquisition
criteria, we are not certain that we will be able to consummate any such
transactions in the future or identify those candidates that would result in the
most successful combinations, or that future acquisitions will be able to be
consummated at acceptable prices and terms. In addition, increased competition
for acquisition candidates could result in fewer acquisition opportunities for
us and higher acquisition prices. The magnitude, timing, pricing and nature of
future acquisitions will depend upon various factors, including:
- the availability of suitable acquisition candidates;
- competition with other industry groups or new industry consolidators for
suitable acquisitions;
- the negotiation of acceptable terms;
- our financial capabilities;
- the availability of skilled employees to manage the acquired companies; and
- general economic and business conditions.
OUR CREDIT RATINGS COULD BE REVISED DOWNWARD.
The current credit ratings for our long-term debt are investment grade. A rating
reflects only the view of a rating agency, and it is not a recommendation to
buy, sell or hold securities. Any rating can be revised upward or downward at
any time by a rating agency if such rating agency decides that circumstances
warrant such a change. If Standard & Poor's or Moody's were to downgrade our
long-term ratings, particularly below investment grade, borrowing costs would
increase and the potential pool of investors and funding sources would likely
decrease.
WE RELY HEAVILY ON TECHNOLOGY TO AUTOMATE AND MAXIMIZE THE EFFICIENCIES OF OUR
BUSINESSES. TECHNOLOGY IS CONSTANTLY EVOLVING AND IN ORDER FOR US TO REMAIN
COMPETITIVE WE WILL EMBRACE NEW TECHNOLOGIES AS THEY BECOME PROVEN AND ARE
ECONOMICALLY VIABLE.
Technology is an integral part of the operating and administrative functions of
our businesses. The information systems and processes necessary to support
business areas such as risk management, sales, customer service, and procurement
and supply are complex and are constantly evolving. To successfully compete in
our businesses, we must adapt to the evolving market by continually improving
the responsiveness, functionality, and features of our services and systems to
meet our customers' and other stakeholders' needs. Increased automation through
proven, economically viable technologies is among the primary tools that we use
to enhance our competitive position; without these technologies, our businesses
would not be able to safely operate or adequately respond to customer and other
stakeholder needs.
TAX RESERVES AND THE RECOVERABILITY OF OUR DEFERRED TAX ASSETS MAY HAVE A
SIGNIFICANT IMPACT ON OUR RESULTS OF OPERATIONS.
We are required to make judgments regarding the potential tax effects of various
financial transactions and our ongoing operations to estimate our obligations to
taxing authorities. These tax obligations include income, real estate, use and
employment-related taxes. These judgments include reserves for potential adverse
outcomes regarding tax positions that we have taken. We must also assess our
ability to generate capital gains to realize tax benefits associated with
capital losses expected to be generated in future periods. Capital losses may be
deducted only to the extent of capital gains realized during the year of the
loss or during the three prior or five succeeding years. As of December 31,
2004, we have, where appropriate, recorded an allowance against our deferred tax
assets associated with impairment losses, which will become capital losses when
realized for income tax purposes. The ultimate outcome of such matters could
result in adjustments to our consolidated financial statements and such
adjustments could be material.
ADEQUATE INSURANCE PROTECTION MAY NOT BE COST EFFECTIVE OR AVAILABLE TO MINIMIZE
RISK.
Insurance, warranties or performance guarantees may not cover any or all of the
lost revenue or increased expenses, including the cost of replacement power.
Likewise, our ability to obtain insurance, and the cost of and coverage provided
by such insurance, could be affected by events outside our control.
IF WE ARE NOT ABLE TO RETAIN OUR EXECUTIVE OFFICERS AND KEY EMPLOYEES, WE MAY
NOT BE ABLE TO IMPLEMENT OUR BUSINESS STRATEGY AND OUR BUSINESS COULD SUFFER.
The success of our business heavily depends on the leadership of our executive
officers, all of whom are employees-at-will and none of whom are subject to any
agreements not to compete. If we lose the service of one or more of our
executive officers or key employees, or if one or more of them decides to join a
competitor or otherwise compete directly or indirectly with us, we may not be
able to successfully manage our business or achieve our business objectives. We
may have difficulty in retaining and attracting customers, developing new
services, negotiating favorable agreements with customers and providing
acceptable levels of customer service.
ALLETE 2004 Form 10-K Page 40
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
See Item 7. Management's7 Management’s Discussion and Analysis of Results of Operations and Financial Condition -– Market Risk for information related to quantitative and qualitative disclosure about market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. | Financial Statements and Supplementary Data |
See our consolidated financial statements as of December 31, 20042007 and 20032006, and for each of the three years in the period ended December 31, 2004,2007, and supplementary data, also included, which are indexed in Item 15(a).
ITEM
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
Item 9A. | Controls and Procedures |
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of ourthe effectiveness of the design and operation of ALLETE’s disclosure controls and procedures as such term is(as defined under Rulein Rules 13a-15(e) promulgated underand 15d-15(e) of the Securities Exchange Act of 1934 as
amended (the (“Exchange Act)Act”)). Based on this evaluation,upon those evaluations, our principal executive officer and our principal financial officer have concluded that oursuch disclosure controls and procedures wereare effective as ofto provide assurance that information required to be disclosed in ALLETE’s reports filed or submitted under the end ofExchange Act is recorded, processed, summarized and reported within the period covered by
this annual report.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
time periods specified in the SEC’s rules and forms and such information is accumulated and communicated to our management, including our principal executive and principal financial officer, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control--IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Based on our evaluation under the framework in Internal Control--IntegratedControl—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2004.
Our management's assessment2007.
The effectiveness of the effectiveness of ourCompany’s internal control over financial reporting as of December 31, 2004,2007, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
ITEM 9B. OTHER INFORMATION
Item 9B. | Other Information |
Severance Pay Plan
On December 14, 2004,February 13, 2008, the Board of Directors approved the ALLETE entered intoand Affiliated Companies Change in Control Severance Plan, (the Plan) which provides certain key employees with severance benefits in connection with a committed, syndicated, unsecured,
revolving credit facility with LaSalle Bank, National Association for $100
million (Line).change in control of ALLETE. The Line maturespurpose of the Plan is to enable and encourage the continued dedication and objectivity of members of the Company's management. The Plan will allow the affected individuals to focus their attention on December 14, 2007. The Line may be used by
ALLETE for general corporate purposes, working capitalobtaining the best possible transaction and to provide liquiditymake an independent evaluation of all possible transactions without being diverted by concerns regarding the impact various transactions may have on the security of their jobs and benefits. A change in supportcontrol generally includes: (i) acquisition by any person, entity or group acting together of more than 50 percent of the ALLETE's commercial paper program. ALLETE may prepay amounts
outstandingtotal fair market value or total voting power of the Company’s common stock, (ii) acquisition in any twelve month period of 40 percent or more of the Company’s assets by any person, entity or group acting together, (iii) acquisition in any twelve month period by any person, entity or group acting together of 30 percent or more of the securities entitled to vote in the election of Directors, or (iv) a majority of members of the Board of Directors is replaced during any twelve month period. All of our named executive officers and four of our senior managers were selected by the Executive Compensation Committee of the Board of Directors to participate in the Plan.
A participant in the Plan is entitled to receive specified benefits in the event of certain involuntary terminations of employment (including terminations by the employee following specified changes in duties, benefits, etc., that are treated as involuntary terminations) occurring during the period that begins six months before and ends two years after a change in control. Under the Plan, Mr. Shippar, Mr. Schober, Ms. Welty, and Ms. Amberg would be entitled to receive a benefit of 2.5 times their annual compensation. Annual compensation includes base salary, and an amount representing a “target” award under the LineAnnual Incentive Plan and the Results Sharing program, and certain retirement and welfare benefit make up costs. Ms. Holquist and four other members of senior management would receive 1.5 times their annual compensation. Participants are also entitled to receive outplacement benefits up to a value of $25,000. Payments to participants are to be paid in whole ora lump sum generally within 30 days of termination. As a condition of receiving said payment, participants will be required to sign a waiver of potential claims against the Company, and agree to restrictions on recruiting employees, competing with the Company, and confidentiality. If the total payments to any individual would trigger an excise tax under the Internal Revenue Code Section 4999, payments will be reduced to an amount that would result in part at its discretion. Additionally,
ALLETE may irrevocably terminate or reduceno portion of such payment being subject to the sizeexcise tax, unless the payment would have to be reduced to an amount less than 85 percent of the Line prioramount the participant would otherwise have received, absent the imposition of the excise tax. If payments to maturity.
ALLETE has agreeda participant would need to certain financial covenants relatedbe reduced to the Line. The most
restrictive covenants require ALLETE (1) to not exceed a maximum ratio of funded
debt to total capital of .65 to 1.00; and (2) to maintain an interest coverage
ratio of notamount that is less than 3.0085 percent of the amount the participant would otherwise have received, total payments would not be reduced and the participant would instead receive an additional gross-up payment that would provide the participant with the same net after-tax payment the participant would have received if the excise tax had not applied to 1.00. any of the payments.
The Linesummary description of the Plan set forth above does not purport to be complete and is qualified in its entirety by the ALLETE and Affiliated Companies Change in Control Severance Plan which is filed as Exhibit 10(q).
The ALLETE and Affiliated Companies Supplemental Executive Retirement Plan (SERP) was also contains a cross-default
provision, under which anamended on February 13, 2008 to provide that in the event of default would arisecertain involuntary terminations of employment (including terminations by the employee following specified changes in duties, benefits, etc., that are treated as involuntary terminations) occurring during the period that begins six months before and ends two years after a change in control, as such term is defined in the SERP, a participant in SERP will receive vested amounts in the participant’s deferral account and retirement benefits, if other any, in a single lump sum.
ALLETE
obligations in excess of $5.0 million were in default. (See Note 8.)
Page 41 ALLETE 20042007 Form 10-K
PARTPart III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 10. | Directors, Executive Officers and Corporate Governance |
Unless otherwise stated, the information required for this Item is incorporated by reference herein from our Proxy Statement for the 20052008 Annual Meeting of Shareholders (2005(2008 Proxy Statement) under the following headings:
- DIRECTORS. The information regarding directors will be included in the
"Election of Directors" section;
- AUDIT COMMITTEE FINANCIAL EXPERT. The information regarding the audit
committee financial expert will be included in the "Report of the Audit
Committee" section;
- AUDIT COMMITTEE MEMBERS. The identity of the audit committee members is
included in the "Report of the Audit Committee" section;
- EXECUTIVE OFFICERS. The information regarding executive officers is included
in Part I of this Form 10-K; and
- SECTION 16(A) COMPLIANCE. The information regarding Section 16(a)
compliance will be included in the "Section 16(a) Beneficial Ownership
Reporting Compliance" section.
| · | Directors. The information regarding directors will be included in the “Election of Directors” section; |
| · | Audit Committee Financial Expert. The information regarding the Audit Committee financial expert will be included in the “Audit Committee Report” section; |
| · | Audit Committee Members. The identity of the Audit Committee members is included in the “Audit Committee Report” section; |
| · | Executive Officers. The information regarding executive officers is included in Part I of this Form 10-K; and |
| · | Section 16(a) Compliance. The information regarding Section 16(a) compliance will be included in the “Section 16(a) Beneficial Ownership Reporting Compliance” section. |
Our 20052008 Proxy Statement will be filed with the SEC within 120 days after the end of our 20042007 fiscal year.
CODE OF ETHICS.
Code of Ethics. We have adopted a written Code of Ethics that applies to all of our employees, including our chief executive officer, chief financial officer and controller. A copy of our Code of Ethics is available on our websiteWebsite at www.allete.com and print copies are available without charge upon request without charge.to ALLETE, Inc., Attention: Secretary, 30 West Superior St. Duluth, Minnesota 55802. Any amendment to the Code of Ethics or any waiver of the Code of Ethics will be disclosed on our websiteWebsite at www.allete.com promptly following the date of such amendment or waiver.
CORPORATE GOVERNANCE.
Corporate Governance. The following documents are available on our websiteWebsite at www.allete.com and print copies are available upon request:
- Corporate Governance Guidelines;
- Audit Committee Charter;
- Executive Compensation Committee Charter; and
- Corporate Governance and Nominating Committee Charter.
| · | Corporate Governance Guidelines; |
| · | Audit Committee Charter; |
| · | Executive Compensation Committee Charter; and |
| · | Corporate Governance and Nominating Committee Charter. |
Any amendment to these documents will be disclosed on our websiteWebsite at www.allete.com promptly following the date of such amendment.
ITEM 11. EXECUTIVE COMPENSATION
Item 11. | Executive Compensation |
The information required for this Item is incorporated by reference herein from the "Compensation“Compensation of Executive Officers"Officers,” the “Compensation Discussion and Analysis”, the “Executive Compensation Committee Report” and the "Director Compensation"“Director Compensation – 2007” sections in our 20052008 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required for this Item is incorporated by reference herein from the "Security“Security Ownership of Certain Beneficial Owners, and Management"” the “Security Ownership of Management” and the "Equity“Equity Compensation Plan Information"Information” sections in our 20052008 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required for this Item is incorporated by reference herein from the “Corporate Governance” section in our 2008 Proxy Statement.
We have adopted a Related Person Transaction Policy which is available on our Website at www.allete.com. Print copies are available, free of charge, upon request. Any amendment to this policy will be disclosed on our Website at www.allete.com promptly following the date of such amendment.
Item 14. | Principal Accountant Fees and Services |
The information required by this Item is incorporated by reference herein from the "Report of the Audit Committee"“Audit Committee Report” section in our 20052008 Proxy Statement.
ALLETE
20042007 Form 10-K
Page 42
PARTPart IV
ITEM
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Certain Documents Filed as Part of this Form 10-K.
(1) Financial Statements Page
ALLETE
Report of Independent Registered Public Accounting Firm.......... 47
Consolidated Balance Sheet at December 31, 2004Exhibits and 2003......... 48
For the Three Years Ended December 31, 2004
Consolidated Statement of Income............................ 49
Consolidated Statement of Cash Flows........................ 50
Consolidated Statement of Shareholders' Equity.............. 51
Notes to Consolidated Financial Statements....................... 52-76
(2) Financial Statement Schedules
Schedule II -
(a) | Certain Documents Filed as Part of this Form 10-K. | |
(1) | Financial Statements | Page |
| | ALLETE | |
| | Report of Independent Registered Public Accounting Firm…………………………………………………......... | 58 |
| | Consolidated Balance Sheet at December 31, 2007 and 2006…………………………………………….......... | 59 |
| | For the Three Years Ended December 31, 2007 | |
| | | Consolidated Statement of Income………………………………………………………………………………. | 60 |
| | | Consolidated Statement of Cash Flows…………………………………………………………………………. | 61 |
| | | Consolidated Statement of Shareholders’ Equity………………………………………………………………. | 62 |
| | Notes to Consolidated Financial Statements……………………………………………………………………….. | 63 |
(2) | Financial Statement Schedules | |
| | Schedule II – ALLETE Valuation and Qualifying Accounts and Reserves………………………………………. | 95 |
| All other schedules have been omitted either because the information is not required to be reported by ALLETE or because the information is included in the consolidated financial statements or the notes. |
(3) | Exhibits including those incorporated by reference. | |
Exhibit Number
| *3(a)1 | - | Articles of Incorporation, amended and restated as of May 8, 2001 (filed as Exhibit 3(b) to the March 31, 2001, Form 10-Q, File No. 1-3548). |
| *3(a)2 | - | Amendment to Articles of Incorporation, effective 12:00 p.m. Eastern Time on September 20, 2004 (filed as Exhibit 3 to the September 21, 2004, Form 8-K, File No. 1-3548). |
| *3(a)3 | - | Amendment to Certificate of Assumed Name, filed with the Minnesota Secretary of State on May 8, 2001 (filed as Exhibit 3(a) to the March 31, 2001, Form 10-Q, File No. 1-3548). |
| *3(b) | - | Bylaws, as amended effective August 24, 2004 (filed as Exhibit 3 to the August 25, 2004, Form 8-K, File No. 1-3548). |
| *4(a)1 | - | Mortgage and Deed of Trust, dated as of September 1, 1945, between Minnesota Power & Light Company (now ALLETE) and The Bank of New York (formerly Irving Trust Company) and Douglas J. MacInnes (successor to Richard H. West), Trustees (filed as Exhibit 7(c), File No. 2-5865). |
| *4(a)2 | - | Supplemental Indentures to ALLETE’s Mortgage and Deed of Trust: |
| | | Number | Dated as of | Reference File | Exhibit |
| | | First | March 1, 1949 | 2-7826 | 7(b) |
| | | Second | July 1, 1951 | 2-9036 | 7(c) |
| | | Third | March 1, 1957 | 2-13075 | 2(c) |
| | | Fourth | January 1, 1968 | 2-27794 | 2(c) |
| | | Fifth | April 1, 1971 | 2-39537 | 2(c) |
| | | Sixth | August 1, 1975 | 2-54116 | 2(c) |
| | | Seventh | September 1, 1976 | 2-57014 | 2(c) |
| | | Eighth | September 1, 1977 | 2-59690 | 2(c) |
| | | Ninth | April 1, 1978 | 2-60866 | 2(c) |
| | | Tenth | August 1, 1978 | 2-62852 | 2(d)2 |
| | | Eleventh | December 1, 1982 | 2-56649 | 4(a)3 |
| | | Twelfth | April 1, 1987 | 33-30224 | 4(a)3 |
| | | Thirteenth | March 1, 1992 | 33-47438 | 4(b) |
| | | Fourteenth | June 1, 1992 | 33-55240 | 4(b) |
| | | Fifteenth | July 1, 1992 | 33-55240 | 4(c) |
| | | Sixteenth | July 1, 1992 | 33-55240 | 4(d) |
| | | Seventeenth | February 1, 1993 | 33-50143 | 4(b) |
| | | Eighteenth | July 1, 1993 | 33-50143 | 4(c) |
| | | Nineteenth | February 1, 1997 | 1-3548 (1996 Form 10-K) | 4(a)3 |
| | | Twentieth | November 1, 1997 | 1-3548 (1997 Form 10-K) | 4(a)3 |
| | | Twenty-first | October 1, 2000 | 333-54330 | 4(c)3 |
| | | Twenty-second | July 1, 2003 | 1-3548 (June 30, 2003 Form 10-Q) | 4 |
| | | Twenty-third | August 1, 2004 | 1-3548 (Sept. 30, 2004 Form 10-Q) | 4(a) |
| | | Twenty-fourth | March 1, 2005 | 1-3548 (March 31, 2005 Form 10-Q) | 4 |
| | | Twenty-fifth | December 1, 2005 | 1-3548 (March 31, 2006 Form 10-Q) | 4 |
| | | Twenty-sixth | October 1, 2006 | 1-3548 (2006 Form 10-K) | 4 |
ALLETE Valuation and Qualifying Accounts and Reserves.. 77
All other schedules have been omitted either because the information is not
required to be reported by ALLETE or because the information is included in
the consolidated financial statements or the notes.
(3) Exhibits including those incorporated by reference.
EXHIBIT NUMBER
*2 - Stock Purchase Agreement (without Exhibits and Schedules),
dated November 20, 2003, by and between Philadelphia Suburban
Corporation (now Aqua America, Inc.), as Purchaser, and ALLETE
Water Services, Inc., as Shareholder, related to the sale of
Heater Utilities, Inc. (filed as Exhibit 2(b) to the 20032007 Form 10-K File No. 1-3548).
*3(a)1 - Articles of Incorporation, amended and restated as of May 8,
2001 (filed as
Exhibit 3(b) to the March 31, 2001 Form 10-Q,
File No. 1-3548).
*3(a)2 - Amendment to Articles of Incorporation, effective 12:00 p.m.
Eastern Time on September 20, 2004 (filed as Exhibit 3 to the
September 21, 2004 Form 8-K, File No. 1-3548).
*3(a)3 - Amendment to Certificate of Assumed Name, filed with the
Minnesota Secretary of State on May 8, 2001 (filed as Exhibit
3(a) to the March 31, 2001 Form 10-Q, File No. 1-3548).
*3(b) - Bylaws, as amended effective August 24, 2004 (filed as Exhibit
3 to the August 25, 2004 Form 8-K, File No. 1-3548). *4(a)1 -
Mortgage and Deed of Trust, dated as of September 1, 1945,
between Minnesota Power & Light Company (now ALLETE) and
The Bank of New York (formerly Irving Trust Company) and
Douglas J. MacInnes (successor to Richard H. West), Trustees
(filed as Exhibit 7(c), File No. 2-5865).
*4(a)2 - Supplemental Indentures to ALLETE's Mortgage and Deed of
Trust:
NUMBER DATED AS OF REFERENCE FILE EXHIBIT
First March 1, 1949 2-7826 7(b)
Second July 1, 1951 2-9036 7(c)
Third March 1, 1957 2-13075 2(c)
Fourth January 1, 1968 2-27794 2(c)
Fifth April 1, 1971 2-39537 2(c)
Sixth August 1, 1975 2-54116 2(c)
Seventh September 1, 1976 2-57014 2(c)
Eighth September 1, 1977 2-59690 2(c)
Ninth April 1, 1978 2-60866 2(c)
Tenth August 1, 1978 2-62852 2(d)2
Eleventh December 1, 1982 2-56649 4(a)3
Twelfth April 1, 1987 33-30224 4(a)3
Thirteenth March 1, 1992 33-47438 4(b)
Fourteenth June 1, 1992 33-55240 4(b)
Fifteenth July 1, 1992 33-55240 4(c)
Sixteenth July 1, 1992 33-55240 4(d)
Seventeenth February 1, 1993 33-50143 4(b)
Eighteenth July 1, 1993 33-50143 4(c)
Nineteenth February 1, 1997 1-3548 (1996 Form 10-K) 4(a)3
Twentieth November 1, 1997 1-3548 (1997 Form 10-K) 4(a)3
Twenty-first October 1, 2000 333-54330 4(c)3
Twenty-second July 1, 2003 1-3548 (June 30, 2003 Form 10-Q) 4
Twenty-third August 1, 2004 1-3548 (Sept. 30, 2004 Form 10-Q) 4(a)
Page 43 Number
| 4(a)3 | - | Twenty-Seventh Supplemental Indenture, dated as of February 1, 2008, between ALLETE and The Bank of New York and Douglas J. MacInnes, as Trustees. |
| *4(b)1 | - | Indenture of Trust, dated as of August 1, 2004, between the City of Cohasset, Minnesota and U.S. Bank National Association, as Trustee relating to $111 Million Collateralized Pollution Control Refunding Revenue Bonds (filed as Exhibit 4(b) to the September 30, 2004, Form 10-Q, File No. 1-3548). |
| *4(b)2 | - | Loan Agreement, dated as of August 1, 2004, between the City of Cohasset, Minnesota and ALLETE relating to $111 Million Collateralized Pollution Control Refunding Revenue Bonds (filed as Exhibit 4(c) to the September 30, 2004, Form 10-Q, File No. 1-3548). |
| *4(c)1 | - | Mortgage and Deed of Trust, dated as of March 1, 1943, between Superior Water, Light and Power Company and Chemical Bank & Trust Company and Howard B. Smith, as Trustees, both succeeded by U.S. Bank Trust N.A., as Trustee (filed as Exhibit 7(c), File No. 2-8668). |
| *4(c)2 | - | Supplemental Indentures to Superior Water, Light and Power Company’s Mortgage and Deed of Trust: |
| | | Number | Dated as of | Reference File | Exhibit |
| | | First | March 1, 1951 | 2-59690 | 2(d)(1) |
| | | Second | March 1, 1962 | 2-27794 | 2(d)1 |
| | | Third | July 1, 1976 | 2-57478 | 2(e)1 |
| | | Fourth | March 1, 1985 | 2-78641 | 4(b) |
| | | Fifth | December 1, 1992 | 1-3548 (1992 Form 10-K) | 4(b)1 |
| | | Sixth | March 24, 1994 | 1-3548 (1996 Form 10-K) | 4(b)1 |
| | | Seventh | November 1, 1994 | 1-3548 (1996 Form 10-K) | 4(b)2 |
| | | Eighth | January 1, 1997 | 1-3548 (1996 Form 10-K) | 4(b)3 |
| 4(c)3 | - | Ninth Supplemental Indenture, dated as of October 1, 2007, between Superior Water, Light and Power Company and U.S. Bank National Association, as Trustees. |
| 4(c)4 | - | Tenth Supplemental Indenture, dated as of October 1, 2007, between Superior Water, Light and Power Company and U.S. Bank National Association, as Trustees. |
| *4(d) | - | Amended and Restated Rights Agreement, dated as of July 12, 2006, between ALLETE and the Corporate Secretary of ALLETE, as Rights Agent (filed as Exhibit 4 to the July 14, 2006, Form 8-K, File No. 1-3548). |
| *10(a) | - | Power Purchase and Sale Agreement, dated as of May 29, 1998, between Minnesota Power, Inc. (now ALLETE) and Square Butte Electric Cooperative (filed as Exhibit 10 to the June 30, 1998, Form 10-Q, File No. 1-3548). |
| *10(c) | - | Master Agreement (without Appendices and Exhibits), dated December 28, 2004, by and between Rainy River Energy Corporation and Constellation Energy Commodities Group, Inc. (filed as Exhibit 10(c) to the 2004 Form 10-K, File No. 1-3548). |
| *10(d)1 | - | Fourth Amended and Restated Committed Facility Letter (without Exhibits), dated January 11, 2006, by and among ALLETE and LaSalle Bank National Association, as Agent (filed as Exhibit 10 to the January 17, 2006, Form 8-K, File No. 1-3548). |
| *10(d)2 | - | First Amendment to Fourth Amended and Restated Committed Facility Letter dated June 19, 2006, by and among ALLETE and LaSalle Bank National Association, as Agent (filed as Exhibit 10(a) to the June 30, 2006, Form 10-Q, File No. 1-3548). |
| 10(d)3 | - | Second Amendment to Fourth Amended and Restated Committed Facility Letter dated December 14, 2006, by and among ALLETE and LaSalle Bank National Association, as Agent. |
| *10(e)1 | - | Financing Agreement between Collier County Industrial Development Authority and ALLETE dated as of July 1, 2006 (filed as Exhibit 10(b)1 to the June 30, 2006, Form 10-Q, File No. 1-3548). |
| *10(e)2 | - | Letter of Credit Agreement, dated as of July 5, 2006, among ALLETE, the Participating Banks and Wells Fargo Bank, National Association, as Administrative Agent and Issuing Bank (filed as Exhibit 10(b)2 to the June 30, 2006, Form 10-Q, File No. 1-3548). |
| *10(g) | - | Agreement (without Exhibit) dated December 16, 2005, among ALLETE, Wisconsin Public Service Corporation and WPS Investments, LLC (filed as Exhibit 10 to the December 21, 2005 Form 8-K, File No. 1-3548). |
| +*10(h)1 | - | Minnesota Power (now ALLETE) Executive Annual Incentive Plan, as amended, effective January 1, 1999 with amendments through January 2003 (filed as Exhibit 10 to the September 30, 2003, Form 10-Q, File No. 1-3548). |
| +*10(h)2 | - | November 2003 Amendment to the ALLETE Executive Annual Incentive Plan (filed as Exhibit 10(t)2 to the 2003 Form 10-K, File No. 1-3548). |
| +*10(h)3 | - | July 2004 Amendment to the ALLETE Executive Annual Incentive Plan (filed as Exhibit 10(a) to the June 30, 2004, Form 10-Q, File No. 1-3548). |
ALLETE
20042007 Form 10-K
EXHIBIT NUMBER
*4(b)1 - Indenture of Trust, dated as of August 1, 2004, between the
City of Cohasset, Minnesota and U.S. Bank National
Association, as Trustee relating to $111 Million
Collateralized Pollution Control Refunding Revenue Bonds
(filed as
Exhibit 4(b) to the September 30, 2004 Form 10-Q,
File No. 1-3548).
*4(b)2 - Loan Agreement, dated as of August 1, 2004, between the City
of Cohasset, Minnesota and ALLETE relating to $111 Million
Collateralized Pollution Control Refunding Revenue Bonds
(filed as Exhibit 4(c) to the September 30, 2004 Form 10-Q,
File No. 1-3548).
*4(c)1 - Mortgage and Deed of Trust, dated as of March 1, 1943, between
Superior Water, Light and Power Company and Chemical Bank &
Trust Company and Howard B. Smith, as Trustees, both succeeded
by U.S. Bank Trust N.A., as Trustee (filed as Exhibit 7(c),
File No. 2-8668).
*4(c)2 - Supplemental Indentures to Superior Water, Light and Power
Company's Mortgage and Deed of Trust:
NUMBER DATED AS OF REFERENCE FILE EXHIBIT
First March 1, 1951 2-59690 2(d)(1)
Second March 1, 1962 2-27794 2(d)1
Third July 1, 1976 2-57478 2(e)1
Fourth March 1, 1985 2-78641 4(b)
Fifth December 1, 1992 1-3548 (1992 Form 10-K) 4(b)1
Sixth March 24, 1994 1-3548 (1996 Form 10-K) 4(b)1
Seventh November 1, 1994 1-3548 (1996 Form 10-K) 4(b)2
Eighth January 1, 1997 1-3548 (1996 Form 10-K) 4(b)3
*4(d)1 - Rights Agreement, dated as of July 24, 1996, between Minnesota
Power & Light Company (now ALLETE) and the Corporate Secretary
of the Company, as Rights Agent (filed as Exhibit 4 to the
August 2, 1996 Form 8-K, File No. 1-3548).
*4(d)2 - Certificate of Adjustment to the Rights Agreement as amended,
dated as of July 24, 1996, between Minnesota Power & Light
Company (now ALLETE) and the Corporate Secretary of the
Company, as Rights Agent (filed as Exhibit 4(d) to the
September 30, 2004 Form 10-Q, File No. 1-3548).
*10(a) - Power Purchase and Sale Agreement, dated as of May 29, 1998,
between Minnesota Power, Inc. (now ALLETE) and Square Butte
Electric Cooperative (filed as Exhibit 10 to the June 30, 1998
Form 10-Q, File No. 1-3548).
*10(b) - Amended and Restated Withdrawal Agreement (without Exhibits
and Schedules), dated January 30, 2004, by and between Great
River Energy and Minnesota Power (now ALLETE) (filed as
Exhibit 10(p)Number
| +10(h)4 | - | January 2007 Amendment to the ALLETE Executive Annual Incentive Plan. | |
| +*10(h)5 | - | Form of ALLETE Executive Annual Incentive Plan 2006 Award – President of ALLETE Properties (filed as Exhibit 10(b) to the January 30, 2006, Form 8-K, File No. 1-3548). | |
| +*10(h)6 | - | Form of ALLETE Executive Annual Incentive Plan 2006 Award (filed as Exhibit 10 to the February 17, 2006, Form 8-K, File No. 1-3548). | |
| +10(h)7 | - | Form of ALLETE Executive Annual Incentive Plan Awards Effective 2007. | |
| +*10(i)1 | - | ALLETE and Affiliated Companies Supplemental Executive Retirement Plan, as amended and restated, effective January 1, 2004 (filed as Exhibit 10(u) to the 2003 Form 10-K, File No. 1-3548). | |
| +*10(i)2 | - | January 2005 Amendment to the ALLETE and Affiliated Companies Supplemental Executive Retirement Plan (filed as Exhibit 10(b) to the March 31, 2005, Form 10-Q, File No. 1-3548). | |
| +*10(i)3 | - | August 2006 Amendments to the ALLETE and Affiliated Companies Supplemental Executive Retirement Plan (filed as Exhibit 10(a) to the September 30, 2006, Form 10-Q, File No. 1-3548). | |
| +10(i)4 | - | December 2006 Amendments to the ALLETE and Affiliated Companies Supplemental Executive Retirement Plan. | |
| +*10(j)1 | - | Minnesota Power and Affiliated Companies Executive Investment Plan I, as amended and restated, effective November 1, 1988 (filed as Exhibit 10(c) to the 1988 Form 10-K, File No. 1-3548). | |
| +*10(j)2 | - | Amendments through December 2003 to the Minnesota Power and Affiliated Companies Executive Investment Plan I (filed as Exhibit 10(v)2 to the 2003 Form 10-K, File No. 1-3548). | |
| +*10(j)3 | - | July 2004 Amendment to the Minnesota Power and Affiliated Companies Executive Investment Plan I (filed as Exhibit 10(b) to the June 30, 2004, Form 10-Q, File No. 1-3548). | |
| +*10(j)4 | - | August 2006 Amendment to the Minnesota Power and Affiliated Companies Executive Investment Plan I (filed as Exhibit 10(b) to the September 30, 2006, Form 10-Q, File No. 1-3548). | |
| +*10(k)1 | - | Minnesota Power and Affiliated Companies Executive Investment Plan II, as amended and restated, effective November 1, 1988 (filed as Exhibit 10(d) to the 1988 Form 10-K, File No. 1-3548). | |
| +*10(k)2 | - | Amendments through December 2003 to the Minnesota Power and Affiliated Companies Executive Investment Plan II (filed as Exhibit 10(w)2 to the 2003 Form 10-K, File No. 1-3548). | |
| +*10(k)3 | - | July 2004 Amendment to the Minnesota Power and Affiliated Companies Executive Investment Plan II (filed as Exhibit 10(c) to the June 30, 2004, Form 10-Q, File No. 1-3548). | |
| +*10(k)4 | - | August 2006 Amendment to the Minnesota Power and Affiliated Companies Executive Investment Plan II (filed as Exhibit 10(c) to the September 30, 2006, Form 10-Q, File No. 1-3548). | |
| +*10(l) | - | Deferred Compensation Trust Agreement, as amended and restated, effective January 1, 1989 (filed as Exhibit 10(f) to the 1988 Form 10-K, File No. 1-3548). | |
| +*10(m)1 | - | ALLETE Executive Long-Term Incentive Compensation Plan as amended and restated effective January 1, 2006 (filed as Exhibit 10 to the May 16, 2005, Form 8-K, File No. 1-3548). | |
| +*10(m)2 | - | Form of ALLETE Executive Long-Term Incentive Compensation Plan 2006 Nonqualified Stock Option Grant (filed as Exhibit 10(a)1 to the January 30, 2006, Form 8-K, File No. 1-3548). | |
| +*10(m)3 | - | Form of ALLETE Executive Long-Term Incentive Compensation Plan 2006 Performance Share Grant (filed as Exhibit 10(a)2 to the January 30, 2006, Form 8-K, File No. 1-3548). | |
| +*10(m)4 | - | Form of ALLETE Executive Long-Term Incentive Compensation Plan 2006 Long-Term Cash Incentive Award – President of ALLETE Properties (filed as Exhibit 10(a)3 to the January 30, 2006, Form 8-K, File No. 1-3548). | |
| +*10(m)5 | - | Form of ALLETE Executive Long-Term Incentive Compensation Plan 2006 Stock Grant – President of ALLETE Properties (filed as Exhibit 10(a)4 to the January 30, 2006, Form 8-K, File No. 1-3548). | |
| +10(m)6 | - | Form of ALLETE Executive Long-Term Incentive Compensation Plan Nonqualified Stock Option Grant Effective 2007. | |
| +10(m)7 | - | Form of ALLETE Executive Long-Term Incentive Compensation Plan Performance Share Grant Effective 2007. | |
| +10(m)8 | - | Form of ALLETE Executive Long-Term Incentive Compensation Plan Long-Term Cash Incentive Award Effective 2007. | |
| +10(m)9 | - | Form of ALLETE Executive Long-Term Incentive Compensation Plan Stock Grant Effective 2007. | |
| +10(m)10 | - | Form of ALLETE Executive Long-Term Incentive Compensation Plan Performance Share Grant Effective 2008. | |
| +*10(n)1 | - | Minnesota Power (now ALLETE) Director Stock Plan, effective January 1, 1995 (filed as Exhibit 10 to the March 31, 1995 Form 10-Q, File No. 1-3548). | |
ALLETE 2007 Form 10-K File No. 1-3548).
10(c) - Master Agreement (without Appendices and Exhibits), dated
December 28, 2004, by and between Rainy River Energy
Corporation and Constellation Energy Commodities Group, Inc.
*10(d)1 - Third Amended and Restated Committed Facility Letter (without
Exhibits), dated December 23, 2003, to ALLETE from LaSalle
Bank National Association, as Agent (filed as
Exhibit
10(s) to
the 2003 Form 10-K, File No. 1-3548).
10(d)2 - First Amendment to Third Amended and Restated Committed
Facility Letter, dated December 14, 2004, by and among ALLETE
and LaSalle Bank National Association, as Agent.
*10(e) - Master Separation Agreement, dated June 4, 2004, between
ALLETE, Inc. and ADESA, Inc. (filed as Exhibit 10.1 to ADESA,
Inc.'s June 30, 2004 Form 10-Q, File No. 1-32198).
+*10(f)1 - Minnesota Power (now ALLETE) Executive Annual Incentive Plan,
as amended, effective January 1, 1999 with amendments through
January 2003 (filed as Exhibit 10 to the September 30, 2003
Form 10-Q, File No. 1-3548).
+*10(f)2 - November 2003 Amendment to the ALLETE Executive Annual
Incentive Plan (filed as Exhibit 10(t)2 to the 2003 Form 10-K,
File No. 1-3548).
+*10(f)3 - July 2004 Amendment to the ALLETE Executive Annual Incentive
Plan (filed as Exhibit 10(a) to the June 30, 2004 Form 10-Q,
File No. 1-3548).
+*10(g) - ALLETE and Affiliated Companies Supplemental Executive
Retirement Plan, as amended and restated, effective January 1,
2004 (filed as Exhibit 10(u) to the 2003 Form 10-K, File No.
1-3548).
+*10(h)1 - Executive Investment Plan I, as amended and restated,
effective November 1, 1988 (filed as Exhibit 10(c) to the 1988
Form 10-K, File No. 1-3548).
+*10(h)2 - Amendments through December 2003 to the Minnesota Power and
Affiliated Companies Executive Investment Plan I (filed as
Exhibit 10(v)2 to the 2003 Form 10-K, File No. 1-3548).
+*10(h)3 - July 2004 Amendment to the Minnesota Power and Affiliated
Companies Executive Investment Plan I (filed as Exhibit 10(b)
to the June 30, 2004 Form 10-Q, File No. 1-3548).
ALLETE 2004 Form 10-K Page 44
EXHIBIT NUMBER
+*10(i)1 - Executive Investment Plan II, as amended and restated,
effective November 1, 1988 (filed as Exhibit 10(d) to the 1988
Form 10-K, File No. 1-3548).
+*10(i)2 - Amendments through December 2003 to the Minnesota Power and
Affiliated Companies Executive Investment Plan II (filed as
Exhibit 10(w)2 to the 2003 Form 10-K, File No. 1-3548).
+*10(i)3 - July 2004 Amendment to the Minnesota Power and Affiliated
Companies Executive Investment Plan II (filed as Exhibit 10(c)
to the June 30, 2004 Form 10-Q, File No. 1-3548).
+*10(j) - Deferred Compensation Trust Agreement, as amended and
restated, effective January 1, 1989 (filed as Exhibit 10(f) to
the 1988 Form 10-K, File No. 1-3548).
+*10(k)1 - Minnesota Power (now ALLETE) Executive Long-Term Incentive
Compensation Plan, effective January 1, 1996 (filed as Exhibit
10(a) to the June 30, 1996 Form 10-Q, File No. 1-3548).
+*10(k)2 - Amendments through January 2003 to the Minnesota Power (now
ALLETE) Executive Long-Term Incentive Compensation Plan (filed
as Exhibit 10(z)2 to the 2002 Form 10-K, File No. 1-3548).
+*10(k)3 - July 2004 Amendment to the ALLETE Executive Long-Term
Incentive Compensation Plan (filed as Exhibit 10(d) to the
June 30, 2004 Form 10-Q, File No. 1-3548).
+10(k)4 - Form of ALLETE Executive Long-Term Incentive Compensation Plan
Nonqualified Stock Option Grant.
+10(k)5 - Form of ALLETE Executive Long-Term Incentive Compensation Plan
Performance Share Grant.
+*10(l)1 - Minnesota Power (now ALLETE) Director Stock Plan, effective
January 1, 1995 (filed as Exhibit 10 to the March 31, 1995
Form 10-Q, File No. 1-3548).
+*10(l)2 - Amendments through December 2003 to the Minnesota Power (now
ALLETE) Director Stock Plan (filed as Exhibit 10(z)2 to the
2003 Form 10-K, File No. 1-3548).
+*10(l)3 - July 2004 Amendment to the ALLETE Director Stock Plan (filed
as Exhibit 10(e) to the June 30, 2004 Form 10-Q, File No.
1-3548).
+*10(m)1 - Minnesota Power (now ALLETE) Director Compensation Deferral
Plan Amended and Restated, effective January 1, 1990 (filed as
Exhibit 10(ac) to the 2002 Form 10-K, File No. 1-3548).
+*10(m)2 - October 2003 Amendment to the Minnesota Power (now ALLETE)
Director Compensation Deferral Plan (filed as Exhibit 10(aa)2
to the 2003 Form 10-K, File No. 1-3548).
+*10(n) - ALLETE Director Compensation Trust Agreement, effective
October 11, 2004 (filed as Exhibit 10(a) to the September 30,
2004 Form 10-Q, File No. 1-3548).
12 - Computation of Ratios of Earnings to Fixed Charges.
*21 - Subsidiaries of the Registrant (referenceNumber | +*10(n)2 | - | Amendments through December 2003 to the Minnesota Power (now ALLETE) Director Stock Plan (filed as Exhibit 10(z)2 to the 2003 Form 10-K, File No. 1-3548). | |
| +*10(n)3 | - | July 2004 Amendment to the ALLETE Director Stock Plan (filed as Exhibit 10(e) to the June 30, 2004, Form 10-Q, File No. 1-3548). | |
| +10(n)4 | - | January 2007 Amendment to the ALLETE Director Stock Plan. | |
| +*10(n)5 | - | ALLETE Director Compensation Summary Effective May 1, 2005 (filed as Exhibit 10 to the June 30, 2005, Form 10-Q, File No. 1-3548). | |
| +10(n)6 | - | ALLETE Non-Management Director Compensation Summary Effective February 15, 2007. | |
| +*10(o)1 | - | Minnesota Power (now ALLETE) Director Compensation Deferral Plan Amended and Restated, effective January 1, 1990 (filed as Exhibit 10(ac) to the 2002 Form 10-K, File No. 1-3548). | |
| +*10(o)2 | - | October 2003 Amendment to the Minnesota Power (now ALLETE) Director Compensation Deferral Plan (filed as Exhibit 10(aa)2 to the 2003 Form 10-K, File No. 1-3548). | |
| +*10(o)3 | - | January 2005 Amendment to the ALLETE Director Compensation Deferral Plan (filed as Exhibit 10(c) to the March 31, 2005, Form 10-Q, File No. 1-3548). | |
| +*10(o)4 | - | August 2006 Amendment to the ALLETE Director Compensation Deferral Plan (filed as Exhibit 10(d) to the September 30, 2006, Form 10-Q, File No. 1-3548). | |
| +*10(p) | - | ALLETE Director Compensation Trust Agreement, effective October 11, 2004 (filed as Exhibit 10(a) to the September 30, 2004, Form 10-Q, File No. 1-3548). | |
| +10(q) | - | ALLETE Change of Control Severance Pay Plan Effective February 13, 2008. | |
| 12 | - | Computation of Ratios of Earnings to Fixed Charges. | |
| 21 | - | Subsidiaries of the Registrant. | |
| 23(a) | - | Consent of Independent Registered Public Accounting Firm. | |
| 23(b) | - | Consent of General Counsel. | |
| 31(a) | - | Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31(b) | - | Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32 | - | Section 1350 Certification of Annual Report by the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 99 | - | ALLETE News Release dated February 15, 2008, announcing earnings for the year ended December 31, 2007. (This exhibit has been furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.) | |
SWL&P is made to ALLETE's
Form U-3A-2 for the year ended December 31, 2004, File No.
69-78).
23(a) - Consent of Independent Registered Public Accounting Firm.
23(b) - Consent of General Counsel.
31(a) - Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31(b) - Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 - Section 1350 Certification of Annual Report by the Chief
Executive Officer and Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
We are a party to other long-term debt instruments, $6,370,000 of City of Superior, Wisconsin, Collateralized Utility Revenue Refunding Bonds Series 2007A and $6,130,000 of City of Superior, Wisconsin, Collateralized Utility Revenue Bonds Series 2007B, that, pursuant to Regulation S-K, Item 601(b)(4)(iii), are not filed as exhibits since the total amount of debt authorized under each suchof these omitted instrumentinstruments does not exceed 10%10 percent of our total consolidated assets. TheseWe will furnish copies of these instruments includeto the following:
-SEC upon its request.
We are a party to another long-term debt instrument, $38,995,000 of City of Cohasset, Minnesota, Variable Rate Demand Revenue Refunding Bonds (ALLETE, formerly Minnesota Power & Light Company, Project) Series 1997A, Series 1997B, Series 1997C and Series 1997D.
- $35,105,000 Collier County Industrial Development Authority,
6.50% Industrial Development Refunding Revenue Bonds (Florida
Water Services Corporation, formerly Southern States
Utilities, Inc.1997D that, pursuant to Regulation S-K, Item 601(b)(4)(iii), Project) Series 1996.is not filed as an exhibit since the total amount of debt authorized under this omitted instrument does not exceed 10 percent of our total consolidated assets. We will furnish copies of these instrumentsthis instrument to the SEC upon its request.
- -----------------------------
* Incorporated herein by reference as indicated.
+
* | Incorporated herein by reference as indicated. |
+ | Management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 15(c) of Form 10-K. |
ALLETE 2007 Form
10-K.
Page 45 ALLETE 2004 Form 10-K
SIGNATURES
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ALLETE, INC.
Dated: February 11, 2005 By Donald J. Shippar
------------------------------------------
Donald J. Shippar
President and Chief Executive Officer
| ALLETE, Inc. |
|
|
Dated: February 15, 2008 | By | /s/ Donald J. Shippar |
| Donald J. Shippar |
| Chairman, President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- -------------------------------------------------------------------------------------------------------------------------
Signature | | Title | | Date |
| | | | |
| | | | |
/s/ Donald J. Shippar | | Chairman, President, Chief Executive Officer | | February 11, 2005
- ----------------------------------------
15, 2008 |
Donald J. Shippar | | and Director
James K. Vizanko (Principal Executive Officer) | | |
| | | | |
/s/ Mark A. Schober | | Senior Vice President and Chief Financial Officer | | February 11, 2005
- ----------------------------------------
James K. Vizanko
15, 2008 |
Mark A. Schober Senior Vice President and | | (Principal Financial Officer) | | |
| | | | |
/s/ Steven Q. DeVinck | | Controller | | February 11, 2005
- ----------------------------------------
Mark15, 2008 |
Steven Q. DeVinck | | (Principal Accounting Officer) | | |
| | | | |
/s/ Kathleen A. SchoberBrekken | | Director | | February 15, 2008 |
Kathleen A. Brekken | | | | |
| | | | |
/s/ Heidi J. Eddins | | Director | | February 11, 2005
- ----------------------------------------
15, 2008 |
Heidi J. Eddins
Peter | | | | |
| | | | |
/s/ Sidney W. Emery, Jr | | Director | | February 15, 2008 |
Sidney W. Emery, Jr | | | | |
| | | | |
/s/ James J. Johnson Hoolihan | | Director | | February 11, 2005
- ----------------------------------------
Peter15, 2008 |
James J. JohnsonHoolihan | | | | |
| | | | |
/s/ Madeleine W. Ludlow | | Director | | February 11, 2005
- ----------------------------------------
15, 2008 |
Madeleine W. Ludlow | | | | |
| | | | |
/s/ George L. Mayer | | Director | | February 11, 2005
- ----------------------------------------
15, 2008 |
George L. Mayer | | | | |
| | | | |
/s/ Douglas C. Neve | | Director | | February 15, 2008 |
Douglas C. Neve | | | | |
| | | | |
/s/ Roger D. Peirce | | Director | | February 11, 2005
- ----------------------------------------
15, 2008 |
Roger D. Peirce | | | | |
| | | | |
/s/ Jack I. Rajala | | Director | | February 11, 2005
- ----------------------------------------
15, 2008 |
Jack I. Rajala
Nick Smith Director February 11, 2005
- ----------------------------------------
Nick Smith | | | | |
| | | | |
/s/ Bruce W. Stender Chairman and | | Director | | February 11, 2005
- ----------------------------------------
15, 2008 |
Bruce W. Stender | | | | |
ALLETE
20042007 Form 10-K
Page 46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of ALLETE, Inc.:
We have completed an integrated audit of ALLETE, Inc.'s 2004 consolidated
financial statements and of its internal control over financial reporting as of
December 31, 2004 and audits of its 2003 and 2002 consolidated financial
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our audits, are
presented below.
Consolidated financial statements and financial statement schedule
- ------------------------------------------------------------------
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of ALLETE, Inc. and its subsidiaries (the Company) at December 31, 20042007 and 2003,2006, and the results of itstheir operations and itstheir cash flows for each of the three years in the period ended December 31, 20042007, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. TheseAlso in our opinion, the Company maintained, in all material respects, effective internal control over financial statements and financial statement schedule arereporting as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by the responsibilityCommittee of Sponsoring Organizations of the Company's management. Our responsibilityTreadway Commission (COSO). The Company’s management is to express an
opinion onresponsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements includesincluded examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1412 to the consolidated financial statements, in 20042007, the Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109.” As discussed in Note 15 to the consolidated financial statements, in 2006 the Company adopted SFAS 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans.” As discussed in Note 16 to the consolidated financial statements, in 2006 the Company changed its method of accountingthe manner in which it accounts for investments in limited liability companies in
accordance with EITF 03-16, "Accounting for Investments in Limited Liability
Companies."
Internal control over financial reporting
- -----------------------------------------
Also, in our opinion, management's assessment, included in Management's Report
on Internal Control Over Financial Reporting appearing under Item 9A, that the
Company maintained effective internal control over financial reporting as of
December 31, 2004 based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control--Integrated Framework
issued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
share-based compensation.
A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 7, 2005
Page 47 11, 2008
ALLETE
20042007 Form 10-K
CONSOLIDATED FINANCIAL STATEMENTS
ALLETE CONSOLIDATED BALANCE SHEET
DECEMBER 31 2004 2003
- ----------------------------------------------------------------------------------------------------------------------
MILLIONS
ASSETS
Current Assets
Cash and Cash Equivalents $ 194.1 $ 110.2
Restricted Cash 30.3 -
Accounts Receivable (Less Allowance of $2.0 and $1.3) 86.1 63.4
Inventories 34.0 31.8
Prepayments and Other 21.6 17.9
Discontinued Operations 2.0 476.7
- ----------------------------------------------------------------------------------------------------------------------
Total Current Assets 368.1 700.0
Property, Plant and Equipment - Net 883.1 919.3
Investments 124.5 175.7
Other Assets 52.8 59.0
Discontinued Operations 2.9 1,247.3
- ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,431.4 $3,101.3
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Accounts Payable $ 40.0 $ 38.5
Accrued Taxes 23.3 18.3
Accrued Interest 6.9 11.5
Notes Payable - 53.0
Long-Term Debt Due Within One Year 1.8 35.6
Other 24.7 28.6
Discontinued Operations 12.0 340.7
- ----------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 108.7 526.2
Long-Term Debt 390.2 514.7
Accumulated Deferred Income Taxes 143.9 150.8
Other Liabilities 158.1 154.6
Discontinued Operations - 294.8
Commitments and Contingencies
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities 800.9 1,641.1
- ----------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common Stock Without Par Value, 43.3 Shares Authorized
29.7 and 29.1 Shares Outstanding 400.1 859.2
Unearned ESOP Shares (51.4) (45.4)
Accumulated Other Comprehensive Loss - Continuing Operations (11.4) (9.0)
Accumulated Other Comprehensive Gain - Discontinued Operations - 23.5
Retained Earnings 293.2 631.9
- ----------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 630.5 1,460.2
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,431.4 $3,101.3
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
Consolidated Financial Statements
ALLETE 2004Consolidated Balance Sheet
December 31 | 2007 | 2006 |
Millions | | |
| | |
Assets | | |
Current Assets | | |
Cash and Cash Equivalents | $23.3 | $44.8 |
Short-Term Investments | 23.1 | 104.5 |
Accounts Receivable (Less Allowance of $1.0 and $1.1) | 79.5 | 70.9 |
Inventories | 49.5 | 43.4 |
Prepayments and Other | 39.1 | 23.8 |
Deferred Income Taxes | – | 0.3 |
Total Current Assets | 214.5 | 287.7 |
Property, Plant and Equipment – Net | 1,104.5 | 921.6 |
Investments | 213.8 | 189.1 |
Other Assets | 111.4 | 135.0 |
Total Assets | $1,644.2 | $1,533.4 |
| | |
Liabilities and Shareholders’ Equity | | |
Liabilities | | |
Current Liabilities | | |
Accounts Payable | $72.7 | $53.5 |
Accrued Taxes | 14.8 | 23.3 |
Accrued Interest | 7.8 | 8.6 |
Long-Term Debt Due Within One Year | 11.8 | 29.7 |
Deferred Profit on Sales of Real Estate | 2.7 | 4.1 |
Other | 27.3 | 24.3 |
Total Current Liabilities | 137.1 | 143.5 |
Long-Term Debt | 410.9 | 359.8 |
Deferred Income Taxes | 144.2 | 130.8 |
Other Liabilities | 200.1 | 226.1 |
Minority Interest | 9.3 | 7.4 |
Total Liabilities | 901.6 | 867.6 |
| | |
Commitments and Contingencies | | |
| | |
Shareholders’ Equity | | |
Common Stock Without Par Value, 43.3 Shares Authorized | | |
30.8 and 30.4 Shares Outstanding | 461.2 | 438.7 |
Unearned ESOP Shares | (64.5) | (71.9) |
Accumulated Other Comprehensive Loss | (4.5) | (8.8) |
Retained Earnings | 350.4 | 307.8 |
Total Shareholders’ Equity | 742.6 | 665.8 |
Total Liabilities and Shareholders’ Equity | $1,644.2 | $1,533.4 |
The accompanying notes are an integral part of these statements.
ALLETE 2007 Form 10-K
Page 48
ALLETE CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
MILLIONS EXCEPT PER SHARE AMOUNTS
OPERATING REVENUE $751.4 $692.3 $643.0
- ------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Fuel and Purchased Power 287.9 252.5 234.8
Operating and Maintenance 285.1 263.1 250.9
Depreciation 49.7 51.2 48.9
Taxes Other than Income 28.9 29.4 30.2
- ------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 651.6 596.2 564.8
- ------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME FROM CONTINUING OPERATIONS 99.8 96.1 78.2
- ------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest Expense (31.8) (50.6) (49.3)
Other (12.1) 2.5 8.1
- ------------------------------------------------------------------------------------------------------------------------
Total Other Expense (43.9) (48.1) (41.2)
- ------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 55.9 48.0 37.0
INCOME TAX EXPENSE 16.8 18.2 12.3
- ------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE
CHANGE IN ACCOUNTING PRINCIPLE 39.1 29.8 24.7
INCOME FROM DISCONTINUED OPERATIONS - NET OF TAX 73.1 206.6 112.5
CHANGE IN ACCOUNTING PRINCIPLE - NET OF TAX (7.8) - -
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME $104.4 $236.4 $137.2
- ------------------------------------------------------------------------------------------------------------------------
AVERAGE SHARES OF COMMON STOCK
Basic 28.3 27.6 27.0
Diluted 28.4 27.8 27.2
- ------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Continuing Operations $1.39 $1.08 $0.91
Discontinued Operations 2.58 7.48 4.16
Change in Accounting Principle (0.28) - -
- ------------------------------------------------------------------------------------------------------------------------
$3.69 $8.56 $5.07
- ------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Continuing Operations $1.37 $1.08 $0.91
Discontinued Operations 2.57 7.44 4.13
Change in Accounting Principle (0.27) - -
- ------------------------------------------------------------------------------------------------------------------------
$3.67 $8.52 $5.04
- ------------------------------------------------------------------------------------------------------------------------
DIVIDENDS PER SHARE OF COMMON STOCK $2.8425 $3.39 $3.30
- ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
Page 49 ALLETE 2004Consolidated Statement of Income
For the Year Ended December 31 | 2007 | 2006 | 2005 |
Millions Except Per Share Amounts | | | |
| | | |
Operating Revenue | $841.7 | $767.1 | $737.4 |
Operating Expenses | | | |
Fuel and Purchased Power | 347.6 | 281.7 | 273.1 |
Operating and Maintenance | 311.9 | 296.0 | 293.5 |
Kendall County Charge | – | – | 77.9 |
Depreciation | 48.5 | 48.7 | 47.8 |
Total Operating Expenses | 708.0 | 626.4 | 692.3 |
Operating Income from Continuing Operations | 133.7 | 140.7 | 45.1 |
Other Income (Expense) | | | |
Interest Expense | (24.6) | (27.4) | (26.4) |
Equity Earnings in ATC | 12.6 | 3.0 | – |
Other | 15.5 | 11.9 | 1.1 |
Total Other Income (Expense) | 3.5 | (12.5) | (25.3) |
Income from Continuing Operations Before Minority | | | |
Interest and Income Taxes | 137.2 | 128.2 | 19.8 |
Income Tax Expense (Benefit) | 47.7 | 46.3 | (0.5) |
Minority Interest | 1.9 | 4.6 | 2.7 |
Income from Continuing Operations | 87.6 | 77.3 | 17.6 |
Loss from Discontinued Operations – Net of Tax | – | (0.9) | (4.3) |
Net Income | $87.6 | $76.4 | $13.3 |
| | | |
Average Shares of Common Stock | | | |
Basic | 28.3 | 27.8 | 27.3 |
Diluted | 28.4 | 27.9 | 27.4 |
| | | |
Basic Earnings (Loss) Per Share of Common Stock | | | |
Continuing Operations | $3.09 | $2.78 | $0.65 |
Discontinued Operations | – | (0.03) | (0.16) |
| $3.09 | $2.75 | $0.49 |
Diluted Earnings (Loss) Per Share of Common Stock | | | |
Continuing Operations | $3.08 | $2.77 | $0.64 |
Discontinued Operations | – | (0.03) | (0.16) |
| $3.08 | $2.74 | $0.48 |
| | | |
Dividends Per Share of Common Stock | $1.640 | $1.450 | $1.245 |
The accompanying notes are an integral part of these statements.
ALLETE 2007 Form 10-K
ALLETE CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31 2004 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
MILLIONS
OPERATING ACTIVITIES
Income from Continuing Operations $ 31.3 $ 29.8 $ 24.7
Change in Accounting Principle 7.8 - -
Depreciation 49.7 51.2 48.9
Deferred Income Taxes (1.9) 10.8 9.4
Changes in Operating Assets and Liabilities
Accounts Receivable (22.7) 15.1 4.1
Trading Securities - 1.8 153.8
Inventories (2.2) 0.2 (4.3)
Prepayments and Other (3.7) (1.6) (5.1)
Accounts Payable 1.5 6.5 (1.7)
Other Current Liabilities (3.5) 4.6 (17.2)
Other Assets 6.2 (0.6) 6.0
Other Liabilities (0.2) 0.2 7.9
Net Operating Activities from Discontinued Operations 106.2 129.4 227.0
- -------------------------------------------------------------------------------------------------------------------------
Cash from Operating Activities 168.5 247.4 453.5
- -------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from Sale of Available-For-Sale Securities 1.6 7.4 1.9
Changes to Investments 18.9 (16.6) (24.9)
Additions to Property, Plant and Equipment (63.0) (73.6) (86.6)
Other 2.3 4.3 1.9
Net Investing Activities from (for) Discontinued Operations 69.4 288.8 (137.1)
- -------------------------------------------------------------------------------------------------------------------------
Cash from (for) Investing Activities 29.2 210.3 (244.8)
- -------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of Common Stock 49.0 44.3 43.2
Issuance of Long-Term Debt 9.8 37.3 16.4
Reacquired Common Stock (5.8) - -
Changes in Notes Payable - Net (53.0) (20.8) (163.4)
Reductions of Long-Term Debt (130.1) (335.7) (8.1)
Dividends on Common Stock (79.7) (93.2) (89.2)
Redemption of Mandatorily Redeemable Preferred Securities - (75.0) -
Net Financing Activities for Discontinued Operations (18.9) (27.6) (41.5)
- -------------------------------------------------------------------------------------------------------------------------
Cash for Financing Activities (228.7) (470.7) (242.6)
- -------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - DISCONTINUED OPERATIONS - 39.2 2.7
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS (31.0) 26.2 (31.2)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 226.3 200.1 231.3
- -------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 195.3 $226.3 $200.1
- -------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Period for
Interest - Net of Capitalized $46.7 $69.2 $71.9
Income Taxes $75.7 $87.4 $49.2
- -------------------------------------------------------------------------------------------------------------------------
Included $1.2 million of cash from Discontinued Operations at December 31, 2004 ($116.1 million at December 31,
2003; $138.0 million at December 31,2002).
The accompanying notes are an integral part of these statements.
ALLETE 2004Consolidated Statement of Cash Flows
For the Year Ended December 31 | 2007 | 2006 | 2005 |
Millions | | | |
| | | |
Operating Activities | | | |
Net Income | $87.6 | $76.4 | $13.3 |
Loss from Discontinued Operations | – | 0.9 | 4.3 |
AFUDC - Equity | (3.8) | – | – |
Income from Equity Investments, Net of Dividends | (2.7) | (1.8) | – |
Gain on Sale of Assets | (2.2) | – | – |
Loss on Impairment of Investments | 0.3 | – | 5.1 |
Depreciation | 48.5 | 48.7 | 47.8 |
Deferred Income Taxes (Benefit) | 14.0 | 27.8 | (34.2) |
Minority Interest | 1.9 | 4.6 | 2.7 |
Stock Compensation Expense | 2.0 | 1.8 | 1.5 |
Bad Debt Expense | 1.0 | 0.7 | 1.1 |
Changes in Operating Assets and Liabilities | | | |
Accounts Receivable | (6.6) | 7.5 | (1.4) |
Inventories | (6.1) | (10.3) | (1.3) |
Prepayments and Other | (11.7) | (2.3) | (2.5) |
Accounts Payable | 9.4 | 5.1 | 4.9 |
Other Current Liabilities | (10.0) | 0.2 | 5.8 |
Other Assets | 0.8 | (4.3) | 8.2 |
Other Liabilities | 0.7 | 1.0 | (4.1) |
Net Operating Activities from (for) Discontinued Operations | – | (13.5) | 2.3 |
Cash from Operating Activities | 123.1 | 142.5 | 53.5 |
Investing Activities | | | |
Proceeds from Sale of Available-For-Sale Securities | 449.7 | 608.8 | 376.0 |
Payments for Purchase of Available-For-Sale Securities | (368.3) | (596.4) | (343.7) |
Changes to Investments | (19.6) | (52.0) | (1.1) |
Additions to Property, Plant and Equipment | (210.2) | (102.3) | (58.6) |
Proceeds from Sale of Assets | 1.5 | – | – |
Other | (7.2) | (15.0) | 0.6 |
Net Investing Activities from Discontinued Operations | – | 2.2 | 30.7 |
Cash from (for) Investing Activities | (154.1) | (154.7) | 3.9 |
Financing Activities | | | |
Issuance of Common Stock | 20.6 | 15.8 | 21.0 |
Issuance of Long-Term Debt | 123.9 | 77.8 | 35.0 |
Reductions of Long-Term Debt | (90.7) | (78.9) | (35.7) |
Dividends on Common Stock and Distributions to Minority Shareholders | (44.3) | (43.9) | (36.7) |
Net Increase (Decrease) in Book Overdrafts | – | (3.4) | 3.4 |
Net Financing Activities for Discontinued Operations | – | – | (0.9) |
Cash from (for) Financing Activities | 9.5 | (32.6) | (13.9) |
Change in Cash and Cash Equivalents | (21.5) | (44.8) | 43.5 |
Cash and Cash Equivalents at Beginning of Period | 44.8 | 89.6 | 46.1 |
Cash and Cash Equivalents at End of Period | $23.3 | $44.8 | $89.6 |
The accompanying notes are an integral part of these statements.
ALLETE 2007 Form 10-K
Page 50
ALLETE CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
ACCUMULATED
TOTAL OTHER UNEARNED
SHAREHOLDERS' RETAINED COMPREHENSIVE ESOP COMMON
EQUITY EARNINGS INCOME (LOSS) SHARES STOCK
- ------------------------------------------------------------------------------------------------------------------------
MILLIONS
Balance at December 31, 2001 $1,143.8 $440.7 $(14.5) $(52.7) $770.3
Comprehensive Income
Net Income 137.2 137.2
Other Comprehensive Income - Net of Tax
Unrealized Gains on Securities - Net (8.1) (8.1)
Interest Rate Swap 1.3 1.3
Foreign Currency Translation Adjustments 2.6 2.6
Additional Pension Liability (3.5) (3.5)
---------
Total Comprehensive Income 129.5
Common Stock Issued - Net 44.6 44.6
Dividends Declared (89.2) (89.2)
ESOP Shares Earned 3.7 3.7
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 1,232.4 488.7 (22.2) (49.0) 814.9
Comprehensive Income
Net Income 236.4 236.4
Other Comprehensive Income - Net of Tax
Unrealized Gains on Securities - Net 3.6 3.6
Interest Rate Swap 0.2 0.2
Foreign Currency Translation Adjustments 39.2 39.2
Additional Pension Liability (6.3) (6.3)
---------
Total Comprehensive Income 273.1
Common Stock Issued - Net 44.3 44.3
Dividends Declared (93.2) (93.2)
ESOP Shares Earned 3.6 3.6
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 1,460.2 631.9 14.5 (45.4) 859.2
Comprehensive Income
Net Income 104.4 104.4
Other Comprehensive Income - Net of Tax
Unrealized Gains on Securities - Net 0.7 0.7
Foreign Currency Translation Adjustments (23.5) (23.5)
Additional Pension Liability (3.1) (3.1)
---------
Total Comprehensive Income 78.5
Common Stock Issued - Net 43.2 43.2
ADESA IPO 70.1 70.1
Spin-Off of ADESA (963.6) (363.4) (600.2)
Receipt of ADESA Stock by ESOP 54.3 26.5 27.8
Purchase of ALLETE Shares by ESOP (35.6) (35.6)
Dividends Declared (79.7) (79.7)
ESOP Shares Earned 3.1 3.1
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 $ 630.5 $293.2 $(11.4) $(51.4) $400.1
- ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
Page 51 ALLETE 2004Consolidated Statement of Shareholders’ Equity
| | | Accumulated | | |
| Total | | Other | Unearned | |
| Shareholders’ | Retained | Comprehensive | ESOP | Common |
| Equity | Earnings | Income (Loss) | Shares | Stock |
Millions | | | | | |
Balance at December 31, 2004 | $630.5 | $293.2 | $(11.4) | $(51.4) | $400.1 |
| | | | | |
Comprehensive Income | | | | | |
Net Income | 13.3 | 13.3 | | | |
Other Comprehensive Income – Net of Tax | | | | | |
Unrealized Gains on Securities – Net | 0.6 | | 0.6 | | |
Additional Pension Liability | (2.0) | | (2.0) | | |
Total Comprehensive Income | 11.9 | | | | |
Common Stock Issued – Net | 21.0 | | | | 21.0 |
Dividends Declared | (34.4) | (34.4) | | | |
Purchase of ALLETE Shares by ESOP | (30.3) | | | (30.3) | |
ESOP Shares Earned | 4.1 | | | 4.1 | |
Balance at December 31, 2005 | 602.8 | 272.1 | (12.8) | (77.6) | 421.1 |
| | | | | |
Comprehensive Income | | | | | |
Net Income | 76.4 | 76.4 | | | |
Other Comprehensive Income – Net of Tax | | | | | |
Unrealized Gains on Securities – Net | 1.9 | | 1.9 | | |
Additional Pension Liability | 6.4 | | 6.4 | | |
Total Comprehensive Income | 84.7 | | | | |
Adjustment to initially apply SFAS 158 – Net of Tax | (4.3) | | (4.3) | | |
Common Stock Issued – Net | 17.6 | | | | 17.6 |
Dividends Declared | (40.7) | (40.7) | | | |
ESOP Shares Earned | 5.7 | | | 5.7 | |
Balance at December 31, 2006 | 665.8 | 307.8 | (8.8) | (71.9) | 438.7 |
| | | | | |
Comprehensive Income | | | | | |
Net Income | 87.6 | 87.6 | | | |
Other Comprehensive Income – Net of Tax | | | | | |
Unrealized Gains on Securities – Net | 1.1 | | 1.1 | | |
Defined Benefit Pension and Other Postretirement Plans | 3.2 | | 3.2 | | |
Total Comprehensive Income | 91.9 | | | | |
Adjustment to initially apply FIN 48 | (0.7) | (0.7) | | | |
Common Stock Issued – Net | 22.5 | | | | 22.5 |
Dividends Declared | (44.3) | (44.3) | | | |
ESOP Shares Earned | 7.4 | | | 7.4 | |
Balance at December 31, 2007 | $742.6 | $350.4 | $(4.5) | $(64.5) | $461.2 |
The accompanying notes are an integral part of these statements.
ALLETE 2007 Form 10-K
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Notes to Consolidated Financial Statements
Presented below are the operating results and other financial information related to our reporting segments. For a description of our reporting segments, see Note 2.
Financial results by segment for the periods presented were impacted by the integration of our Taconite Harbor facility into the Regulated Utility segment, effective January 1, 2006. We have operated the Taconite Harbor facility as a rate-based asset within the Minnesota retail jurisdiction since January 1, 2006. Prior to January 1, 2006, we operated our Taconite Harbor facility as nonregulated generation (non-rate base generation sold at market-based rates primarily to the wholesale market). Historical financial results of Taconite Harbor for periods prior to the 2006 redirection are included in our Nonregulated Energy Operations segment.
| Energy | |
| | Nonregulated | | |
| Regulated | Energy | Investment | Real | |
| Consolidated | Utility | Operations | In ATC | Estate | Other |
Millions | | | | | | |
| | | | | | |
2007 | | | | | | |
| | | | | | |
Operating Revenue | $841.7 | $723.8 | $67.0 | – | $50.5 | $0.4 |
Fuel and Purchased Power | 347.6 | 347.6 | – | – | – | – |
Operating and Maintenance | 311.9 | 229.3 | 61.2 | – | 20.1 | 1.3 |
Depreciation Expense | 48.5 | 43.8 | 4.5 | – | 0.1 | 0.1 |
| | | | | | |
Operating Income (Loss) from Continuing Operations | 133.7 | 103.1 | 1.3 | – | 30.3 | (1.0) |
Interest Expense | (24.6) | (21.0) | (2.0) | – | (0.5) | (1.1) |
Equity Earnings in ATC | 12.6 | – | – | $12.6 | – | – |
Other Income | 15.5 | 4.1 | 3.9 | – | 1.4 | 6.1 |
| | | | | | |
Income from Continuing Operations Before Minority Interest and Income Taxes | 137.2 | 86.2 | 3.2 | 12.6 | 31.2 | 4.0 |
Income Tax Expense (Benefit) | 47.7 | 31.3 | (0.3) | 5.1 | 11.6 | – |
Minority Interest | 1.9 | – | – | – | 1.9 | – |
Income from Continuing Operations | 87.6 | $54.9 | $3.5 | $7.5 | $17.7 | $4.0 |
Loss from Discontinued Operations – Net of Tax | – | | | | | |
| | | | | | |
Net Income | $87.6 | | | | | |
| | | | | | |
Total Assets | $1,644.2 | $1,330.9 | $84.2 | $65.7 | $91.3 | $72.1 |
Capital Additions | $223.9 | $220.6 | $3.3 | – | – | – |
Note 1. BUSINESS SEGMENTS
Business Segments (Continued)
| | Energy | | |
| | | Nonregulated | | | |
| | Regulated | Energy | Investment | Real | |
| Consolidated | Utility | Operations | in ATC | Estate | Other |
Millions | | | | | | |
| | | | | | |
2006 | | | | | | |
Operating Revenue | $767.1 | $639.2 | $65.0 | – | $62.6 | $0.3 |
Fuel and Purchased Power | 281.7 | 281.7 | – | – | – | – |
Operating and Maintenance | 296.0 | 217.9 | 57.1 | – | 19.5 | 1.5 |
Depreciation Expense | 48.7 | 44.2 | 4.3 | – | 0.1 | 0.1 |
| | | | | | |
Operating Income (Loss) from Continuing Operations | 140.7 | 95.4 | 3.6 | – | 43.0 | (1.3) |
Interest Expense | (27.4) | (20.2) | (3.3) | – | – | (3.9) |
Equity Earnings in ATC | 3.0 | – | – | $3.0 | – | – |
Other Income | 11.9 | 0.9 | 2.2 | – | 1.3 | 7.5 |
| | | | | | |
Income from Continuing Operations Before Minority Interest and Income Taxes | 128.2 | 76.1 | 2.5 | 3.0 | 44.3 | 2.3 |
Income Tax Expense (Benefit) | 46.3 | 29.3 | (1.2) | 1.1 | 16.9 | 0.2 |
Minority Interest | 4.6 | – | – | – | 4.6 | – |
Income from Continuing Operations | 77.3 | $46.8 | $3.7 | $1.9 | $22.8 | $2.1 |
Loss from Discontinued Operations – Net of Tax | (0.9) | | | | | |
| | | | | | |
Net Income | $76.4 | | | | | |
| | | | | | |
Total Assets | $1,533.4 | $1,143.3 | $81.3 | $53.7 | $89.8 | $165.3 |
Capital Additions | $109.4 | $107.5 | $1.9 | – | – | – |
|
|
|
2005 | | | | | | |
Operating Revenue | $737.4 | $575.6 | $113.9 | – | $47.5 | $0.4 |
Fuel and Purchased Power | 273.1 | 243.7 | 29.4 | – | – | – |
Operating and Maintenance | 293.5 | 202.9 | 71.2 | – | 16.6 | 2.8 |
Kendall County Charge | 77.9 | – | 77.9 | – | – | – |
Depreciation Expense | 47.8 | 39.4 | 8.1 | – | 0.1 | 0.2 |
| | | | | | |
Operating Income (Loss) from Continuing Operations | 45.1 | 89.6 | (72.7) | – | 30.8 | (2.6) |
Interest Expense | (26.4) | (17.4) | (6.6) | – | (0.1) | (2.3) |
Other Income (Expense) | 1.1 | 0.7 | 1.7 | – | 1.1 | (2.4) |
Income (Loss) from Continuing Operations Before Minority Interest and Income Taxes | 19.8 | 72.9 | (77.6) | – | 31.8 | (7.3) |
Income Tax Expense (Benefit) | (0.5) | 27.2 | (29.1) | – | 11.6 | (10.2) |
Minority Interest | 2.7 | – | – | – | 2.7 | – |
Income (Loss) from Continuing Operations | 17.6 | $45.7 | $(48.5) | – | $17.5 | $2.9 |
Loss from Discontinued Operations – Net of Tax | (4.3) | | | | | |
| | | | | | |
Net Income | $13.3 | | | | | |
| | | | | | |
Total Assets | $1,398.8 (a) | $909.5 | $185.2 | – | $73.7 | $227.8 |
Capital Additions | $63.1 (a) | $46.5 | $12.1 | – | – | – |
NONREGULATED
REGULATED ENERGY REAL
FOR THE YEAR ENDED DECEMBER 31 CONSOLIDATED UTILITY OPERATIONS ESTATE OTHER
- ------------------------------------------------------------------------------------------------------------------------
MILLIONS
2004
Operating Revenue $751.4 $555.0 $106.8 $41.9 $ 47.7
Fuel and Purchased Power 287.9 246.8 41.1 - -
Other Operating Expenses 314.0 181.9 59.3 16.4 56.4
Depreciation Expense 49.7 39.5 7.2 0.1 2.9
- ------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) from Continuing
Operations 99.8 86.8 (0.8) 25.4 (11.6)
Interest Expense (31.8) (18.5) (1.5) (0.3) (11.5)
Other Income (Expense) (12.1) 0.1 0.6 - (12.8)
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
Before Income Taxes 55.9 68.4 (1.7) 25.1 (35.9)
Income Tax Expense (Benefit) 16.8 25.6 (1.4) 10.4 (17.8)
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 39.1 $ 42.8 $ (0.3) $14.7 $(18.1)
--------------------------------------------------------
Income from Discontinued Operations -
Net of Tax 73.1
Change in Accounting Principle - Net of Tax (7.8)
- --------------------------------------------------------
Net Income $104.4
- --------------------------------------------------------
Total Assets $1,431.4 $902.8 $161.4 $75.1 $287.2
Capital Expenditures $79.2 $41.7 $15.7 - $5.6
- ------------------------------------------------------------------------------------------------------------------------
2003
Operating Revenue $692.3 $510.0 $106.6 $42.6 $ 33.1
Fuel and Purchased Power 252.5 212.5 40.0 - -
Other Operating Expenses 292.5 176.5 53.4 18.1 44.5
Depreciation Expense 51.2 41.2 7.4 0.1 2.5
- ------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) from Continuing
Operations 96.1 79.8 5.8 24.4 (13.9)
Interest Expense (50.6) (20.4) (1.8) (0.2) (28.2)
Other Income (Expense) 2.5 2.9 1.9 - (2.3)
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
Before Income Taxes 48.0 62.3 5.9 24.2 (44.4)
Income Tax Expense (Benefit) 18.2 24.4 2.2 10.1 (18.5)
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 29.8 $ 37.9 $ 3.7 $14.1 $(25.9)
--------------------------------------------------------
Income from Discontinued Operations -
Net of Tax 206.6
- --------------------------------------------------------
Net Income $236.4
- --------------------------------------------------------
Total Assets $3,101.3 $917.3 $194.7 $78.6 $186.7
Capital Expenditures $136.3 $42.2 $26.5 - $4.9
- ------------------------------------------------------------------------------------------------------------------------
2002
Operating Revenue $643.0 $497.9 $84.7 $33.6 $ 26.8
Fuel and Purchased Power 234.8 206.7 28.1 - -
Other Operating Expenses 281.1 156.5 66.3 15.4 42.9
Depreciation Expense 48.9 40.5 6.2 0.1 2.1
- ------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) from Continuing
Operations 78.2 94.2 (15.9) 18.1 (18.2)
Interest Expense (49.3) (20.6) (0.3) - (28.4)
Other Income (Expense) 8.1 7.7 0.6 - (0.2)
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
Before Income Taxes 37.0 81.3 (15.6) 18.1 (46.8)
Income Tax Expense (Benefit) 12.3 30.9 (6.9) 6.9 (18.6)
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 24.7 $ 50.4 $(8.7) $11.2 $(28.2)
--------------------------------------------------------
Income from Discontinued Operations -
Net of Tax 112.5
- --------------------------------------------------------
Net Income $137.2
- --------------------------------------------------------
Total Assets $3,147.2 $902.8 $170.1 $84.1 $147.1
Capital Expenditures $201.2 $33.6 $42.1 - $10.9
- ------------------------------------------------------------------------------------------------------------------------
(a) | Discontinued Operations represented $4.9$2.6 million of total assets in 2004 ($1,724.0 million in 2003; $1,843.1
million in 2002)2005 and $16.2$4.5 million of capital expendituresadditions in 2004 ($62.7 million in 2003; $114.6 million in 2002).
2005. |
ALLETE
20042007 Form 10-K
Page 52
NOTENote 2. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PREPARATION.Operations and Significant Accounting Policies
Financial Statement Preparation. References in this report to "we," "us"“we,” “us” and "our"“our” are to ALLETE and its subsidiaries, collectively. We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. These principles require management to make informed judgments, best estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION.
Principles of Consolidation. Our consolidated financial statements include the accounts of ALLETE and all of our majority-owned subsidiary companies. All material intercompany balances and transactions have been eliminated in consolidation. Information for prior periods has been reclassified to present
comparable information for all periods.
BUSINESS SEGMENTS.
Business Segments. Our Regulated Utility, Nonregulated Energy Operations, and
Real Estate, Investment in ATC and Other segments were determined in accordance with SFAS 131, “Disclosures about Segments of an Enterprise and Related Information.” Segmentation is based on productsthe manner in which we operate, assess, and services provided.allocate resources to the business. We measure performance of our operations through careful budgeting and monitoring of contributions to consolidated net income by each business segment. Discontinued Operations includes our Automotive Servicestelecommunications business, that was spun
offwhich we sold in September 2004,December 2005, and our Water Services businesses, the majority of which were sold in 2003 costs associated with the spin-off of ADESA incurred by ALLETE,
and our retail stores, which we exited in 2002.
REGULATED UTILITY (See Note 13.)
Regulated Utility includes retail and wholesale rate-regulated electric, waternatural gas and gaswater services in northeastern Minnesota and northwestern Wisconsin. Minnesota Power an operating division of ALLETE, andprovides regulated utility electric service to 141,000 retail customers in northeastern Minnesota. SWL&P, a wholly-owned subsidiary, provideprovides regulated utility electric, natural gas and water service in northwestern Wisconsin to 150,000 retail15,000 electric customers, in
northeastern Minnesota12,000 natural gas customers and northwestern Wisconsin.10,000 water customers. Approximately 45%39 percent of regulated utility electric revenue is from Large Power Customers (32%(34 percent of consolidated revenue). Large Power Customers consist of five taconite producers, four paper and pulp mills, two pipeline companies and one manufacturer under all-requirements contracts with expiration dates extending from February 20062009 through April 2009.October 2014. Revenue of $88.3$100.6 million (11.8%(12.0 percent of consolidated revenue) was received from one taconite producer in 2004 (less than 10%2007 (11.6 percent in 2003 and 2002)2006; 11.3 percent in 2005). Regulated utility rates are under the jurisdiction of various stateMinnesota and Wisconsin, and federal regulatory authorities. Billings are rendered on a cycle basis. Revenue is accrued for service provided but not billed. Regulated utility electric rates include adjustment clauses thatthat: (1) bill or credit customers for fuel and purchased energy costs above or below the base levels in rate schedules and thatschedules; (2) bill retail customers for the recovery of CIPconservation improvement program expenditures not collected in base rates.
Minnesota Power withdrewrates; and (3) bill customers for the recovery of certain environmental expenditures. Fuel and purchased power expense is deferred to match the period in which the revenue for fuel and purchased power expense is collected from Split Rock Energy, a joint venture with Great
River Energy, in 2004. Upon withdrawal, we received a $12.0 million distribution
in 2004. We accounted for our 50% ownership interest in Split Rock Energy under
the equity method of accounting. For the year ended December 31, 2004, our
pre-tax equity income from Split Rock Energy was less than $0.1 million ($2.9
million in 2003; $7.3 million in 2002). In 2004, prior to our withdrawal, we
made power purchases from Split Rock Energy of $6.2 million ($50.9 million in
2003; $34.3 million in 2002) and power sales to Split Rock Energy of $1.9
million ($19.6 million in 2003; $14.5 million in 2002).
NONREGULATED ENERGY OPERATIONS includes nonregulated generation (non-rate base
generation sold at market-based ratescustomers pursuant to the wholesale market), consisting
primarily of generation from Taconite Harbor in northern Minnesota and
generation secured through the Kendall County power purchase agreement. Subject
to certain approvals, we expect to transfer the Kendall power purchase agreement
to Constellation Energy Commodities in April 2005. (See Note 11.) Revenue for
nonregulated generation is recognized under terms of contracts and as energy is
delivered. fuel adjustment clause.
Nonregulated Energy Operations also includes our coal mining activities in North Dakota.Dakota, approximately 50 MW of nonregulated generation and Minnesota land sales. BNI Coal, a wholly-owned subsidiary, mines and sells lignite coal to two North Dakota mine-mouth generating units, one of which is Square Butte. In 2007, Square Butte suppliessupplied approximately 71% (32360 percent (273 MW) of its output to Minnesota Power under a long-term contract. (See Note 11.8.) Coal sales are recognized when delivered at the cost of production plus a specified profit per ton of coal delivered.
REAL ESTATE
In 2005, Nonregulated Energy Operations included nonregulated generation (non-rate base generation sold at market-based rates to the wholesale market) from our Taconite Harbor facility in northern Minnesota and generation secured through the Kendall County power purchase agreement. To help meet forecasted base load energy requirements effective January 1, 2006, Taconite Harbor was integrated into our Regulated Utility, as approved by the MPUC. The Kendall County power purchase agreement was assigned to Constellation Energy Commodities in April 2005. (See Note 10.)
Investment in ATC includes our approximate 8 percent equity ownership interest in ATC, a Wisconsin-based public utility that owns and maintains electric transmission assets in parts of Wisconsin, Michigan, Minnesota and Illinois. ATC provides transmission service under rates regulated by the FERC that are set in accordance with the FERC’s policy of establishing the independent operation and ownership of, and investment in, transmission facilities. (See Note 6.)
Note 2. Operations and Significant Accounting Policies (Continued)
Real Estate includes our Florida real estate operations. Our real estate operations include several wholly-owned subsidiaries and an 80%80 percent ownership in Lehigh Acquisition Corporation, which are consolidated in ALLETE'sALLETE’s financial statements. All of ourOur Florida real estate companies are principally engaged in real estate acquisitions, development and sales.
Full profit recognition is recorded on sales upon closing, provided cash collections are at least 20%20 percent of the contract price and the other requirements of SFAS 66, "Accounting“Accounting for Sales of Real Estate,"” are met. CostsIn certain cases, where there are obligations to perform significant development activities after the date of sale, we recognize profit on a percentage-of-completion basis in accordance with SFAS 66. Pursuant to this method of accounting, gross profit is recognized based upon the relationship of development costs incurred as of that date to the total estimated development costs of the parcels, including related amenities or common costs of the entire project. Revenue and cost of real estate sales include capitalized costs
incurred since acquisitionsold in excess of the amount recognized based on the percentage-of-completion method is deferred and the allocatedrecognized as revenue and cost of the underlying real estate determined at acquisition. sold during the period in which the related development costs are incurred. Deferred revenue and cost of real estate sold are recorded net as Deferred Profit on Sales of Real Estate on our consolidated balance sheet. Certain contracts allow us to receive participation revenue from land sales to third parties if various formula-based criteria are achieved.
In certain cases, we pay fees or construct improvements to mitigate offsite traffic impacts. In return, we receive traffic impact fee credits as a result of some of these expenditures. We recognize revenue from the sale of traffic impact fee credits when payment is received.
Land held for sale is recorded at the lower of cost or fair value determined by the evaluation of individual land parcels.
OTHERparcels and is included in Investments on our consolidated balance sheet. Real estate costs include the cost of land acquired, subsequent development costs and costs of improvements, capitalized development period interest, real estate taxes and payroll costs of certain employees devoted directly to the development effort. These real estate costs incurred are capitalized to the cost of real estate parcels based upon the relative sales value of parcels within each development project in accordance with SFAS 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects.” When real estate is sold, the cost of real estate sold includes our telecommunications activities,the actual costs incurred and the estimate of future completion costs allocated to the real estate sold based upon the relative sales value method.
Whenever events or circumstances indicate that the carrying value of the real estate may not be recoverable, impairments would be recorded and the related assets would be adjusted to their estimated fair value, less costs to sell.
Other includes investments in emerging technologies, related to the electric utility industry,and earnings on cash and general corporate chargesshort-term investments. As part of our emerging technology portfolio, we have several minority investments in venture capital funds and interest not specifically related to any one
business segment. General corporate charges include employee salaries and
benefits, as well as legal and other outside service fees. Enventis Telecom, a
wholly-owned subsidiary, isdirect investments in privately-held, start-up companies. We account for our telecommunications business, which is an
integrated data services provider offering fiber optic-based communication and
advanced data services to businesses and communitiesinvestment in Minnesota and Wisconsin.
Revenue is generally recognized when equipment is delivered and when services
are completed under short-term contracts. Revenue from fiber-optic sales is
recognizedventure capital funds under the straight-line basisequity method and account for contracts over 12 months.
Other included Operationour direct investments in privately-held companies under the cost method because of our ownership percentage. Short-term investments consist of auction rate bonds and Other Expense totaling $12.6 million in 2004 ($14.8
million in 2003; $17.0 million in 2002) for general corporate expenses suchvariable rate demand notes, and are classified as employee salariesavailable-for-sale securities. All income generated from these short-term investments is recorded as interest income. (See Note 6.)
Property, Plant and benefits, and legal and other outside contract service
fees, and Interest Expense of $11.2 million in 2004 ($28.0 million in 2003;
$28.2 million in 2002).
Page 53 ALLETE 2004 Form 10-K
PROPERTY, PLANT AND EQUIPMENT.Equipment. Property, plant and equipment are recorded at original cost and are reported on the balance sheet net of accumulated depreciation. Expenditures for additions and significant replacements and improvements are capitalized; maintenance and repair costs are expensed as incurred. Expenditures for major plant overhauls are also accounted for using this same policy. Gains or losses on nonregulated property, plant and equipment are recognized when they are retired or otherwise disposed of.disposed. When regulated utility property, plant and equipment are retired or otherwise disposed, of, no gain or loss is recognized.recognized, pursuant to SFAS 71, “Accounting for the Effects of Certain Types of Regulations.” Our Regulated Utility operations capitalize an
allowance for funds used during construction,AFUDC, which includes both an interest and equity component. Our other operations capitalize interest during the course
of a construction project.
LONG-LIVED ASSET IMPAIRMENTS.(See Note 3.)
Long-Lived Asset Impairments. We annually reviewaccount for our long-lived assets at depreciated historical cost. A long-lived asset is tested for impairment.recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. We conduct this assessment using SFAS 144, "Accounting“Accounting for the Impairment and Disposal of Long-Lived Assets," is the
basis for these analyses.Assets.” Judgments and uncertainties affecting the application of accounting for asset impairment include economic conditions affecting market valuations, changes in our business strategy, and changes in our forecast of future operating cash flows and earnings. We account for our long-lived assets at depreciated historical cost. A
long-lived asset is tested for recoverability whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable. We would recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted future cash flows. Management judgment is involved in both deciding if testing for recoverability is necessary and in estimating undiscounted future cash flows. As of December 31, 2004, no write-downs were
required.
ACCOUNTS RECEIVABLE.
Note 2. Operations and Significant Accounting Policies (Continued)
Accounts Receivable. Accounts receivable are reported on the balance sheet net of an allowance for doubtful accounts. The allowance is based on our evaluation of the receivable portfolio under current conditions, the size of the portfolio,
overall portfolio quality, review of specific problems and such other factors that, in our judgment, deserve recognition in estimating losses.
ACCOUNTS RECEIVABLE
DECEMBER 31 2004 2003
- --------------------------------------------------------------------------------
MILLIONS
Trade Accounts Receivable
Billed $77.4 $54.0
Unbilled 10.2 9.7
Less: Allowance for Doubtful Accounts 2.0 1.3
- --------------------------------------------------------------------------------
85.6 62.4
Finance Receivables - Net 0.5 1.0
- --------------------------------------------------------------------------------
Total Accounts Receivable - Net $86.1 $63.4
- --------------------------------------------------------------------------------
Finance receivables consist of short-term seller financing at our real estate
operations.
INVENTORIES.
Accounts Receivable | |
December 31 | 2007 | 2006 |
Millions | | |
| | |
Trade Accounts Receivable | | |
Billed | $63.9 | $58.5 |
Unbilled | 16.6 | 13.5 |
Less: Allowance for Doubtful Accounts | 1.0 | 1.1 |
Total Accounts Receivable – Net | $79.5 | $70.9 |
Inventories. Inventories are stated at the lower of cost or market. Cost is
determined by theAmounts removed from inventory are recorded on an average cost method.
INVENTORIES
DECEMBER 31 2004 2003
- --------------------------------------------------------------------------------
MILLIONS
Fuel $11.4 $12.2
Materials and Supplies 20.4 19.3
Other 2.2 0.3
- --------------------------------------------------------------------------------
$34.0 $31.8
- --------------------------------------------------------------------------------
UNAMORTIZED EXPENSE, DISCOUNT AND PREMIUM ON DEBT. Expense, discountbasis.
Inventories | |
December 31 | 2007 | 2006 |
Millions | | |
| | |
Fuel | $22.1 | $18.9 |
Materials and Supplies | 27.4 | 24.5 |
Total Inventories | $49.5 | $43.4 |
Unamortized Discount and Premium on Debt. Discount and premium on debt are deferred and amortized over the livesterms of the related issues.
CASH AND CASH EQUIVALENTS.debt instruments using the effective interest method.
Cash and Cash Equivalents. We consider all investments purchased with original maturities of three months or less to be cash equivalents.
RESTRICTED CASH.
Supplemental Statement of Cash Flow Information.
Consolidated Statement of Cash Flows | |
Supplemental Disclosure | |
For the Year Ended December 31 | 2007 | 2006 | 2005 |
Millions | | | |
| | | |
Cash Paid During the Period for | | | |
Interest – Net of Amounts Capitalized | $26.3 | $25.3 | $24.6 |
Income Taxes | $34.2 | $32.4 (a) | $27.1 |
| | | |
Noncash Investing Activities | | | |
Accounts Payable for Capital Additions to Property, Plant and Equipment | $9.8 | $7.1 | – |
AFUDC - Equity | $3.8 | – | – |
(a) | Net of a $24.3 million cash refund. |
Available-for-Sale Securities. Available-for-sale securities are recorded at fair value with unrealized gains and losses included in accumulated other comprehensive income (loss), net of tax. Unrealized losses that are other than temporary are recognized in earnings. Our auction rate securities and variable rate demand notes, classified as available-for-sale securities, are recorded at cost because their cost approximates fair market value as they typically reset every 7 to 35 days. Despite the long-term nature of their stated contractual maturities, we have the ability to quickly liquidate these securities. We sponsoruse the specific identification method as the basis for determining the cost of securities sold. Our policy is to review on a leveraged ESOPquarterly basis available-for-sale securities for other than temporary impairment by assessing such factors as partthe share price trends and the impact of our Retirement Savingsoverall market conditions.
Note 2. Operations and Stock Ownership Plan. The ESOP had $30.3 million in cash, which is being
used to purchase ALLETE common stock on the open market. We reflected the cash
held by the ESOP as Restricted Cash on our consolidated balance sheet. (See Note
17.)
ACCOUNTING FOR STOCK-BASED COMPENSATION. We have elected to accountSignificant Accounting Policies (Continued)
Accounting for stock-based compensation under the intrinsic value method in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly,Stock-Based Compensation. Effective January 1, 2006, we recognize expense for performance share awards granted and do not recognize
expense for employee stock options granted. The after-tax expense recognized for
performance share awards was approximately $1 million in 2004 ($3 million in
2003). The following table illustrates the effect on net income and earnings per
share if we had appliedadopted the fair value recognition provisions of SFAS 123,
"Accounting for Stock-Based Compensation."
ALLETE 2004 Form 10-K Page 54
EFFECT OF SFAS 123
ACCOUNTING FOR STOCK-BASED COMPENSATION
FOR THE YEAR ENDED DECEMBER 31 2004 2003 2002
- ---------------------------------------------------------------------------------------------------------------
MILLIONS EXCEPT PER SHARE AMOUNTS
Net Income
As Reported $104.4 $236.4 $137.2
Less: Employee Stock Compensation Expense
Determined Under SFAS 123 - Net of Tax (0.3) (0.5) (1.4)
- ---------------------------------------------------------------------------------------------------------------
Pro Forma $104.1 $235.9 $135.8
- ---------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
As Reported $3.69 $8.56 $5.07
Pro Forma $3.68 $8.55 $5.03
Diluted Earnings Per Share
As Reported $3.67 $8.52 $5.04
Pro Forma $3.66 $8.49 $4.99
- ---------------------------------------------------------------------------------------------------------------
In123R, “Share-Based Payment,” using the previous table, themodified prospective transition method. Under this method, we recognize compensation expense for employee stock optionsall share-based payments granted determined
under SFAS 123 was calculated using the Black-Scholes option pricing modelafter January 1, 2006, and the following assumptions:
2004 2003 2002
- ---------------------------------------------------------------------------------------------------------------
Risk-Free Interest Rate 3.3% 3.1% 4.4%
Expected Life - Years 5 5 5
Expected Volatility 28.1% 25.2% 24.2%
Dividend Growth Rate 2% 2% 2%
- ---------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION. Results of operations for our Canadian and Mexican
automotive subsidiariesthose granted prior to but not yet vested as of January 1, 2006. Under the spin-off were translated into United States
dollars usingfair value recognition provisions of SFAS 123R, we recognize stock-based compensation net of an estimated forfeiture rate and only recognize compensation expense for those shares expected to vest over the average exchange rates. Assetsrequired service period of the award. Prior to our adoption of SFAS 123R, we accounted for share-based payments under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and liabilities were translated
into United States dollars using the exchange rate on the balance sheet date.
Resulting translation adjustments were recorded in the Accumulated Other
Comprehensive Gain - Discontinued Operations section of Shareholders' Equity on
our consolidated balance sheet.
OTHER LIABILITIES
DECEMBER 31 2004 2003
- ---------------------------------------------------------------------------------------------------------------
MILLIONS
Deferred Regulatory Credits (See Note 5) $ 35.9 $ 39.3
Deferred Compensation and Accrued Postretirement Benefits 66.3 62.2
Asset Retirement Obligations (See Note 4) 22.4 20.7
Other 33.5 32.4
- ---------------------------------------------------------------------------------------------------------------
$158.1 $154.6
- ---------------------------------------------------------------------------------------------------------------
ENVIRONMENTAL LIABILITIES.related interpretations. (See Note 16.)
Prepayments and Other Current Assets | | |
December 31 | 2007 | 2006 |
Millions | | |
Deferred Fuel Adjustment Clause | $26.5 | $15.1 |
Other | 12.6 | 8.7 |
Total Prepayments and Other Current Assets | $39.1 | $23.8 |
Other Assets | | |
December 31 | 2007 | 2006 |
Millions | | |
Deferred Regulatory Charges (See Note 5) | | |
Future Benefit Obligations Under Defined Benefit Pension and Other Postretirement Plans | $53.7 | $86.1 |
Other Deferred Regulatory Charges | 22.9 | 17.5 |
Total Deferred Regulatory Charges | 76.6 | 103.6 |
Other | 34.8 | 31.4 |
Total Other Assets | $111.4 | $135.0 |
| | |
Other Liabilities | | |
December 31 | 2007 | 2006 |
Millions | | |
Future Benefit Obligation Under Defined Benefit Pension and Other Postretirement Plans | $71.6 | $108.2 |
Deferred Regulatory Credits (See Note 5) | 31.3 | 33.8 |
Asset Retirement Obligation (See Note 3) | 36.5 | 27.2 |
Other | 60.7 | 56.9 |
Total Other Liabilities | $200.1 | $226.1 |
Environmental Liabilities. We review environmental matters on a quarterly basis. Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. These accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in the balance sheet at undiscounted amounts and exclude claims for recoveries from insurance or other third parties. Costs related to environmental contamination treatment and cleanup are charged to expense.
INCOME TAXES.operating expense unless recoverable in rates from customers. (See Note 8.)
Income Taxes. We file a consolidated federal income tax return. Income taxes are
allocated to each subsidiary based on their taxable income. We account for income taxes using the liability method as prescribed by SFAS 109, "Accounting“Accounting for Income Taxes."” Under the liability method, deferred income tax assets and liabilities are established for all temporary differences in the book and tax basis of assets and liabilities, based upon enacted tax laws and rates applicable to the periods in which the taxes become payable. Due to the effects of regulation on Minnesota Power, certain adjustments made to deferred income taxes are, in turn, recorded as regulatory assets or liabilities. Investment tax credits have been recorded as deferred credits and are being amortized to income tax expense over the service lives of the related property. EXCISE TAXES.Effective January 1, 2007, we adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109.” Under this provision we are required to recognize in our financial statements the largest tax benefit of a tax position that is “more-likely-than-not” to be sustained, on audit, based solely on the technical merits of the position as of the reporting date. Only tax positions that meet the “more-likely-than-not’ threshold may be recognized, and the term “more-likely-than-not” means more than 50 percent. (See Note 12.)
Excise Taxes. We collect excise taxes from our customers levied by government entities. These taxes are stated separately on the billing to the customer and recorded as a liability to be remitted to the government entity. We account for the collection and payment of these taxes on the net basisbasis.
Note 2. Operations and
neither the
amounts collected or paid are reflected on our consolidated statement of income.
Page 55 ALLETE 2004 Form 10-K
NEW ACCOUNTING STANDARDS.Significant Accounting Policies (Continued)
New Accounting Standards. SFAS 157. In December 2004,September 2006, the FASB issued SFAS 123(R),
"Share-Based Payment,"157, “Fair Value Measurements,” to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value in generally accepted accounting principles, and expanding disclosures about fair value measurements. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. It clarifies the extent to which will befair value is used to measure recognized assets and liabilities, the inputs used to develop the measurements, and the effect of certain measurements on earnings for the period. SFAS 157 is effective for public entities as of the
first interim or annual reporting period that begins after June 15, 2005. SFAS
123(R) replaces SFAS 123, "Accounting for Stock-Based Compensation," and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." The
new standard requires that the compensation cost relating to share-based payment
be recognized in financial statements at fair value. As such, reporting employee
stock options underissued for fiscal years beginning after November 15, 2007, and is applied on a prospective basis. On February 6, 2008, the intrinsic value-based method prescribed by APB 25FASB announced it will no longer be allowed. We have historically electedissue a FASB Staff Position (FSP) to use the intrinsic value
method and have not recognized expense for employee stock options granted. We
estimate that the impactallow a one-year deferral of adoption of SFAS 123(R)157 for nonfinancial assets and nonfinancial liabilities that are recognized at fair value on a nonrecurring basis. The FSP will also amend SFAS 157 to exclude SFAS 13, “Accounting for Leases,” and its related interpretive accounting pronouncements. The FSP is expected to be issued in 2005the near future. We have determined that the adoption of SFAS 157 will be an
additional expensenot have a material impact on our consolidated financial position, results of approximately $0.2 million after tax. We also have an
Employee Stock Purchase Plan that provides a discount of 5% from market price.
Current accounting rules do not require the recognition of compensation expense
for employee stock purchase plans such as ours, and operations or cash flows.
SFAS 123(R) continues this
exception.
NOTE 3. DISCONTINUED OPERATIONS
AUTOMOTIVE SERVICES. On September 20, 2004, the spin-off of Automotive Services
was completed by distributing to ALLETE shareholders all of ALLETE's shares of
ADESA common stock. One share of ADESA common stock was distributed for each
outstanding share of ALLETE common stock held at the close of business on the
September 13, 2004 record date. The distribution was made from ALLETE's retained
earnings to the extent of ADESA's undistributed earnings ($363.4 million), with
the remainder made from common stock ($600.2 million)159. In June 2004, ADESAFebruary 2007, the FASB issued 6.3 million sharesSFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which is an elective, irrevocable election to measure eligible financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis. The election may only be applied at specified election dates and to instruments in their entirety rather than to portions of common stock through an IPO
priced at $24.00 per share, which netted proceeds of $136.0 million after
transaction costs, issued $125 million of senior notesinstruments. Upon initial election, the entity reports the difference between the instruments’ carrying value and borrowed $275 million
under a new $525 million credit facility. With these funds, ADESA repaid
previously existing debt and all intercompany debt outstanding to ALLETE. The
IPO represented 6.6% of ADESA's 94.9 million shares then outstanding. As a
result of the IPO, ALLETE recorded a $70.1 million increase to Common Stock with
no gain recognized pursuant to SEC Staff Accounting Bulletin Topic 5H,
"Accounting for Sales of Stock by a Subsidiary." We accounted for the 6.6%
public ownership of ADESAtheir fair value as a minority interest and continued to own and
consolidate the remaining portion of ADESA until the spin-off was completed on
September 20, 2004.
In accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," we have reported our Automotive Services business in
Discontinued Operations.
WATER SERVICES. During 2003, we sold, under condemnation or imminent threat of
condemnation, substantially all of our water assets in Florida for a total sales
price of approximately $445 million. Income from discontinued operations for
2003 included a $71.6 million after-tax gain on the sale of substantially all
our Water Services businesses. The gain was net of all selling, transaction and
employee termination benefit expenses, as well as impairment losses on certain
remaining assets.
In June 2004, we essentially concluded our strategy to exit our Water Services
businesses when we completed the sale of our North Carolina water assets and the
sale of the remaining 72 water and wastewater systems in Florida. Aqua America
purchased our North Carolina water assets for $48 million and assumed
approximately $28 million in debt, and also purchased 63 of our water and
wastewater systems in Florida for $14 million. Seminole County purchased the
remaining 9 Florida systems for a total of $4 million. The FPSC approved the
Seminole County transaction in September 2004. The transaction relating to the
sale of 63 water and wastewater systems in Florida to Aqua America remains
subject to regulatory approval by the FPSC. The approval process may result in
ancumulative-effect adjustment to the final purchase price, basedopening balance of retained earnings. At each subsequent reporting date, an entity reports in earnings, unrealized gains and losses on items for which the FPSC's determinationfair value option has been elected. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and is applied on a prospective basis. Early adoption of plant investmentSFAS 159 is permitted provided the entity also elects to adopt the provisions of SFAS 157 as of the early adoption date selected for SFAS 159. We have elected not to adopt the systems. A decisionprovisions of SFAS 159 at this time.
SFAS 141R. In December 2007, the FASB issued SFAS 141(revised 2007), “Business Combinations,” to increase the relevance, representational faithfulness, and comparability of the information a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141R replaces SFAS 141, “Business Combinations” but, retains the fundamental requirements of SFAS 141 that the acquisition method of accounting be used and an acquirer be identified for all business combinations. SFAS 141R expands the definition of a business and of a business combination and establishes how the acquirer is expectedto: (1) recognize and measure in late 2005. Gainsits financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in 2004the acquiree; (2) recognize and measure the goodwill acquired in the business combination or a gain from a bargain purchase; and (3) determine what information to disclose to enable users of the salefinancial statements to evaluate the nature and financial effects of our North Carolina assetsthe business combination. SFAS 141R is applicable to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, and is to be applied prospectively. Early adoption is prohibited. SFAS 141R will impact ALLETE if we elect to enter into a business combination subsequent to December 31, 2008.
SFAS 160. In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51,” to improve the relevance, comparability, and transparency of the financial information a reporting entity provides in its consolidated financial statements. SFAS 160 amends ARB 51 to establish accounting and reporting standards for noncontrolling interests in subsidiaries and to make certain consolidation procedures consistent with the requirements of SFAS 141R. It defines a noncontrolling interest in a subsidiary as an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 changes the way the consolidated income statement is presented by requiring consolidated net income to include amounts attributable to the parent and the remaining systemsnoncontrolling interest. SFAS 160 establishes a single method of accounting for changes in Florida were offset by an adjustment to gainsa parent’s ownership interest in a subsidiary which do not result in deconsolidation. SFAS 160 also requires expanded disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective for financial statements issued for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. SFAS 160 shall be applied prospectively, with the exception of the presentation and disclosure requirements which shall be applied retrospectively for all periods presented. We are currently evaluating the effect that the adoption of SFAS 160 will have on our consolidated financial position, results of operations and cash flows; however ALLETE Properties does have certain noncontrolling interests in consolidated subsidiaries. If SFAS 160 had been applied as of December 31, 2007, the $9.3 million reported as Minority Interest in 2003, resulting in an
overall net loss of $0.5 million in 2004. The adjustment to gains reported in
2003 resulted primarily from an arbitration award in December 2004 relating to a
gain-sharing provisionthe Liabilities section on a system sold in 2003; $5.1 million was recorded in
2004 ($1.2 million in 2003). We sold our wastewater assets in Georgia in
February 2005.
The net cash proceeds from the sale of all water assets in 2003 and 2004, after
transaction costs, retirement of most Florida Water debt and payment of income
taxes, were approximately $300 million. These net proceeds were used to retire
debt at ALLETE.
In accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," we suspended depreciating our Water Services assets when
they were classified as held-for-sale in 2001. Had we not suspended
depreciation, depreciation expense at our Water Services businessesConsolidated Balance Sheet would have been $2.6reported as $9.3 million of Noncontrolling Interest in 2004 ($12.9 millionSubsidiaries in 2003; $14.7 million in 2002).
ELECTRIC ODYSSEY. In 2002 we exitedthe Equity section of our retail stores.
Consolidated Balance Sheet.
ALLETE
20042007 Form 10-K
Page 56
SUMMARY OF DISCONTINUED OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------------
MILLIONS
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31 2004 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
Operating Revenue
Automotive Services $681.7 $ 924.1 $852.2
Water Services 18.5 107.4 117.2
Electric Odyssey - - 0.4
- ----------------------------------------------------------------------------------------------------------------------------
$700.2 $1,031.5 $969.8
- ----------------------------------------------------------------------------------------------------------------------------
Pre-Tax Income (Loss) from Operations
Automotive Services $132.5 $185.4 $149.2
Water Services (1.7) 34.4 41.8
- ----------------------------------------------------------------------------------------------------------------------------
130.8 219.8 191.0
- ----------------------------------------------------------------------------------------------------------------------------
Income Tax Expense (Benefit)
Automotive Services 54.0 73.1 58.3
Water Services (0.9) 13.0 16.3
- ----------------------------------------------------------------------------------------------------------------------------
53.1 86.1 74.6
- ----------------------------------------------------------------------------------------------------------------------------
Total Net Income from Operations 77.7 133.7 116.4
- ----------------------------------------------------------------------------------------------------------------------------
Gain (Loss) on Disposal
Automotive Services (6.7) 2.0 (3.7)
Water Services 6.2 110.1 -
Electric Odyssey - - (2.1)
- ----------------------------------------------------------------------------------------------------------------------------
(0.5) 112.1 (5.8)
- ----------------------------------------------------------------------------------------------------------------------------
Income Tax Expense (Benefit)
Automotive Services (2.6) 0.7 (1.0)
Water Services 6.7 38.5 -
Electric Odyssey - - (0.9)
- ----------------------------------------------------------------------------------------------------------------------------
4.1 39.2 (1.9)
- ----------------------------------------------------------------------------------------------------------------------------
Net Gain (Loss) on Disposal (4.6) 72.9 (3.9)
- ----------------------------------------------------------------------------------------------------------------------------
Income from Discontinued Operations $ 73.1 $206.6 $112.5
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET INFORMATION
DECEMBER 31 2004 2003
- ----------------------------------------------------------------------------------------------------------------------------
Assets of Discontinued Operations
Cash and Cash Equivalents $1.2 $116.1
Other Current Assets $0.8 $360.6
Property, Plant and Equipment $2.9 $660.9
Investments - $34.5
Goodwill - $511.0
Other Intangibles - $33.3
Other Assets - $7.6
Liabilities of Discontinued Operations
Current Liabilities $12.0 $340.7
Long-Term Debt - $252.8
Other Liabilities - $42.0
Foreign Currency Translation Adjustment - $23.5
- ----------------------------------------------------------------------------------------------------------------------------
Page 57 ALLETE 2004 Form 10-K
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31 2004 2003
- ---------------------------------------------------------------------------------------------------------
MILLIONS
Regulated Utility $1,431.9 $1,409.5
Construction Work in Progress 10.4 11.9
Accumulated Depreciation (716.4) (692.3)
- ---------------------------------------------------------------------------------------------------------
Regulated Utility Plant - Net 725.9 729.1
- ---------------------------------------------------------------------------------------------------------
Nonregulated Energy Operations 155.5 185.4
Construction Work in Progress 1.1 1.6
Accumulated Depreciation (39.6) (35.8)
- ---------------------------------------------------------------------------------------------------------
Nonregulated Energy Operations Plant - Net 117.0 151.2
- ---------------------------------------------------------------------------------------------------------
Other Plant - Net 40.2 39.0
- ---------------------------------------------------------------------------------------------------------
Property, Plant and Equipment - Net $ 883.1 $ 919.3
- ---------------------------------------------------------------------------------------------------------
Note 3. Property, Plant and Equipment
Property, Plant and Equipment | | |
December 31 | 2007 | 2006 |
Millions | | |
Regulated Utility | $1,683.0 | $1,575.8 |
Construction Work in Progress | 165.8 | 71.4 |
Accumulated Depreciation | (796.8) | (781.3) |
Regulated Utility Plant – Net | 1,052.0 | 865.9 |
Nonregulated Energy Operations | 89.9 | 88.5 |
Construction Work in Progress | 2.5 | 2.6 |
Accumulated Depreciation | (43.2) | (40.1) |
Nonregulated Energy Operations Plant – Net | 49.2 | 51.0 |
Other Plant – Net | 3.3 | 4.7 |
Property, Plant and Equipment – Net | $1,104.5 | $921.6 |
Depreciation is computed using the straight-line method over the estimated useful lives of the various classes of plant.assets. The MPUC and the PSCW have approved depreciation rates for our Regulated Utility plant.
ESTIMATED USEFUL LIVES OF PROPERTY, PLANT AND EQUIPMENT
- ---------------------------------------------------------
Estimated Useful Lives of Property, Plant and Equipment |
| | | | |
Regulated Utility - – | Generation 5 | 4 to 3029 years | Nonregulated Energy Operations | 4 to 40 years |
| Transmission | 40 to 60 years | Other Plant | 5 to 25 years |
| Distribution | 30 to 70 years
Nonregulated Energy Operations 5 to 35 years
Other Plant 5 to 40 years
- ---------------------------------------------------------
| | |
ASSET RETIREMENT OBLIGATIONS.
Asset Retirement Obligations. Pursuant to SFAS 143, "Accounting“Accounting for Asset Retirement Obligations,"” we recognize, at fair value, obligations associated with the retirement of tangible, long-lived assets that result from the acquisition, construction or development and/or normal operation of the asset. The associated retirement costs are capitalized as part of the related long-lived asset and depreciated over the useful life of the asset. Asset retirement obligations relate primarily to the decommissioning of our utility steam generating facilities and land reclamation at BNI Coal, and are included in Other Liabilities on our consolidated balance sheet. Removal costs associated with certain distribution and transmission assets have not been recognized as these facilities have been determined to have indeterminate useful lives. Prior to the adoption of SFAS 143, utility decommissioning obligations were accrued through depreciation expense at depreciation rates approved by the MPUC. Upon
implementation of SFAS 143, we reclassified previously recorded liabilities of
$12.5 million from Accumulated Depreciation and capitalized a netConditional asset retirement cost of $6.7 million.
obligations have been identified for treated wood poles and remaining polychlorinated biphenyl and asbestos-containing assets; however, removal costs have not been recognized because they are considered immaterial to our consolidated financial statements.
ASSET RETIREMENT OBLIGATION
- --------------------------------------------------------------------------------
MILLIONS
Asset Retirement Obligation | |
Millions | |
Obligation at December 31, 2002 -
Initial Obligation Upon Adoption of SFAS 143 $19.0
2005 | $25.3 |
Accretion Expense 0.7
| 1.8 |
Additional Liabilities Incurred in 2003 1.0
- --------------------------------------------------------------------------------
2006 | 0.1 |
Obligation at December 31, 2003 20.7
2006 | 27.2 |
Accretion Expense 1.2
| 2.1 |
Additional Liabilities Incurred in 2004 0.5
- --------------------------------------------------------------------------------
2007 | 7.2 |
Obligation at December 31, 2004 $22.4
- --------------------------------------------------------------------------------
2007 | $36.5 |
ALLETE 2004 Form 10-K Page 58
NOTE 5. REGULATORY MATTERS
Entities within our regulated utility segment file for periodic rate revisions
with the MPUC, the FERC or the PSCW. Minnesota Power's last retail rate filing
with the MPUC was in 1994. SWL&P's current retail rates are based on a 2001 PSCW
retail rate order. During 2004, SWL&P filed an application with the PSCW to
increase retail utility rates by an average of approximately 6%. New rates, if
approved, are expected to go into effect in the first half of 2005. In 2004, 70%
of our consolidated operating revenue was under regulatory authority (69% in
2003; 73% in 2002). The MPUC had regulatory authority over approximately 56% of
our consolidated operating revenue in 2004 (54% in 2003; 58% in 2002).
ELECTRIC RATES. Federal legislation and FERC regulations have been proposed that
aim to maintain reliability, assure adequate energy supply, and address
wholesale price volatility while encouraging wholesale competition. Legislation
or regulation that initiates a process which may lead to retail customer choice
of their electric service provider currently lacks momentum in both Minnesota
and Wisconsin. Legislative and regulatory activity, as well as the actions of
competitors, affect the way Minnesota Power strategically plans for its future.
Note 4. | Jointly-Owned Electric Facility |
We
cannot predict the timing or substance of any future legislation or
regulation.
DEFERRED REGULATORY CHARGES AND CREDITS. Our regulated utility operations are
subject to the provisions of SFAS 71, "Accounting for the Effects of Certain
Types of Regulation." We capitalize as deferred regulatory charges incurred
costs which are probable of recovery in future utility rates. Deferred
regulatory credits represent amounts expected to be credited to customers in
rates. Deferred regulatory charges and credits are included in Other Assets and
Other Liabilities on our consolidated balance sheet.
DEFERRED REGULATORY CHARGES AND CREDITS
DECEMBER 31 2004 2003
- --------------------------------------------------------------------------------
MILLIONS
Deferred Charges
Income Taxes $ 13.7 $ 14.1
Conservation Improvement Programs 0.6 1.5
Premium on Reacquired Debt 4.1 3.8
Other 0.6 0.5
- --------------------------------------------------------------------------------
19.0 19.9
Deferred Credits - Income Taxes 35.9 39.3
- --------------------------------------------------------------------------------
Net Deferred Regulatory Liabilities $(16.9) $(19.4)
- --------------------------------------------------------------------------------
NOTE 6. INVESTMENTS
At December 31, 2004, Investments included the real estate assets of ALLETE
Properties, debt and equity securities consisting primarily of securities held
for employee benefits, and our emerging technology investments.
INVESTMENTS
DECEMBER 31 2004 2003
- --------------------------------------------------------------------------------
MILLIONS
Real Estate Assets $ 75.1 $ 78.6
Debt and Equity Securities 35.8 59.6
Emerging Technology Investments (See Note 7) 13.6 37.5
- --------------------------------------------------------------------------------
$124.5 $ 175.7
- --------------------------------------------------------------------------------
REAL ESTATE. At December 31, 2004, real estate assets included land of $47.2
million ($50.7 million at December 31, 2003), long-term finance receivables of
$9.7 million ($9.6 million at December 31, 2003) and $18.2 million ($18.3
million at December 31, 2003) of other assets, which consisted primarily of a
shopping center. Finance receivables have maturities ranging up to ten years,
accrue interest at market-based rates and are net of an allowance for doubtful
accounts of $0.7 million at December 31, 2004 ($1.2 million at December 31,
2003). Minority interest associated with real estate operations was $5.6 million
at December 31, 2004 ($7.5 million at December 31, 2003).
Page 59 ALLETE 2004 Form 10-K
NOTE 7. FINANCIAL INSTRUMENTS
SECURITIES INVESTMENTS. At December 31, 2004, Investments included securities
accounted for as available-for-sale under SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities," and securities in our emerging
technology portfolio. Income and realized gains and losses from securities
investments were included in Other Income (Expense) on our consolidated income
statement.
AVAILABLE-FOR-SALE SECURITIES. At December 31, 2004, our available-for-sale
securities portfolio consisted of securities in a grantor trust established to
fund certain employee benefits. Available-for-sale securities are recorded at
fair value with unrealized gains and losses included in accumulated other
comprehensive income, net of tax. Unrealized losses that are other than
temporary are recognized in earnings. We use the specific identification method
as the basis for determining the cost of securities sold. Our policy is to
review on a quarterly basis available-for-sale securities for other than
temporary impairment by assessing such factors as the continued viability of
products offered, cash flow, share price trends and the impact of overall market
conditions. As a result of our periodic assessments, we did not record any
impairment write-down on available-for-sale securities in 2004 or 2003.
During the fourth quarter of 2004, we sold 3.3 million shares of ADESA stock
received by our ESOP plan (see Note 17) as a resultown 80 percent of the September 2004
spin-off of ADESA. In total, the ESOP received total proceeds of $65.9 million,
resulting in a gain of $11.5 million, which we recognized during the fourth
quarter. We accounted for the ADESA stock as available-for-sale.
During the second quarter of 2003, we sold the publicly-traded investments held
in our emerging technology portfolio and recognized a $2.3 million after-tax
loss. These publicly-traded emerging technology investments were accounted for
as available-for-sale securities prior to sale.
AVAILABLE-FOR-SALE SECURITIES
- -------------------------------------------------------------------------------------------------
MILLIONS
GROSS UNREALIZED
AT DECEMBER 31 COST GAIN (LOSS) FAIR VALUE
- -------------------------------------------------------------------------------------------------
2004 $27.2 $3.1 $(0.1) $30.2
2003 $24.1 $1.4 - $25.5
2002 $25.4 $0.7 $(5.2) $20.9
- -------------------------------------------------------------------------------------------------
NET
UNREALIZED
GAIN (LOSS)
IN OTHER
YEAR ENDED SALES GROSS REALIZED COMPREHENSIVE
DECEMBER 31 PROCEEDS GAIN (LOSS) INCOME
- -------------------------------------------------------------------------------------------------
2004 $65.9 $11.5 - $1.6
2003 $6.4 $1.2 $(4.7) $2.4
2002 $12.1 $1.0 - $(11.8)
- -------------------------------------------------------------------------------------------------
EMERGING TECHNOLOGY PORTFOLIO. As part of our emerging technology portfolio, we
have several minority investments in venture capital funds and direct
investments in privately-held, start-up companies. We account for our investment
in venture capital funds under the equity method and account for our direct
investment in privately-held companies under the cost method. The total carrying
value of our emerging technology portfolio was $13.6 million at December 31,
2004, down $23.9 million from December 31, 2003. The decline was primarily due
to a change to the equity method of accounting for the venture capital funds
(see Note 14) and impairments related to investments in privately-held
companies. Our basis in cost method investments included in the emerging
technology portfolio was $4.5 million ($11.0 million in 2003). Our policy is to
review these investments quarterly for impairment by assessing such factors as
continued commercial viability of products, cash flow and earnings. Any
impairment would reduce the carrying value of the investment. In 2004, we
recorded $6.5 million ($4.1 million after tax) of impairment losses related to
direct investments in certain privately-held, start-up companies whose future
business prospects have diminished significantly. Recent developments at these
companies indicated that future commercial viability is unlikely, as is new
financing necessary to continue development. We did not record any impairment
loss on these investments in 2003 ($1.5 million pretax in 2002).
OTHER. During the second half of 2002, we substantially liquidated our trading
securities portfolio and incurred a $2.9 million after-tax loss. Prior to
liquidation, the trading securities portfolio consisted primarily of the common
stock of various publicly traded companies and was included in current assets at
fair value.
ALLETE 2004 Form 10-K Page 60
FAIR VALUE OF FINANCIAL INSTRUMENTS. With the exception of the items listed
below, the estimated fair values of all financial instruments approximate the
carrying amount. The fair values for the items below were based on quoted market
prices for the same or similar instruments.
FINANCIAL INSTRUMENTS
DECEMBER 31 CARRYING AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------
MILLIONS
Long-Term Debt
2004 $392.0 $396.7
2003 $550.3 $587.4
- --------------------------------------------------------------------------------
CONCENTRATION OF CREDIT RISK. Financial instruments that subject us to
concentrations of credit risk consist primarily of accounts receivable.
Minnesota Power sells electricity to 12 Large Power Customers. Receivables from
these customers totaled approximately $9 million at December 31, 2004 ($9
million at December 31, 2003). Minnesota Power does not obtain collateral to
support utility receivables, but monitors the credit standing of major
customers. In addition, our taconite-producing Large Power Customers are on a
weekly billing cycle.
NOTE 8. SHORT-TERM AND LONG-TERM DEBT
SHORT-TERM DEBT. Total short-term debt outstanding at December 31, 2004 was $1.8
million ($88.6 million at December 31, 2003.) This consisted of $0 in Notes
Payable ($53 million at December 31, 2003) and $1.8 million of Long-Term Debt
Due Within One Year ($35.6 million at December 31, 2003).
In July 2003, ALLETE entered into a one-year credit agreement for $250 million.
The proceeds were used to redeem $250 million of the Company's Floating Rate
First Mortgage Bonds due October 20, 2003. In April 2004, ALLETE used internally
generated funds and proceeds from the sale of water assets to repay $53.0
million outstanding under this credit agreement. The credit agreement contained
certain mandatory prepayment provisions, including a requirement to repay an
amount equal to 75% of the net proceeds from the sale of water assets. In
accordance with these provisions, $197.0 million was repaid in 2003.
We have bank lines of credit aggregating $111.5 million ($176.5 million at
December 31, 2003), the majority of which will expire in December 2007. These
bank lines of credit make financing available through short-term bank loans and
provide credit support for commercial paper. At December 31, 2004, $111.5
million was available for use ($176.5 million at December 31, 2003). Certain
lines of credit require a commitment fee of 0.15%. There was no commercial paper
issued as of December 31, 2004 or December 31, 2003.
Our lines of credit contain financial covenants. The most restrictive covenants
require ALLETE (1) to not exceed a maximum ratio of funded debt to total capital
of .60 to 1.0 and (2) to maintain an interest coverage ratio of not less than
3.00 to 1.00. Failure to meet these covenants could give rise to an event of
default, if not corrected after notice from the lender, in which event ALLETE
may need to pursue alternative sources of funding. Certain of ALLETE's lines of
credit contain cross-default provisions under which an event of default would
arise if other ALLETE obligations in excess of $5.0 million were in default. As
of December 31, 2004, ALLETE was in compliance with these financial covenants.
Page 61 ALLETE 2004 Form 10-K
LONG-TERM DEBT. The aggregate amount of long-term debt maturing during 2005 is
$1.8 million ($2.4 million in 2006; $119.2 million in 2007; $57.5 million in
2008; $10.3 million in 2009; and $200.8 million thereafter). Substantially all
of our electric plant is subject to the lien of the mortgages securing various
first mortgage bonds.
At December 31, 2003, BNI Coal had a $28.8 million long-term bank line of credit
outstanding. The amount was repaid in 2004 when BNI Coal entered into a new
operating lease agreement. (See Note 11.)
In January 2004, we used internally-generated funds to retire approximately $3.5
million in principal amount of Industrial Development Revenue Bonds Series
1994-A, due January 1, 2004.
In July 2004, we repaid $125 million in principal amount of 7.80% Senior Notes
due 2008. Proceeds from the sale of our water assets and proceeds received from
ADESA were used to repay this debt. As a result of the redemption, we recognized
an expense of $18.5 million in the third quarter of 2004 comprised of an early
redemption premium and the write-off of unamortized debt issuance costs.
In August 2004, we issued $111 million in principal amount of 4.95%
Collateralized Pollution Control Refunding Revenue Bonds Series 2004 due 2022.
Proceeds were used to redeem $111 million in principal amount of 6%
Collateralized Pollution Control Refunding Revenue Bonds Series E due 2022.
ALLETE's letters of credit supporting certain long-term debt arrangements
contain financial covenants. The most restrictive covenant requires ALLETE not
to exceed a maximum ratio of funded debt to total capital of .65 to 1.0. Failure
to meet these covenants may give rise to an event of default, if not corrected
after notice from the trustee or security holder. Some of ALLETE's long-term
debt arrangements contain "cross-default" provisions that would result in an
event of default if there is a failure under other financing arrangements to
meet payment terms or to observe other covenants that would result in an
acceleration of payments due. As of December 31, 2004, ALLETE was in compliance
with these financial covenants.
DECEMBER 31 2004 2003
- ---------------------------------------------------------------------------------------------------
MILLIONS
First Mortgage Bonds
6.68% Series Due 2007 $ 20.0 $20.0
7% Series Due 2007 60.0 60.0
7 1/2% Series Due 2007 35.0 35.0
7% Series Due 2008 50.0 50.0
6% Pollution Control Series E Due 2022 - 111.0
4.95% Pollution Control Series F Due 2022 111.0 -
Senior Notes, 7.80% - 125.0
Variable Demand Revenue Refunding Bonds
Series 1997 A, B, C and D Due 2007 - 2020 39.0 39.0
Industrial Development Revenue Bonds 6.5% Due 2025 35.1 35.1
Other Long-Term Debt, 2.0% - 8.5% Due 2005 - 2025 41.9 75.2
- ---------------------------------------------------------------------------------------------------
Total Long-Term Debt 392.0 550.3
Less Due Within One Year 1.8 35.6
- ---------------------------------------------------------------------------------------------------
Net Long-Term Debt $390.2 $514.7
- ---------------------------------------------------------------------------------------------------
The 6.68% Series Due 2007 and the 7% Series Due 2007 cannot be redeemed prior to
maturity. The 7 1/2% Series Due 2007 are redeemable after August 1, 2005, and
the 7% Series Due 2008 are redeemable after March 1, 2006. The remaining debt
may be redeemed in whole or in part at our option, according to the terms of the
obligations.
ALLETE 2004 Form 10-K Page 62
NOTE 9. COMMON STOCK AND EARNINGS PER SHARE
Our Articles of Incorporation and mortgages contain provisions that, under
certain circumstances, would restrict the payment of common stock dividends. As
of December 31, 2004, no retained earnings were restricted as a result of these
provisions.
REVERSE COMMON STOCK SPLIT. On September 20, 2004, our one-for-three reverse
common stock split became effective. All common share and per share amounts have
been adjusted for all periods to reflect the one-for-three reverse stock split.
SUMMARY OF COMMON STOCK SHARES EQUITY
- --------------------------------------------------------------------------------
MILLIONS
Balance at December 31, 2001 28.0 $ 770.3
2002 Employee Stock Purchase Plan 0.0 1.4
Invest Direct 0.3 19.6
Other 0.2 23.6
- --------------------------------------------------------------------------------
Balance at December 31, 2002 28.5 814.9
2003 Employee Stock Purchase Plan 0.0 1.4
Invest Direct 0.3 19.9
Other 0.3 23.0
- --------------------------------------------------------------------------------
Balance at December 31, 2003 29.1 859.2
2004 Employee Stock Purchase Plan 0.0 1.0
Invest Direct 0.3 18.1
ADESA IPO (See Note 3) - 70.1
Spin-off of ADESA (See Note 3) - (600.2)
Receipt of ADESA Stock by ESOP - 27.8
Reacquired (0.1) (5.8)
Other 0.4 29.9
- --------------------------------------------------------------------------------
Balance at December 31, 2004 29.7 $ 400.1
- --------------------------------------------------------------------------------
Invest Direct is ALLETE's direct stock purchase and dividend reinvestment
plan.
SHAREHOLDER RIGHTS PLAN. In 1996, we adopted a rights plan that provides for a
dividend distribution of one preferred share purchase right (Right) to be
attached to each share of common stock.
The Rights, which are currently not exercisable or transferable apart from our
common stock, entitle the holder to purchase one-and-a-half of one-hundredth
(three two-hundredths) of a share of ALLETE's Junior Serial Preferred Stock A,
without par value. The purchase price as defined in the Rights Plan, remains at
$90. These Rights would become exercisable if a person or group acquires
beneficial ownership of 15% or more of our common stock or announces a tender
offer which would increase the person's or group's beneficial ownership interest
to 15% or more of our common stock, subject to certain exceptions. If the 15%
threshold is met, each Right entitles the holder (other than the acquiring
person or group) to purchase common stock (or, in certain circumstances, cash,
property or other securities of ours) having a market price equal to twice the
exercise price of the Right. If we are acquired in a merger or business
combination, or 50% or more of our assets or earning power are sold, each
exercisable Right entitles the holder to purchase common stock of the acquiring
or surviving company having a value equal to twice the exercise price of the
Right. Certain stock acquisitions will also trigger a provision permitting the
Board of Directors to exchange each Right for one share of our common stock.
The Rights, which expire on July 23, 2006, are nonvoting and may be redeemed by
us at a price of $0.005 per Right at any time they are not exercisable. One
million shares of Junior Serial Preferred Stock A have been authorized and are
reserved for issuance under the plan.
Page 63 ALLETE 2004 Form 10-K
EARNINGS PER SHARE. The difference between basic and diluted earnings per share
arises from outstanding stock options and performance share awards granted under
our Executive and Director Long-Term Incentive Compensation Plans.
RECONCILIATION OF BASIC AND DILUTED
EARNINGS PER SHARE DILUTIVE
FOR THE YEAR ENDED DECEMBER 31 BASIC SECURITIES DILUTED
- --------------------------------------------------------------------------------
MILLIONS EXCEPT PER SHARE AMOUNTS
2004
Net Income from Continuing Operations
Before Change in Accounting Principle $39.1 - $39.1
Common Shares 28.3 0.1 28.4
Per Share from Continuing Operations $1.39 - $1.37
2003
Net Income from Continuing Operations $29.8 - $29.8
Common Shares 27.6 0.2 27.8
Per Share from Continuing Operations $1.08 - $1.08
2002
Net Income from Continuing Operations $24.7 - $24.7
Common Shares 27.0 0.2 27.2
Per Share from Continuing Operations $0.91 - $0.91
- --------------------------------------------------------------------------------
NOTE 10. JOINTLY-OWNED ELECTRIC FACILITY
We own 80% of the 537-MW536-MW Boswell Energy Center Unit 4 (Boswell Unit 4). While we operate the plant, certain decisions about the operations of Boswell Unit 4 are subject to the oversight of a committee on which we and Wisconsin Public Power, Inc. (WPPI), the owner of the other 20%20 percent of Boswell Unit 4, have equal representation and voting rights. Each of us must provide our own financing and is obligated to pay our ownership share of operating costs. Our share of direct operating expenses of Boswell Unit 4 is included in operating expense on our consolidated statement of income. Our 80%80 percent share of the original cost of Boswell Unit 4, which is included in property, plant and equipment at December 31, 20042007, was $309$316 million ($308314 million at December 31, 2003)2006). The corresponding accumulated depreciation balance was $157$170 million at December 31, 20042007 ($154168 million at December 31, 2003)2006).
Note 5. | Regulatory Matters |
Electric Rates. Entities within our Regulated Utility segment file for periodic rate revisions with the MPUC, the FERC or the PSCW. On February 8, 2008, the FERC approved our wholesale rate filing. Our wholesale customers consist of 16 municipalities in Minnesota and two private utilities in Wisconsin, including SWL&P. The FERC authorized an average 10 percent increase for wholesale municipal customers, a 12.5 percent increase for SWL&P, and an overall return on equity of 11.25 percent. The rate increase will go into effect on March 1, 2008, and on an annualized basis, the filing will generate approximately $7.5 million in additional revenue. Minnesota Power’s retail rates are based on a 1994 MPUC retail rate order that allows for an 11.6 percent return on common equity dedicated to utility plant. SWL&P’s current retail rates are based on a 2006 PSCW retail rate order, effective January 1, 2007. In 2007, 76 percent of our consolidated operating revenue was under regulatory authority (72 percent in 2006 and 2005). NOTE 11. COMMITMENTS, GUARANTEES AND CONTINGENCIES
SQUARE BUTTE POWER PURCHASE AGREEMENT.The MPUC had regulatory authority over approximately 58 percent of our consolidated operating revenue in 2007 (56 percent in 2006 and 2005).
Deferred Regulatory Charges and Credits. Our regulated utility operations are subject to the provisions of SFAS 71, “Accounting for the Effects of Certain Types of Regulation.” We capitalize as deferred regulatory charges incurred costs which are probable of recovery in future utility rates. Deferred regulatory credits represent amounts expected to be credited to customers in rates. Deferred regulatory charges and credits are included in Other Assets and Other Liabilities on our consolidated balance sheet except for deferred fuel adjustment clause charges which are included in Prepayments and Other Current Assets (See Note 2). No deferred regulatory charges or credits are currently earning a return.
Deferred Regulatory Charges and Credits | | |
December 31 | 2007 | 2006 |
Millions | | |
| | |
Deferred Charges | | |
Income Taxes | $11.3 | $11.6 |
Premium on Reacquired Debt | 2.3 | 2.8 |
Future Benefit Obligations Under | | |
Defined Benefit Pension and Other Postretirement Plans (See Note 15) | 53.7 | 86.1 |
Deferred MISO Costs | 3.7 | – |
Asset Retirement Obligation | 3.6 | 2.3 |
Other | 2.0 | 0.8 |
| 76.6 | 103.6 |
Deferred Credits – Income Taxes | 31.3 | 33.8 |
Net Deferred Regulatory Assets | $45.3 | $69.8 |
Available-for-Sale Investments. We account for our available-for-sale portfolio in accordance with SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities.” Our available-for-sale securities portfolio consisted of securities in a grantor trust established to fund certain employee benefits included in Investments and various auction rate municipal bonds and variable rate municipal demand notes included as Short-Term Investments (see below). As a result of our periodic assessments, we did not record an impairment charge on our available for sale securities in the last three years.
Available-For-Sale Securities |
Millions | | | |
| | Gross Unrealized | |
At December 31 | Cost | Gain | (Loss) | Fair Value |
| | | | |
2007 | $45.3 | $8.4 | $(0.1) | $53.6 |
2006 | $123.2 | $7.0 | $(0.1) | $130.1 |
2005 | $135.2 | $4.4 | $(0.1) | $139.5 |
| | | Net |
| | | Unrealized |
| | | Gain (Loss) |
| | | in Other |
Year Ended | Sales | Gross Realized | Comprehensive |
December 31 | Proceeds | Gain | (Loss) | Income |
| | | | |
2007 | $81.4 | – | – | $1.4 |
2006 | $12.4 | – | – | $2.5 |
2005 | $32.3 | – | – | $1.3 |
Note 6. Investments (Continued)
Short-Term Investments. At December 31, 2007, we held $23.1 million of short-term investments ($104.5 million at December 31, 2006) consisting of various auction rate municipal bonds and variable rate municipal demand notes. Substantially all of these securities consisted of guaranteed student loans, insured or reinsured by the federal government. The credit markets are currently experiencing significant uncertainty, and some of this uncertainty has impacted the markets where our auction rate securities would be offered. We are unable to estimate the impact, if any, which emerging credit market conditions may have on the liquidity of our auction rate securities. Any reduction in liquidity of our auction rate securities will not have a material impact on our overall liquidity needs. We believe the $23.1 million carrying value is not impaired, but we may have to reclassify the investment from short-term to long-term investments if future liquidity conditions mandate.
Investments. At December 31, 2007, our long-term investment portfolio included the real estate assets of ALLETE Properties, our investment in ATC, debt and equity securities consisting primarily of securities held to fund employee benefits, and our emerging technology portfolio.
Investments | | |
December 31 | 2007 | 2006 |
Millions | | |
Real Estate Assets | $91.3 | $89.8 |
Debt and Equity Securities | 48.9 | 36.4 |
Investment in ATC | 65.7 | 53.7 |
Emerging Technology Portfolio | 7.9 | 9.2 |
Total Investments | $213.8 | $189.1 |
| | |
| | |
Real Estate Assets | 2007 | 2006 |
Millions | | |
Land Held for Sale Beginning Balance | $58.0 | $48.0 |
Additions during period: Capitalized Improvements | 12.8 | 18.8 |
Purchases | – | 1.4 |
Deductions during period: Cost of Real Estate Sold | (8.2) | (10.2) |
Land Held for Sale Ending Balance | 62.6 | 58.0 |
Long-Term Finance Receivables | 15.3 | 18.3 |
Other (a) | 13.4 | 13.5 |
Total Real Estate Assets | $91.3 | $89.8 |
(a) | Consisted primarily of a shopping center. |
Finance receivables, which are collateralized by property sold, accrue interest at market-based rates and are net of an allowance for doubtful accounts of $0.2 million at December 31, 2007 ($0.2 million at December 31, 2006). The majority are receivables having maturities up to 5 years. Minority interest associated with real estate operations was $9.3 million at December 31, 2007 ($7.4 million at December 31, 2006).
Investment in ATC. Our Wisconsin subsidiary, Rainy River Energy Corporation - Wisconsin, has invested $60 million in ATC, a Wisconsin-based public utility that owns and maintains electric transmission assets in parts of Wisconsin, Michigan, Minnesota and Illinois. ATC provides transmission service under rates regulated by the FERC that are set in accordance with the FERC’s policy of establishing the independent operation and ownership of, and investment in, transmission facilities. We account for our investment in ATC under the equity method of accounting, pursuant to EITF 03-16, “Accounting for Investments in Limited Liability Companies.” As of December 31, 2007, our equity investment balance in ATC was $65.7 million ($53.7 million at December 31, 2006), representing an approximate 8.0 percent ownership interest.
ALLETE’s Interest in ATC | |
For the Year Ended December 31, 2007 | |
Millions | |
Equity Investment Balance at December 31, 2006 | $53.7 |
2007 Cash Investments | 8.7 |
Equity in ATC Earnings | 12.6 |
Distributed ATC Earnings | (9.3) |
Equity Investment Balance at December 31, 2007 | $65.7 |
Note 6. Investments (Continued)
Emerging Technology Portfolio. As part of our emerging technology portfolio, we have several minority investments in venture capital funds and direct investments in privately-held, start-up companies. We account for our investment in venture capital funds under the equity method and account for our direct investments in privately-held companies under the cost method because of our ownership percentage. The total carrying value of our emerging technology portfolio was $7.9 million at December 31, 2007 ($9.2 million at December 31, 2006). Our policy is to review these investments quarterly for impairment by assessing such factors as continued commercial viability of products, cash flow and earnings. Any impairment would reduce the carrying value of the investment. Due to the distribution of investments from matured venture capital funds, our basis in direct investments in privately-held companies included in the emerging technology portfolio was $1.2 million at December 31, 2007 (zero at December 31, 2006). In 2007, we recorded $0.5 million ($0.3 million after tax) of impairments related to our venture capital funds whose future business prospects had significantly diminished. Developments at these companies indicated that future commercial viability was unlikely, as was new financing necessary to continue development. We did not record any impairments in 2006. In 2005, we recorded $5.1 million ($3.3 million after tax) of impairments related to our direct investments in certain privately-held, start-up companies.
Fair Value of Financial Instruments. With the exception of the items listed below, the estimated fair value of all financial instruments approximates the carrying amount. The fair value for the items below were based on quoted market prices for the same or similar instruments.
Financial Instruments | | |
December 31 | Carrying Amount | Fair Value |
Millions | | |
Long-Term Debt, Including Current Portion | | |
2007 | $422.7 | $410.9 |
2006 | $389.5 | $387.6 |
Concentration of Credit Risk. Financial instruments that subject us to concentrations of credit risk consist primarily of accounts receivable. Minnesota Power sells electricity to 12 Large Power Customers. Receivables from these customers totaled approximately $14 million at December 31, 2007 ($9 million at December 31, 2006). Minnesota Power does not obtain collateral to support utility receivables, but monitors the credit standing of major customers. In addition, our taconite-producing Large Power Customers are on a weekly billing cycle, which allows us to closely manage collection of amounts due.
Note 7. | Short-Term and Long-Term Debt |
Short-Term Debt. Total short-term debt outstanding at December 31, 2007, was $11.8 million ($29.7 million at December 31, 2006) and consisted of Long-Term Debt Due Within One Year.
As of December 31, 2007, we had bank lines of credit aggregating $170.0 million ($170.0 million at December 31, 2006), the majority of which expire in January 2012. These bank lines of credit made financing available through short-term bank loans and provided credit support for commercial paper. At December 31, 2007, $4.3 million ($2.9 million at December 31, 2006) was drawn on our lines of credit leaving a $165.7 million balance available for use ($167.1 million at December 31, 2006). The drawn amounts at December 31, 2007, related to an $8.5 million revolving development loan with CypressCoquina Bank that we entered into in March 2005. The revolving development loan has an interest rate equal to the prime rate, with an initial term of 36 months. The term of the loan may be extended 24 months if certain conditions are met. The loan is guaranteed by Lehigh Acquisition Corporation, an 80 percent owned subsidiary of ALLETE Properties. There was no commercial paper issued as of December 31, 2007 and 2006.
In January 2006, we renewed, increased and extended a committed, syndicated, unsecured revolving credit facility (Line) with LaSalle Bank National Association, as Agent, for $150 million. The Line was subsequently extended for an additional year in December 2006 and currently matures in January 2012. At our request and subject to certain conditions, the Line may be increased to $200 million and extended for two additional 12-month periods. The Line may be used for general corporate purposes and working capital, and to provide liquidity in support of our commercial paper program. We may prepay amounts outstanding under the Line in whole or in part at our discretion without premium or penalty. Additionally, we may irrevocably terminate or reduce the size of the Line prior to maturity without premium or penalty. No funds were drawn under this Line at December 31, 2007 and 2006.
Note 7. | Short-Term and Long-Term Debt (Continued) |
Long-Term Debt. The aggregate amount of long-term debt maturing during 2008 is $11.8 million ($10.7 million in 2009; $5.0 million in 2010; $1.4 million in 2011; $3.1 million in 2012; and $390.7 million thereafter). Substantially all of our electric plant is subject to the lien of the mortgages collateralizing various first mortgage bonds.
On February 1, 2007, we issued $60 million in principal amount of First Mortgage Bonds (Bonds), 5.99% Series due February 1, 2027, in the private placement market. The Company has the option to prepay all or a portion of the Bonds at its discretion, subject to a make-whole provision. Proceeds were used to retire $60 million in principal amount of First Mortgage Bonds, 7% Series on February 15, 2007.
On June 8, 2007, we issued $50 million of senior unsecured notes (Notes) in the private placement market. The Notes bear an interest rate of 5.99% and will mature on June 1, 2017. The Company has the option to prepay all or a portion of the Notes at its discretion, subject to a make-whole provision. The Company used the proceeds from the sale of the Notes to fund utility capital projects and for general corporate purposes.
On behalf of SWL&P, the City of Superior, Wisconsin, issued $6.4 million in principal amount of Collateralized Utility Revenue Refunding Bonds (Series A Bonds) and $6.1 million of Collateralized Utility Revenue Bonds (Series B Bonds) on October 3, 2007. The Series A Bonds bear an interest rate of 5.375% and will mature on November 1, 2021. The proceeds, together with other funds, were used to redeem $6.5 million of existing 6.125% bonds. The Series B Bonds bear an interest rate of 5.75% and will mature on November 1, 2037. The proceeds from the Series B Bonds will be used to fund qualifying electric and gas projects.
On February 1, 2008, we issued $60 million in principal amount of First Mortgage Bonds (Bonds), 4.86% Series due April 1, 2013, in the private placement market. We have the option to prepay all or a portion of the Bonds at our discretion, subject to a make-whole provision. We intend to use the proceeds from the sale of the Bonds to fund utility capital expenditures and for general corporate purposes.
Long-Term Debt | | |
December 31 | 2007 | 2006 |
Millions | | |
| | |
First Mortgage Bonds | | |
6.68% Series Due 2007 | – | $20.0 |
7.00% Series Due 2007 | – | 60.0 |
5.28% Series Due 2020 | $35.0 | 35.0 |
4.95% Pollution Control Series F Due 2022 | 111.0 | 111.0 |
5.99% Series Due 2027 | 60.0 | – |
5.69% Series Due 2036 | 50.0 | 50.0 |
Senior Unsecured Notes 5.99% Due 2017 | 50.0 | – |
Variable Demand Revenue Refunding Bonds Series 1997 A, B, and C Due 2009 – 2020 | 36.5 | 39.0 |
Industrial Development Revenue Bonds 6.5% Due 2025 | 6.0 | 6.0 |
Industrial Development Variable Rate Demand Refunding | | |
Revenue Bonds Series 2006 Due 2025 | 27.8 | 27.8 |
Other Long-Term Debt, 2.0% – 8.0% Due 2008 – 2037 | 46.4 | 40.7 |
Total Long-Term Debt | 422.7 | 389.5 |
Less: Due Within One Year | 11.8 | 29.7 |
Net Long-Term Debt | $410.9 | $359.8 |
Financial Covenants. Our long-term debt arrangements contain customary covenants. In addition, our lines of credit and letters of credit supporting certain long-term debt arrangements contain financial covenants. The most restrictive covenant requires ALLETE to maintain a quarterly ratio of its funded debt to total capital of less than or equal to .65 to 1.00. Failure to meet this covenant could give rise to an event of default, if not corrected after notice from the lender, in which event ALLETE may need to pursue alternative sources of funding. Some of ALLETE’s debt arrangements contain “cross-default” provisions that would result in an event of default if there is a failure under other financing arrangements to meet payment terms or to observe other covenants that would result in an acceleration of payments due.
Note 8. Commitments, Guarantees and Contingencies
Off-Balance Sheet Arrangements. Square Butte Power Purchase Agreement. Minnesota Power has a power purchase agreement with Square Butte that extends through 2026 (Agreement). It provides a long-term supply of low-cost energy to customers in our electric service territory and enables Minnesota Power to meet power pool reserve requirements. Square Butte, a North Dakota cooperative corporation, owns a 455-MW coal-fired generating unit (Unit) near Center, North Dakota. The Unit is adjacent to a generating unit owned by Minnkota Power, a North Dakota cooperative corporation whose Class A members are also members of Square Butte. Minnkota Power serves as the operator of the Unit and also purchases power from Square Butte.
Minnesota Power iswas entitled to approximately 71%71 percent of the Unit'sUnit’s output under the Agreement. After 2005, and upon compliance with a two-year advance notice
requirement,Agreement prior to 2006. Minnkota Power has theexercised its option to reduce Minnesota Power'sPower’s entitlement by approximately 5%5 percent annually to a minimum of 50%. In December 200466 percent in 2006 and 2003, we60 percent in 2007. We received notices from Minnkota Power that they will reducefurther reduced our output entitlement by approximately 5% in 20065 percent annually to 55 percent on January 1, 2008, and 2007,50 percent on January 1, 2009, and thereafter. Minnkota Power has no further option to 66% and 60%,
respectively.
reduce Minnesota Power’s entitlement below 50 percent.
Minnesota Power is obligated to pay its pro rata share of Square Butte'sButte’s costs based on Minnesota Power'sPower’s entitlement to Unit output. Minnesota Power'sPower’s payment obligation will be suspended if Square Butte fails to deliver any power, whether produced or purchased, for a period of one year. Square Butte'sButte’s fixed costs consist primarily of debt service. At December 31, 2004,2007, Square Butte had total debt outstanding of $314.9$323.0 million. Total annual debt service for Square Butte is expected to be approximately $25$29 million in each of the years 20052008 through 2009.2012. Variable operating costs include the price of coal purchased from BNI Coal, our subsidiary, under a long-term contract.
Minnesota
Power'sPower’s cost of power purchased from Square Butte during
20042007 was
$56.1$57.3 million ($
52.357.9 million in
2003 and $60.92006; $56.4 million in
2002)2005). This reflects Minnesota
Power'sPower’s pro rata share of total Square Butte costs, based on the
71%60 percent output entitlement in
2004, 20032007, the 66 percent output entitlement in 2006 and
2002.the 71 percent output entitlement in 2005. Included in this amount was Minnesota
Power'sPower’s pro rata share of interest expense of
$12.6$11.0 million in
20042007 ($
12.812.6 million in
2003; $13.72006; $13.6 million in
2002)2005). Minnesota
Power'sPower’s payments to Square Butte are approved as a purchased power expense for ratemaking purposes by both the MPUC and the FERC.
ALLETE 2004 Form 10-K Page 64
LEASING AGREEMENTS. In September 2004, BNI Coal entered into
We have two wind power purchase agreements with an operating leaseaffiliate of FPL Energy to purchase the output from two wind facilities, Oliver Wind I and II located near Center, North Dakota. We began purchasing the output from Oliver Wind I, a 50-MW facility, in December 2006 and the output from Oliver Wind II, a 48-MW facility in November 2007. Each agreement is for a new dragline that was placed in service at BNI Coal's mine on
September 30, 2004.25 years and provides for the purchase of all output from the facilities. There are no fixed capacity charges, and we only pay for energy as it is delivered to us.
Leasing Agreements. BNI Coal is obligated to make lease payments for a dragline totaling $2.8 million annually for the lease term which expires in 2027. BNI Coal has the option at the end of the lease term to renew the lease at a fair market rental, to purchase the dragline at fair market value, or to surrender the dragline and pay a $3.0 million termination fee. We lease other properties and equipment under operating lease agreements with terms expiring through 2013.2016. The aggregate amount of minimum lease payments for all of these other operating leases is $6.3 million in 2005, $6.0 million in
2006, $5.6 million in 2007, $4.9$8.1 million in 2008, $8.1 million in 2009, $7.7 million in 2010, $7.2 million in 2011, $6.6 million in 2012 and $53.4$48.7 million thereafter. Total rent and lease expense was $2.8$6.6 million in 20042007 ($3.86.8 million in 2003; $3.22006; $6.2 million in 2002)2005).
KENDALL COUNTY POWER PURCHASE AGREEMENT. We have 275 MW of nonregulated
generation (non rate-base generation sold at market-based rates to the wholesale
market) through an agreement with LSP-Kendall Energy that extends through
mid-September 2017. Under the agreement, we pay a fixed capacity charge for the
right, but not the obligation, to capacity
Coal, Rail and energy from a 275-MW generating
unit at a facility in Kendall County near Chicago, Illinois. We currently have
130 MW of long-term capacity sales contracts for the Kendall County generation,
with 50 MW expiring in April 2012 and 80 MW expiring in September 2017. To date,
this power purchase agreement has resulted in losses to us due to negative spark
spreads (the differential between electric and natural gas prices) in the
wholesale power market and our resulting inability to cover the fixed capacity
charge on unsold capacity (currently 145 MW). An after-tax loss of approximately
$8 million was recognized in 2004.
In December 2004, we entered into an agreement to assign this power purchase
agreement to Constellation Energy Commodities. Under the terms of the agreement,
we will pay Constellation Energy Commodities $73 million in cash to assume the
power purchase agreement. The proposed transaction is subject to the approvals
of LSP-Kendall Energy, as well as of its project lenders and the FERC. Pending
these approvals, the transaction is scheduled to close in April 2005. The 130 MW
of long-term capacity sales contracts will also be transferred to Constellation
Energy Commodities at closing. We will recognize an after-tax loss of
approximately $47 million upon the closing of this transaction.
COAL AND SHIPPING CONTRACTS.Shipping Contracts. We have three coal supply agreements with various expiration dates ranging from December 20062008 to December 2009.2011. We also have rail and shipping agreements for the transportation of all of our coal, with various expiration dates ranging from December 20052008 to December 2011. Our minimum annual obligationpayment obligations under these coal, rail and shipping agreements ranges from approximately
$32are currently $44.8 million in 2008, $10.8 million in 2009, $5.3 million in 2010, $5.4 million in 2011 and no specific commitments beyond 2011. Our minimum annual payment obligations will increase when annual nominations are made for coal deliveries in future years.
On January 24, 2008, the Company received a letter from BNSF alleging Minnesota Power defaulted on a material obligation under the Company’s Coal Transportation Agreement (CTA). In the notice, BNSF claimed Minnesota Power underpaid approximately $1.6 million for coal transportation services in 2006 and that failure to pay such amounts plus interest within 60 days may result in BNSF’s termination of the CTA. Minnesota Power believes it does not owe the amount claimed, and that BNSF’s claims are wholly without merit. Minnesota Power intends to vigorously defend its position in this dispute.
Fuel Clause Recovery of MISO Day 2 Costs. We filed a petition with the MPUC in February 2005 to $6amend our fuel clause to accommodate costs and revenue related to the day-ahead and real-time markets through which we engage in wholesale energy transactions in MISO (MISO Day 2). In December 2006, the MPUC issued an order allowing Minnesota Power and the other utilities involved in the MISO Day 2 proceeding to continue recovering MISO Day 2 charges through the Minnesota retail fuel clause except for MISO Day 2 administrative charges. On January 8, 2007, this order was challenged by the Minnesota OAG, through a request for reconsideration. The request was opposed by Minnesota Power and the other utilities, as well as MISO. The reconsideration request effectively was denied by the MPUC. Upon denial of the reconsideration request, the OAG appealed the MPUC Order in a filing with the Minnesota Court of Appeals. Oral argument in the case is scheduled to be held on February 27, 2008, and a decision would be expected approximately 90 days there after. We are unable to predict the outcome of this matter.
Note 8. Commitments, Guarantees and Contingencies (Continued)
Fuel Clause Recovery of MISO Day 2 Costs (Continued). The December 2006 MPUC order, subject to the rehearing request, granted deferred accounting treatment for three MISO Day 2 charge types that were determined to be administrative charges. Under the order, Minnesota Power refunded, through customer bills, approximately $2 million of administrative charges previously collected through the fuel clause between April 1, 2005, and December 31, 2006, and recorded these administrative charges as a regulatory asset. We were permitted to continue accumulating MISO Day 2 administrative charges after December 31, 2006, as a regulatory asset until we file our next rate case, at which time recovery for such charges will be determined. The balance of this regulatory asset was $3.7 million on December 31, 2007, and we consider regulatory recovery to be probable. This order removed the subject to refund requirement of the two interim orders, and included extensive fuel clause reporting requirements that review our monthly and annual fuel clause filings with the MPUC. There was no impact on earnings as a result of this ruling. As a result of the MPUC’s December 2006 order allowing recovery of nearly all MISO Day 2 charges through the fuel clause, we rescinded our December 2005 Letter of Intent to Withdraw from MISO in 2009.
EMERGING TECHNOLOGY PORTFOLIO.December 2006.
Emerging Technology Portfolio. We have investments in emerging technologies through minority investments in venture capital funds structured as limited liability companies, and direct investments in privately-held, start-up companies. We have committed to make additional investments in certain emerging technology holdings.venture capital funds. The total future commitment was $4.5$1.0 million at December 31, 2004 ($4.8 million at December 31, 2003)2007, and is expected tomay be invested at
various times through 2007.in 2008. We do not have plans to make any additional investments beyond this commitment.
ENVIRONMENTAL MATTERS.
Discontinued Operations. Two of our subsidiaries, which were involved in our discontinued water operations, have been named in a claim brought by Capital Resources and Properties, Inc, (CRP). CRP alleges that Georgia Water and ALLETE Water Services are obligated to pay $2 million dollars plus interest and attorney fees pursuant to a contract that was entered into in 2001. The contract provides for payments of certain amounts upon the satisfaction of specified contingencies, which CRP alleges were satisfied in 2005 or were waived, or are otherwise due and owing. We intend to vigorously assert our defenses to the claim, and cannot predict the outcome of this matter. A trial date is expected later this year.
Environmental Matters. Our businesses are subject to regulation of environmental matters by various federal, state and local authorities concerningauthorities. Due to future stricter environmental matters. Werequirements through legislation and/or rulemaking, we anticipate that potential expenditures for environmental matters will be material in the future, due to stricter environmental requirements through
legislation and/or rulemakings that are expected toand will require significant capital investments. We are unable to predict if and when any such stricter
environmental requirements will be imposed and the impact they will have on the
Company. We review environmental matters on a quarterly basis. Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. These accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in the balance sheet at undiscounted amounts and exclude claims for recoveries from insurance or other third parties. Costs related to environmental contamination treatment and cleanup are charged to expense unless recoverable in rates from customers.
SWL&P MANUFACTURED GAS PLANT.Manufactured Gas Plant. In May 2001, SWL&P received notice from the WDNR that the City of Superior had found soil contamination on property adjoining a former Manufactured Gas Plant (MGP) site owned and operated by SWL&P's
predecessors&P from 1889 to 1904. The WDNR requested SWL&P to initiate an
environmental investigation. The WDNR also issued SWL&P a Responsible Party
letterA report submitted in February 2002. The environmental investigation is under way. In
February 2003 SWL&P submitted a Phase II environmental site investigation
report to the WDNR. This report identified some MGP-like chemicals that were found in the soil near the former plant site. During MarchThe final Phase II report was issued in June 2007, confirming our understanding of the issues involved. The final Phase II Report and April 2003,
sediment samplesRisk Assessment were taken from nearby Superior Bay. The report onsent to the resultsWDNR for review in June 2007. A remediation plan was developed during the fourth quarter of this sampling was completed2007 and sentwill be submitted to the WDNR during the first quarter of 2004. The next phase of the investigation is to determine any impact to soil or
ground water between the former MGP site and Superior Bay. The site work for
this phase of the investigation was performed during October 2004, and the final
report is expected to be sent to the WDNR during the first quarter of 2005. It
is anticipated that additional site investigation will be needed during 2005.2008. Although it is not possible to quantify the potential clean-up cost until the investigation is completed, a $0.5 million liability was recorded in December 2003 to address the known areas of contamination. We haveThe Company has recorded a corresponding dollar amount as a regulatory asset to offset this liability. The PSCW has approved SWL&P's deferralthe collection through rates of these MGP environmental$0.3 million of site investigation and
potential clean-up costs for future recovery in rates, subject to a regulatory
prudency review.that had been incurred through 2005. ALLETE maintains pollution liability insurance coverage that includes coverage for SWL&P. A claim has been filed with respect to this matter. The insurance carrier has issued a reservation of rights letter and we continuethe Company continues to work with the insurer to determine the availability of insurance coverage.
Page 65
EPA Clean Air Interstate Rule. In March 2005, the EPA announced the final Clean Air Interstate Rule (CAIR) that reduces and permanently caps emissions of SO2, NOX and particulates in the eastern United States. The CAIR includes Minnesota as one of the 28 states it considers as “significantly contributing” to air quality standards non-attainment in other states. The CAIR has been challenged in the court system, which may delay implementation or modify provisions in the rules. Minnesota Power is participating in the legal challenge to the CAIR. However, if the CAIR does go into effect, Minnesota Power expects to be required to:
| (1) make emissions reductions; |
| (2) purchase mercury, SO2 and NOX allowances through the EPA’s cap-and-trade system; and/or |
| (3) use a combination of both. |
ALLETE
20042007 Form 10-K
SQUARE BUTTE GENERATING FACILITY.Note 8. Commitments, Guarantees and Contingencies (Continued)
EPA Clean Air Mercury Rule. In June 2002, Minnkota Power,March 2005, the operatorEPA also announced the final Clean Air Mercury Rule (CAMR) that would have reduced and permanently capped emissions of Square Butte, receivedelectric utility mercury emissions in the continental United States. On February 8, 2008 the United States Court of Appeals for the District of Columbia Circuit overturned the CAMR and remanded the rulemaking to the EPA for reconsideration. The Court’s decision is subject to appeal. It is uncertain how the EPA will respond; and therefore it is also uncertain whether mercury emission reductions expected as a Noticeresult of Violationimplementing AREA Plan expenditures at Taconite Harbor, and implementation of the 2006 Minnesota Mercury Emission Reduction Law which applies to Boswell Units 3 and 4, will meet the EPA’s reformed mercury regulations. (See Minnesota Mercury Emission Law.) Cost estimates for complying with future mercury regulations under the Clean Air Act are therefore premature at this time.
Real Estate. As of December 31, 2007, ALLETE Properties, through its subsidiaries, had surety bonds outstanding of $35.9 million primarily related to performance and maintenance obligations to governmental entities to construct improvements in the company’s various projects. The remaining work to be completed on these improvements is estimated to be approximately $6.4 million, and ALLETE Properties does not believe it is likely that any of these outstanding bonds will be drawn upon.
Community Development District Obligations.Town Center. In March 2005, the Town Center District issued $26.4 million of tax-exempt, 6% Capital Improvement Revenue Bonds, Series 2005, which are payable through property tax assessments on the land owners over 31 years (by May 1, 2036). The bond proceeds (less capitalized interest, a debt service reserve fund and cost of issuance) were used to pay for the construction of a portion of the major infrastructure improvements at Town Center. The bonds are payable from and secured by the revenue derived from assessments imposed, levied and collected by the Town Center District. The assessments represent an allocation of the costs of the improvements, including bond financing costs, to the lands within the Town Center District benefiting from the EPA regarding alleged New
Source Review violationsimprovements. The assessments were billed to Town Center landowners effective in November 2006. To the extent that we still own land at the M.R. Young Station, which includestime of the Square
Butte generating unit. The EPA claims certain capital projects completed by
Minnkota Power should have been reviewed pursuantassessment, in accordance with EITF 91-10, “Accounting for Special Assessments and Tax Increment Financing Entities,” we will incur the cost of our portion of these assessments, based upon our ownership of benefited property. At December 31, 2007, we owned approximately 69 percent of the assessable land in the Town Center District (73 percent at December 31, 2006). As we sell property, the obligation to pay special assessments will pass to the New Source Review
regulations, potentially resulting in new air permit operating conditions.
Minnkota Power has held several meetings withlandowners. Under current accounting rules, these bonds are not reflected as debt on our consolidated balance sheet.
Palm Coast Park. In May 2006, the EPA to discussPalm Coast Park District issued $31.8 million of tax-exempt, 5.7% Special Assessment Bonds, Series 2006, which are payable through property tax assessments on the alleged
violations. Discussions with the EPA are ongoingland owners over 31 years (by May 1, 2037). The bond proceeds (less capitalized interest, a debt service reserve fund and we are unable to predict
the outcome or cost impacts. If Square Butte is required to make significant
capital expenditures to comply with EPA requirements, we expect such capital
expenditures to be debt financed. Our future cost of purchased power would
includeissuance) were used to pay for the construction of the major infrastructure improvements at Palm Coast Park and to mitigate traffic and environmental impacts. The bonds are payable from and secured by the revenue derived from assessments imposed, levied and collected by the Palm Coast Park District. The assessments represent an allocation of the costs of the improvements, including bond financing costs, to the lands within the Palm Coast Park District benefiting from the improvements. The assessments will be billed to Palm Coast Park landowners effective in November 2007. To the extent that we still own land at the time of the assessment, in accordance with EITF 91-10, “Accounting for Special Assessments and Tax Increment Financing Entities,” we will incur the cost of our pro rata shareportion of this additionalthese assessments, based upon our ownership of benefited property. At December 31, 2007, we owned 86 percent of the assessable land in the Palm Coast Park District (97 percent at December 31, 2006). As we sell property, the obligation to pay special assessments will pass to the new landowners. Under current accounting rules, these bonds are not reflected as debt service.
OTHER.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 materially our present liquidity position, noror have a material adverse effect on our financial condition.
NOTE 12. OTHER INCOME (EXPENSE)
FOR THE YEAR ENDED DECEMBER 31 2004 2003 2002
- ----------------------------------------------------------------------------------------------------------
MILLIONS
Debt Prepayment PremiumNote 9. | Common Stock and Unamortized Debt
Issuance Costs (See Note 8) $(18.5) - -
Gain on ESOP's Sale of ADESA Stock (See Note 17) 11.5 - -
Income (Loss) on Emerging Technology Investments (8.6) $(3.4) $1.9
Split Rock Energy Equity Income (See Note 2) - 2.9 7.3
InvestmentsEarnings Per Share |
Our Articles of Incorporation contains provisions that, under certain circumstances, would restrict the payment of common stock dividends. As of December 31, 2007, no retained earnings were restricted as a result of these provisions.
Summary of Common Stock | Shares | Equity |
| Thousands | Millions |
| | |
Balance at December 31, 2004 | 29,651 | $400.1 |
2005 Employee Stock Purchase Plan | 13 | 0.5 |
Invest Direct (a) | 238 | 10.5 |
Options and Stock Awards | 241 | 10.0 |
Balance at December 31, 2005 | 30,143 | 421.1 |
2006 Employee Stock Purchase Plan | 12 | 0.5 |
Invest Direct (a) | 218 | 10.0 |
Options and Stock Awards | 63 | 7.1 |
Balance at December 31, 2006 | 30,436 | 438.7 |
2007 Employee Stock Purchase Plan | 17 | 0.7 |
Invest Direct (a) | 331 | 15.1 |
Options and Stock Awards | 43 | 6.7 |
Balance at December 31, 2007 | 30,827 | $461.2 |
(a) | Invest Direct is ALLETE’s direct stock purchase and Other Income (Loss) 3.5 3.0 (1.1)
- ----------------------------------------------------------------------------------------------------------
$(12.1) $ 2.5 $8.1
- ----------------------------------------------------------------------------------------------------------
dividend reinvestment plan. |
NOTE 13. INCOME TAX EXPENSE
INCOME TAX EXPENSE
YEAR ENDED DECEMBER 31 2004 2003 2002
- ----------------------------------------------------------------------------------------------------------
MILLIONS
Current Tax Expense
Federal $11.4 $ 4.2 $ 0.6
State 6.4 3.1 2.2
- ----------------------------------------------------------------------------------------------------------
17.8 7.3 2.8
- ----------------------------------------------------------------------------------------------------------
Deferred Tax Expense (Benefit)
Federal 1.7 10.2 9.5
State (2.3) 2.0 1.3
- ----------------------------------------------------------------------------------------------------------
(0.6) 12.2 10.8
- ----------------------------------------------------------------------------------------------------------
Change in Valuation Allowance 0.9 0.1 0.1
Deferred Tax Credits (1.3) (1.4) (1.4)
- ----------------------------------------------------------------------------------------------------------
Income Tax from Continuing Operations 16.8 18.2 12.3
Income Tax from Discontinued Operations 57.2 125.3 72.7
Change in Accounting Principle (5.5) - -
- ----------------------------------------------------------------------------------------------------------
Total Income Tax Expense $68.5 $143.5 $85.0
- ----------------------------------------------------------------------------------------------------------
Shareholder Rights Plan. In 1996, we adopted a rights plan that provides for a dividend distribution of one preferred share purchase right (Right) to be attached to each share of common stock. In July 2006, we amended the rights plan to extend the expiration of the Rights to July 11, 2009. The amendment also provides that the Company may not consolidate, merge, or sell a majority of its assets or earning power if doing so would be counter to the intended benefits of the Rights or would result in the distribution of Rights to the shareholders of the other parties to the transaction. Finally, the amendment provides for the creation of a committee of independent directors to annually review the terms and conditions of the amended rights plan (Rights Plan), as well as to consider whether termination or modification of the Rights Plan would be in the best interests of the shareholders and to make a recommendation based on such review to the Board of Directors.
The Rights, which are currently not exercisable or transferable apart from our common stock, entitle the holder to purchase one-and-a-half one-hundredths (three two-hundredths) of a share of ALLETE’s Junior Serial Preferred Stock A, without par value. The purchase price, as defined in the Rights Plan, remains at $90. These Rights would become exercisable if a person or group acquires beneficial ownership of 15 percent or more of our common stock or announces a tender offer which would increase the person’s or group’s beneficial ownership interest to 15 percent or more of our common stock, subject to certain exceptions. If the 15 percent threshold is met, each Right entitles the holder (other than the acquiring person or group) to receive, upon payment of the purchase price, the number of shares of common stock (or, in certain circumstances, cash, property or other securities of ours) having a market value equal to twice the exercise price of the Right. If we are acquired in a merger or business combination, or more than 50 percent of our assets or earning power are sold, each exercisable Right entitles the holder to receive, upon payment of the purchase price, the number of shares of common stock of the acquiring or surviving company having a value equal to twice the exercise price of the Right. Certain stock acquisitions will also trigger a provision permitting the Board of Directors to exchange each Right for one share of our common stock.
The Rights are nonvoting and may be redeemed by us at a price of $0.005 per Right at any time they are not exercisable. One million shares of Junior Serial Preferred Stock A have been authorized and are reserved for issuance under the Rights Plan.
ALLETE
20042007 Form 10-K
Page 66
Note 9. Common Stock and Earnings Per Share (Continued)
Earnings Per Share. The difference between basic and diluted earnings per share arises from outstanding stock options and performance share awards granted under our Executive and Director Long-Term Incentive Compensation Plans. In accordance with SFAS 128, “Earnings Per Share,” for 2007, 0.2 million options to purchase shares of common stock were excluded from the computation of diluted earnings per share because the option exercise prices were greater than the average market prices, and therefore, their effect would be anti-dilutive (no shares were excluded for 2006 and 2005).
Reconciliation of Basic and Diluted | | | |
Earnings Per Share | | Dilutive | |
For the Year Ended December 31 | Basic | Securities | Diluted |
Millions Except Per Share Amounts | | | |
| | | |
2007 | | | |
| | | |
Income from Continuing Operations | $87.6 | – | $87.6 |
Common Shares | 28.3 | 0.1 | 28.4 |
Per Share from Continuing Operations | $3.09 | – | $3.08 |
| | | |
2006 | | | |
| | | |
Income from Continuing Operations | $77.3 | – | $77.3 |
Common Shares | 27.8 | 0.1 | 27.9 |
Per Share from Continuing Operations | $2.78 | – | $2.77 |
| | | |
2005 | | | |
| | | |
Income from Continuing Operations | $17.6 | – | $17.6 |
Common Shares | 27.3 | 0.1 | 27.4 |
Per Share from Continuing Operations | $0.65 | – | $0.64 |
RECONCILIATION OF TAXES FROM FEDERAL STATUTORY
RATE TO TOTAL INCOME TAX EXPENSE FOR CONTINUING OPERATIONS
YEAR ENDED DECEMBER 31 2004 2003 2002
- --------------------------------------------------------------------------------------------------------------------------
MILLIONS
Income from Continuing Operations Before Income Taxes $55.9 $48.0 $37.0
Statutory Federal Income Tax Rate 35% 35% 35%
- --------------------------------------------------------------------------------------------------------------------------
Income Taxes Computed at 35% Statutory Federal Rate 19.6 16.8 13.0
Increase (Decrease) in Tax Due to:
SaleNote 10. | Kendall County Charge |
On April 1, 2005, Rainy River Energy, a wholly-owned subsidiary of
ADESA Stock by ESOP (4.1) - -
Amortization of Deferred Investment Tax Credits (1.3) (1.4) (1.4)
State Income Taxes - Net of Federal Income Tax Benefit 3.6 2.9 3.0
Depletion (0.6) (0.7) (0.7)
Other (0.4) 0.6 (1.6)
- --------------------------------------------------------------------------------------------------------------------------
Total Income Tax Expense for Continuing Operations $16.8 $18.2 $12.3
- --------------------------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS AND LIABILITIES
DECEMBER 31 2004 2003
- --------------------------------------------------------------------------------------------------------------------------
MILLIONS
Deferred Tax Assets
Employee Benefits and Compensation $ 47.5 $ 44.2
Property Related 29.5 29.4
Investment Tax Credits 13.8 14.8
Unrealized Loss Booked Through Equity 8.2 6.4
Excess of Tax Value Over Book Value 4.9 0.3
Other 10.6 13.5
- --------------------------------------------------------------------------------------------------------------------------
Gross Deferred Tax Assets 114.5 108.6
Deferred Tax Asset Valuation Allowance (1.1) (0.2)
- --------------------------------------------------------------------------------------------------------------------------
Total Deferred Tax Assets 113.4 108.4
- --------------------------------------------------------------------------------------------------------------------------
Deferred Tax Liabilities
Property Related 216.3 213.4
Investment Tax Credits 19.7 21.0
Employee Benefits and Compensation 14.6 15.1
Other 6.7 9.7
- --------------------------------------------------------------------------------------------------------------------------
Total Deferred Tax Liabilities 257.3 259.2
- --------------------------------------------------------------------------------------------------------------------------
Accumulated Deferred Income Taxes $143.9 $150.8
- --------------------------------------------------------------------------------------------------------------------------
Included impairments related to the emerging technology portfolio.
Page 67 ALLETE,
2004 Form 10-K
NOTE 14. CHANGE IN ACCOUNTING PRINCIPLE
Inassigned its power purchase agreement with LSP-Kendall Energy, LLC, the owner of an energy generation facility located in Kendall County, Illinois, to Constellation Energy Commodities. Rainy River Energy paid Constellation Energy Commodities $73 million in cash to assume the power purchase agreement that remains in effect through mid-September 2017. The federal tax benefits of the payment were realized through a $24.3 million capital loss carryback refund received in the third quarter of 2004, we adopted EITF 03-16, "Accounting for Investments
in Limited Liability Companies," which requires2006. In addition, consent, advisory and closing costs of $4.9 million were incurred to complete the usetransaction. As a result of the equity method of
accounting for investments in all limited liability companies, including
investments we have in venture capital funds within our emerging technology
portfolio. EITF 03-16 was issuedthis transaction, ALLETE incurred a charge to operating expenses totaling $77.9 million ($50.4 million after tax, or $1.84 per diluted share) in the second quarter of 2004. We had
previously accounted for these investments under2005.
Note 11. Other Income (Expense)
For the Year Ended December 31 | 2007 | 2006 | 2005 |
Millions | | | |
Loss on Emerging Technology Investments | $(1.3) | $(0.9) | $(6.1) |
AFUDC - Equity | 3.8 | 0.5 | 0.2 |
Debt Prepayment Premium and Unamortized Debt Issuance Costs | – | (0.6) | – |
Investments and Other Income | 13.0 | 12.9 | 7.0 |
Total Other Income | $15.5 | $11.9 | $1.1 |
In August 2006, we redeemed $29.1 million of outstanding Collier County Industrial Development Refunding Revenue Bonds 6.5% Series 1996 due 2025 with proceeds from the cost methodissuance of accounting.
EITF 03-16 is$27.8 million of Collier County Industrial Development Variable Rate Demand Refunding Revenue Bonds Series 2006 due 2025 and internally generated funds. As a result of an early redemption premium, we recognized an expense of $0.6 million in the third quarter of 2006.
Note 12. Income Tax Expense
Income Tax Expense | | | | | | |
Year Ended December 31 | 2007 | | 2006 | | 2005 | |
Millions | | | | | | |
| | | | | | |
Current Tax Expense | | | | | | |
Federal | $26.5 | | $8.9 | (a) | $27.2 | (b) |
State | 7.2 | | 9.6 | | 6.5 | (b) |
Total Current Tax Expense | 33.7 | | 18.5 | | 33.7 | |
Deferred Tax Expense (Benefit) | | | | | | |
Federal | 10.7 | | 28.0 | (a) | (26.4) | (b) |
State | 4.7 | | 2.0 | | (9.5) | |
Total Deferred Tax Expense (Benefit) | 15.4 | | 30.0 | | (35.9) | |
Change in Valuation Allowance | (0.3) | | (1.1) | | 3.0 | |
Investment Tax Credit Amortization | (1.1) | | (1.1) | | (1.3) | |
Income Tax Expense (Benefit) for Continuing Operations | 47.7 | | 46.3 | | (0.5) | |
Income Tax Expense (Benefit) for Discontinued Operations | – | | (0.6) | | 3.4 | |
Total Income Tax Expense | $47.7 | | $45.7 | | $2.9 | |
(a) | Included a current federal tax benefit of $24.3 million and a deferred federal tax expense of $24.3 million related to the refund from the Kendall County capital loss carryback. (See Note 10.) |
(b) | Included a current federal tax benefit of $1.3 million, current state tax benefit of $0.4 million and deferred federal tax benefit of $25.8 million related to the Kendall County charge. (See Note 10.) |
Reconciliation of Taxes from Federal Statutory | | | |
Rate to Total Income Tax Expense for Continuing Operations | | | |
Year Ended December 31 | 2007 | 2006 | 2005 |
Millions | | | |
Income from Continuing Operations Before Minority Interest and Income Taxes | $137.2 | $128.2 | $19.8 |
Statutory Federal Income Tax Rate | 35% | 35% | 35% |
Income Taxes Computed at 35% Statutory Federal Rate | $48.0 | $44.9 | $6.9 |
Increase (Decrease) in Tax Due to: | | | |
Amortization of Deferred Investment Tax Credits | (1.1) | (1.1) | (1.3) |
State Income Taxes – Net of Federal Income Tax Benefit | 7.4 | 6.5 | 1.1 |
Depletion | (0.9) | (1.1) | (1.0) |
Employee Benefits | 0.4 | 0.1 | (0.5) |
Domestic Manufacturing Deduction | (1.1) | (0.6) | (0.4) |
Regulatory Differences for Utility Plant | (2.2) | (0.9) | (0.6) |
Positive Resolution of Audit Issues | (1.6) | – | (3.7) |
Other | (1.2) | (1.5) | (1.0) |
Total Income Tax Expense (Benefit) for Continuing Operations | $47.7 | $46.3 | $(0.5) |
The effective for reporting periods beginning after June 15, 2004.
Pursuant to EITF 03-16, the effect of adoption is reported as the cumulative
effect of a change in accounting principle. The cumulative effect of this changetax rate on prior yearsincome from continuing operations before minority interest was a 34.8 percent expense for 2007; (36.1 percent expense for 2006; 2.5 percent benefit for 2005). The 2007 effective tax rate was impacted by state income tax audit settlements ($1.6 million), deductions for Medicare health subsidies (included in Employee Benefits, above), domestic manufacturing deduction, AFUDC-Equity (included in Regulatory Differences for Utility Plant, above), investment tax credits and depletion. The 2006 effective rate was impacted by investment tax credits, deductions for Medicare health subsidies, depletion and the expected use of state capital loss carryforwards, of $13.3which a $1.1 million ($7.8benefit was included in the state tax provision.
Note 12. Income Tax Expense (Continued)
Deferred Tax Assets and Liabilities | | |
December 31 | 2007 | 2006 |
Millions | | |
| | |
Deferred Tax Assets | | |
Employee Benefits and Compensation (a) | $80.5 | $95.5 |
Property Related | 26.5 | 32.8 |
Investment Tax Credits | 11.4 | 12.1 |
Other | 13.4 | 17.9 |
Gross Deferred Tax Assets | 131.8 | 158.3 |
Deferred Tax Asset Valuation Allowance | (3.3) | (3.6) |
Total Deferred Tax Assets | $128.5 | $154.7 |
Deferred Tax Liabilities | | |
Property Related | $201.7 | $204.7 |
Regulatory Asset for Benefit Obligations | 21.6 | 34.8 |
Unamortized Investment Tax Credits | 16.1 | 17.2 |
Employee Benefits and Compensation | 19.5 | 13.2 |
Fuel Clause Adjustment | 10.7 | 6.0 |
Other | 8.1 | 9.3 |
Total Deferred Tax Liabilities | $277.7 | $285.2 |
Accumulated Deferred Income Taxes | $149.2 | $130.5 |
| | |
Recorded as: | | |
Net Current Deferred Tax Liabilities (Assets) | $5.0 | $(0.3) |
Net Long-Term Deferred Tax Liabilities | 144.2 | 130.8 |
Net Deferred Tax Liabilities | $149.2 | $130.5 |
(a) | Includes Unfunded Employee Benefits |
Uncertain Tax Positions. Effective January 1, 2007, we adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109.” As a result of the implementation of FIN 48, we recognized a $1.0 million after-tax), which was
recorded asincrease in the liability for unrecognized tax benefits. The adoption of FIN 48 also resulted in a changereduction in accounting principleretained earnings of $0.7 million, a reduction of deferred tax liabilities of $0.8 million and reflectedan increase in accrued interest of $0.5 million. Subsequent to the implementation of FIN 48, ALLETE’s gross unrecognized tax benefits were $10.4 million. Of this total, $6.8 million (net of federal tax benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate.
Uncertain Tax Positions |
December 31, 2007 |
Millions | Gross Unrecognized Income Tax Benefits |
Balance at January 1, 2007 | $10.4 |
Additions for Tax Positions Related to the Current Year | 0.8 |
Reductions for Tax Positions Related to the Current Year | – |
Additions for Tax Positions Related to Prior Years | – |
Reduction for Tax Positions Related to Prior Years | (2.4) |
Settlements | (3.5) |
Balance at December 31, 2007 | $5.3 |
Less: Tax Attributable to Temporary Items and Federal Benefit on State Tax | (2.3) |
Total Unrecognized Tax Benefits that, if Recognized, Would Impact the Effective Tax Rate as of December 31, 2007 | $3.0 |
We recognize interest related to unrecognized tax benefits in interest expense and penalties in operating expenses in the Consolidated Statement of Income. As of January 1, 2007, the Company had $1.3 million of accrued interest and no accrued penalties related to unrecognized tax benefits included in the Consolidated Balance Sheet. As of December 31, 2007, the liability for the payment of interest is $0.9 million with no penalties. Due to the settlement of audits, $0.1 million of interest benefit and no penalties were recognized in the Consolidated Statement of Income for the year ended December 31, 2007.
We file income tax returns in the U.S. federal and various state jurisdictions. With few exceptions, ALLETE is no longer subject to federal examination for years before 2003 or state examinations for years before 2004. During 2004, $1.6
We expect that the total amount of unrecognized tax benefits as of December 31, 2007, will change by less than $2.0 million
of current losses underin the
equity method were recognized.
PRO FORMA AMOUNTS ASSUMING THE EQUITY METHOD
WAS APPLIED RETROACTIVELY
FOR THE YEAR ENDED DECEMBER 31 2003 2002
- --------------------------------------------------------------------------------
MILLIONS EXCEPT PER SHARE AMOUNTS
Net Income
As Reported $236.4 $137.2
Pro Forma Adjustment (2.3) (1.9)
- --------------------------------------------------------------------------------
Pro Forma $234.1 $135.3
- --------------------------------------------------------------------------------
Basic Earnings Per Share
As Reported $8.56 $5.07
Pro Forma Adjustment (0.08) (0.07)
- --------------------------------------------------------------------------------
Pro Forma $8.48 $5.00
- --------------------------------------------------------------------------------
Diluted Earnings Per Share
As Reported $8.52 $5.04
Pro Forma Adjustment (0.08) (0.07)
- --------------------------------------------------------------------------------
Pro Forma $8.44 $4.97
- --------------------------------------------------------------------------------
next 12 months due to statute expirations. ALLETE
20042007 Form 10-K
Page 68
NOTENote 13. Discontinued Operations
Enventis Telecom. In December 2005, we sold all the stock of our telecommunications subsidiary, Enventis Telecom, to Hickory Tech Corporation of Mankato, Minnesota, for $35.5 million. The transaction resulted in an after-tax loss of $3.6 million, which was included in our 2005 loss from discontinued operations. Net cash proceeds realized from the sale were approximately $29 million after transaction costs, repayment of debt and payment of income taxes. In accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we have reported our telecommunications business in discontinued operations for all periods presented.
Water Services. During 2003, we sold, under condemnation or imminent threat of condemnation, substantially all of our water assets in Florida for a total sales price of approximately $445 million. In 2004, we essentially concluded our strategy to exit our Water Services businesses with the sale of our North Carolina water assets and the sale of the remaining 72 water and wastewater systems in Florida. Aqua Utilities Florida, Inc. (Aqua Utilities) purchased our North Carolina water assets for $48 million and assumed approximately $28 million in debt. Aqua Utilities also purchased 63 of our water and wastewater systems in Florida for $14 million. Seminole County purchased the remaining 9 Florida systems for a total of $4 million. The FPSC approved the Seminole County transaction in September 2004. In December 2005, the FPSC ordered a $1.7 million reduction to plant investment, which the Company reserved for in 2005, and approved the transfer of the remaining 63 water and wastewater systems from Florida Water to Aqua Utilities. In March 2006, the Company paid Aqua Utilities the adjustment refund amount of $1.7 million.
In February 2005, we completed the exit from our Water Services businesses in Georgia with the sale of our wastewater assets for an immaterial gain. In 2005, we also incurred administrative and other expenses to support Florida Water transfer proceedings and recorded the $1.7 million rate-base settlement charge related to the sale by Florida Water of 63 systems to Aqua Utilities mentioned above.
Financial results for 2006 reflected additional legal and administrative expenses incurred by the Company to exit the Water Services businesses. There were no discontinued operations in 2007.
Discontinued Operations | | |
Summary Income Statement | | |
For the Year Ended December 31 | 2006 | 2005 |
Millions | | |
| | |
Operating Revenue | | |
Enventis Telecom | – | $50.7 |
Total Operating Revenue | – | $50.7 |
| | |
Pre-Tax Income from Operations | | |
Enventis Telecom | – | $3.0 |
| – | 3.0 |
Income Tax Expense | | |
Enventis Telecom | – | 1.2 |
| – | 1.2 |
Total Income from Operations | – | 1.8 |
Loss on Disposal | | |
Water Services | $(1.5) | (4.5) |
Enventis Telecom | – | 0.6 |
| (1.5) | (3.9) |
Income Tax Expense (Benefit) | | |
Water Services | (0.6) | (2.0) |
Enventis Telecom | – | 4.2 |
| (0.6) | 2.2 |
Net Loss on Disposal | (0.9) | (6.1) |
Loss from Discontinued Operations | $(0.9) | $(4.3) |
Note 14. Other Comprehensive Income (Loss)
Other Comprehensive Income (Loss) | Pre-Tax | Tax Expense | Net-of-Tax |
Year Ended December 31 | Amount | (Benefit) | Amount |
Millions | | | |
| | | |
2007 | | | |
Unrealized Gain on Securities During the Year | $1.4 | $0.3 | $1.1 |
Defined Benefit Pension and Other Postretirement Plans | 5.5 | 2.3 | 3.2 |
Other Comprehensive Income | $6.9 | $2.6 | $4.3 |
| | | |
2006 | | | |
Unrealized Gain on Securities During the Year | $2.5 | $0.6 | $1.9 |
Additional Pension Liability | 11.0 | 4.6 | 6.4 |
Other Comprehensive Income | $13.5 | $5.2 | $8.3 |
| | | |
2005 | | | |
Unrealized Gain on Securities During the Year | $1.3 | $0.7 | $0.6 |
Additional Pension Liability | (3.4) | (1.4) | (2.0) |
Other Comprehensive Loss | $(2.1) | $(0.7) | $(1.4) |
Accumulated Other Comprehensive Income (Loss)
December 31 | 2007 | 2006 |
Millions | | |
| | |
Unrealized Gain on Securities | $5.1 | $4.0 |
Defined Benefit Pension and Other Postretirement Plans | (9.6) | (12.8) |
Total Accumulated Other Comprehensive Loss | $(4.5) | $(8.8) |
Note 15.
OTHER COMPREHENSIVE INCOME (LOSS)
OTHER COMPREHENSIVE INCOME PRE-TAX TAX EXPENSE NET-OF-TAX
YEAR ENDED DECEMBER 31 AMOUNT (BENEFIT) AMOUNT
- ------------------------------------------------------------------------------------------------------------------------
MILLIONS
2004
Unrealized Gain (Loss) on Securities
Gain During the Year $ 13.1 $ 0.9 $ 12.2
Less: Gain Included in Net Income 11.5 - 11.5
- ------------------------------------------------------------------------------------------------------------------------
Net Unrealized Gain on Securities 1.6 0.9 0.7
Foreign Currency Translation Adjustments (23.5) - (23.5)
Additional Pension Liability (5.7) (2.6) (3.1)
- ------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Loss $(27.6) $(1.7) $(25.9)
- ------------------------------------------------------------------------------------------------------------------------
2003
Unrealized Gain (Loss) on Securities
Gain During the Year $ 2.4 $ 1.0 $ 1.4
Add: Loss Included in Net Income 3.5 1.3 2.2
- ------------------------------------------------------------------------------------------------------------------------
Net Unrealized Gain on Securities 5.9 2.3 3.6
Interest Rate Swap 0.2 - 0.2
Foreign Currency Translation Adjustments 39.2 - 39.2
Additional Pension Liability (10.8) (4.5) (6.3)
- ------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income $ 34.5 $(2.2) $36.7
- ------------------------------------------------------------------------------------------------------------------------
2002
Unrealized Gain (Loss) on Securities
Loss During the Year $(11.8) $(4.3) $(7.5)
Less: Gain Included in Net Income 1.0 0.4 0.6
- ------------------------------------------------------------------------------------------------------------------------
Net Unrealized Loss on Securities (12.8) (4.7) (8.1)
Interest Rate Swap 2.3 1.0 1.3
Foreign Currency Transaction Adjustment 2.6 - 2.6
Additional Pension Liability (6.0) (2.5) (3.5)
- ------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Loss $(13.9) $(6.2) $(7.7)
- ------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
DECEMBER 31 2004 2003
- -------------------------------------------------------------------------------------------------------------------
MILLIONS
Unrealized Gain on Securities $ 1.5 $ 0.8
Additional Pension Liability (12.9) (9.8)
Foreign Currency Translation Adjustment - Discontinued Operations - 23.5
- -------------------------------------------------------------------------------------------------------------------
$(11.4) $ 14.5
- -------------------------------------------------------------------------------------------------------------------
Page 69 ALLETE 2004 Form 10-K
NOTE 16. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Pension and Other Postretirement Benefit Plans
We have noncontributory defined benefit pension plans covering eligible employees. The plans provide defined benefits based on years of service and final average pay. We also have defined contribution pension plans covering substantially all employees; employer contributions are made through our employee stock ownership plan (see Note 17)16), except for BNI Coal, which made cash contributions of $0.6$0.4 million in 20042007 ($0.60.7 million in 2003)2006 and 2005). In 2007, we made no contributions to ALLETE’s defined benefit plan ($8.3 million in 2006).
On August 9, 2006, ALLETE’s Board of Directors approved amendments to the Minnesota Power and Affiliated Companies Retirement Plan A (Retirement Plan A) and the Minnesota Power and Affiliated Companies Retirement Savings and Stock Ownership Plan (RSOP). Retirement Plan A was amended to suspend further crediting service pursuant to the plan, effective as of September 30, 2006, and to close Retirement Plan A to new participants. Participants will continue to accrue benefits under the plan for future pay increases. In conjunction with this change, the Board of Directors took action to increase benefits employees will receive under the RSOP. The modification of Retirement Plan A required us to re-measure our pension expense as of August 9, 2006. As a result of the re-measurement, Retirement Plan A pension expense for 2006 was reduced by $0.2 million.
We have postretirement health care and life insurance plans covering eligible employees. The postretirement health plans are contributory with participant contributions adjusted annually. Postretirement health and life benefits are funded through a combination of Voluntary Employee Benefit Association trusts (VEBAs), established under section 501(c)(9) of the Internal Revenue Code, and an irrevocable grantor trust. Contributions deductible for income tax purposes are made directly to the VEBAs; nondeductible contributions are made to the irrevocable grantor trust. Amounts are transferred from the irrevocable grantor trust to the VEBAs when they become deductible for income tax purposes. In 2007, $5.9 million was transferred from the grantor trust to the VEBAs ($3.6 million in 2006; $11.4 million in 2005).
In September 2006, the FASB issued SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158). SFAS 158 requires that employers recognize on a prospective basis the funded status of their defined benefit pension and other postretirement plans on their consolidated balance sheet and recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but that are not recognized as components of net periodic benefit cost. SFAS 158 also requires additional disclosures in the notes to financial statements. SFAS 158 was effective for fiscal years ending after December 15, 2006.
Note 15. Pension and Other Postretirement Benefit Plans (Continued)
We use a September 30 measurement date for the pension and postretirement health and life plans.
PENSION OBLIGATION AND FUNDED STATUS
AT SEPTEMBER 30 2004 2003
- ------------------------------------------------------------------------------------------------------------
MILLIONS
Change in Benefit Obligation
Obligation, Beginning of Year $353.4 $297.9
Service Cost 8.4 6.7
Interest Cost 20.7 19.5
Actuarial Loss 10.0 43.7
Benefits Paid (17.3) (16.4)
Other 4.8 2.0
- ------------------------------------------------------------------------------------------------------------
Obligation, End of Year 380.0 353.4
- ------------------------------------------------------------------------------------------------------------
Change in Plan Assets
Fair Value, Beginning of Year 285.3 265.7
Actual Return on Assets 28.9 33.5
Employer Contribution 8.4 0.5
Benefits Paid (17.3) (16.4)
Other 4.8 2.0
- ------------------------------------------------------------------------------------------------------------
Fair Value, End of Year 310.1 285.3
- ------------------------------------------------------------------------------------------------------------
Funded Status (69.9) (68.1)
Unrecognized Amounts
Net Loss 89.3 82.3
Prior Service Cost 5.2 6.0
Transition Obligation - 0.3
- ------------------------------------------------------------------------------------------------------------
Net Asset Recognized $ 24.6 $ 20.5
- ------------------------------------------------------------------------------------------------------------
Amounts Recognized in Consolidated Balance Sheet Consist of:
Prepaid Pension Cost $33.3 $31.9
Accrued Benefit Liability (33.8) (31.2)
Intangible Asset 2.6 3.0
Accumulated Other Comprehensive Income 22.5 16.8
- ------------------------------------------------------------------------------------------------------------
Net Asset Recognized $24.6 $20.5
- ------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC PENSION EXPENSE (INCOME)
YEAR ENDED DECEMBER 31 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------
MILLIONS
Service Cost $ 8.4 $ 6.7 $ 5.6
Interest Cost 20.7 19.5 19.5
Expected Return on Assets (27.4) (28.8) (30.4)
Amortized Amounts
Unrecognized Loss (Gain) 1.4 - (1.4)
Prior Service Cost 0.8 0.9 0.8
Transition Obligation 0.3 0.2 0.2
- ------------------------------------------------------------------------------------------------------------
Net Pension Expense (Income) $ 4.2 $ (1.5) $ (5.7)
- ------------------------------------------------------------------------------------------------------------
Pursuant to SFAS 158, we are required to change our measurement date to December 31 during the year ending December 31, 2008. On January 1, 2008, ALLETE
2004 Form 10-K Page 70
INFORMATION FOR PENSION PLANS WITH AN
ACCUMULATED BENEFIT OBLIGATION IN EXCESS OF PLAN ASSETS
AT SEPTEMBER 30 2004 2003
- -------------------------------------------------------------------------------------------------------------------------
MILLIONS
Projected Benefit Obligation $163.1 $147.9
Accumulated Benefit Obligation $140.6 $124.6
Fair Value of Plan Assets $108.8 $95.1
- -------------------------------------------------------------------------------------------------------------------------
ADDITIONAL PENSION INFORMATION
YEAR ENDED DECEMBER 31 2004 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
MILLIONS
Increase in Minimum Liability Included in Other Comprehensive Income $5.7 $10.8 $6.0
- -------------------------------------------------------------------------------------------------------------------------
The accumulated benefit obligation for allrecorded three months of pension expense as a reduction to retained earnings in the amount of $1.6 million, net of tax, to reflect the impact of this measurement date change.
Approximately 82 percent of the defined benefit pension plans was
$332.9 million and $303.5 million69 percent of the postretirement health and life benefit costs recognized annually by our regulated companies are recovered through rates filed with our regulatory jurisdictions. It is expected that these costs will continue to be recovered in future rates in accordance with the requirements of SFAS 71. As a result, these amounts that are required to otherwise be recognized in accumulated other comprehensive income under the provisions of SFAS 158 have been recognized as a long-term regulatory asset on our consolidated balance sheet. The remaining 18 percent of the defined benefit pension and 31 percent of the postretirement health and life benefit costs relate to costs associated with our nonregulated operations and, accordingly, have been recognized as a charge to accumulated other comprehensive income at September 30, 2004December 31, 2007.
Pension Obligation and Funded Status | | |
At September 30 | 2007 | 2006 |
Millions | | |
| | |
Accumulated Benefit Obligation | $384.9 | $376.1 |
| | |
Change in Benefit Obligation | | |
Obligation, Beginning of Year | $417.7 | $412.4 |
Service Cost | 5.3 | 9.1 |
Interest Cost | 23.4 | 22.2 |
Actuarial Gain | (7.1) | (12.2) |
Benefits Paid | (21.6) | (19.8) |
Participant Contributions | 2.7 | 6.0 |
Obligation, End of Year | $420.4 | $417.7 |
Change in Plan Assets | | |
Fair Value, Beginning of Year | $364.7 | $337.1 |
Actual Return on Assets | 58.9 | 32.5 |
Employer Contribution | 3.6 | 8.9 |
Benefits Paid | (21.6) | (19.8) |
Other | – | 6.0 |
Fair Value, End of Year | $405.6 | $364.7 |
Funded Status, End of Year | $(14.8) | $(53.0) |
| | |
Net Pension Amounts Recognized in Consolidated Balance Sheet Consist of: | | |
Noncurrent Assets | $29.3 | – |
Current Liabilities | $0.8 | $0.8 |
Noncurrent Liabilities | $43.3 | $52.3 |
| | |
Note 15.Pension and
2003, respectively.
POSTRETIREMENT HEALTH AND LIFE OBLIGATION AND FUNDED STATUS
AT SEPTEMBER 30 2004 2003
- -----------------------------------------------------------------------------------------
MILLIONS
Change in Benefit Obligation
Obligation, Beginning of Year $117.2 $ 99.5
Service Cost 3.9 3.7
Interest Cost 6.5 6.6
Actuarial Loss (Gain) (6.6) 10.8
Participation Contributions 1.1 0.9
Benefits Paid (4.9) (4.3)
- -----------------------------------------------------------------------------------------
Obligation, End of Year 117.2 117.2
- -----------------------------------------------------------------------------------------
Change in Plan Assets
Fair Value, Beginning of Year 50.9 39.5
Actual Return on Assets 6.3 6.6
Employer Contribution 5.0 8.2
Participation Contributions 1.1 0.9
Benefits Paid (4.9) (4.3)
- -----------------------------------------------------------------------------------------
Fair Value, End of Year 58.4 50.9
- -----------------------------------------------------------------------------------------
Funded Status (58.8) (66.3)
Unrecognized Amounts
Net Loss 15.5 23.9
Transition Obligation 20.0 22.4
- -----------------------------------------------------------------------------------------
Accrued Cost $(23.3) $(20.0)
- -----------------------------------------------------------------------------------------
Other Postretirement Benefit Plans (Continued)
The pension costs reported on our consolidated balance sheet as regulatory long-term assets and accumulated other comprehensive income consist of the following:
Pension Costs | | |
Year Ended December 31 | 2007 | 2006 |
Millions | | |
| | |
Net Loss | $31.1 | $69.9 |
Prior Service Cost | 3.2 | 3.9 |
Transition Obligation | – | (0.1) |
Total Pension Cost | $34.3 | $73.7 |
Components of Net Periodic Pension Expense | | | |
Year Ended December 31 | 2007 | 2006 | 2005 |
Millions | | | |
Service Cost | $5.3 | $9.1 | $8.7 |
Interest Cost | 23.4 | 22.2 | 21.3 |
Expected Return on Assets | (30.6) | (28.6) | (28.2) |
Amortized Amounts | | | |
Loss | 3.4 | 4.6 | 3.1 |
Prior Service Cost | 0.6 | 0.6 | 0.6 |
Transition Obligation | – | – | 0.2 |
Net Pension Expense | $2.1 | $7.9 | $5.7 |
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income | | |
Year Ended December 31 | 2007 | 2006 |
Millions | | |
Net Gain | $(35.4) | $(5.9) |
Amortization | | – |
Prior Service Cost | (0.6) | (0.6) |
Prior Loss | (3.3) | (4.6) |
Total Recognized in Other Comprehensive Income | $(39.3) | $(11.1) |
Information for Pension Plans with an | | |
Accumulated Benefit Obligation in Excess of Plan Assets | | |
At September 30 | 2007 | 2006 |
Millions | | |
Projected Benefit Obligation | $170.6 | $180.4 |
Accumulated Benefit Obligation | $188.3 | $160.6 |
Fair Value of Plan Assets | $145.3 | $130.9 |
Note 15. Pension and Other Postretirement Benefit Plans (Continued)
Postretirement Health and Life Obligation and Funded Status | | |
At September 30 | 2007 | 2006 |
Millions | | |
Change in Benefit Obligation | | |
Obligation, Beginning of Year | $138.9 | $136.9 |
Service Cost | 4.2 | 4.4 |
Interest Cost | 7.9 | 7.4 |
Actuarial Loss (Gain) | 7.5 | (4.7) |
Participation Contributions | 1.4 | 1.4 |
Benefits Paid | (6.2) | (6.4) |
Amendments | – | (0.1) |
Obligation, End of Year | $153.7 | $138.9 |
Change in Plan Assets | | |
Fair Value, Beginning of Year | $78.9 | $60.9 |
Actual Return on Assets | 9.6 | 5.8 |
Employer Contribution | 6.8 | 17.2 |
Participation Contributions | 1.4 | 1.4 |
Benefits Paid | (5.8) | (6.4) |
Fair Value, End of Year | $90.9 | $78.9 |
Funded Status, End of Year | ($62.8) | $(60.0) |
| | |
Net Pension Amounts Recognized in Consolidated Balance Sheet Consist of: | | |
Current Liabilities | $0.6 | |
Noncurrent Liabilities | $62.2 | $60.0 |
Under SFAS 106,
"Employers'“Employers’ Accounting for Postretirement Benefits Other Than Pensions,
"” only assets in the VEBAs are treated as plan assets in the
above table
above for the purpose of determining funded status. In addition to the postretirement health and life assets reported
above,in the previous table, we had
$24.4$22.8 million in an irrevocable grantor trust at December 31,
20042007 ($
20.225.6 million at December 31,
2003)2006). We consolidate the irrevocable grantor trust and it is included in Investments on our consolidated balance sheet.
COMPONENTS OF NET PERIODIC POSTRETIREMENT
HEALTH AND LIFE EXPENSE
YEAR ENDED DECEMBER 31 2004 2003 2002
- -----------------------------------------------------------------------------------------
MILLIONS
Service Cost $3.9 $3.7 $2.9
Interest Cost 6.6 6.6 5.9
Expected Return on Assets (4.6) (4.0) (3.9)
Amortized Amounts
Unrecognized Loss (Gain) 0.4 0.1 (0.2)
Transition Obligation 2.4 2.4 2.4
- -----------------------------------------------------------------------------------------
Net Expense $8.7 $8.8 $7.1
- -----------------------------------------------------------------------------------------
Page 71
The postretirement health and life costs reported on our consolidated balance sheet as regulatory long-term assets and accumulated other comprehensive income consist of the following:
Postretirement Health and Life Costs | | |
Year Ended December 31 | 2007 | 2006 |
Millions | | |
Net Loss | $22.7 | $19.2 |
Prior Service Cost | (0.1) | (0.1) |
Transition Obligation | 12.6 | 15.0 |
Total Postretirement Health and Life Costs | $35.2 | $34.1 |
Components of Net Periodic Postretirement Health and Life Expense (Income) | | |
Year Ended December 31 | 2007 | 2006 | 2005 |
Millions | | | |
Service Cost | $4.2 | $4.4 | $4.0 |
Interest Cost | 7.8 | 7.4 | 6.7 |
Expected Return on Assets | (6.5) | (5.6) | (4.8) |
Amortized Amounts | | | |
Loss | 1.0 | 1.7 | 0.7 |
Transition Obligation | 2.4 | 2.4 | 2.4 |
Net Expense | $8.9 | $10.3 | $9.0 |
ALLETE
20042007 Form 10-K
POSTRETIREMENT
ESTIMATED FUTURE BENEFIT PAYMENTS PENSION HEALTH AND LIFE
- ------------------------------------------------------------------------------------------------------------------------
MILLIONS
2005 $17 $4
2006 $17 $5
2007 $18 $5
2008 $19 $5
2009 $20 $6
Years 2010 - 2014 $113 $38
- ------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS
USED TO DETERMINE BENEFIT OBLIGATION
AT SEPTEMBER 30 2004 2003
- ------------------------------------------------------------------------------------------------------------------------
MILLIONS
Discount Rate 5.75% 6.0%
Rate of Compensation Increase 3.5 - 4.5% 3.5 - 4.5%
Health Care Trend Rates
Trend Rate 11% 10%
Ultimate Trend Rate 5% 5%
Year Ultimate Trend Rate Effective 2011 2008
- ------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS
USED TO DETERMINE NET PERIODIC BENEFIT COSTS
YEAR ENDED DECEMBER 31 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
Discount Rate 6.0% 6.75% 7.75%
Expected Long-Term Return on Plan Assets
Pension 9.0% 9.5% 10.0%
Postretirement Health and Life 7.2 - 9.0% 7.6 - 9.5% 8.0 - 10.0%
Rate of Compensation Increase 3.5 - 4.5% 3.5 - 4.5% 3.5 - 4.5%
- ------------------------------------------------------------------------------------------------------------------------
Note 15. Pension and Other Postretirement Benefit Plans (Continued)
| | Postretirement |
Estimated Future Benefit Payments | Pension | Health and Life |
Millions | | |
| | |
2008 | $22.5 | $5.9 |
2009 | $23.1 | $6.7 |
2010 | $24.0 | $7.6 |
2011 | $25.0 | $8.4 |
2012 | $25.9 | $9.0 |
Years 2013 – 2017 | $148.2 | $54.8 |
The pension and postretirement health and life costs recorded in other long-term assets and accumulated other comprehensive income expected to be recognized as a component of net pension and postretirement benefit costs for the year ending December 31, 2008, are as follows:
| | Postretirement |
| Pension | Health and Life |
Millions | | |
| | |
Net Loss | $1.5 | $1.4 |
Prior Service Costs | $0.6 | – |
Transition Obligations | – | $2.5 |
Total Pension and Postretirement Health and Life Costs | $2.1 | $3.9 |
Weighted-Average Assumptions | | |
Used to Determine Benefit Obligation | | |
At September 30 | 2007 | 2006 |
| | |
Discount Rate | 6.25% | 5.75% |
Rate of Compensation Increase | 4.3 – 4.6% | 3.5 – 4.5% |
Health Care Trend Rates | | |
Trend Rate | 10% | 10% |
Ultimate Trend Rate | 5% | 5% |
Year Ultimate Trend Rate Effective | 2012 | 2011 |
Weighted-Average Assumptions | | | |
Used to Determine Net Periodic Benefit Costs | | | |
Year Ended December 31 | 2007 | 2006 | 2005 |
| | | |
Discount Rate | 5.75% | 5.50% | 5.75% |
Expected Long-Term Return on Plan Assets | | | |
Pension | 9.0% | 9.0% | 9.0% |
Postretirement Health and Life | 5.0 – 9.0% | 5.0 – 9.0% | 5.0 – 9.0% |
Rate of Compensation Increase | 4.3 – 4.6% | 3.5 – 4.5% | 3.5 – 4.5% |
In establishing the expected long-term return on plan assets, we consider the diversification and allocation of plan assets, the actual long-term historical performance for the type of securities invested in, the actual long-term historical performance of plan assets and the impact of current economic conditions, if any, on long-term historical returns.
Note 15. Pension and Other Postretirement Benefit Plans (Continued)
Currently for plan valuation purposes, the discount rate is determined considering high-quality long-term corporate bond rates at the valuation date. The discount rate is compared to the Citigroup Pension Discount Curve adjusted for ALLETE’s specific cash flows.
Sensitivity of a One-Percentage-Point | One Percent | One Percent |
Change in Health Care Trend Rates | Increase | Decrease |
Millions | | |
| | |
Effect on Total of Postretirement Health and Life Service and Interest Cost | $1.9 | $(1.5) |
Effect on Postretirement Health and Life Obligation | $18.4 | $(15.1) |
| Pension | Postretirement Health and Life (a) |
Plan Asset Allocations | 2007 | 2006 | 2007 | 2006 |
| | | | |
Equity Securities | 61.3% | 65.1% | 61.6% | 68.9% |
Debt Securities | 25.1% | 29.6% | 27.9% | 30.6% |
Real Estate | 1.6% | 0.8% | – | – |
Private Equity | 9.4% | 4.2% | 5.5% | – |
Cash | 2.6% | 0.3% | 5.0% | 0.5% |
| 100.0% | 100.0% | 100.0% | 100.0% |
SENSITIVITY OF A ONE-PERCENTAGE-POINT ONE PERCENT ONE PERCENT
CHANGE IN HEALTH CARE TREND RATES INCREASE DECREASE
- ------------------------------------------------------------------------------------------------------------------------
MILLIONS
Effect on Total of Postretirement Health and Life Service and Interest Cost $0.7 $(0.5)
Effect on Postretirement Health and Life Obligation $14.2 $(12.1)
- ------------------------------------------------------------------------------------------------------------------------
POSTRETIREMENT
PENSION HEALTH AND LIFE
PLAN ASSET ALLOCATIONS 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------
Equity Securities 60.4% 61.6% 64.4% 62.2%
Debt Securities 30.9 27.8 34.9 36.3
Real Estate 2.2 2.8 - -
Venture Capital 5.2 5.6 - -
Cash 1.3 2.2 0.7 1.5
- ------------------------------------------------------------------------------------------------------------------------
100.0% 100.0% 100.0% 100.0%
- ------------------------------------------------------------------------------------------------------------------------
Included(a) | Includes VEBAs and irrevocable grantor trust. |
Pension plan equity securities
did not include ALLETE common stock
in the amounts of
$22.6 million (7.3% of total plan assets) and $25.8 million (9.1% of total plan
assets) at September 30,
2004 and 2003, respectively.
ALLETE 2004 Form 10-K Page 72
2007 or 2006.
To achieve strong returns within managed risk, we diversify our asset portfolio to approximate the target allocations in the table below. Equity securities are diversified among domestic companies with large, mid and small market capitalizations, as well as investments in international companies. In addition, all debt securities must have a Standard &
Poor'sPoor’s credit rating of A or higher.
POSTRETIREMENT
PLAN ASSET TARGET ALLOCATIONS PENSION HEALTH AND LIFE
- ---------------------------------------------------------------------------------------------
Equity Securities 58% 62%
Debt Securities 30 35
Real Estate 5 -
Venture Capital 6 -
Cash 1 3
- ---------------------------------------------------------------------------------------------
100% 100%
- ---------------------------------------------------------------------------------------------
Included
| | Postretirement |
Plan Asset Target Allocations | Pension | Health and Life (a) |
| | |
Equity Securities | 60% | 69% |
Debt Securities | 24 | 30 |
Real Estate | 9 | – |
Private Equity | 6 | – |
Cash | 1 | 1 |
| 100% | 100% |
(a) Includes VEBAs and irrevocable grantor trust.
We expect to contribute approximately $6 million to our postretirement health and
life plans in 2005. We are not required to make any contributions to our
defined benefit pension plans in 2005.
irrevocable grantor trust.
In May 2004, the FASB issued FSP 106-2, "Accounting“Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Act),"” which provides accounting and disclosure guidance for employers that sponsor postretirement health care plans that provide prescription drug benefits. FSP 106-2 requires that the accumulated postretirement benefit obligation and postretirement benefit cost reflect the impact of the Act upon adoption. We provide postretirement health benefits that include prescription drug benefits and have concluded that our prescription drug benefits will
qualifyqualified us for the federal subsidy to be provided for under the Act. We adopted FSP 106-2 in the third quarter of 2004. The impact of adoptiondeduction for Medicare health subsidies reduced our after-tax postretirement medical expense by $1.6$2.3 million for 2004.
Page 73 2007 ($2.4 million for 2006; $3.5 million in 2005).
In 2005, we determined that our postretirement health care plans met the requirements of the Centers for Medicare and Medicaid Services’ (CMS) regulations, and enrolled with the CMS to begin recovering the subsidy. We received the first subsidy payment of $0.3 million in May 2007 for 2006 credits.
ALLETE
20042007 Form 10-K
NOTE 17. EMPLOYEE STOCK AND INCENTIVE PLANS
EMPLOYEE STOCK OWNERSHIP PLAN.Note 16. Employee Stock and Incentive Plans
Employee Stock Ownership Plan. We sponsor a leveraged employee stock ownership plan (ESOP) within the Retirement SavingsRSOP. As of their date of hire, all employees of ALLETE, SWL&P and Stock Ownership Plan (RSOP) that
covers certainMinnesota Power Affiliate Resources are eligible employees. In 1989,to contribute to the ESOP used the proceeds from a
$16.5 million third-party loan, guaranteed by us, to purchase 0.4 million shares
of our common stock on the open market. This loan was fully repaid in 2004, and
all shares originally purchased with loan proceeds have been allocated to
participants.plan. In 1990, the ESOP issued a $75 million note (term not to exceed 25 years at 10.25%)10.25 percent) to us as consideration for 1.92.8 million shares (1.9 million shares adjusted for stock splits) of our newly issued common stock. The Company makesnote was refinanced in 2006 at 6 percent. We make annual contributions to the ESOP equal to the ESOP'sESOP’s debt service less available dividends received by the ESOP. The majority of dividends received by the ESOP are used to pay debt service, with the balance distributed to participants. The ESOP shares were initially pledged as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to participants based on the proportion of debt service paid in the year. As shares are released from collateral, the Company
reportswe report compensation expense equal to the current market price of the shares less dividends on allocated shares. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; available dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest. ESOP compensation expense was $5.0$9.5 million in 20042007 ($3.76.9 million in 2003; $3.92006; $5.5 million in 2002)2005).
As a result of the September 2004 spin-off of ADESA, the ESOP received 3.3
million shares of ADESA stock related to unearned ESOP shares that have not been
allocated to participants. The ESOP was required to sell the ADESA stock and use
the proceeds to purchase ALLETE common stock on the open market. In accordance
with a private letter ruling received from the Internal Revenue Service in
December 2004, the ESOP has until May 2006 to complete the sale of ADESA stock
and the purchase of ALLETE common stock. At December 31, 2004, the ESOP had sold
all of these ADESA shares. The 3.3 million ADESA shares sold by the ESOP in 2004
resulted in total proceeds of $65.9 million and an after-tax gain of $11.5
million, which we recognized in the fourth quarter of 2004. The ESOP used $35.6
million of the proceeds to purchase 1.0 million shares of ALLETE common stock
during the fourth quarter of 2004. Under the direction of an independent
trustee, the ESOP had $30.3 million of cash available at December 31, 2004 to
purchase ALLETE common stock; we reported the cash held by the ESOP as
Restricted Cash on our consolidated balance sheet. During January 2005, the
trustee purchased an additional 0.5 million shares of ALLETE common stock and
$8.9 million remains as Restricted Cash.
As of January 31, 2005, participants in the RSOP had $52.2 million, or 2.5
million shares, invested in ADESA common stock. Beginning later in 2005, the
RSOP trustee will be selling the ADESA common stock and purchasing ALLETE common
stock according to the requirements of the RSOP. Participants may transfer out
of the ADESA common stock fund at any time. That decision also initiates a sale
of ADESA common stock but may not initiate an ALLETE purchase, unless the
participant chooses to transfer to the ALLETE common stock fund.
Pursuant to AICPA Statement of Position 93-6,
"Employers'“Employers’ Accounting for Employee Stock Ownership Plans,
"” unallocated ALLETE common stock currently held and purchased by the ESOP will be treated as unearned ESOP shares and not considered as outstanding for earnings per share computations. ESOP shares are included in earnings per share computations after they are allocated to participants.
YEAR ENDED DECEMBER 31 2004 2003 2002
- ---------------------------------------------------------------------------------------------
MILLIONS
ESOP Shares
Allocated 1.4 1.2 1.3
Unallocated 2.0 1.1 1.2
- ---------------------------------------------------------------------------------------------
Total 3.4 2.3 2.5
- ---------------------------------------------------------------------------------------------
Fair Value of Unallocated Shares $72.7 $105.0 $84.0
- ---------------------------------------------------------------------------------------------
STOCK OPTION AND AWARD PLANS. We have an
Year Ended December 31 | 2007 | 2006 | 2005 |
Millions | | | |
| | | |
ESOP Shares | | | |
Allocated | 1.8 | 1.7 | 1.9 |
Unallocated | 2.2 | 2.5 | 2.6 |
Total | 4.0 | 4.2 | 4.5 |
Fair Value of Unallocated Shares | $87.1 | $115.2 | $115.0 |
Stock-Based Compensation. Stock Incentive Plan. Under our Executive Long-Term Incentive Compensation Plan (Executive Plan), share-based awards may be issued to key employees through a broad range of methods, including non-qualified and incentive stock options, performance shares, performance units, restricted stock, stock appreciation rights and other awards. There are 1.5 million shares of common stock reserved for issuance under the Executive Plan, with 0.9 million of these shares available for issuance as of December 31, 2007.
We had a Director Long-Term Stock Incentive Plan (Director Plan). The Executive Plan allows for the grant of up to 3.2 million
shares of our common stock to key employees. To date, these grants have taken
the form of stock options, performance share awards and restricted stock awards.
The Director Plan allows for the grant of up to 0.1 million shares of our common
stock to nonemployee directors. Each nonemployee director may receive an annual
grant of 500 stock options and a biennial grant of performance shares equal to
$10,000 in value of common stock at the date of grant. which expired on January 1, 2006. No grants have been made since 2003 under the Director Plan. Approximately 7,758 options were outstanding under the Director Plan at December 31, 2007.
Note 16. Employee Stock and Incentive Plans (Continued)
We currently have the following types of share-based awards outstanding:
Non-Qualified Stock Options. The options allow for the purchase of shares of common stock at a price equal to the market value of our common stock at the date of grant. Options become exercisable beginning one year after the grant date, with one-third vesting each year over three years. Options may be exercised up to ten years following the date of grant. In the case of qualified retirement, death or disability, options vest immediately and the period over which the options can be exercised is three years. Employees have up to three months to exercise vested options upon voluntary termination or involuntary termination without cause. All options are exercisablecancelled upon termination for cause. All options vest immediately upon retirement, death, disability or a change of control, as defined in the award agreement. We determine the fair value of options using the Black-Scholes option-pricing model. The estimated fair value of options, including the effect of estimated forfeitures, is recognized as expense on the straight-line basis over the options’ vesting periods, or the accelerated vesting period if the employee is retirement eligible.
The following assumptions were used in determining the fair value of stock options granted during 2007, under the Black-Scholes option-pricing model:
| 2007 | 2006 |
Risk-Free Interest Rate | 4.8% | 4.5% |
Expected Life | 5 Years | 5 Years |
Expected Volatility | 20% | 20% |
Dividend Growth Rate | 5% | 5% |
The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the market
price of common sharesgrant date. Expected volatility is estimated based on the historic volatility of our stock and the stock of our peer group companies. We utilize historical option exercise and employee pre-vesting termination data to estimate the option life. The dividend growth rate is based upon historical growth rates in our dividends.
Performance Shares. Under these awards, the number of shares earned is contingent upon attaining specific performance targets over a three-year performance period. In the case of qualified retirement, death or disability during a performance period, a pro-rata portion of the award will be earned at the conclusion of the performance period based on the performance goals achieved. In the case of termination of employment for any reason other than qualified retirement, death or disability, no award will be earned. If there is a change in control, a pro-rata portion of the award will be paid based on the greater of actual performance up to the date of the options are granted and vestchange in control or target performance. The fair value of these awards is equal annual installments over two years, with expiration tento the grant date fair value which is estimated based upon the assumed share-based payment three years from the date of grant. PerformanceCompensation cost is recognized over the three-year performance period based on our estimate of the number of shares which will be earned by the award recipients.
Employee Stock Purchase Plan (ESPP). Under our ESPP, eligible employees may purchase ALLETE common stock at a 5 percent discount from the market price. Because the discount is not greater than 5 percent, we are earned over multi-year time periodsnot required by SFAS 123R to apply fair value accounting to these awards.
RSOP. Shares held in our RSOP are excluded from SFAS 123R and are contingent uponaccounted for in accordance with the attainmentAICPA Statement of certainPosition No. 93-6, “Employers’ Accounting for Employee Stock Ownership Plans.”
The following share-based compensation expense amounts were recognized in our consolidated statement of income for the periods presented since our adoption of SFAS 123R.
Share-Based Compensation Expense | | |
For the Year Ended December 31 | 2007 | 2006 |
Millions | | |
| | |
Stock Options | $0.8 | $0.8 |
Performance Shares | 1.0 | 1.0 |
| | |
Total Share-Based Compensation Expense | $1.8 | $1.8 |
| | |
Income Tax Benefit | $0.7 | $0.7 |
There were no capitalized stock-based compensation costs at December 31, 2007.
As of December 31, 2007, the total unrecognized compensation cost for performance goalsshare awards not yet recognized in our statements of ALLETE.
Restrictedincome was $1.1 million. This amount is expected to be recognized over a weighted-average period of 1.7 years.
Note 16. Employee Stock and Incentive Plans (Continued)
The following table presents the pro forma effect of stock-based compensation had we applied the provisions of SFAS 123 for the year ended December 31, 2005.
Pro Forma Effect of SFAS 123 | |
Accounting for Stock-Based Compensation | 2005 |
Millions Except Per Share Amounts | |
Net Income | |
As Reported | $13.3 |
Less: Employee Stock Compensation Expense Determined Under SFAS 123 – Net of Tax | 1.5 |
Plus: Employee Stock Compensation Expense Included in Net Income – Net of Tax | 1.5 |
Pro Forma Net Income | $13.3 |
Basic Earnings Per Share | |
As Reported | $0.49 |
Pro Forma | $0.49 |
Diluted Earnings Per Share | |
As Reported | $0.48 |
Pro Forma | $0.48 |
In the previous table, the pro forma expense determined under SFAS 123 for employee stock vests once certain periodsoptions granted was calculated using the Black-Scholes option-pricing model with the following assumptions:
| 2005 |
Risk-Free Interest Rate | 3.7% |
Expected Life | 5 Years |
Expected Volatility | 20.0% |
Dividend Growth Rate | 5% |
The following table presents information regarding our outstanding stock options for the year ended December 31, 2007.
| | | | Weighted-Average |
| | Weighted-Average | Aggregate | Remaining |
| Number of | Exercise | Intrinsic | Contractual |
| Options | Price | Value | Term |
| | | Millions | |
Outstanding at December 31, 2006 | 438,351 | $37.35 | $4.0 | 7.2 years |
Granted | 100,702 | $48.65 | | |
Exercised | (28,061) | $32.80 | | |
Forfeited | – | – | | |
Outstanding at December 31, 2007 | 510,992 | $39.83 | $(0.1) | 6.8 years |
Exercisable at December 31, 2007 | 327,473 | $36.43 | $1.0 | 6.0 years |
Fair Value of Options | | | | |
Granted During the Year | $8.15 | | | |
The weighted-average grant-date fair value of time have elapsed. options was $6.92 for 2007 ($6.48 for 2006). The intrinsic value of a stock award is the amount by which the fair value of the underlying stock exceeds the exercise price of the award. The total intrinsic value of options exercised was $0.4 million during 2007 ($0.6 in 2006).
At December 31,
2004, 1.3 million shares were held in reserve for future issuance under the
Executive Plan and Director Plan.
ALLETE 2004 Form 10-K Page 74
2004 2003 2002
--------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
STOCK OPTION ACTIVITY OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
- ------------------------------------------------------------------------------------------------------------------------
OPTIONS IN MILLIONS
Outstanding, Beginning of Period 0.8 $64.47 0.8 $67.44 0.8 $60.54
Granted 0.1 $97.65 0.2 $61.77 0.2 $77.76
Exercised (0.4) $67.14 (0.2) $61.32 (0.2) $56.10
Cancelled - - - $68.13 - $71.31
- ------------------------------------------------------------------------------------------------------------------------
Outstanding, End of Period 0.5 $69.85 0.8 $64.47 0.8 $67.44
- ------------------------------------------------------------------------------------------------------------------------
Exercisable, End of Period - - 0.5 $67.26 0.4 $60.69
Fair Value of Options
Granted During the Period $20.01 $8.16 $13.65
- ------------------------------------------------------------------------------------------------------------------------
All amounts above are prior to the ADESA spin-off and the historical option and average exercise prices have been
adjusted for the one-for-three reverse stock split on September 20, 2004. The 2004 amounts are up to the
September 20, 2004 spin-off of ADESA.
2004
-------------------
AVERAGE
EXERCISE
STOCK OPTION ACTIVITY OPTIONS PRICE
- -------------------------------------------------------------------------------------------------
OPTIONS IN MILLIONS
Outstanding as of September 20, 2004, after spin-off 0.5 $28.56
Granted - -
Exercised (0.1) $24.40
Cancelled - -
- -------------------------------------------------------------------------------------------------
Outstanding, End of Year 0.4 $28.94
- -------------------------------------------------------------------------------------------------
Exercisable, End of Year 0.3 $26.57
- -------------------------------------------------------------------------------------------------
Amounts subsequent to the ADESA spin-off.
The employee stock options outstanding at the date of the spin-off were
converted to reflect the spin-off and one-for-three reverse stock split. This
conversion was done to preserve the noncompensatory nature of the options under
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation."
At December 31, 2004,2007, options outstanding consisted of less than 0.1 million with an exercise price of $15.88prices ranging from $18.85 to $18.85, 0.3$29.79, 0.2 million with an exercise price
of $23.79prices ranging from $37.76 to $29.79$41.35 and 0.10.2 million with an exercise price of $37.76.prices ranging from $44.15 to $48.65. The options with an exercise price of $23.79prices ranging from $18.85 to $29.79 have an average remaining contractual life of 6.6 years, with 0.3 million3.8 years; all are exercisable onat December 31, 2004,2007, at ana weighted average price of $27.46.$26.70. The options with an exercise price ofprices ranging from $37.76 to $41.35 have an average remaining contractual life of 9 years, with 0.1 million6.6 years; all are exercisable on December 31, 2004.
A total2007, at a weighted average price of $39.92. The options with exercise prices ranging from $44.15 to $48.65 have an average remaining contractual life of 8.5 years; less than 0.1 million are exercisable on December 31, 2007, at a weighted average price of $46.25.
In February 2007, we granted stock options to purchase 0.1 million shares of common stock (exercise price of $48.65 per share).
Note 16. Employee Stock and Incentive Plans (Continued)
Performance Shares. The following table presents information regarding our nonvested performance shares for the year ended December 31, 2007.
| | Weighted-Average |
| Number of | Grant Date |
| Shares | Fair Value |
Nonvested at December 31, 2006 | 71,004 | $45.39 |
Granted | 23,974 | $54.48 |
Awarded | (24,714) | $42.80 |
Forfeited | (3,299) | $49.70 |
Nonvested at December 31, 2007 | 66,965 | $49.39 |
Less than 0.1 million performance share grants were awarded in February 20042007 for performance periods ending in 2005 and 2006.2009. The ultimate issuance is contingent upon the attainment of certain future performance goals of ALLETE during the performance periods. The grant date fair value of the performance share awards was $1.6$1.1 million.
A total of
Less than 0.1 million performance share grants were awarded in 2002 and 2003February 2006 for the performance period ended December 31, 2003.periods ending in 2007. The grant date fair value of the share awards was $8.3$1.0 million. In early 2004, 50% ofPerformance share grants related to the shares were issued
with the balance to2007 period will be issued in 2005.
In February 2005, we granted stock options to purchase less than 0.1 million
shares of common stock (exercise price of $41.35 per share).
EMPLOYEE STOCK PURCHASE PLAN. We have an Employee Stock Purchase Plan that
permits eligible employees to buy up to $23,750 per year of our common stock at
95% of the market price. At December 31, 2004, 1.3 million shares had been
issued under the plan and 0.1 million shares were held in reserve for future
issuance.
Page 75 early 2008.
ALLETE
20042007 Form 10-K
NOTE 18. QUARTERLY FINANCIAL DATA (UNAUDITED)
Note 17. Quarterly Financial Data (Unaudited)
Information for any one quarterly period is not necessarily indicative of the results which may be expected for the year. Financial results for the first
quarter of 2004 included a $7.8 million, or $0.27 per share, non-cash after-tax
charge for a change in accounting principle related to investments in our
emerging technology portfolio. Financial results for the third quarter of 2004
included a $10.9 million, or $0.38 per share, after-tax debt prepayment cost as
part of ALLETE's financial restructuring in preparation for the spin-off of
ADESA, which occurred on September 20, 2004. Financial results for the fourth
quarter of 2004 included an $11.5 million, or $0.41 per share, after-tax gain on
the sale of ADESA shares held by our ESOP. The ESOP received the ADESA shares as
a result of the spin-off.
Financial results for 2003 included a $71.6 million, or $2.59 per share,
after-tax gain on the sale of substantially all our Water Services businesses
($0.2 million first quarter
Quarter Ended | Mar. 31 | Jun. 30 | Sept. 30 | Dec. 31 |
Millions Except Earnings Per Share | | | | |
| | | | |
2007 | | | | |
Operating Revenue | $205.3 | $223.3 | $200.8 | $212.3 |
| | | | |
Operating Income from Continuing Operations | $41.3 | $33.9 | $24.7 | $33.8 |
| | | | |
Income from Continuing Operations | $26.3 | $22.6 | $16.5 | $22.2 |
| | | | |
Net Income | $26.3 | $22.6 | $16.5 | $22.2 |
| | | | |
Earnings Per Share of Common Stock | | | | |
Basic Continuing Operations | $0.93 | $0.80 | $0.58 | $0.78 |
| | | | |
Diluted Continuing Operations | $0.93 | $0.80 | $0.58 | $0.77 |
| | | | |
2006 | | | | |
Operating Revenue | $192.5 | $178.3 | $199.1 | $197.2 |
| | | | |
Operating Income from Continuing Operations | $36.4 | $26.3 | $38.7 | $39.3 |
| | | | |
Income from Continuing Operations | $18.8 | $13.6 | $21.9 | $23.0 |
Loss from Discontinued Operations | – | (0.4) | (0.1) | (0.4) |
Net Income | $18.8 | $13.2 | $21.8 | $22.6 |
| | | | |
Earnings (Loss) Per Share of Common Stock | | | | |
Basic Continuing Operations | $0.68 | $0.50 | $0.78 | $0.82 |
Discontinued Operations | – | (0.02) | – | (0.01) |
| $0.68 | $0.48 | $0.78 | $0.81 |
| | | | |
Diluted Continuing Operations | $0.68 | $0.49 | $0.78 | $0.82 |
Discontinued Operations | – | (0.02) | – | (0.01) |
| $0.68 | $0.47 | $0.78 | $0.81 |
Schedule II
ALLETE
Valuation and second quarter; $3.0 million, or $0.11 per
share, third quarter; $68.2 million, or $2.47 per share, fourth quarter). The
gain was net of all selling, transactionQualifying Accounts and employee termination benefit
expenses, as well as impairment losses on certain remaining assets.
Reserves
| Balance at | Additions | Deductions | Balance at |
| Beginning | Charged | Other | from | End of |
For the Year Ended December 31 | of Year | to Income | Changes | Reserves (a) | Period |
Millions | | | | | |
| | | | | |
Reserve Deducted from Related Assets | | | | | |
Reserve For Uncollectible Accounts | | | | | |
2007 Trade Accounts Receivable | $1.1 | $1.0 | – | $1.1 | $1.0 |
Finance Receivables – Long-Term | 0.2 | – | – | – | 0.2 |
2006 Trade Accounts Receivable | 1.0 | 0.7 | _ | 0.6 | 1.1 |
Finance Receivables – Long-Term | 0.6 | _ | _ | 0.4 | 0.2 |
2005 Trade Accounts Receivable | 1.0 | 1.1 | – | 1.1 | 1.0 |
Finance Receivables – Long-Term | 0.7 | – | – | 0.1 | 0.6 |
Deferred Asset Valuation Allowance | | | | | |
2007 Deferred Tax Assets | 3.6 | (0.3) | – | – | 3.3 |
2006 Deferred Tax Assets | 4.1 | (1.1) | $0.6 | – | 3.6 |
2005 Deferred Tax Assets | 1.1 | 3.8 | – | 0.8 | 4.1 |
QUARTER ENDED MAR. 31 JUN. 30 SEPT. 30 DEC. 31
- -------------------------------------------------------------------------------------------------------------------------
MILLIONS EXCEPT EARNINGS PER SHARE
2004
Operating Revenue $209.0 $186.2 $177.6 $178.6
Operating Income from Continuing Operations $42.7 $18.8 $23.2 $15.1
Net Income (Loss) Continuing Operations $21.4 $ 2.4 $(0.6) $15.9
Discontinued Operations 31.3 34.3 13.7 (6.2)
Change in Accounting Principle (7.8) - - -
- -------------------------------------------------------------------------------------------------------------------------
$44.9 $36.7 $ 13.1 $9.7
Earnings Available for Common Stock $44.9 $36.7 $ 13.1 $9.7
Earnings (Loss) Per Share of Common Stock
Basic Continuing Operations $0.77 $0.08 $(0.03) $0.57
Discontinued Operations 1.11 1.21 0.48 (0.22)
Change in Accounting Principle (0.28) - - -
- -------------------------------------------------------------------------------------------------------------------------
$1.60 $1.29 $ 0.45 $0.35
Diluted Continuing Operations $0.76 $0.08 $(0.02) $0.55
Discontinued Operations 1.10 1.21 0.47 (0.21)
Change in Accounting Principle (0.27) - - -
- -------------------------------------------------------------------------------------------------------------------------
$1.59 $1.29 $ 0.45 $0.34
2003
Operating Revenue $186.0 $171.4 $169.0 $165.9
Operating Income from Continuing Operations $26.9 $20.3 $30.3 $18.6
Net Income Continuing Operations $11.3 $ 3.4 $10.9 $ 4.2
Discontinued Operations 33.0 41.0 36.7 95.9
- -------------------------------------------------------------------------------------------------------------------------
$44.3 $44.4 $47.6 $100.1
Earnings Available for Common Stock $44.3 $44.4 $47.6 $100.1
Earnings Per Share of Common Stock
Basic Continuing Operations $0.41 $0.12 $0.40 $0.15
Discontinued Operations 1.21 1.49 1.32 3.46
- -------------------------------------------------------------------------------------------------------------------------
$1.62 $1.61 $1.72 $3.61
Diluted Continuing Operations $0.41 $0.12 $0.40 $0.15
Discontinued Operations 1.20 1.49 1.31 3.44
- -------------------------------------------------------------------------------------------------------------------------
$1.61 $1.61 $1.71 $3.59
- -------------------------------------------------------------------------------------------------------------------------
ALLETE 2004 Form 10-K Page 76
SCHEDULE II
ALLETE
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
BALANCE AT ADDITIONS DEDUCTIONS BALANCE AT
BEGINNING CHARGED OTHER FROM END OF
FOR THE YEAR ENDED DECEMBER 31 OF YEAR TO INCOME CHANGES RESERVES PERIOD
- ------------------------------------------------------------------------------------------------------------------------
MILLIONS
Reserve Deducted from Related Assets
Reserve For Uncollectible Accounts
2004 Trade Accounts Receivable $1.3 $1.7 - $1.0 $2.0
Finance Receivables - Long-Term 1.2 - - 0.5 0.7
2003 Trade Accounts Receivable 2.2 (0.1) - 0.8 1.3
Finance Receivables - Long-Term 1.7 - - 0.5 1.2
2002 Trade Accounts Receivable 1.4 2.2 - 1.4 2.2
Finance Receivables - Long-Term 2.7 0.4 - 1.4 1.7
Deferred Asset Valuation Allowance
2004 Deferred Tax Assets 0.2 0.9 - - 1.1
2003 Deferred Tax Assets 0.1 0.1 - - 0.2
2002 Deferred Tax Assets 0.0 0.1 - - 0.1
- ------------------------------------------------------------------------------------------------------------------------
Included(a) | Includes uncollectible accounts written off. |
Page 77
ALLETE
20042007 Form 10-K
EXHIBIT INDEX
EXHIBIT NUMBER
10(c) - Master Agreement (without Appendices and Exhibits),
dated December 28, 2004, by and between Rainy River Energy
Corporation and Constellation Energy Commodities Group, Inc.
10(d)2 - First Amendment to Third Amended and Restated Committed
Facility Letter, dated December 14, 2004, by and among ALLETE
and LaSalle Bank National Association, as Agent.
10(k)4 - Form of ALLETE Executive Long-Term Incentive Compensation
Plan Nonqualified Stock Option Grant.
10(k)5 - Form of ALLETE Executive Long-Term Incentive Compensation
Plan Performance Share Grant.
12 - Computation of Ratios of Earnings to Fixed Charges.
23(a) - Consent of Independent Registered Public Accounting Firm.
23(b) - Consent of General Counsel.
31(a) - Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31(b) - Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 - Section 1350 Certification of Annual Report by the Chief
Executive Officer and Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
ALLETE 2004 Form 10-K