| NOTE 10. | PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
POSTRETIREMENT
PENSION HEALTH AND LIFE
-------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT EXPENSE 2007 2006 2007 2006
- --------------------------------------------------------------------------------------------------------------------
MILLIONS
FOR THE QUARTER ENDED JUNE 30,
Service Cost $ 1.3 $ 2.3 $ 0.9 $ 1.1
Interest Cost 5.7 5.6 1.8 1.8
Expected Return on Plan Assets (7.6) (7.2) (1.6) (1.4)
Amortization of Prior Service Costs 0.1 0.2 - -
Amortization of Net Loss 0.8 1.2 0.1 0.5
Amortization of Transition Obligation - (0.1) 0.6 0.6
- --------------------------------------------------------------------------------------------------------------------
Net Periodic Benefit Expense $ 0.3 $ 2.0 $ 1.8 $ 2.6
- --------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30,
Service Cost $ 2.6 $ 4.6 $ 1.9 $ 2.2
Interest Cost 11.4 11.1 3.7 3.7
Expected Return on Plan Assets (15.3) (14.3) (3.2) (2.8)
Amortization of Prior Service Costs 0.3 0.4 - -
Amortization of Net Loss 1.6 2.4 0.3 0.9
Amortization of Transition Obligation - (0.1) 1.2 1.2
- --------------------------------------------------------------------------------------------------------------------
Net Periodic Benefit Expense $ 0.6 $ 4.1 $ 3.9 $ 5.2
- --------------------------------------------------------------------------------------------------------------------
(Continued)
In 2005, we determined that our postretirement health care plans meet the
requirements of the Centers for Medicare and Medicaid Services' (CMS)
regulations and enrolled with the CMS to begin recovering the subsidy. We
received our first subsidy payment of $0.3
Employer Contributions. On April 10, 2008, $7.0 million in 2007 for 2006 credits.
EMPLOYER CONTRIBUTIONS. For the quarter ended June 30, 2007, no contributions
were madewas contributed to our pension or postretirement healthplan and life plans. For the six
months ended june 30, 2007, no contributions were made to our pension plans and
$2.8$3.3 million of contributions were made to our postretirement health and life plans.plan. We do not expect to make any additional contributions to fund our pension orplan of $11.6 million and $6.0 million to our postretirement health and life plansplan in 2007.
2008.
We have historically used a September 30 measurement date for the pension and postretirement health and life plans. Pursuant to SFAS 158, we are required to change our measurement date to December 31 during the year ending December 31, 2008. On January 1, 2008, we recorded three months of pension expense as a reduction to retained earnings in the amount of $1.6 million, net of tax, to reflect the impact of this measurement date change. Also on January 1, 2008, we recorded $0.8 million relating to three months of amortization for transition obligations, prior service costs and prior gains and losses within accumulated other comprehensive income.
NOTE 11. COMMITMENTS, GUARANTEES AND CONTINGENCIES
OFF-BALANCE SHEET ARRANGEMENTS.
Off-Balance Sheet Arrangements. Square Butte Power Purchase Agreement. Minnesota Power has a power purchase agreement with Square Butte that extends through 2026 (Agreement). It provides a long-term supply of low-cost energy to customers in our electric service territory and enables Minnesota Power to meet power pool reserve requirements. Square Butte, a North Dakota cooperative corporation, owns a 455-MW coal-fired generating unit (Unit) near Center, North Dakota. The Unit is adjacent to a generating unit owned by Minnkota Power, a North Dakota cooperative corporation whose Class A members are also members of Square Butte. Minnkota Power serves as the operator of the Unit and also purchases power from Square Butte.
Minnesota Power was entitled to approximately 71 percent of the Unit'sUnit’s output under the Agreement prior to 2006. Beginning in 2006, Minnkota Power exercised its option to reduce Minnesota Power'sPower’s entitlement by approximately 5 percent annually.annually to 66 percent in 2006 and 60 percent in 2007. We received notices from Minnkota Power reducingthat they further reduced our output entitlement by approximately 5 percent annually to 60 percent as of January 1,
2007, 55 percent on January 1, 2008, and 50 percent on January 1, 2009, and thereafter. Minnkota Power has no further option to reduce Minnesota Power'sPower’s entitlement below 50 percent.
Minnesota Power is obligated to pay its pro-ratapro 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 June 30,
2007,March 31, 2008, Square Butte had total debt outstanding of $324.2$316.6 million. Total annual debt service for Square Butte is expected to be approximately $26$29 million in each of the years 20072008 through 2011.2012. Variable operating costs include the price of coal purchased from BNI Coal, our subsidiary, under a long-term contract.
ALLETE Second Quarter 2007 Form 10-Q 14
NOTE 11. COMMITMENTS, GUARANTEES AND CONTINGENCIES (CONTINUED)
LEASING AGREEMENTS.
Wind Power Purchase Agreements. 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 Oliver Wind II located near Center, North Dakota. We began purchasing the output from Oliver Wind I, a 50-MW facility, in December 2006 and the output from Oliver Wind II, a 48-MW facility in November 2007. Each agreement is for 25 years and provides for the purchase of all output from the facilities. There are no fixed capacity charges, and we only pay for energy as it is delivered to us.
Leasing Agreements. BNI Coal is obligated to make lease payments for a dragline totaling $2.8 million annually for the lease term which expires in 2027. BNI Coal has the option at the end of the lease term to renew the lease at a fair market rental, to purchase the dragline at fair market value, or to surrender the dragline and pay a $3.0 million termination fee. We lease other properties and equipment under operating lease agreements with terms expiring through 2013.2016. The aggregate amount of minimum lease payments for all operating leases is $8.2
million in 2007, $7.6$8.1 million in 2008, $7.0$8.1 million in 2009, $6.5$7.7 million in 2010, $6.0$7.2 million in 2011, $6.6 million in 2012 and $51.2$48.7 million thereafter.
COAL, RAIL
ALLETE First Quarter 2008 Form 10-Q
NOTE 11. COMMITMENTS, GUARANTEES AND SHIPPING CONTRACTS.CONTINGENCIES (Continued)
Coal, Rail and Shipping Contracts. We have three coal supply agreements with various expiration dates ranging from December 2008 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 20072008 to December 2011. Our minimum annual payment obligations under these coal, rail and shipping agreements are currently $42.0 million in 2007, $16.0$44.8 million in 2008, $10.7$10.8 million in 2009, $5.3 million in 2010, $5.4 million in 2011 and no specific commitments beyond 2009.2011. Our minimum annual payment obligations will increase when annual nominations are made for coal deliveries in future years.
EMERGING TECHNOLOGY PORTFOLIO.
On January 24, 2008, we received a letter from BNSF alleging that the Company defaulted on a material obligation under the Company’s Coal Transportation Agreement (CTA). In the notice, BNSF claimed the Company underpaid approximately $1.6 million for coal transportation services in 2006 and that failure to pay such amount plus interest 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. On April 1, 2008, to ensure that BNSF does not attempt to terminate the CTA, we paid under protest the full amount claimed by BNSF and filed a demand for arbitration of the issue. The delivered costs of fuel for the Company’s generation are recoverable from Minnesota Power’s utility customers through the fuel adjustment clause.
Fuel Clause Recovery of MISO Day 2 Costs. We filed a petition with the MPUC in February 2005 to amend our fuel clause to accommodate costs and revenue related to the day-ahead and real-time markets through which we engage in wholesale energy transactions in MISO (MISO Day 2). In December 2006, the MPUC issued an order allowing Minnesota Power and the other utilities involved in the MISO Day 2 proceeding to continue recovering MISO Day 2 charges through the Minnesota retail fuel clause except for MISO Day 2 administrative charges. Upon denial of a reconsideration request, the OAG appealed the MPUC Order in a filing with the Minnesota Court of Appeals. A written decision was issued on April 15, 2008, upholding the terms of the MISO Day 2 Order.
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 $4.1 million on March 31, 2008, ($3.7 million at December 31, 2007) and we consider regulatory recovery to be probable. This order removed the subject to refund requirement of the two interim orders, and included extensive fuel clause reporting requirements that review our monthly and annual fuel clause filings with the MPUC. There was no impact on earnings as a result of this ruling. As a result of the MPUC’s December 2006 order allowing recovery of nearly all MISO Day 2 charges through the fuel clause, we rescinded our December 2005 Letter of Intent to Withdraw from MISO in December 2006.
Emerging Technology Portfolio. We have investments in emerging technologies through minority investments in venture capital funds structured as limited liability companies, and direct investments in privately-held, start-up companies. We have committed to make additional investments in certain emerging technology venture capital funds. The total future commitment was $1.8$0.8 million at June 30, 2007March 31, 2008, ($2.51.0 million at December 31, 2006),2007) and willmay be invested in 2007.2008. 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 sold certain wastewater treatment assets to Georgia Water in 2001. The purchase agreement called for the payment of $2 million upon the satisfaction of specific contingencies. CRP alleges that Georgia Water and ALLETE Water Services are obligated to pay the contractual amount plus interest and attorney fees pursuant to the contract, and that the contingencies 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.
ALLETE First Quarter 2008 Form 10-Q
NOTE 11. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters. Our businesses are subject to regulation of environmental matters by various federal, state and local authorities. Due to future stricter environmental requirements through legislation and/or rulemaking, in the future, we anticipate that potential expenditures for environmental matters will be material and will require significant capital investments. We review environmental matters on a quarterly basis. Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. These accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in the balance sheet at undiscounted amounts and exclude claims for recoveries from insurance or other third parties. Costs related to environmental contamination treatment and cleanup are charged to expense unless recoverable in rates from customers.
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 from 1889 to 1904. A report submitted in 2003 identified some MGP-like chemicals that were found in the soil near the former plant site. The investigation continued
through the fall of 2006. The final Phase II report was issued onin June 7, 2007, confirming our understanding of the issues involved. The final Phase II Report and Risk Assessment were sent to the WDNR for review onin June 18, 2007. A remediation plan was developed during the fourth quarter of 2007 and sent to the WDNR in March 2008. Although it is not possible to quantify the potential clean-up cost until the investigation is completed, a $0.5 million liability was recorded in December 2003 to address the known areas of contamination. The Company has recorded a corresponding dollar amount as a regulatory asset to offset this liability. In
May 2005, theThe PSCW approved the collection through rates of $150,000$0.3 million of site investigation costs that had been incurred at the time SWL&P filed its 2005 rate
request. On December 11, 2006, the PSCW approved the recovery of an additional
$186,000 of site investigation costs that were incurred through 2005. ALLETE maintains pollution liability insurance coverage that includes coverage for SWL&P. A claim has been filed with respect to this matter. The insurance carrier has issued a reservation of rights letter and the Company continues to work with the insurer to determine the availability of insurance coverage.
15 ALLETE Second Quarter 2007 Form 10-Q
NOTE 11. COMMITMENTS, GUARANTEES AND CONTINGENCIES (CONTINUED)
EPA CLEAN AIR INTERSTATE RULE AND CLEAN AIR MERCURY RULE.Clean Air Interstate Rule. In March 2005, the EPA announced the final Clean Air Interstate Rule (CAIR) that reduces and permanently caps emissions of SO2SO2, NOX and NOXparticulates in the eastern United States. The CAIR includes Minnesota as one of the 28 states it considers as "significantly
contributing"“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 SO2 and NOX allowances through the EPA’s cap-and-trade system; and/or |
(3) use a combination of both.
EPA Clean Air Mercury Rule. In March 2005, the EPA also announced the final Clean Air Mercury Rule (CAMR) that reduceswould have reduced and permanently capscapped emissions of electric utility mercury emissions nationwide. The CAIR and the
CAMR regulations have been challenged in the federal court system, which may
delay implementation or modify provisions. Minnesota Power is participating in a
legal challenge tocontinental United States. On February 8, 2008 the CAIR, but is not participating in a challenge to the
CAMR. However, if the CAMR and the CAIR do 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; or (3) use a
combination of both.
Minnesota Power petitioned the EPA to review its CAIR determinations affecting
Minnesota. In July 2005, Minnesota Power also filed a Petition for Review with
the U.S.United States Court of Appeals for the District of Columbia Circuit (Court of
Appeals). In November 2005,overturned the CAMR and remanded the rulemaking to the EPA agreedfor reconsideration. The Court’s decision is subject to reconsider certain aspects of the
CAIR, including the Minnesota Power petition addressing emissions applied to air
quality modeling used to determine Minnesota's inclusion in the CAIR region and
our claims about inequities in the SO2 allowance methodology. In March 2006,appeal. It is uncertain how the EPA announced that it would not make any changes to the CAIRwill respond. The mercury emission reductions expected as a result of implementing the petitionsAREA Plan expenditures at Taconite Harbor, and implementation of the 2006 Minnesota Mercury Emission Reduction Law which applies to Boswell Units 3 and 4, are expected to meet the EPA’s reformed mercury regulations. Cost estimates for reconsideration. Petitions for Review, including Minnesota
Power's, remain pending at the Court of Appeals. If the Petitions for Review
filedcomplying with the Court of Appeals are successful, we expect to incur significantly
lower compliance costs, consistent with the rules applicable to those states
determined to not be "significant contributors" to air quality non-attainment as
addressedfuture mercury regulations under the CAIR. ResolutionClean Air Act are therefore premature at this time.
Real Estate. As of March 31, 2008, ALLETE Properties, through its subsidiaries, had surety bonds outstanding of $32.6 million ($35.9 million at December 31, 2007) primarily related to performance and maintenance obligations to governmental entities to construct improvements in the CAIR Petition for Review with the
Courtcompany’s various projects. The remaining work to be completed on these improvements is estimated to be approximately $7.0 million ($6.4 million at December 31, 2007) and ALLETE Properties does not believe it is likely that any of Appeals is anticipated in 2008.
COMMUNITY DEVELOPMENT DISTRICT OBLIGATIONS. TOWN CENTER.these outstanding bonds will be drawn upon.
ALLETE First Quarter 2008 Form 10-Q
NOTE 11. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Community Development District Obligations.Town Center. In March 2005, the Town Center District issued $26.4 million of tax-exempt, 6% Capital Improvement Revenue Bonds, Series 2005, which are payable through property tax assessments on the land owners over 31 years (by May 1, 2036). The bond proceeds (less capitalized interest, a debt service reserve fund and cost of issuance) were used to pay for the construction of a portion of the major infrastructure improvements at Town Center. The bonds are payable from and secured by the revenue derived from assessments imposed, levied and collected by the Town Center District. The assessments represent an allocation of the costs of the improvements, including bond financing costs, to the lands within the Town Center District benefiting from the improvements. The assessments were billed to Town Center landowners beginningeffective in November 2006. To the extent that we still own land at the time of thean assessment, in accordance with EITF 91-10, “Accounting for Special Assessments and Tax Increment Financing Entities,” we recognizewill incur the cost of our portion of these assessments, based upon our ownership of benefited property. At June 30, 2007,March 31, 2008, we owned approximately 69 percent of the assessable land in the Town Center District (73(approximately 69 percent at December 31, 2006)2007). PALM COAST PARK. As we sell property, the obligation to pay special assessments will pass to the new landowners. Under EITF 91-10, these bonds are not reflected as debt on our consolidated balance sheet.
Palm Coast Park. In May 2006, the Palm Coast Park District issued $31.8 million of tax-exempt, 5.7% Special Assessment Bonds, Series 2006, which are payable through property tax assessments on the land owners over 31 years (by May 1, 2037). The bond proceeds (less capitalized interest, a debt service reserve fund and cost of issuance) are beingwere 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 bewere billed to Palm Coast Park landowners beginningeffective in November 2007. To the extent that we still own land at the time of thean assessment, in accordance with EITF 91-10, “Accounting for Special Assessments and Tax Increment Financing Entities,” we will recognizeincur the cost of our portion of these assessments, based upon our ownership of benefited property. At June 30, 2007,March 31, 2008, we owned 89approximately 86 percent of the assessable land in the Palm Coast Park District (97(approximately 86 percent at December 31, 2006)2007). OTHER.As we sell property, the obligation to pay special assessments will pass to the new landowners. Under EITF 91-10, these bonds are not reflected as debt on our consolidated balance sheet.
Other. We are involved in litigation arising in the normal course of business. Also in the normal course of business, we are involved in tax, regulatory and other governmental audits, inspections, investigations and other proceedings that involve state and federal taxes, safety, compliance with regulations, rate base and cost of service issues, among other things. While the resolution of such matters could have a material effect on earnings and cash flows in the year of resolution, none of these matters are expected to materially change our present liquidity position, or have a material adverse effect on our financial condition.
NOTE 12. RECURRING FAIR VALUE MEASURES
Effective January 1, 2008, the company adopted SFAS 157 as discussed in Note 1, which, among other things, requires enhanced disclosures about assets and liabilities carried at fair value.
As defined in SFAS 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company primarily applies the market approach for recurring fair value measurements and endeavors to utilize the best available information. Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company is able to classify fair value balances based on the observability of those inputs. SFAS 157 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). The three levels of the fair value hierarchy defined by SFAS 157 are as follows:
ALLETE SecondFirst Quarter 20072008 Form 10-Q 16
NOTE 12. RECURRING FAIR VALUE MEASURES (Continued)
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Instruments in this category include primarily mutual fund investments held to fund employee benefits and deferred compensation.
Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category represent the Company’s deferred compensation obligation.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. At each balance sheet date, management performs an analysis of all instruments subject to SFAS 157 and includes in Level 3 all of those whose fair value is based on significant unobservable inputs. Instruments in this category include auction rate securities consisting of guaranteed student loans classified as Level 3 investments as of March 31, 2008, and carried at face value. The Company also holds certain financial transmission rights (FTRs) related to our participation in MISO. These FTRs are accounted for as derivatives. While our valuation of these FTRs is based on Level 3 inputs, the fair value of our FTRs at March 31, 2008, is immaterial, and as a result we have not presented them in the tables below.
The following table sets forth by level within the fair value hierarchy the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2008. As required by SFAS 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
| | At Fair Value as of March 31, 2008 | | Recurring Fair Value Measures | | Level 1 | | Level 2 | | Level 3 | | Total | | Millions | | | | | | | | | | Assets: | | | | | | | | | | Mutual Funds | | $25.8 | | – | | – | | $25.8 | | Bonds | | – | | $4.0 | | – | | 4.0 | | Auction Rate Securities | | – | | – | | $25.2 | (a) | 25.2 | | Total Assets | | $25.8 | | $4.0 | | $25.2 | | $55.0 | | | | | | | | | | | | Liabilities: | | | | | | | | | | Deferred compensation obligation | | – | | $9.3 | | – | | $9.3 | | Total Liabilities | | – | | $9.3 | | – | | $9.3 | | Total Net Assets(Liabilities) | | $25.8 | | $(5.3) | | $25.2 | | $45.7 |
(a) See Note 3 for additional information.
| Recurring Fair Value Measures | Auction Rate | | Activity in Level 3 | | Securities | | Millions | | | | | | | | | Balance as of January 1, 2008 | | | | | – | | Level 3 Transfers In | | | | | $25.2 | | Balance as of March 31, 2008 | | | | | $25.2 |
ALLETE First Quarter 2008 Form 10-Q
ITEM 2. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements, notes to those statements, management, discussion and analysis from the 20062007 Form 10-K and the other financial information appearing elsewhere in this report. In addition to historical information, the following discussion and other parts of this Form 10-Q contain forward-looking information that involves risks and uncertainties. Readers are cautioned that forward-looking statements should be read in conjunction with our disclosures in this Form 10-Q under the headings: "Safeheading: “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995"1995” located on page 35 and "Risk Factors"“Risk Factors” located in Part I, Item 1A, page 2422 of our 20062007 Form 10-K. The risks and uncertainties described in this Form 10-Q and our 20062007 Form 10-K are not the only risks facing our Company. Additional risks and uncertainties that we are not presently aware of, or that we currently consider immaterial, may also affect our business operations. Our business, financial condition or results of operations could suffer if the concerns set forth are realized.
EXECUTIVE SUMMARY
OVERVIEW
ALLETE is a diversified company providingthat has provided fundamental products and services since 1906. This includes our two core businesses--ENERGY and REAL ESTATE, as
well asThese include our former operations in the water, paper, telecommunications and automotive industries.
ENERGYindustries 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
| · | 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
Other includes our investments in emerging technologies, and earnings on cash and short-term investments.
17
ALLETE Secondis incorporated under the laws of Minnesota. Our corporate headquarters are in Duluth, Minnesota. Statistical information is presented as of March 31, 2008, unless otherwise indicated. All subsidiaries are wholly owned unless otherwise specifically indicated. References in this report to “we,” “us” and “our” are to ALLETE and its subsidiaries, collectively.
ALLETE First Quarter 20072008 Form 10-Q
EXECUTIVE SUMMARY (CONTINUED)
OVERVIEW (Continued)
| | | | | Quarter Ended | | | | | | March 31, | | Kilowatthours Sold | 2008 | 2007 | | Millions | | | | | | | | | | | | Regulated Utility | | | | | Retail and Municipals | | | | | | Residential | 362.6 | 341.6 | | | | Commercial | 359.6 | 352.2 | | | | Municipals | 272.9 | 266.4 | | | | Industrial | 1,823.2 | 1,705.4 | | | | Other | 22.3 | 22.2 | | | | | | | | | | | | Total Retail and Municipals | 2,840.6 | 2,687.8 | | | Other Power Suppliers | 404.1 | 524.0 | | | | | | | | | | | | Total Regulated Utility | 3,244.7 | 3,211.8 | | Nonregulated Energy Operations | 48.6 | 63.7 | | | | | | 3,293.3 | 3,275.5 |
| | Quarter Ended | | | March 31, | | Real Estate | 2008 | 2007 | | Revenue and Sales Activity | Qty | Amount | Qty | Amount | | Dollars in Millions | | | | | | | | | | | | Other Land Sales | | | | | Acres (a) | 2 | $1.3 | 367 | $6.0 | Contract Sales Price (b) | | 1.3 | | 6.0 | Revenue Recognized from Previously Deferred Sales | | – | | 1.3 | | Deferred Revenue | | – | | – | | Revenue from Land Sales | | 1.3 | | 7.3 | | Other Revenue | | 1.4 | | 0.9 | | | | $2.7 | | $8.2 |
(a) Acreage amounts are shown on a gross basis, including wetlands and minority interest.
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
KILOWATTHOURS SOLD 2007 2006 2007 2006
- ------------------------------------------------------------------------------------------------------------------
MILLIONS
Regulated Utility
Retail and Municipals
Residential 231.7 229.1 573.3 537.1
Commercial 320.9 315.5 673.1 644.2
Municipals 229.2 216.1 495.6 435.4
Industrial 1,734.0 1,769.9 3,439.4 3,592.2
Other 19.0 18.6 41.3 38.6
- ------------------------------------------------------------------------------------------------------------------
Total Retail and Municipals 2,534.8 2,549.2 5,222.7 5,247.5
Other Power Suppliers 513.0 515.5 1,036.9 1,020.6
- ------------------------------------------------------------------------------------------------------------------
Total Regulated Utility 3,047.8 3,064.7 6,259.6 6,268.1
Nonregulated Energy Operations 59.8 55.3 123.5 120.9
- ------------------------------------------------------------------------------------------------------------------
3,107.6 3,120.0 6,383.1 6,389.0
- ------------------------------------------------------------------------------------------------------------------
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
REAL ESTATE 2007 2006 2007 2006
REVENUE AND SALES ACTIVITY QTY AMOUNT QTY AMOUNT QTY AMOUNT QTY AMOUNT
- ------------------------------------------------------------------------------------------------------------------
DOLLARS IN MILLIONS
Town Center Sales
Commercial Sq. Ft. 435,000 $ 12.6 170,695 $ 4.7 435,000 $ 12.6 250,695 $ 6.2
Residential Units 130 1.6 186 5.6 130 1.6 186 5.6
Palm Coast Park
Commercial Sq. Ft. 40,000 2.0 - - 40,000 2.0 - -
Residential Units 406 11.1 - - 406 11.1 - -
Other Land Sales
Acres - - 10 5.2 367 6.0 466 15.5
Lots - - - - - - - -
- ------------------------------------------------------------------------------------------------------------------
Contract Sales Price 27.3 15.5 33.3 27.3
Revenue Recognized from
Previously Deferred Sales 1.0 2.7 2.3 4.3
Deferred Revenue (3.1) (3.2) (3.1) (4.0)
Adjustments - (1.4) - (1.5)
- ------------------------------------------------------------------------------------------------------------------
Revenue from Land Sales 25.2 13.6 32.5 26.1
Other Revenue 2.8 1.6 3.7 2.8
- ------------------------------------------------------------------------------------------------------------------
$ 28.0 $ 15.2 $ 36.2 $28.9
- ------------------------------------------------------------------------------------------------------------------
Acreage amounts are shown on a gross basis, including wetlands and minority interest.
| (b) | Reflected total contract sales price on closed land transactions. Contributed development dollars, which are credited to cost of real estate sold.
|
ALLETE SecondFirst Quarter 20072008 Form 10-Q 18
NET INCOME
OVERVIEW (Continued) Financial Overview
(See Note 2. Business Segments for financial results by segment.)
The following income discussion summarizes, by segment, a comparison of the six
monthsquarter ended June 30, 2007,March 31, 2008, to the six monthsquarter ended June 30, 2006.
REGULATED UTILITYMarch 31, 2007.
Regulated Utility contributed income of $24.9$18.1 million in 20072008 ($19.818.8 million in 2006)2007). The decrease in earnings is primarily the result of a $5.5 million increase in earnings for 2007 reflects:
- increased electric salesoperations and maintenance expenses and a $4.9 million margin impact primarily due to residential, commercial and municipal
customers,the expiration of two contracts with Other Power Suppliers. These decreases in income were partially offset by a $5.3 million increase in current cost recovery on environmental retrofit projects as well as increased gasa 6 percent increase in retail and municipal kilowatthour sales. Total regulated kilowatthour sales at SWL&P duewere up one percent as the decrease in sales to colder weather
in the first quarter of 2007;
- rate increases effective January 1, 2007, at SWL&P;
-Other Power Suppliers was more than offset by increased sales to other power suppliers under long-term contracts;our retail and - increased operations and maintenance expense relating to the Boswell Unit
4 outage.
NONREGULATED ENERGY OPERATIONS reportedmunicipal customers.
Nonregulated Energy Operations contributed income of $2.8$0.2 million in 20072008 ($1.82.2 million in 2006), reflecting2007). The decrease is primarily due to a $1.2 million after tax gain on land sold that was
part of our purchase of Taconite Harbor.
INVESTMENT INsale occurring in 2007.
Investment in ATC contributed income of $3.7$2.0 million in 2007. Our initial
investment in ATC was in May 2006.
REAL ESTATE contributed income of $14.62008 ($1.8 million in 20072007).
Real Estate. Market conditions have not improved, and net loss for the quarter ended March 31, 2008 was $0.5 million ($10.63.1 million net income in 2006)2007).
Income was higher in 2007 due to the timing and mix of land sale transaction
closings. Two large sales closed during the second quarter of 2007. The timing
of the closing of real estate sales varies from period to period and impacts
comparisons between years.
OTHER reflected
Other contributed net income of $2.9$3.8 million in 20072008 ($0.20.4 million in 2006),2007). The increase is primarily due to a state tax audit settlement$4.0 million gain realized from the sale of certain available for $1.5 million and the release from a loan
guarantee for Northwest Airlines Corporation of $0.6 million after tax.
sale securities. The gain was triggered when securities were sold to reallocate investments to meet defined investment allocations based upon an approved investment strategy.
COMPARISON OF THE QUARTERS ENDED JUNE 30,MARCH 31, 2008 AND 2007 AND 2006
(See
(See Note 2. Business Segments for financial results by segment.)
REGULATED UTILITY
OPERATING REVENUE
Regulated Utility
Operating revenue increased $32.5 million, or 22 percent, from 2006
primarily due to increased fuel clause recoveries, increased power
marketing prices, and rate increases at SWL&P.
Fuel clause recoveries increased $30.4 million in 2007 primarily as a
result of increased purchased power expenses (see Fuel and Purchased Power
Expense discussion below).
Revenue from other power suppliers increased $2.3 million, or 11 percent,
from 2006 primarily due to an 11 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
$0.3 million increase in operating revenue.
Revenue from electric sales to taconite customers accounted for 24 percent
of consolidated operating revenue in each of 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 similar to 2006. Residential, commercial
and municipal kilowatthour sales increased 21.1 million, or 3 percent, from
2006, while industrial kilowatthour sales decreased by 35.9 million, or 2
percent. The increase in residential, commercial and municipal kilowatthour
sales was primarily due to two existing municipal customers converting to
full-energy requirements. The reduction in industrial kilowatthour sales
was primarily due to production scheduling at one of our taconite
customers. 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.
19 ALLETE Second Quarter 2007 Form 10-Q
REGULATED UTILITY (CONTINUED)
OPERATING EXPENSES increased $33.5 million, or 26 percent, from 2006.
FUEL AND PURCHASED POWER EXPENSE increased $29.9 million from 2006
primarily due to a $30.1 million increase in purchased power reflecting a
48 percent increase in kilowatthours purchased. Scheduled outages at
Boswell Unit 3 and Taconite Harbor Unit 2, low hydro generation and lower
Square Butte entitlement contributed to higher purchased power expenses.
The replacement power costs are recovered through the regulated utility
fuel adjustment clause in Minnesota.
Boswell Unit 4 completed generator repairs and returned to service May 13,
2007 as scheduled. The cost of the replacement coils was covered under the
original manufacturer's warranty.
OPERATING AND MAINTENANCE EXPENSE increased $4.0$13.1 million, or 7 percent, from 2006 due to planned outages at Boswell Unit 3 and Taconite Harbor Unit
2, which resulted in higher plant maintenance.
DEPRECIATION decreased $0.4 million from 2006 primarily due to the life
extension of Boswell Unit 3.
OTHER INCOME increased $0.4 million from 2006 primarily due to higher
earnings from the capitalization of AFUDC due to increased construction
activity.
NONREGULATED ENERGY OPERATIONS
OPERATING REVENUE decreased $0.3 million, or 2 percent, from 2006
reflecting a decrease in sales prices due to BNI Coal's cost plus contract.
OPERATING EXPENSES increased $0.9 million, or 6 percent, from 2006
primarily due to increased property taxes.
INVESTMENT IN ATC
OTHER INCOME reflected $3.2 million of income in 2007, resulting from our
pro-rata share of ATC's earnings as discussed in Note 3. Our investment in
ATC began in May 2006.
REAL ESTATE
OPERATING REVENUE increased $12.8 million, or 84 percent, from 2006 due to
the timing and mix of land sale transaction closings. Two large sales
closed during the second quarter of 2007. Revenue from land sales in 2007
was $25.2 million, which included $1.0 million in previously deferred
revenue. In 2006, revenue from land sales was $13.6 million, which included
$2.7 million in previously deferred revenue.
For the quarter ended June 30, 2007, 435,000 commercial square feet sold at
Town Center (170,695 in 2006), and 40,000 commercial square feet sold at
Palm Coast Park (none in 2006). Town Center sold 130 residential units (186
in 2006) and Palm Coast Park sold 406 residential units (none in 2006).
There were no acres of other land sold during the second quarter of 2007
(10 acres in 2006).
OPERATING EXPENSES increased $2.9 million, or 59 percent, from 2006
reflecting an increase in selling expenses and the cost of real estate
sold.
INCOME TAXES
For the quarter ended June 30, 2007, the effective tax rate on income from
continuing operations before minority interest was 31.9 percent (38.2 percent
for the quarter ended June 30, 2006). The effective rate of 31.9 percent for the
quarter ended June 30, 2007, deviated from the statutory rate (approximately 40
percent) primarily due to a state income tax audit settlement ($1.5 million).
Excluding this $1.5 million item, the effective rate would have been 36.1
percent for the quarter ended June 30, 2007. Other items affecting the deviation
from the statutory rate include deductions for Medicare health subsidies,
domestic manufacturing deduction, AFUDC and depletion.
ALLETE Second Quarter 2007 Form 10-Q 20
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
REGULATED UTILITY
OPERATING REVENUE increased $50.3 million, or 16 percent, from 2006 primarily due to increased fuel clause recoveries, increased kilowatthour sales to residential, commercialretail and municipal customers, increasedadditional current cost recovery revenue related to the AREA Plan and Boswell Unit 3 environmental projects and higher FERC approved wholesale rates. These increases were partially offset by a reduction in revenue from sales to other power marketing prices, and rate increases at SWL&P.
suppliers.
Fuel clause recoveries increased $37.7$7.9 million in 20072008 primarily as a result of increased purchased power expenses that were deferred from the fourth quarter of 2007 (see Fuel and Purchased Power Expense discussion below).
Revenue related to the AREA Plan and Boswell Unit 3 expenditures represented $5.3 million in 2008 ($0.1 million in 2007).
Revenue from sales to Other Power Suppliers decreased $5.5 million from 2007 due to the expiration of two Other Power Supplier contracts that expired on December 31, 2007. Total regulated kilowatthour sales were up one percent as the decrease in sales to other power suppliers was more than offset by increased $4.4sales to our retail and municipal customers.
New FERC approved wholesale rates, effective March 1, 2008, resulted in an additional $0.2 million of operating revenue.
Gas sales increased $1.9 million, or 1021 percent, compared to 2007 reflecting a colder 2008.
ALLETE First Quarter 2008 Form 10-Q
COMPARISON OF THE QUARTERS ENDED MARCH 31, 2008 AND 2007 (Continued) Operating revenue (Continued)
Overall kilowatthour sales increased 1 percent compared to 2007. Increased sales to the Company’s retail and municipal customers were partially offset by the expiration of two contracts to Other Power Suppliers. Combined residential, commercial and municipal kilowatthour sales increased 34.9 million, or 3.6 percent, from 20062007, while industrial kilowatthour sales increased by 117.8 million, or 6.9 percent. The increase in residential, commercial and municipal sales is primarily due to an 8.3a 7.7 percent increase in the price per
kilowatthour.
New rates at SWL&P, which became effective January 1, 2007, reflect a 2.8
percentHeating Degree Days compared to 2007. The increase in electric rates,industrial sales reflects higher sales to a 1.4 percent increasetaconite customer which was partially idled in gas rates and
an 8.6 percent increase in water rates. These rate increases resulted in a
$0.8 million increase in operating revenue.
early 2007.
Revenue from electric sales to taconite customers accounted for 2326 percent of consolidated operating revenue in 2007 (242008 (23 percent in 2006)2007). Revenue from electric sales to paper and pulp mills accounted for 9 percent of consolidated operating revenue in each of 20072008 and 2006.2007. Revenue from electric sales to pipelines accounted for 7 percent of consolidated operating revenue in 20072008 (6 percent in 2006)2007).
Overall kilowatthour sales were similar to 2006. Residential, commercial
and municipal kilowatthour sales
Operating expenses increased 125.3$15.0 million, or 810 percent, from 2006 while industrial kilowatthour sales decreased by 152.82007.
Fuel and Purchased Power Expense increased $8.6 million, or 4 percent. The increase in residential, commercial and municipal
kilowatthour sales was primarily11 percent, from 2007. Fuel expense increased due to additional Company generation in 2008, which was not available in 2007 as a 12 percent increase in Heating
Degree Days (primarily in February) and two existing municipal customers
converting to full-energy requirements. The reduction in industrial
kilowatthour sales was primarily weather related. Minor fluctuations in
industrial kilowatthour sales generally do not have a large impact on
revenue due to a fixed demand componentresult of revenue that is less sensitive
to changes in kilowatthours sales.
OPERATING EXPENSES increased $42.4 million, or 16 percent, from 2006.
FUEL AND PURCHASED POWER EXPENSE increased $38.2 million from 2006
primarily due to a $38.0 million increase in purchased power reflecting a
60 percent increase in kilowatthours purchased. The increase in purchased
power was primarily due to the following outages atcaused by environmental retrofits as part of our generation units:
- scheduledAREA Plan as well as an outage at Boswell Unit 3 relating to environmental
upgrades;
- scheduled outages at Laskin Unit 1 and Taconite Harbor Unit 2
relating to AREA plan environmental upgrades; and
- unplanned outages at Boswell Unit 4. Additionally, low hydro generation and lower Square Butte entitlement
contributed to higher purchased power expense. The replacementHigher purchase power costs are recoveredin the fourth quarter of 2007 impacted power purchase expense in the first quarter of 2008. Some of the 2007 costs were deferred and recognized coincident with revenue collected through the regulated utility fuel adjustment clause in Minnesota.
Boswell Unit 4 completed generator repairs2008.
Operating and returned to service May 13,
2007 as scheduled. The cost of the replacement coils were covered under the
original manufacturer's warranty.
OPERATING AND MAINTENANCE EXPENSEMaintenance Expense increased $5.1$5.5 million, or 510 percent, from 20062007 due to increased gas purchases reflecting a $4.7 million increase in plant maintenance primarily duecolder 2008, higher salaries and wages and increased costs for materials related to planned outages at our generating facilities.
DEPRECIATION decreased $0.9 million from 2006 primarily due to the life
extension of Boswell Unit 3.
OTHER INCOME environmental retrofit projects.
Depreciation Expense increased $0.9 million from 20062007 reflecting higher asset balances.
Interest Expense increased $0.6 million, or 12 percent, from 2007 primarily due to higher debt balances reflecting increased construction activity. The increase was partially offset by the capitalization of more AFUDC-Debt of $0.2 million.
Other income increased $0.6 million from 2007 due to higher earnings from the capitalization of AFUDC due toAFUDC-Equity reflecting increased construction activity.
21 ALLETE Second Quarter 2007 Form 10-Q
NONREGULATED ENERGY OPERATIONS
OPERATING REVENUE
Nonregulated Energy Operations
Operating revenue increased $0.2$0.5 million, or 13 percent, from 2006 primarily
due to increased coal sales at BNI Coal.
OPERATING EXPENSES2007.
Operating expenses increased $1.2 million, or 48 percent, from 2006 due to2007 primarily due to increased property taxes.
OTHER INCOME increased $2.4a planned outage at one of our nonregulated generating facilities. The outage is expected to be completed early in the second quarter of 2008.
Other income decreased $2.3 million from 20062007 reflecting a $1.9 million gain on land sold in 2007 which was part of the land received when we purchased Taconite Harbor purchase.
INVESTMENT INHarbor.
Investment in ATC
OTHER INCOME reflected $6.1
Equity Earnings increased $0.5 million, of income inor 17 percent, from 2007 resulting from our pro-rata share of ATC'sATC’s earnings as discussed in Note 3. Our investment in
ATC began in May 2006.
REAL ESTATE
OPERATING REVENUE increased $7.3
ALLETE First Quarter 2008 Form 10-Q
COMPARISON OF THE QUARTERS ENDED MARCH 31, 2008 AND 2007 (Continued)
Real Estate
Operating revenue decreased $5.5 million, or 2567 percent, from 2006 due to
the timing and mix of land sale transaction closings. Two large sales
closed during the second quarter of 2007. Revenue from land sales was $1.3 million in 2008 and did not include any previously deferred revenue. In 2007, revenue from land sales was $32.5$7.3 million, which included $2.3$1.3 million in previously deferred revenue. In 2006, revenue from land sales was $26.1 million which included
$4.3 million in previously deferred revenue.
Through June 30, 2007, 435,000 commercial square feet were sold at Town
Center (250,695 in 2006), and 40,000 commercial square feet were sold at
Palm Coast Park (none in 2006). Town Center has sold 130 residential units
(186 in 2006) and Palm Coast Park has sold 406 residential units (none in
2006). DuringFor the first six months of 2007, 367quarter ended March 31, 2008, 2 acres of other land werewas sold (466(367 acres in 2006)2007).
OPERATING EXPENSES
Operating expenses increased $2.4$0.5 million, or 2916 percent, from 20062007 reflecting an increasecommunity development district property tax assessments capitalized in sellingthe first quarter of 2007 at Town Center during major infrastructure construction.
Other
Operating expenses and the cost of real estate
sold.
OTHER
OPERATING EXPENSES decreased $0.7 increased $0.6 million from 2006 reflecting lower
general and administrative expenses.
OTHER INCOME 2007 as a result of additional expense related to our Georgia Water dispute as discussed in Note 11.
Other income increased $0.3$5.6 million from 20062007 primarily due to a $4.0 million gain realized from the release
from a loan guaranteesale of certain available for Northwest Airlines Corporation of $1.0 million,sale securities partially offset by lesslower earnings on cash reflecting lower average cash balances. The gain on available for sale securities was triggered when securities were sold to reallocate investments to meet a defined investment income.
INCOME TAXES
allocation based upon an approved investment strategy.
Income Taxes
For the six monthsquarter ended June 30, 2007,March 31, 2008, the effective tax rate on income from continuing operations before minority interest was 35.136.6 percent (37.3(37.9 percent for six monthsthe quarter ended June 30, 2006)March 31, 2007). The effective tax rate decreased due to higher AFUDC-Equity and wind production tax credits. The effective rate of 35.136.6 percent for the six monthsquarter ended June 30, 2007,March 31, 2008, deviated from the statutory rate (approximately 40 percent) primarily due to a state income tax audit settlement ($1.5 million).
Excluding this $1.5 million item, the effective rate would have been 37.1
percent for the six months ended June 30, 2007. Other items affecting the
deviation from the statutory rate include deductions for Medicare health subsidies, domestic manufacturing deduction, AFUDCAFUDC-Equity, investment tax credits, wind production tax credits and depletion.
CRITICAL ACCOUNTING ESTIMATES
Certain accounting measurements under applicable GAAP involve management'smanagement’s judgment about subjective factors and estimates, the effects of which are inherently uncertain. Accounting measurements that we believe are most critical to our reported results of operations and financial condition include: impairment of long-lived assets,real estate revenue and expense recognition, pension and postretirement health and life actuarial assumptions, regulatory accounting, the valuation of investments and provisions for environmental remediation.taxation. These policies are reviewed with the Audit Committee of our Board of Directors on a regular basis and summarized in Part II, Item 7 of our 20062007 Form 10-K.
ALLETE Second Quarter
OUTLOOK
Earnings Guidance. We expect ALLETE’s diluted earnings per share for 2008 to be in the range previously indicated in the 2007 Form 10-Q 22
OUTLOOK
EARNINGS GUIDANCE. ALLETE expects10-K. The guidance stated that its full-year 2007the Company’s earnings performance
will be between $3.00 and $3.05 per share in 2007. This guidance assumes lower
real estate sales during the second half of 2007 compared to the same period in
2006, normal weather patterns in Minnesota Power's service territory compared to
a warmer than normal third quarter in 2006, and higher income from the
investment in ATC due to a larger investment balance in 2007. Due to difficult
market conditions in Florida, some sales originally anticipated to close in 2007
are now being deferred. As a result of these sales deferrals, total year net
income from Real Estate is expected to be less than 2006; net income in 2006 was
the largest ever for our real estate business.between $2.70 to $2.90. This earnings guidanceprojection does not include an impact from any investment we may make in new growth opportunities.
ENERGY.
LARGE POWER CUSTOMERS. Electric power
ALLETE First Quarter 2008 Form 10-Q
OUTLOOK (Continued)
Energy. As part of our strategy, we will leverage the strengths of our Regulated Utility business to improve our strategic and financial outlook and seek growth opportunities in close proximity to existing operations in the Midwest. We believe electric industry deregulation is unlikely in Minnesota and Wisconsin in the next five years.
Minnesota Power expects significant rate base growth over the next several years as it makes capital expenditures to comply with renewable energy requirements and environmental mandates. In addition, significant investment will be made in our existing low-cost generation fleet to provide for continued future operations as we continue to believe ownership of low-cost generation is a competitive advantage. Minnesota Power will also look for transmission opportunities which strengthen and enhance the regional transmission grid and take advantage of our geographic location between sources of renewable energy and growing energy markets. Our capital investments will be recovered through a combination of current cost recovery riders and anticipated increased base electric rates. We also expect an average annual kilowatt-hour growth of approximately one percent from our existing customers, as well as up to 400 MW of additional growth from several potential new industrial customers planning projects in our service territory.
Our energy strategy is to be a leader in the movement toward renewable energy and cleaner power plants. We believe we can meet our customers’ electric energy needs for the next decade while achieving real reductions in total carbon emissions. We intend to aggressively pursue renewable energy resources and expect to comply with Minnesota’s renewable energy requirements prior to the 2025 deadline.
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 mining, paper
productionMidwestern 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 pipeline industries. Salesthe 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. |
ALLETE First Quarter 2008 Form 10-Q
OUTLOOK - - Energy (Continued)
The Company has become a “founding reporter” of The Climate Registry, an organization established to measure and publicly report GHG emissions consistently and accurately across borders and industry sectors. The non-profit organization includes 39 states, six Canadian provinces, three Native American tribes, two Mexican states and the District of Columbia. In becoming one of the founding reporters of The Climate Registry, we have voluntarily committed to measure, independently verify and publicly report our GHG emissions annually, using The Climate Registry General Reporting Protocol. This method of reporting is based on the internationally recognized GHG measurements standards of the World Resources Institute and World Business Council on Sustainable Development.
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 end of the second quarter of this year, we will have doubled our renewable generation capacity with wind additions in North Dakota and Minnesota.
Rate Cases. Entities within our Regulated Utility segment file for periodic rate revisions with the MPUC, the FERC or the PSCW. Minnesota Power’s current 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; SWL&P anticipates filing a retail rate case with the PSCW in 2008.
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 went into effect on March 1, 2008, and on an annualized basis, is expected to result in approximately $7.5 million in additional revenue.
On May 2, 2008, Minnesota Power filed a rate increase request with the MPUC seeking an average increase of approximately 10 percent for retail customers. The rate filing seeks an overall return on equity of 11.15 percent, and a capital structure consisting of 54.8 percent equity and 45.2 percent debt. On an annualized basis, the rate increase would generate approximately $45 million in additional revenue. The Company anticipates interim rates will take effect in July 2008, with a final rate order in mid-2009. Interim rates are expected to result in an average increase of approximately 8 percent, and are subject to refund pending the final rate order. We cannot predict the level of any rate increase the MPUC may approve.
Incremental revenue in 2008 from both the FERC authorized wholesale rate increase and the expected interim Minnesota retail rate increase is expected to total approximately $20 million.
Large Power Customers within
these industries represent more than half. In March 2008, a contract was signed with Northshore Mining Company to provide up to 10 MW of new load beginning April 1, 2008. Northshore Mining needs the additional power for the restart of a taconite pellet furnace. The furnace will produce about 800,000 tons of pellets annually. The contract requires Minnesota Power's regulated utilityPower to provide for Northshore Mining’s electric sales. On April 25,requirements that are in excess of their ability to supply them through their wholly owned generation facilities at Silver Bay Power Company. The contract is subject to MPUC approval.
ALLETE First Quarter 2008 Form 10-Q
OUTLOOK - - Energy (Continued)
Renewable Energy. In September 2007, the MPUC approved our electric service
agreement with PolyMet Mining, Inc. (PolyMet).site permit application and we began construction of the $50 million, 25-MW Taconite Ridge Wind I Facility, located in northeastern Minnesota. The Taconite Ridge Wind I Facility is expected to become operational in mid-2008. Although the MPUC approved our request for cost recovery in February 2008, these costs were included in our rate filing on May 2, 2008.
AREA and Boswell 3 Emission Reduction Plan. 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 contractrate proceeding. Cost recovery from retail customers includes 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 has begun at Laskin and the first of three units at Taconite Harbor. Another Taconite Harbor unit is expected to become operational in mid-2008. We anticipate rate recovery for approximately 70 MW was successfully negotiated with PolyMet, a new industrial
customer planning to start a copper, nickelthese expenditures through our rate filing, filed on May 2, 2008. We anticipate beginning cost recovery on the final Taconite Harbor unit once work is complete and precious metals (non-ferrous)
mining operationthe unit has been placed back in-service, which is expected in late 2008. If PolyMet's environmental permits are received
and start-up is achieved, the contract with PolyMet will run through at least
2018.
AREA AND BOSWELL 3 EMISSION REDUCTION PLAN.2009. As of June 30, 2007March 31, 2008, we have spent $28.6$38 million ($36 million as of the expected $60 million on theDecember 31, 2007) in AREA project. On April 15,
2007, Laskin Unit 1 was placed back in service and cost-recovery beganPlan expenditures.
In May 1,
2007. On June 24, 2007 Taconite Harbor Unit 2 was placed back in service and
cost-recovery began July 1, 2007. As of June 30, 20072006, we have spent $33.4
million of the expected $200 million on theannounced plans to make emission reduction investments at our Boswell Unit 3 emission reduction
plan.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 April 25,In October 2007, the MPCAMPUC issued its assessment ofa written order approving Minnesota Power’s request for cost recovery for the Boswell Unit 3 emission reduction plan underwith some minor modifications and additional reporting requirements. MPUC approval authorized a cash return on construction work in progress during the Mercury Emissions Reduction Actconstruction phase in lieu of 2006. The MPCA found that Minnesota Power's plan meetsAFUDC-Equity and allows for a return on investment and current cost recovery of incremental operations and maintenance expenses once the statutory
requirements, found it cost effective and groundbreaking forunit is placed into service in late 2009. In December 2007, the MPUC approved Boswell Unit 3
project occurred on May 9, 2007. On June 8, 2007 the DOC filed comments
recommending approval of the3’s rate adjustment for 2008 and we began cost recovery filing for theon January 1, 2008. As of March 31, 2008, we have spent $123 million ($89 million as of December 31, 2007) in Boswell Unit 3 emission reduction plan. Anplan expenditures.
Fuel Clause Recovery of MISO Day 2 Costs. We filed a petition with the MPUC hearingin 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. In December 2006, the MPUC issued an order (the MISO Day 2 Order) allowing us and the other utilities involved in the proceeding to continue recovering MISO Day 2 charges through the Minnesota retail fuel clause except for MISO Day 2 administrative charges.
The MISO Day 2 Order 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 $4.1 million on March 31, 2008 ($3.7 million at December 31, 2007) and we consider regulatory recovery to be probable. This order removed the Boswell Unit 3 plan is scheduledsubject 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 MISO Day 2 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.
On January 8, 2007, the MISO Day 2 Order was challenged by the Minnesota OAG, through a request for October 2007.
MINNESOTA FUEL CLAUSE.reconsideration that was opposed by Minnesota Power and the other utilities, as well as MISO. The reconsideration request was denied by the MPUC. Upon denial of the reconsideration request, the OAG appealed the MPUC Order in a filing with the Minnesota Court of Appeals. Oral arguments were held on February 27, 2008, and a written decision was issued on April 15, 2008, upholding the terms of the MISO Day 2 Order.
ALLETE First Quarter 2008 Form 10-Q
OUTLOOK - - Energy (Continued)
Minnesota Fuel Clause Investigation. 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'sOur initial comments on the proposed scope and procedure of the investigation were filed in July 2003. In November 2003, the MPUC approved the initial scope and procedure of the investigation. The investigation's purpose was to focus on whether the fuel clause continues to be
an appropriate regulatory tool. 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 very active. In March 2007, the MPUC solicited comments on whether the original fuel clause investigation should continue and, if so, what issues should be pursued. Minnesota PowerWe filed comments in April 2007, suggesting that if the investigation continued, it should focus on remaining key elements of the fuel clause, beyond the purchased power transactions examined in the MISO Day 2 proceeding, such as fuel purchases and outages. Additionally, Minnesota Power'sWe filed additional comments suggested that more
specializedin September 2007, updating our previous filings in the fuel clause issues be addressedinvestigation docket to account for changes occurring since the investigation began in separate dockets onJuly 2003. Since that time, a number of stakeholder sessions have been held at the OES offices, the primary outcome of which was the adoption of a requirement for an as needed
basis.annual fuel clause report to customers by utilities. The fuel clause investigation docket is awaiting further action by the MPUC.
23 ALLETE Second Quarter 2007 Form 10-Q
OUTLOOK (CONTINUED)
ENERGY. (Continued)
RENEWABLE ENERGY. In February 2007, the Minnesota Legislature enacted a law
requiring most electric utilities to generate 25 percent of their energy through
renewable energy sources by 2025. Minnesota Power worked with other stakeholders
to ensure the legislation included provisions for allowing regulatory assessment
of the ratepayer cost forMPUC pending these ongoing discussions regarding fuel clause report content and technical feasibility of individual utilities
meeting the 25 percent standard. Minnesota Power was developing and making
renewable supply additions as part of its generation planning strategy prior to
this legislation and this activity continues.
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, LLC.
On May 11, 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 recovery of the costs for associated transmission upgrades. The
project is expected to be operational by the end of 2007.
On May 29, 2007, the MPUC approved two 20-year Community-Based Energy
Development Project power purchase agreements. The 2.5-MW Wing River Wind
project, with Wing River Wind, LLC, became operational on July 6, 2007. The
30-MW Bear Creek Wind Partners project, with Bear Creek Wind Partners, LLC, is
expected to be operational by the end of 2008.
In the fall of 2007, we intend to begin construction of the $50 million, 25-MW
Taconite Ridge Wind Facility, to be located in northeastern Minnesota. On June
14, 2007, the MPUC issued a draft site permit, beginning the regulatory review
process. A public meeting was held July 11, 2007. The Taconite Ridge Wind
Facility is expected to become operational in mid-2008.
Minnesota Power continues to investigate additional renewable energy resources
including biomass, hydroelectric and wind generation that will help it meet the
Minnesota 25 percent renewable energy standard. In particular, Minnesota Power
is conducting a feasibility study for construction of a 40 to 50-MW biomass
generating unit at its Laskin Energy Center, as well as looking at opportunities
to expand biomass energy production at existing facilities. Additionally,
Minnesota Power is pursuing a potential 10-MW expansion of its Fond du Lac
hydroelectric station. The Company will submit plans regarding the additional
renewable energy options currently under study as a part of its Resource Plan
filing with the State of Minnesota by November 1, 2007. We will also make
specific renewable project filings for regulatory approval as needed.
INVESTMENT IN ATC. In February 2007, we completed our $60 million investmentformat.
Investment in ATC. As of June 30, 2007,March 31, 2008 our equity investment was $64.4$66.7 million, representing an 8.3a 7.9 percent ownership interest. On April 30, 2008, we made an additional investment in ATC of $2.8 million. As additional opportunities arise, we plan to make additional investments in ATC through general capital calls based upon our pro-rata ownership interest in ATC. (See Note 3.)
REAL ESTATE. In June 2005,
Real Estate. Market conditions in the Florida real estate market have not improved in 2008, and demand remains weak. While we began selling property fromare unable to predict when the Florida real estate market will improve, we continue to believe the long-term growth indicators remain strong. We expect our Town Center
development project. In August 2006,real estate operations to be profitable in 2008, however total net income is expected to be less than 2007.
Substantially all of our properties have key entitlements in place. With minimal debt, low ongoing carrying costs and a low inventory book basis, we began selling property fromexpect that our Palm
Coast Park development project. SinceReal Estate business will continue to be profitable in the future, and an important contributor to ALLETE’s ongoing earnings stream. We believe the northeastern Florida market area where a large portion of our real estate inventory is located will continue to experience above average long-term population growth, and our inventory of mixed-use land is being sold before completionin those areas will remain attractive to buyers.
ALLETE Properties plans to maximize the value of the projectproperty it currently owns through entitlement, infrastructure revenueimprovements and costorderly sales of properties. In addition to managing its current real estate inventory, ALLETE Properties is focused on identifying, acquiring, entitling and developing infrastructure on vacant land in Florida and other parts of the southeast United States.
On May 1, 2008, ALLETE Properties sold are recorded
using a percentage-of-completion method. Asretail shopping center in Winter Haven, Florida for $20.0 million. This sale resulted in an after-tax gain of June 30, 2007, we had $5.0
million ($6.5 million revenue; $1.2 million cost of real estate sold; $0.3
million selling expense) of deferred profit on sales of real estate, before
taxes and minority interest, on our consolidated balance sheet. The majority of
deferred profit relates to sales at Town Center.
approximately $3 million.
ALLETE SecondFirst Quarter 20072008 Form 10-Q 24
OUTLOOK (CONTINUED)
– Real Estate (Continued)
| Summary of Development Projects | | For the Quarter Ended | | Total | Residential | Non-residential | | March 31, 2008 | Ownership | Acres (a) | Units (b) | Sq. Ft. (b, c) | | Town Center | 80% | | | | | At December 31, 2007 | | 991 | 2,289 | 2,228,200 | | Property Sold | | – | – | – | Change in Estimate (a) | | – | – | – | | | | 991 | 2,289 | 2,228,200 | | Palm Coast Park | 100% | | | | | At December 31, 2007 | | 3,436 | 3,154 | 3,116,800 | | Property Sold | | – | – | – | Change in Estimate (a) | | – | – | – | | | | 3,436 | 3,154 | 3,116,800 | | Ormond Crossings | 100% | | | | | At December 31, 2007 | | 5,968 | (d) | (d) | Change in Estimate (a) | | – | | | | | | 5,968 | | | | | | 10,395 | 5,443 | 5,345,000 |
REAL ESTATE
PENDING CONTRACTS CONTRACT
AT JUNE 30, 2007 QUANTITY SALES PRICE
- -----------------------------------------------------------------------------------------------------------------
DOLLARS IN MILLIONS
Town Center
Commercial Sq. Ft. 442,200 $ 15.1
Residential Units 910 14.6
Palm Coast Park
Commercial Sq. Ft. - -
Residential Units 1,981 39.1
Other Land
Acres 220 11.0
- -----------------------------------------------------------------------------------------------------------------
$ 79.8
- -----------------------------------------------------------------------------------------------------------------
| (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 Quarter Ended | | | | Non- | | | March 31, 2008 | Total | Mixed Use | Residential | residential | Agricultural | Acres (a) | | | | | | | | | | | | | | | Other | | | | | | | | At December 31, 2007 | 1,573 | 362 | 248 | 424 | 539 | | | Property Sold | (2) | (2) | – | – | – | | | Change in Estimate (a) | – | – | – | – | – | | | | 1,571 | 360 | 248 | 424 | 539 |
| (a) | Acreage amounts may vary due to platting or surveying activity. Wetland amounts vary by propertyare approximate and are
oftenshown on a gross basis, including wetlands and minority interest. |
| (b) | Other properties include land located in Palm Coast, Florida not formally determined prior to sale. Commercial square feetincluded in development projects, Lehigh and residential units are estimated
and include minority interest. The actual property allocation at full build-out may be different than
these estimates.
Cape Coral. |
At June 30, 2007,March 31, 2008, total pending land sales under contract were $79.8$55.5 million ($113.855.2 million at December 31, 2006)2007) and are anticipatedscheduled to close at various times through 2012. Pending land sales under contract for propertiescontracts at Town Center include 304,000 non-residential square feet totaling $9.6 million and Palm Coast Park totaled $29.7 million ($40.1 million at December 31,
2006) and $39.1 million ($62.8 million at December 31, 2006), respectively. The
decrease in pending land sales under contract is mainly due to two large sales
that closed during the second quarter of 2007. In April 2007, Palm Coast Center,
LLC and Target Corporation closed for $12.6 million at Town Center and in June
2007, LRCF Palm Coast, LLC (Lowe Enterprises) closed on the first parcel of the
Sawmill Creek project490 residential units totaling $9.3 million. Pending contracts at Palm Coast Park for $13.1 million pursuant to revised
contract terms. Under the amended contract, the total purchase price under
contract was reduced from $52.5 million to $42.0include 1,263 residential units totaling $31.9 million. In addition to the
base price, the amended contract allows us to receive participation revenue from
land sales to third parties if various formula based criteria are achieved.
Current contract terms with Lowe Enterprises allow for extensionsOther Land pending contracts include 167 acres totaling $4.7 million. Prices on the remaining three closings. The final closings will occur through 2011.
Prices on thesepending contracts range from $20 to $60$42 per commercialnon-residential square foot, $8,000$15,000 to $30,000$27,200 per residential unit and $11,000$11,200 to $830,000$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 commercialnon-residential or mixed use. In addition
to minimum-base priceCertain contracts certain contracts, including the amended Lowe
Enterprises contract, allow us to receive participation revenue from land sales to third parties if various formula-based criteria are achieved.
If a purchaser defaults under terms ofon a sales contract, our remedies generally
include retention of the purchaser's depositlegal remedy is limited to terminating the contract and retaining the ability to remarket thepurchaser’s deposit. The property to other prospective buyers.is then available for resale. In many cases, the purchaser has also
incurredcontract purchasers incur significant costs induring due diligence, planning, designing and marketing of the property
under contract before the contract closes.
Conditionscloses, therefore they have substantially more at risk than the deposit.
ALLETE First Quarter 2008 Form 10-Q
OUTLOOK – Real Estate (Continued)
We continue to have discussions with buyers under pending contracts, including the contract with LDD Palm Coast North LLC, a subsidiary of Lowe Enterprises. Our objective is to proactively assist our buyers through this current period of weak market conditions, as we believe the long-term prospects for our properties are favorable. Our discussions may result in the Floridaadjustments to contract terms, and may include extending closing dates, revised pricing or termination.
As of March 31, 2008, we had $2.7 million of deferred profit on sales of real estate, market may fluctuate over time. The real
estate market has been difficult across the United States, including Florida.
The difficult market conditions for Florida real estate have not improved as
quickly as we had originally expected, cauing some sales originally planned for
2007 to be deferred. We expect that Florida will continue to experience above
average long-term population growthbefore taxes and that current market conditions will
improve over time. We believeminority interest, on our entitled inventory of land, most of which is
located in onebalance sheet. All of the fastest growing areas of Florida, will continuedeferred profit relates to be
attractive to buyers.
25 ALLETE Second Quarter 2007 Form 10-Q
OUTLOOK (CONTINUED)
SUMMARY OF DEVELOPMENT PROJECTS
FOR THE SIX MONTHS ENDED TOTAL RESIDENTIAL COMMERCIAL
JUNE 30, 2007 OWNERSHIP ACRES UNITS SQ. FT.
- -------------------------------------------------------------------------------------------------------------------------
Town Center 80%
At December 31, 2006 1,356 2,222 2,705,310
Property Sold (81) (130) (435,000)
Change in Estimate 17 177 72,736
- -------------------------------------------------------------------------------------------------------------------------
1,292 2,269 2,343,046
- -------------------------------------------------------------------------------------------------------------------------
Palm Coast Park 100%
At December 31, 2006 4,337 3,760 3,156,800
Property Sold (863) (406) (40,000)
Change in Estimate 112 - -
- -------------------------------------------------------------------------------------------------------------------------
3,586 3,354 3,116,800
- -------------------------------------------------------------------------------------------------------------------------
Ormond Crossings 100%
At December 31, 2006 5,960
Change in Estimate 8
- -------------------------------------------------------------------------------------------------------------------------
5,968
- -------------------------------------------------------------------------------------------------------------------------
10,846 5,623 5,459,846
- -------------------------------------------------------------------------------------------------------------------------
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
these estimates.
Includes industrial, office and retail square footage.
A development order approval from the city of Ormond Crossings was received in December 2006, for up to 3,700
residential units and 5 million commercial square feet. A development order from Flagler County is currently under
review, and if approved, Ormond Crossings will receive entitlements for up to 700 additional residential units.
Actual build-out, however, will consider market demand as well as infrastructure and mitigation costs.
SUMMARY OF OTHER LAND INVENTORIES
FOR THE SIX MONTHS ENDED
JUNE 30, 2007 OWNERSHIP TOTAL MIXED USE RESIDENTIAL COMMERCIAL AGRICULTURAL
- -------------------------------------------------------------------------------------------------------------------
ACRES
Palm Coast Holdings 80%
At December 31, 2006 2,136 1,404 346 247 139
Change in Estimate (666) (474) (244) 101 (49)
- -------------------------------------------------------------------------------------------------------------------
1,470 930 102 348 90
- -------------------------------------------------------------------------------------------------------------------
Lehigh 80%
At December 31, 2006 223 - 140 74 9
Change in Estimate - - - - -
- -------------------------------------------------------------------------------------------------------------------
223 - 140 74 9
- -------------------------------------------------------------------------------------------------------------------
Cape Coral 100%
At December 31, 2006 30 - 1 29 -
Property Sold (3) - - (3) -
- -------------------------------------------------------------------------------------------------------------------
27 - 1 26 -
- -------------------------------------------------------------------------------------------------------------------
Other 100%
At December 31, 2006 934 - - - 934
Property Sold (364) - - - (364)
Change in Estimate (113) - - - (113)
- -------------------------------------------------------------------------------------------------------------------
457 - - - 457
- -------------------------------------------------------------------------------------------------------------------
2,177 930 243 448 556
- -------------------------------------------------------------------------------------------------------------------
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 allocation at full build-out may be different than
these estimates.
Includes land located in Palm Coast, Florida not included in development projects.
ALLETE Second Quarter 2007 Form 10-Q 26
OUTLOOK (CONTINUED)
INCOME TAXES. ALLETE's aggregate federal and multi-state statutory tax rate is expected to be approximately 40% for 2007. On an ongoing basis ALLETE, has
certain tax credits and other tax adjustments that will reducerecognized in 2008 as the expected
effective tax rate to approximately 37% for 2007. These tax credits and
adjustments historically have included items such as investment tax credits,
depletion allowances, Medicare health subsidies as well as other items. The
effective rate will 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. Based upon our earnings per share guidance for 2007, we now expect
our effective tax rate for 2007 to be approximately 37%.
remaining development obligations are completed.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW ACTIVITIES
Cash Flow Activities
We believe our financial condition is strong, as evidenced by cash and cash equivalents and short-term investments of $158.9$76.2 million and a debt to total capital ratio of 38 percent39% at June 30, 2007.
OPERATING ACTIVITIES.March 31, 2008.
Operating Activities. Cash flowsflow from operating activities were $52.3was $57.4 million for the sixthree months ended June 30, 2007March 31, 2008 ($36.425.7 million for the sixthree months ended June 30, 2006)March 31, 2007). Cash flow from operating activities was higher in 2008 than 2007 primarily due to increased earningsan increase in cash flow from continuing operations compared to 2006operating assets and no cash
used for discontinued operations in 2007. Cash used for discontinued operations
was higher in 2006 due to the payment of $13.0 million of accrued liabilities
from 2005.liabilities. Cash flow from accounts receivable collections in 2006 was higherincreased due to the collection of deferred fuel cost billings related to outagescustomer receivables which were higher in late
2005.December 2007 as a result of colder weather. Cash used forflow from prepayments and other iswas higher in 20072008 due to an $11.2
million changea reduction in deferred fuel costs yet to be recovered through future
billings. The increases in deferredat March 31, 2008. Deferred fuel costs are a resultincreased in the first quarter of higher purchased
power expenses2007 due to generation outages relating to the AREA Plan environmental retrofits, lower hydro generation and lower Square Butte entitlement.
INVESTING ACTIVITIES.
Investing Activities. Cash flow used infor investing activities was $102.3$53.2 million for the sixthree months ended June 30, 2007 ($45.3March 31, 2008 (cash flow used for investing activities of $19.7 million for the sixthree months ended June 30, 2006)March 31, 2007). Cash flow used infor investing activities was higherincreased in 2007 due2008 compared to additions to property, plant and equipment and activity within our short-term
investment portfolio. Additions to property, plant and equipment were higher in
2007 than 2006 by $34.8 million primarily due to increased spending on major environmental construction projects. Activity within our short-term investment portfolio
reflected increased net purchases of short-term investments of $17.3Cash invested in ATC decreased from $8.7 million in 2007 while 2006 included $3.5to zero for the quarter ended March 31, 2008. Net proceeds from sales of available-for-sale securities were $3.1 million of net purchases.
FINANCING ACTIVITIES.in 2008 compared to $22.4 million in 2007.
Financing Activities. Cash flow from financing activities was $42.3$48.7 million for the sixthree months ended June 30, 2007 (usedMarch 31, 2008 (cash used for financing activities was $17.9$4.4 million for the sixthree months ended June 30, 2006)March 31, 2007). The increase in cash flowsflow from financing activities is due to $50resulted from the issuance of $60.0 million of unsecured notes issuedfirst mortgage bonds in the
private placement market in June 2007. (See Securities below and Note 4.)
WORKING CAPITAL.2008.
Working Capital. Additional working capital, if and when needed, generally is provided by the sale of commercial paper. We have 0.30.1 million original issue shares of our common stock available for issuance through Invest Direct, our direct stock purchase and dividend reinvestment plan. We have bank lines of credit aggregating $170.0 million, the majority of which expire in January 2012. 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.
SECURITIES
On June 8, 2007,
Auction Rate Securities. At March 31, 2008, we issued $50held $25.2 million of senior unsecured notes (Notes)investments ($23.1 million at December 31, 2007) consisting of five auction rate municipal bonds with stated maturity dates ranging between 15 and 28 years. These auction rate securities consist of guaranteed student loans insured or reinsured by the federal government. These auction rate securities were historically auctioned every 35 days to set new rates and provide a liquidating event in which investors could either buy or sell securities. The auctions have been unable to sustain themselves during 2008 due to the overall lack of credit market liquidity, and we have been unable to liquidate our auction rate securities. Until called by the issuer or liquidity returns to the auction market, these securities will pay above market interest rates. As a result, we have classified the auction rate securities as long-term investments and we have the ability to hold these securities to maturity, or until liquidity returns to this market. Our auction rate securities are recorded at face value, which we believe approximates fair market value. See Note 12 for additional information.
ALLETE First Quarter 2008 Form 10-Q
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Securities
On January 11, 2008, we accepted an offer from certain institutional buyers in the private placement market.market to purchase $60 million of First Mortgage Bonds. The Notes bearbonds were issued on February 1, 2008, carry an interest rate of 5.99 percent4.86% and will mature on JuneApril 1, 2017. The Company has2013. We have the option to prepay all or a portion of the Notesbonds at itsour discretion, subject to a make-whole provision. The Company intendsbonds are subject to additional terms and conditions which are customary for this type of transaction. We intend to use the proceeds from the sale of the Notesbonds to fund utility capital projectsexpenditures and for general corporate purposes.
27 ALLETE Second Quarter 2007 Form 10-Q
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
OFF-BALANCE SHEET ARRANGEMENTS
On March 20, 2008, we accepted an offer from certain institutional buyers in the private placement market to purchase $75 million of First Mortgage Bonds. When issued, on or before May 14, 2008, the bonds will carry an interest rate of 6.02% and will have a term of 15 years. We have the option to prepay all or a portion of the bonds at our discretion, subject to a make-whole provision. The bonds are subject to additional terms and conditions which are customary for this type of transaction. We intend to use the proceeds from the sale of the bonds to fund utility capital expenditures and for general corporate purposes.
On February 19, 2008, we entered into a Distribution Agreement with KCCI, Inc. with respect to the issuance and sale of up to 2,500,000 shares of our common stock, without par value, together with the preferred share purchase rights (Shares). The Shares may be offered for sale, from time to time, in accordance with the terms of the Distribution Agreement, which terminates on June 30, 2009. Pursuant to the Distribution Agreement, no shares have been sold in the three months ended March 31, 2008.
Off-Balance Sheet Arrangements
Off-balance sheet arrangements are summarized in our 20062007 Form 10-K, with additional disclosure discussed in Note 11 of this Form 10-Q.
CAPITAL REQUIREMENTS
Capital Requirements
For the six monthsquarter ended June 30, 2007,March 31, 2008, capital expenditures for continuing operations totaled $71.3$60.3 million ($35.321.9 million in 2006), which2007). The expenditures were spentmade in the Regulated Utility segment using a combination of internallyand Nonregulated Energy segments. Internally generated funds and additional debt issuances.
were the sources of funding.
Real estate development expenditures are and will be funded with a revolving development loan and tax-exempt bonds issued by community development districts and
internally generated funds.districts. Additional disclosure regarding the Town Center district and Palm Coast Park district tax-exempt bonds is included in Note 11 of this Form 10-Q.
ENVIRONMENTAL MATTERS AND OTHER
As previously discussed in our Critical Accounting Policies section, our
Our businesses are subject to regulation of environmental matters by various federal, state and local authorities. Due to restrictive environmental requirements through legislation and/or rulemaking in the future, we anticipate that potential expenditures for environmental matters will be material and will require significant capital investments. We are unable to predict the outcome of the matters discussed in Note 11 of this Form 10-Q.
NEW ACCOUNTING STANDARDS
New accounting standards are discussed in Note 1.
ALLETE First Quarter 2008 Form 10-Q
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SECURITIES INVESTMENTS
AVAILABLE-FOR-SALE SECURITIES.
Available-For-Sale Securities. As of June 30, 2007,March 31, 2008, our available-for-sale securities portfolio consisted of securities in a grantor trust, established to fund certain employee benefits, included in Investments, and various auction rate bonds and variable rate demand notes included in Short-Term Investments.securities. Our available-for-sale securities portfolio had a fair value of $151.7$55.0 million at June 30, 2007March 31, 2008 ($130.153.6 million at December 31, 2006)2007), and a totaldo not have any unrealized after-tax gain of $5.0 million at June 30, 2007gains ($4.05.1 million at December 31, 2006)2007).
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 share price trends and the impact of overall market conditions. As a result of our periodic assessments, we did not record any impairments on our available-for-sale securities for the quarter ended June 30, 2007.
EMERGING TECHNOLOGY PORTFOLIO.March 31, 2008.
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 investmentsinvestment in venture capital funds under the equity method and account for our direct investments in privately-held companies under the cost method based
primarily onbecause of our ownership percentages.percentage. The total carrying value of our emerging technology portfolio was $9.0$7.5 million at June 30, 2007March 31, 2008 ($9.27.9 million at December 31, 2006)2007). 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. As a resultDue to the distribution of investments from matured venture capital funds, our periodic assessments, we did not record any impairments on
our emerging technology portfolio for the quarter ended June 30, 2007. Our basis in direct investments in privately-held companies included in the emerging technology portfolio was zero$1.2 million at both June 30, 2007 andMarch 31, 2008 ($1.2 million at December 31, 2006.
ALLETE Second Quarter2007). No impairments were recorded in the quarter ended March 31, 2008. In 2007, Form 10-Q 28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
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.
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 resulted 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
Our power marketing activities consist of (1) purchasing energy in the wholesale market for resale in our regulated service territories when retail energy requirements exceed generation output and (2) selling excess available generation and purchased power.
From time to time, our utility operations may have excess generation that is temporarily not required by retail and municipal customers in our regulated service territory. We actively sell this generation to the wholesale market to optimize the value of our generating facilities. This generation is typically sold in the MISO market at market prices.
ALLETE First Quarter 2008 Form 10-Q
POWER MARKETING (Continued)
Approximately 200 MW of generation from our Taconite Harbor facility in northern Minnesota has been sold through various long-term capacity and energy contracts. Long-term, we have entered into two capacity and energy sales contracts totaling 175 MW (201 MW including a 15 percent reserve), which were effective May 1, 2005, and expire on April 30, 2010. Both contracts contain fixed monthly capacity charges and fixed minimum energy charges. One contract provides for an annual escalator to the energy charge based on increases in our cost of coal, subject to a small minimum annual escalation. The other contract provides that the energy charge will be the greater of a fixed minimum charge or an amount based on the variable production cost of a combined-cycle, natural gas unit. Our exposure in the event of a full or partial outage at our Taconite Harbor facility is significantly limited under both contracts. When the buyer is notified at least two months prior to an outage, there is no exposure. Outages with less than two months notice are subject to an annual duration limitation typical of this type of contract. We also have a 50-MW capacity and energy sales
contract that extends through April 2008, with formula pricing based on variable
production cost of a combustion-turbine, natural gas unit.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a system
Evaluation of controlsDisclosure Controls and procedures designed to provide reasonable
assurance as to the reliabilityProcedures. As of the financial statements and other
disclosures included in this report, as well as to safeguard assets from
unauthorized use or disposition. We evaluated the effectiveness of the design
and operation of our disclosure controls and proceduresMarch 31, 2008, evaluations were performed, under the supervision and with the participation of management, including our chiefprincipal executive officer and chiefprincipal financial officer, as of the endeffectiveness of the period covered by this Form
10-Q.design and operation of ALLETE’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”)). Based upon that evaluation,those evaluations, our chiefprincipal executive officer and chiefprincipal financial officer have concluded that oursuch disclosure controls and procedures are effective.effective to provide assurance that information required to be disclosed in ALLETE’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
Changes in Internal Controls. While we continue to enhance our internal control over financial reporting, there has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
29 ALLETE Second Quarter 2007 Form 10-Q
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Material legal and regulatory proceedings are included in the discussion of Other Information in Part II, Item 5 and/or Note 11 of this Form 10-Q, and are incorporated by reference herein.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors disclosed under the heading "Risk Factors"“Risk Factors” in Part I, Item 1A of our 20062007 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) We held our Annual Meeting of Shareholders on May 8, 2007.
(b) Included in (c) below.
(c) The election of directors and the ratification of the appointment of
PricewaterhouseCoopers LLP, as the Company's independent registered public
accounting firm for 2007, were voted on at the 2007 Annual Meeting of
Shareholders.
The results were as follows:
VOTES
VOTES FOR WITHHELD
- ------------------------------------------------------------------------------------------------------------------
DIRECTORS
Kathleen A. Brekken 25,871,813 418,468
Heidi J. Eddins 23,456,099 2,834,183
Sidney W. Emery, Jr. 25,848,429 441,853
James J. Hoolihan 23,331,033 2,959,249
Madeleine W. Ludlow 23,456,062 2,834,220
George L. Mayer 23,319,274 2,971,008
Roger D. Peirce 23,298,748 2,991,533
Jack I. Rajala 22,694,844 3,595,438
Donald J. Shippar 23,247,493 3,042,789
Bruce W. Stender 23,319,884 2,970,398
- ------------------------------------------------------------------------------------------------------------------
VOTES BROKER
VOTES FOR AGAINST ABSTENTIONS NONVOTES
- ------------------------------------------------------------------------------------------------------------------
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP 25,633,128 516,411 140,740 -
- ------------------------------------------------------------------------------------------------------------------
(d) Not applicable.
None.
ALLETE SecondFirst Quarter 20072008 Form 10-Q 30
ITEM 5. OTHER INFORMATION
Reference is made to our 20062007 Form 10-K for background information on the following updates. Unless otherwise indicated, cited references are to our 20062007 Form 10-K.
Ref. Page 178 – Energy – Regulated Utility, Large Power Customer Contracts – Fifth Paragraph
| | Minimum | | | Minimum Revenue and Demand Under Contract | Annual Revenue (a, b) | Monthly | | As of March 31, 2008 | (Millions) | Megawatts | | | | | | 2008 | $97.8 | 647 | | 2009 | $31.4 | 188 | | 2010 | $25.5 | 148 | | 2011 | $25.3 | 148 | | 2012 | $17.5 | 100 | | | | |
| (a) | Based on past experience, we believe revenue from our Large Power Customers will be substantially in excess of the minimum contract amounts. |
| (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. |
Ref. Page 11 – Energy - Real Estate,Regulated Utility, Power Supply – First Full Paragraph
On January 24, 2008, we received a letter from BNSF alleging that the Company defaulted on a material obligation under the Company’s CTA. In June 2007, LRCF Palm Coast, LLC (Lowe Enterprises) closed on the first parcelnotice, BNSF claimed Minnesota Power underpaid approximately $1.6 million for coal transportation services in 2006 and that failure to pay such amount plus interest may result in BNSF’s termination of the Sawmill Creek project at Palm Coast ParkCTA. We believe we do not owe the amount claimed, and that BNSF’s claims are wholly without merit. On April 1, 2008, to ensure that BNSF does not attempt to terminate the CTA, we paid under protest the full amount claimed by BNSF and filed a demand for $13.1 million pursuant to
revised contract terms. Underarbitration of the amended contract,issue. The delivered costs of fuel for the total purchase price
under contract was reducedCompany’s generation are recoverable from $52.5 million to $42.0 million. In addition toMinnesota Power’s utility customers through the base price, the amended contract allows us to receive participation revenue
from land sales to third parties if various formula based criteria are achieved.
Current contract terms with Lowe Enterprises allow for extensions on the
remaining three closings. The final closings will occur through 2011.
fuel adjustment clause.
Ref. Page 49 - Contractual Obligations,20 –Employees – First Full Paragraph
The labor agreement between BNI Coal and the International Brotherhood of Electrical Workers (IBEW) local 1593 expired on March 31, 2008. The parties continue to negotiate under article 1.02 of the labor agreement which assures no work stoppage or work slowdown for a 45 day period following expiration. The extension period will expire on May 15, 2008. The Company believes that a new labor agreement will be achieved before the May 15, 2008 deadline.
ALLETE First Table
Unconditional purchase obligations represent our Square Butte power purchase
agreements, minimum purchase commitments under coal and rail contracts, and have
been updated to reflect additional purchase obligations for capital expenditures
related to the Taconite Ridge Wind Facility, AREA and Boswell Unit 3
environmental upgrade projects. The amounts included in the less than 1 year
column include amounts already paid in 2007.
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS LESS THAN 1 TO 3 4 TO 5 AFTER
AS OF DECEMBER 31, 2006 TOTAL 1 YEAR YEARS YEARS 5 YEARS
- ---------------------------------------------------------------------------------------------------------------------
MILLIONS
Long-Term Debt $ 639.7 $ 46.7 $ 65.1 $31.2 $496.7
Operating Lease Obligations 86.5 8.2 21.1 11.4 45.8
Unconditional Purchase Obligations 487.5 177.9 100.1 26.2 183.3
Investment in ATC 8.6 8.6 - - -
- ---------------------------------------------------------------------------------------------------------------------
$1,222.3 $241.4 $186.3 $68.8 $725.8
- ---------------------------------------------------------------------------------------------------------------------
Includes interest and assumes variable interest rate in effect at December 31, 2006, remains constant through
remaining term.
Quarter 2008 Form 10-Q
ITEM 5. OTHER INFORMATION (Continued) Ref. Page 7611 – Energy - Fuel Clause Recovery of MISO Day 2 Costs,Regulated Utility, Minnesota Public Utilities Commission – First Full Paragraph
On
Entities within our Regulated Utility segment file for periodic rate revisions with the MPUC, the FERC or the PSCW. Minnesota Power’s current 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 8, 2007,1, 2007; SWL&P anticipates filing a retail rate case with the Minnesota Office of Attorney General petitioned for
reconsideration of the MPUC's December 20, 2006, order. PSCW in 2008.
On February 15, 2007,8, 2008, the MPUC declinedFERC 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 went into effect on March 1, 2008, and on an annualized basis, is expected to address the Minnesota Office of Attorney General's request
for reconsideration. result in approximately $7.5 million in additional revenue.
On April 10, 2007, the Minnesota Office of Attorney General
filed an appeal with the Minnesota Court of Appeals. The appeal does not alter
current cost recovery of MISO charges in accordance with the MPUC's order.
Minnesota Power timely responded to the Minnesota Office of Attorney General's
notice of filing. On June 25, 2007, the Minnesota Office of Attorney General
filed its initial brief.May 2, 2008, Minnesota Power filed reply briefsa rate increase request with the MPUC seeking an average increase of approximately 10 percent for retail customers. The rate filing seeks an overall return on equity of 11.15 percent, and a capital structure consisting of 54.8 percent equity and 45.2 percent debt. On an annualized basis, the rate increase would generate approximately $45 million in additional revenue. The Company anticipates interim rates will take effect in July 30, 2007.
31 ALLETE Second Quarter 2007 Form 10-Q
2008, with a final rate order in mid-2009. Interim rates are expected to result in an average increase of approximately 8 percent, and are subject to refund pending the final rate order. We cannot predict the level of any rate increase the MPUC may approve.
Incremental revenue in 2008 from both the FERC authorized wholesale rate increase and the expected interim Minnesota retail rate increase is expected to total approximately $20 million.
ITEM 6. EXHIBITS
EXHIBIT
NUMBER
10(a) Note Purchase Agreement, dated as of June 8, 2007, between
Exhibit Number
| 31(a) | Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31(b) | Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32 | | Section 1350 Certification of Periodic Report by the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 99 | | ALLETE News Release dated May 2, 2008, announcing 2008 first quarter earnings. (This exhibit has been furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.) |
ALLETE and Thrivent Financial for Lutherans and The Northwestern Mutual Life
Insurance Company.
31(a) Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b) Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Section 1350 Certification of Periodic Report by the Chief Executive
Officer and Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99 ALLETE News Release dated July 27, 2007, announcing 2007 second
quarter earnings. (THIS EXHIBIT HAS BEEN FURNISHED AND SHALL NOT BE
DEEMED "FILED" FOR PURPOSES OF SECTION 18 OF THE SECURITIES EXCHANGE
ACT OF 1934, NOR SHALL IT BE DEEMED INCORPORATED BY REFERENCE IN ANY
FILING UNDER THE SECURITIES ACT OF 1933, EXCEPT AS SHALL BE EXPRESSLY
SET FORTH BY SPECIFIC REFERENCE IN SUCH FILING.)
ALLETE SecondFirst Quarter 20072008 Form 10-Q 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | Allete, Inc. | | | | | | | | | | | | | | May 2, 2008 | | /s/ Mark A. Schober | | | Mark A. Schober | | | Senior Vice President and Chief Financial Officer | | | | | | | | | | | | | | | | | May 2, 2008 | | /s/ Steven Q. DeVinck | | | Steven Q. DeVinck | | | Controller |
ALLETE INC.
July 26, 2007 Mark A. Schober
-------------------------------------------------
Mark A. Schober
Senior Vice President and Chief Financial Officer
July 26, 2007 Steven Q. DeVinck
-------------------------------------------------
Steven Q. DeVinck
Controller
First Quarter 2008 Form 10-Q
|