================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K
(Mark One)
/X/    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Fiscal Year Ended DECEMBER 31, 1997

/ /    Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from              to
                                                    ------------    ------------

Commission File No. 1-3548

                         MINNESOTA POWER & LIGHT COMPANY
             (Exact name of registrant as specified in its charter)

            Minnesota                                      41-0418150
   (State or other jurisdiction                         (I.R.S. Employer
  of incorporation or organization)                    Identification No.)

                             30 West Superior Street
                             Duluth, Minnesota 55802
           (Address of principal executive offices including Zip Code)

          Registrant's telephone number, including area code (218) 722-2641  

           Securities registered pursuant to Section 12(b) of the Act:

                                                        Name of Each Stock
            Title of Each Class                    Exchange on Which Registered
            -------------------                    ----------------------------

      Common Stock, without par value                 New York Stock Exchange

  5% Cumulative Preferred Stock, par value
             $100 per share                           American Stock Exchange

   8.05% Cumulative Quarterly Income 
          Preferred Securities
    of MP&L Capital I, a subsidiary of
      Minnesota Power & Light Company                 New York Stock Exchange

            Securities  registered  pursuant to Section 12(g) of the Act:
                       Preferred Stock, without par value

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

         Yes      /X/        No       / /

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/

     The aggregate  market value of voting stock held by  nonaffiliates on 
March 2, 1998 was $1,370,119,250.

     As of March 2, 1998 there were 33,699,517 shares of Minnesota Power & Light
Company Common Stock, without par value, outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Minnesota Power 1997 Annual Report are incorporated by reference
in Part II,  Items 7 and 8, and  portions  of the Proxy  Statement  for the 1998
Annual Meeting of Shareholders are incorporated by reference in Part III.

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                                      INDEX

                                                                         PAGE
PART I
Item 1.   Business                                                         1
          Electric Operations                                              2
              Electric Sales                                               2
              Purchased Power                                              5
              Capacity Sales                                               5
              Fuel                                                         6
              Regulatory Issues                                            6
              Capital Expenditure Program                                  8
              Competition                                                  8
              Franchises                                                   9
              Environmental Matters                                        9
          Water Services                                                  12
              Regulatory Issues                                           13
              Capital Expenditure Program                                 14
              Competition                                                 14
              Franchises                                                  14
              Environmental Matters                                       14
          Automotive Services                                             15
              Capital Expenditure Program                                 15
              Competition                                                 16
              Environmental Matters                                       16
          Investments                                                     16
              Environmental Matters                                       17
          Executive Officers of the Registrant                            18
Item 2.   Properties                                                      20
Item 3.   Legal Proceedings                                               22
Item 4.   Submission of Matters to a Vote of Security Holders             23

PART II
Item 5.   Market for the Registrant's Common Equity and Related 
           Stockholder Matters                                            23
Item 6.   Selected Financial Data                                         24
Item 7.   Management's Discussion and Analysis of Financial Condition 
           and Results of Operations                                      24
Item 8.   Financial Statements and Supplementary Data                     24
Item 9.   Changes in and Disagreements with Accountants on Accounting 
           and Financial Disclosure                                       24

PART III
Item 10.  Directors and Executive Officers of the Registrant              25
Item 11.  Executive Compensation                                          25
Item 12.  Security Ownership of Certain Beneficial Owners 
           and Management                                                 25
Item 13.  Certain Relationships and Related Transactions                  25

PART IV
Item 14.  Exhibits, Financial Statement Schedules and Reports 
           on Form 8-K                                                    26

SIGNATURES                                                                33



                                   DEFINITIONS

         The following abbreviations or acronyms are used in the text.

ABBREVIATION OR ACRONYMS    TERM
- - - ------------------------    ----------------------------------------------------

ADESA                       ADESA Corporation
AFC                         Automotive Finance Corporation
Americas' Water             Americas' Water Services Corporation
BNI Coal                    BNI Coal, Ltd.
Boswell                     Boswell Energy Center
Capital Re                  Capital Re Corporation
CIP                         Conservation Improvement Program(s)
Company                     Minnesota Power & Light Company and its Subsidiaries
Duluth                      City of Duluth, Minnesota
EPA                         Environmental Protection Agency
FERC                        Federal Energy Regulatory Commission
Florida Water               Florida Water Services Corporation
FPSC                        Florida Public Service Commission
Great Rigs                  Great Rigs Incorporated
Heater                      Heater Utilities, Inc.
Hibbard                     M.L. Hibbard Station
ISI                         Instrumentation Services, Inc.
Laskin                      Laskin Energy Center
Lehigh                      Lehigh Acquisition Corporation
MAPP                        Mid-Continent Area Power Pool
MBtu                        Million British thermal units
Minnesota Power             Minnesota Power & Light Company and its Subsidiaries
Minnkota Power              Minnkota Power Cooperative, Inc.
MP Telecom                  Minnesota Power Telecom, Inc.
MPCA                        Minnesota Pollution Control Agency
MPUC                        Minnesota Public Utilities Commission
MW                          Megawatt(s)
MWh                         Megawatthour
NCUC                        North Carolina Utilities Commission
Note_                       Note __ to the consolidated financial statements 
                                 in the Minnesota Power 1997 Annual Report
NPDES                       National Pollutant Discharge Elimination System
PSCW                        Public Service Commission of Wisconsin
Square Butte                Square Butte Electric Cooperative
SWL&P                       Superior Water, Light and Power Company
U.S. Maintenance 
 and Management             U.S. Maintenance and Management Services
                                 Corporation
WPPI                        Wisconsin Public Power, Inc.





                              SAFE HARBOR STATEMENT
                                    UNDER THE
                PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995


         In connection with the safe harbor provisions of the Private Securities
Litigation  Reform  Act of 1995  (Reform  Act),  the  Company  is hereby  filing
cautionary  statements  identifying  important  factors  that  could  cause  the
Company's   actual  results  to  differ   materially  from  those  projected  in
forward-looking  statements  (as such term is defined in the Reform Act) made by
or  on  behalf  of  the  Company  in  this  annual   report  on  Form  10-K,  in
presentations,  in response to  questions  or  otherwise.  Any  statements  that
express, or involve discussions as to expectations,  beliefs, plans, objectives,
assumptions or future events or performance (often, but not always,  through the
use  of  words  or  phrases  such  as  "anticipates",  "believes",  "estimates",
"expects",  "intends",  "plans",  "predicts",  "projects", "will likely result",
"will continue",  or similar expressions) are not statements of historical facts
and may be forward-looking.

         Forward-looking   statements   involve  estimates,   assumptions,   and
uncertainties  and are  qualified  in their  entirety by  reference  to, and are
accompanied by, the following important factors, which are difficult to predict,
contain  uncertainties,  are beyond the  control  of the  Company  and may cause
actual  results to differ  materially  from those  contained in  forward-looking
statements:

         -   prevailing governmental policies and regulatory actions, including
             those of the FERC, the MPUC, the FPSC, the NCUC and the PSCW,  with
             respect to allowed  rates of return,  industry and rate  structure,
             acquisition  and disposal of assets and  facilities,  operation and
             construction of plant facilities,  recovery of purchased power, and
             present or prospective wholesale and retail competition  (including
             but not limited to retail wheeling and transmission costs);
         -   economic and geographic  factors including  political and economic
             risks; 
         -   changes in and compliance  with  environmental  and safety
             laws and policies; 
         -   weather conditions; 
         -   population growth rates and demographic   patterns;
         -   competition  for  retail  and  wholesale customers;  
         -   pricing  and  transportation  of  commodities;  
         -   market demand,  including structural market changes; 
         -   changes in tax rates or policies or in rates of  inflation;  
         -   changes in project  costs;
         -   unanticipated changes in operating expenses and capital 
             expenditures;  
         -   capital  market  conditions;  
         -   competition  for  new energy  development  opportunities; and
         -   legal and  administrative proceedings (whether  civil or  criminal)
             and settlements  that influence the business and profitability of 
             the Company.

         Any forward-looking  statement speaks only as of the date on which such
statement  is made,  and the  Company  undertakes  no  obligation  to update any
forward-looking  statement to reflect events or circumstances  after the date on
which such  statement  is made or to reflect  the  occurrence  of  unanticipated
events.  New  factors  emerge  from  time to  time  and it is not  possible  for
management to predict all of such  factors,  nor can it assess the impact of any
such factor on the business or the extent to which any factor, or combination of
factors,  may cause  results to differ  materially  from those  contained in any
forward-looking statement.



                                     PART I

ITEM 1.  BUSINESS.

         Minnesota  Power, a broadly  diversified  service company  incorporated
under  the  laws of the  State of  Minnesota  in 1906,  has  operations  in four
business  segments:  (1) Electric  Operations,  which  include  electric and gas
services,  and  coal  mining;  (2)  Water  Services,  which  include  water  and
wastewater services; (3) Automotive Services, which include a network of vehicle
auctions,  a finance company and an auto transport company; and (4) Investments,
which  include a  securities  portfolio,  a 21 percent  equity  investment  in a
financial guaranty reinsurance and insurance company and real estate operations.
Corporate Charges represent general corporate expenses,  including interest, not
specifically  related to any one business  segment.  As of December 31, 1997 the
Company and its subsidiaries had approximately 6,800 employees.

                                             1997          1996         1995
- - - --------------------------------------------------------------------------------
                                                         Millions
Operating Revenue and Income
    Electric Operations                    $ 541.9       $ 529.2      $ 503.5
    Water Services                            95.5          85.2         66.1
    Automotive Services (a)                  255.5         183.9         61.6
    Investments                               60.9          49.9         43.7
    Corporate Charges                         (0.2)         (1.3)        (2.0)
                                           -------       -------      -------
                                           $ 953.6       $ 846.9      $ 672.9
                                           =======       =======      =======

Net Income
    Electric Operations                    $  43.1       $  39.4      $  41.0
    Water Services                             8.2           5.4         (1.0)
    Automotive Services (a)                   14.0           3.7            -
    Investments                               32.1          38.1         41.3
    Corporate Charges                        (19.8)        (17.4)       (19.4)
                                           -------       -------      -------
                                              77.6          69.2         61.9
                                           
    Discontinued Operations (b)                  -             -          2.8
                                           -------       -------      -------
                                           $  77.6       $  69.2      $  64.7
                                           =======       =======      =======

- - - --------------------------------------------------------------------------------

Basic and Diluted
    Earnings Per Share of Common Stock        $2.47        $2.28        $2.16

Average Shares of Common Stock - Millions      30.6         29.3         28.5

- - - --------------------------------------------------------------------------------
(a)  The Company  purchased  80 percent of ADESA,  including  AFC and Great
     Rigs, on July 1, 1995,  another 3 percent in January 1996 and the remaining
     17 percent in August 1996.
(b)  On June 30,  1995 the Company  sold its  interest in the paper and pulp
     business to  Consolidated  Papers,  Inc. 

         Since 1983 Minnesota Power has been diversifying to reduce its reliance
on electricity  sales to Minnesota's  taconite  industry and to gain  additional
earnings  growth   potential.   Acquisitions   have  been  a  primary  means  of
diversification.  During 1997 the Company  continued its  corporate  strategy of
expanding   existing   business   segments.   Electric   Operations   created  a
telecommunications  subsidiary, while Water Services acquired a water subsidiary
and established two non-regulated  subsidiaries.  Automotive  Services added two
auction facilities and 25 loan production offices. The Company plans to consider
other acquisitions that would complement its businesses, expand its services and
contribute to earnings growth.

         For a detailed  discussion  of results of  operations  and trends,  see
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations  in the  Minnesota  Power 1997 Annual  Report.  For business  segment
information, see Note 1.

                                      -1-


                               ELECTRIC OPERATIONS

         Electric   Operations   generate,   transmit,   distribute  and  market
electricity.    In   addition   Electric   Operations   include   coal   mining,
telecommunications  and  economic  development  projects  within  the  Company's
service area.  Electric  Operations intend to seek cost saving  alternatives and
efficiencies, and expand non-regulated services.

         -    MINNESOTA  POWER  provides  electricity  in a 26,000  square mile
              electric service territory located in northeastern  Minnesota.  As
              of December 31, 1997 Minnesota Power was supplying retail electric
              service to 122,000 customers in 153 cities, towns and communities,
              and outlying rural areas. The largest city served is Duluth with a
              population of 85,000 based on the 1990 census.  Wholesale electric
              service  for  resale  is  supplied  to 15  municipal  distribution
              systems, one private utility and SWL&P.

              MPEX,  a division of  Minnesota  Power,  is an  expansion  of the
              Company's inter-utility marketing group which has been a buyer and
              seller of capacity  and energy for over 25 years in the  wholesale
              power market.  The customers of MPEX are other power  suppliers in
              the Midwest and Canada.  MPEX also contracts with its customers to
              provide hourly energy scheduling and power trading services.

         -    SUPERIOR  WATER,  LIGHT AND POWER COMPANY sells  electricity  and
              natural gas, and provides water service in northwestern Wisconsin.
              As of December 31, 1997 SWL&P served  14,000  electric  customers,
              11,000 natural gas customers and 10,000 water customers.

         -    BNI COAL owns and  operates a lignite mine in North  Dakota.  Two
              electric generating cooperatives, Minnkota Power and Square Butte,
              presently  consume  virtually  all of  BNI  Coal's  production  of
              lignite coal under coal supply agreements extending to 2027. Under
              an agreement with Square Butte, Minnesota Power purchases about 71
              percent of the output from the Square  Butte unit which is capable
              of generating up to 455 MW. Minnkota Power has an option to extend
              its coal supply agreement to 2042. (See - Fuel and Note 5.)
 
         -    ELECTRIC OUTLET, INC. is a retail store that sells life-style  
              changing electric products  and also researches new products to 
              be offered for sale and distribution.

         -    MINNESOTA POWER TELECOM,  INC., formed in 1997, will provide high
              volume  fiber optic and  microwave  communications  to  businesses
              across the Company's service territory.

         -    UPPER  MINNESOTA  PROPERTIES,  INC.  has  invested in  affordable
              housing   projects   located  in  Electric   Operations'   service
              territory.  The Company is also an active participant in a variety
              of economic  development  projects throughout Electric Operations'
              service territory providing resources and expertise.

ELECTRIC SALES

         The two major  industries in Minnesota  Power's  service  territory are
taconite production,  and paper and pulp mills. Taconite customers accounted for
31 percent of the Company's  electric  operating  revenue and income in 1997 (32
percent in 1996; 35 percent in 1995). Paper and pulp customers  accounted for 12
percent of electric operating revenue and income in 1997 (11 percent in 1996; 12
percent in 1995).  Sales to other power  suppliers  accounted  for 12 percent of
electric  operating revenue and income in 1997 (13 percent in 1996; 9 percent in
1995). As deregulation of the electric utility industry approaches,  the Company
believes the percentage of electric  revenue from sales to other power suppliers
will  continue to increase.  The  percentage  of electric  revenue from taconite
customers is expected to decrease as other strategic initiatives, including MPEX
and MP Telecom, add to electric operating revenue and income.

         Over the last five years,  80 percent of the  domestic  ore consumed by
iron and steel plants in the United States has originated from plants within the
Company's  electric  service  territory.   Taconite,  an  iron-bearing  rock  of
relatively  low iron content which is abundantly  available in Minnesota,  is an
important  domestic  source of raw  material  for the steel  industry.  Taconite
processing   plants  use  large  quantities  of  electric  power  to  grind  the
ore-bearing rock, and agglomerate and pelletize the iron particles into taconite
pellets. Annual taconite production in Minnesota was 47 million tons in 1997 (46
million tons in 1996; 

                                      -2-


47  million  tons in 1995).  Based on the  Company's  research  of the  taconite
industry, 1998 Minnesota taconite production is anticipated to remain at or near
the 1997  level.  While  taconite  production  is expected to continue at annual
levels over 40 million tons, the long-term  future of this cyclical  industry is
less certain. Production may decline gradually some time after the year 2008.


                                                                                 Year Ended December 31,
                                                                        1997              1996             1995
- - - -------------------------------------------------------------------------------------------------------------------
                                                                                                 

Total Electric Operating Revenue and Income - Millions                 $541.9            $529.2           $503.5

Percentage of Total Electric Operating Revenue and Income
     Retail
       Industrial
         Taconite Producers <F1>                                         31%               32%              35%
         Paper and Pulp Mills                                            12                11               12
         Other Industrial                                                 6                 6                7
                                                                        ---               ---              ---
           Total Industrial                                              49                49               54
       Residential                                                       12                12               11
       Commercial                                                        11                11               12
       Other Retail                                                       1                 1                1
     Sales to Other Power Suppliers                                      12                13                9
     Other Revenue and Income                                            15                14               13
                                                                        ---               ---              ---
                                                                        100%              100%             100%
                                                                        ===               ===              ===

- - - -------------------------------------------------------------------------------------------------------------------
<FN>
<F1> The Company's two largest  customers  represented 10 percent and 8 percent,
     respectively,  of total electric  operating  revenue and income in 1997 (11
     percent and 8 percent in 1996; 12 percent and 9 percent in 1995).
</FN>


         LARGE POWER CUSTOMER CONTRACTS

         The Company  has Large  Power  Customer  contracts  with five  taconite
producers,  four paper and pulp mills,  and two pipeline  companies (Large Power
Customers),  each of which requires 10 MW or more of generating capacity.  Large
Power  Customer  contracts  require  the  Company  to have a  certain  amount of
generating capacity available at all times. In turn each Large Power Customer is
required  to pay a minimum  monthly  demand  charge  that covers the fixed costs
associated  with having  capacity  available to serve the customer,  including a
return on common equity.  Most contracts  allow customers to establish the level
of MW subject to a demand  charge on a periodic  (pool season) basis and require
that a portion of their MW needs be  committed  on a  take-or-pay  basis for the
entire term of the agreement. In addition to the demand charge, each Large Power
Customer is billed an energy charge for each kilowatthour used that recovers the
variable  costs  incurred  in  generating  electricity.  Six of the Large  Power
Customers have interruptible service for a portion of their needs which includes
a discounted  demand rate and energy  priced at the Company's  incremental  cost
after serving all firm power obligations.  The Company also provides incremental
production  service for customer  demand  levels above the contract  take-or-pay
levels.  There is no demand  charge for this  service and energy is priced at an
increment  above  the  Company's  cost.   Incremental   production   service  is
interruptible.

         Each contract continues after the contract termination date, unless the
required four-year advance notice of cancellation has been given. Such contracts
minimize the impact on earnings  that  otherwise  would result from  significant
reductions in kilowatthour  sales to such  customers.  Large Power Customers are
required to purchase their entire electric service requirements from the Company
for the  duration  of their  contracts.  The  rates  and  corresponding  revenue
associated  with capacity and energy  provided under these contracts are subject
to change  through the same  regulatory  process  governing all retail  electric
rates.  Minnesota  Power has  implemented  a key account  management  process to
heighten its focus on large  commercial  and  industrial  customers' needs,  and
anticipates  continuing  negotiations with these customers to explore options to
respond to those needs. (See Regulatory Issues - Electric Rates.)

         As of March 15, 1998 the  minimum  annual  revenue  the  Company  would
collect under contracts with these Large Power  Customers,  assuming no electric
energy use by these customers,  is estimated to be $101.8,  $78.3,  $69.2, $66.5
and  $47.3  million  during  the  years  1998,   1999,   2000,  2001  and  2002,
respectively.  Based on past  experiences and projected  operating  levels,  the
Company  believes revenue from these Large Power Customers will be substantially
in excess of the minimum contract amounts.

                                      -3-



                              CONTRACT STATUS FOR MINNESOTA POWER LARGE POWER CUSTOMERS
                                                   AS OF MARCH 15, 1998
- - - -------------------------------------------------------------------------------------------------------------------

                                                                                                Earliest
Customer                       Location                      Ownership                       Termination Date
- - - --------                       --------                      ---------                       ----------------
                                                                                    
Eveleth Mines LLC              Eveleth, MN                   45% Rouge Steel Co.             October 31, 1999 <F1>
                                                             40% AK Steel Co.
                                                             15% Stelco Inc.

Hibbing Taconite Co.           Hibbing, MN                   70.3% Bethlehem Steel Corp.     December 31, 2001 <F2>
                                                             15% Cleveland-Cliffs Inc
                                                             14.7% Stelco Inc.

Inland Steel Mining Co.        Virginia, MN                  Inland Steel Co.                December 31, 2007


U.S. Steel - Minntac           Mt. Iron, MN                  USX Corporation                 December 31, 2007


National Steel Pellet Co.      Keewatin, MN                  National Steel Corp.            October 31, 2004


Blandin Paper Co.              Grand Rapids, MN              UPM-Kymmene Corporation         April 30, 2004


Boise Cascade Corp.            International Falls, MN       Boise Cascade Corp.             December 31, 2002


Lake Superior Paper            Duluth, MN                    Consolidated Papers, Inc.       July 31, 2008
   Industries and Superior
   Recycled Fiber Industries


Potlatch Corp.                 Cloquet, MN and               Potlatch Corp.                  December 31, 2002
                               Brainerd, MN

Lakehead Pipe Line Co. L.P.    Deer River, MN                Lakehead Pipe Line              April 30, 2001
                               Floodwood, MN                   Partners, L.P.


Minnesota Pipeline Company     Staples, MN                   60% Koch Pipeline Co LP         September 30, 2002
                               Little Falls, MN              40% Marathon Ashland
                               Park Rapids, MN                 Petroleum LLC
- - - -------------------------------------------------------------------------------------------------------------------
<FN>
<F1> A contract  amendment,  which  provides for the Company to continue to meet
     all of Eveleth Mines LLC's electric  requirements through October 2008, has
     been filed for MPUC approval.
<F2> A contract  amendment,  which  provides for the Company to continue to meet
     all of Hibbing Taconite Co.'s electric  requirements through December 2008,
     has been filed for MPUC approval.
</FN>



                                      -4-

PURCHASED POWER

         Minnesota  Power has  contracts  to purchase  capacity  and energy from
various  entities.  In addition to the contracts  listed below,  the Company has
entered into  various  smaller  purchased  power  contracts  for the purposes of
meeting its capacity needs or brokering power.

               STATUS OF MINNESOTA POWER PURCHASED POWER CONTRACTS
- - - --------------------------------------------------------------------------------

Entity                 Contract MW   Contract Period
- - - ------                 -----------   ---------------
Participation Power 
- - - -------------------
  Purchases (a)
  ---------

   Square Butte (b)        322       May 6, 1977 through December 31, 2007

   LTV Steel               210       May 1, 1995 though April 30, 2000

   Silver Bay Power         78       November 1, 1995 through October 31, 2000

- - - --------------------------------------------------------------------------------
(a)  Participation  power  purchase  contracts  require  the  Company to pay the
     demand charges for generating  capacity under contract and an energy charge
     for each MWh  purchased.  The selling entity is obligated to provide energy
     as  scheduled  by the Company  from the  generating  unit  specified in the
     contract as energy is available from that unit.
     
(b)  Under an agreement  extending  through 2007 with Square Butte,  Minnesota 
     Power purchases  about 71 percent of the output of a mine-mouth  generating
     unit capable of generating up to 455 MW. The Square Butte  generating  unit
     is located near Center,  North Dakota and is one of two lignite-fired units
     at Minnkota Power's Milton R. Young Generating Station. Reductions to about
     49 percent  of the output are  provided  for in the  contract  and,  at the
     option of Square Butte, could begin after a five-year advance notice to the
     Company.  The cost of the power and  energy  purchased  is a  proportionate
     share  of  Square  Butte's  fixed  and  variable  costs.   The  Company  is
     responsible  for paying all costs and expenses of Square  Butte  (including
     leasing,  operating and any debt service costs) if not paid by Square Butte
     when due. These obligations of the Company are absolute and  unconditional,
     whether or not any power is actually  delivered to the  Company. (See Note
     5.)

CAPACITY SALES

         Minnesota Power has contracts to sell capacity to nonaffiliated utility
companies.  In addition to the contracts  listed below,  the Company has entered
into  various  smaller  capacity  sales  contracts  for the  purposes of selling
surplus capacity or brokering power.

               STATUS OF MINNESOTA POWER CAPACITY SALES CONTRACTS
- - - --------------------------------------------------------------------------------

Utility                Contract MW    Contract Period
- - - -------                -----------    ---------------
Participation Power
- - - -------------------
  Sales (a)
  -----
   Interstate Power 
     Company               55         May 1 through October 31 of each year from
                                        1994 through 2000
                           20         November 1, 1997 through April 30, 1998
                           35         November 1, 1998 through April 30, 1999
                           50         November 1, 1999 through April 30, 2000
Firm Power Sales (b)
- - - --------------------
   Wisconsin Power & 
     Light Company         75         January 1, 1998 through  December 31, 2007
   Northern States 
     Power Company        150         May 1 through October 31 of each year from
                                        1997 through 2000
- - - --------------------------------------------------------------------------------
(a)  Participation  power sales contracts require the purchasing  utility to pay
     the demand  charges for MW under contract and an energy charge for each MWh
     purchased.  The Company is obligated to provide  energy as scheduled by the
     purchasing  utility from the  generating  unit specified in the contract as
     energy is available from that unit.
(b)  Firm power sales contracts require the purchasing utility to pay the demand
     charges for MW under  contract and an energy charge for each MWh purchased.
     The Company is obligated to provide  energy as scheduled by the  purchasing
     utility.

                                      -5-



FUEL

         The Company purchases  low-sulfur,  sub-bituminous coal from the Powder
River Basin coal field  located in Montana and  Wyoming.  Coal  consumption  for
electric generation at the Company's Minnesota coal-fired generating stations in
1997 was about 4.1 million  tons. As of December 31, 1997 the Company had a coal
inventory of about 497,000 tons. The Company has three coal supply agreements in
place with  Montana  suppliers.  Two  terminate  in December  1999 and the other
terminates in December 2000.  Under these agreements the Company has the tonnage
flexibility to procure 70 percent to 100 percent of its total coal requirements.
The Company will obtain coal in 1998 under these agreements and the spot market.
This mix of coal supply  options allows the Company to reduce market risk and to
take advantage of favorable spot market prices.  The Company is exploring future
coal  supply  options  and  believes  that  adequate   supplies  of  low-sulfur,
sub-bituminous coal will continue to be available.

         Burlington Northern Santa Fe Railroad transports the coal by unit train
from Montana or Wyoming to the Company's  generating  stations.  The Company and
Burlington  Northern  Santa Fe Railroad  have two  long-term  coal  freight-rate
contracts  that provide for coal  deliveries  through 2002 to Laskin and through
2003 to Boswell.  The Company also has a contract with the Duluth Missabe & Iron
Range  Railway  which is the final  destination  short-hauler  to  Laskin.  This
contract  provides for deliveries  through 2002. The delivered  price of coal is
subject to periodic adjustments in freight rates.

                                                Year Ended December 31,
COAL DELIVERED TO MINNESOTA POWER      1997             1996              1995
- - - --------------------------------------------------------------------------------
     Average Price Per Ton            $20.26           $19.30            $19.19
     Average Price Per MBtu            $1.11            $1.06             $1.07
- - - --------------------------------------------------------------------------------

         The generating unit operated by Square Butte burns North Dakota lignite
supplied by BNI Coal, a wholly owned subsidiary of the Company,  pursuant to the
terms of a contract  expiring in 2027.  Square Butte's cost of lignite burned in
1997 was  approximately  64 cents per MBtu.  The lignite  acreage  that has been
dedicated  to Square  Butte by BNI Coal is located on lands  essentially  all of
which are under private  control and presently  leased by BNI Coal. This lignite
supply is sufficient to provide the fuel for the anticipated  useful life of the
generating unit. Under the various  agreements with Square Butte, the Company is
unconditionally  obligated  to pay all costs not paid by Square  Butte when due.
These costs include the price of lignite  purchased  under a cost-plus  contract
from BNI Coal.  (See Item 2. Properties and Note 5.) BNI Coal has experienced no
difficulty in supplying all of Square Butte's lignite requirements.

REGULATORY ISSUES

         The Company and its  subsidiaries  are exempt from regulation under the
Public Utility Holding  Company Act of 1935,  except as to Section 9(a)(2) which
relates to acquisition of securities of public utility operations.

         The Company and its  subsidiaries  are subject to the  jurisdiction  of
various regulatory authorities.  The MPUC has regulatory authority over Electric
Operations' service area in Minnesota,  retail rates, retail services,  issuance
of securities and other matters. The FERC has jurisdiction over the licensing of
hydroelectric  projects,  the establishment of rates and charges for the sale of
electricity for resale and  transmission of electricity in interstate  commerce,
and certain  accounting  and record keeping  practices.  The PSCW has regulatory
authority  over the retail  sales of  electricity,  water and gas by SWL&P.  The
MPUC, FERC and PSCW had regulatory  authority over 68 percent, 12 percent, and 8
percent,  respectively,  of the Company's  1997 electric  operating  revenue and
income.

         ELECTRIC RATES

         The Company has historically  designed its electric service rates based
on cost of service  studies  under  which  allocations  are made to the  various
classes of customers. Nearly all retail sales include billing adjustment clauses
which  adjust  electric  service  rates  for  changes  in the  cost of fuel  and
purchased energy, and recovery of current and deferred CIP expenditures.

                                      -6-


         The demand charge component of the Company's large power rate schedules
are  designed to recover the fixed  costs of  providing  capacity to Large Power
Customers, including a return on common equity. A Large Power Customer's monthly
demand charge  obligation in any particular  month is determined  based upon the
firm demand amount. The rates and corresponding revenue associated with capacity
and energy  provided  under these  contracts  are subject to change  through the
regulatory  process  governing all retail electric rates.  Contracts with ten of
the eleven  Large Power  Customers  provide  for  deferral  without  interest or
diminishment of one-half of demand charge obligations  incurred during the first
three  months of a strike or illegal  walkout at a customer's  facilities,  with
repayment  required over the 12-month  period  following  resolution of the work
stoppage. (See Electric Sales - Large Power Customer Contracts.)

         The Company also has contracts  with large  industrial  and  commercial
customers  who have  monthly  demands  of more  than 2 MW but less than 10 MW of
capacity  (Large Light and Power  Customers).  The terms of these contracts vary
depending  upon the  customers'  demand for power and the cost of extending  the
Company's facilities to provide electric service.  Generally,  the contracts for
less than 3 MW have  one-year  terms and the  contracts  ranging from 3 to 10 MW
have initial  five-year  terms.  The Company's rate schedule for Large Light and
Power Customers is designed to minimize fluctuations in revenue and to recover a
significant portion of the fixed costs of providing service to such customers.

         The Company requires that all large industrial and commercial customers
under contract specify the date when power is first required, and thereafter the
customer  is billed for at least the  minimum  power for which they  contracted.
These conditions are part of all contracts  covering power to be supplied to new
large  industrial  and  commercial  customers and to current  customers as their
contracts expire or are amended. All contracts provide that new rates which have
been  approved  by  appropriate   regulatory  authorities  will  be  substituted
immediately  for obsolete  rates,  without  regard to any unexpired  term of the
existing  contract.  All rate  schedules are subject to approval by  appropriate
regulatory authorities.

         FEDERAL ENERGY REGULATORY COMMISSION

         The FERC has jurisdiction over the Company's wholesale electric service
resale customers and transmission service (wheeling) customers.

         The Company has long-term  contracts  with 15 Minnesota  municipalities
receiving  resale service.  Two contracts are for service through 2002 and 2004,
while the other 13 are for service  through at least 2007.  The contracts  limit
rate  increases  (including  fuel  costs)  to  about  2  percent  per  year on a
cumulative basis. In 1997 the 15 municipal  customers purchased 615,422 MWh from
the Company.

         A contract  between  Minnesota  Power and SWL&P  provides  for SWL&P to
purchase  its power from the  Company  through  at least  2010 and  limits  rate
increases  (including  fuel costs) to about 2 percent  per year on a  cumulative
basis. SWL&P purchased 564,200 MWh from the Company in 1997.

         The Company also has a contract  through 2004 to supply  electricity to
Dahlberg  Light and  Power  Company  (Dahlberg),  a  private  utility.  Dahlberg
purchased 86,434 MWh from the Company in 1997.

         The Company's hydroelectric facilities, which are located in Minnesota,
are  licensed  by the FERC.  In 1995 the FERC  issued  to the  Company a 30-year
license  for the St.  Louis  River  hydroelectric  project  (87.6 MW  generating
capability).  In 1996 the FERC  extended  the  license  term from 30 to 40 years
because  of certain  mandates  to  mitigate  environmental  consequences  of the
project.  In May  1997  the FERC  issued  an  annual  license  for the  Pillager
hydroelectric project (1.5 MW generating  capability) under the existing license
terms and conditions.  This annual license is effective until the new license is
issued. (See Environmental Matters - Water.)

         MINNESOTA PUBLIC UTILITIES COMMISSION

         The  Company's  retail rates are based on a 1994 MPUC retail rate order
which  allows for an  11.6 percent return on common equity devoted to utility
plant.

         Minnesota requires investor owned electric utilities to spend a minimum
of  1.5  percent  of  gross  annual  retail  electric  revenue  on  conservation
improvement  programs  (CIP) each year.  The MPUC  approved a minimum  statutory
spending  requirement  of $5.1  million for 1997 ($5.1  million  for 1996;  $5.3
million for 1995).  In 1997 the Company spent $5.8 million on CIP ($14.4 million
in 1996;  $14.2  million in 1995) and expects to spend a total of $11.9  million
during 1998. The MPUC allows such conservation 

                                      -7-


expenditures  in  excess  of  amounts  recovered  through  current  rates  to be
accumulated  in a  deferred  account  for  future  recovery.  Through  a billing
adjustment and retail base rates approved by the MPUC, the Company is allowed to
recover current and deferred CIP expenditures,  a carrying charge on unrecovered
expenditures  and the lost  margins  associated  with power saved as a result of
these  programs.  The Company  collected CIP related revenue of $13.7 million in
1997 ($10.8 million in 1996 and 1995).

CAPITAL EXPENDITURE PROGRAM

         Capital expenditures for Electric Operations totaled $35 million during
1997. Internally generated funds and long-term financing were used to fund these
capital  expenditures.  Electric Operations capital expenditures are expected to
be $44 million in 1998 and total  approximately  $144 million  during the period
1999 through 2002. The 1998 amount is for electric system component  replacement
and upgrades, telecommunication fiber and coal handling equipment. The Company's
estimates of such capital  expenditures and the sources of financing are subject
to continuing review and adjustment.

COMPETITION

         The electric utility  industry  continues to become more competitive at
both the  wholesale  and retail  levels.  This is  particularly  the case in the
wholesale  markets.  Retail  deregulation of the industry is being considered at
both the federal and state level, and effects the way the Company  strategically
views the future.  With electric rates among the lowest in the United States and
with  long-term  wholesale and Large Power Customer  retail  contracts in place,
Minnesota Power believes Electric  Operations are well positioned to address and
benefit from competitive pressures.

         WHOLESALE

         Minnesota  Power's MPEX  division  conducts an active  wholesale  power
marketing and trading  business,  including  participation  in the new power and
energy  markets  within the  Mid-Continent  Area  Power Pool and other  regional
reliability  councils.  In 1997  Manitoba  Hydro and  Minnesota  Power  signed a
three-year  agreement  whereby MPEX will provide  Manitoba  Hydro with exclusive
hourly power trading and energy scheduling  services in the United States.  This
agreement  became  effective  January 1, 1998.  Also in 1997 Manitoba  Hydro and
Minnesota  Power  signed a  memorandum  of  understanding  that  establishes  an
alliance  whereby the two utilities are and will market  electric  energy in the
Midwest,  including  but not limited to Wisconsin,  Michigan and Illinois.  This
memorandum strengthens the international relationship beyond the wholesale power
trading  agreement.  Manitoba  Hydro is the fourth largest  electric  utility in
Canada.  More than a third of Manitoba Hydro's electric sales represent  exports
of renewable  hydroelectricity to the United States and neighboring provinces in
Canada.  MPEX  is  reviewing  new  strategic  opportunities  for  its  wholesale
marketing  operations in light of the new Open Access Transmission Rules enacted
by the FERC in 1996.  The Company also has wholesale  contracts with a number of
municipal  customers.   (See  Regulatory  Issues  -  Federal  Energy  Regulatory
Commission.)

         In 1996 the Company completed  functional  unbundling of its operations
under FERC Order No. 888, "Open Access Transmission  Rules." This order requires
public  utilities  to  take   transmission   service  for  their  own  wholesale
transactions under the same terms and conditions on which  transmission  service
is  provided  to third  parties.  Also in 1996 the  Company  filed  its "Code of
Conduct" under FERC Order No. 889, "Open Access Same Time Information System and
Standards of Conduct," which formalized the functional  separation of generation
from  transmission  within  the  organization.  The  transmission  component  of
Electric  Operations is organized for and  conducting  business  under these new
federal regulatory requirements. (See Item 2. Properties - Electric Operations.)

         RETAIL

         In 1995  the  MPUC  initiated  an  investigation  into  structural  and
regulatory  issues  in the  electric  utility  industry.  To make  certain  that
delivery  of  electric   service   continues  to  be  efficient   following  any
restructuring,  the MPUC adopted 15 principles to guide a deliberate and orderly
approach to developing  reasonable  restructuring  alternatives  that ensure the
fairness of a  competitive  market and protect the public  interest.  In January
1996  the  MPUC  established  a  competition  working  group  in  which  company
representatives  have participated in addressing issues related to wholesale and
retail competition.  The 

                                      -8-



working group issued a Wholesale Competition Report in October 1996 and a Retail
Competition  Report in November 1997. The MPUC is expected to begin  identifying
the steps necessary to successfully  implement  restructuring  upon receipt of a
legislative mandate.

         LEGISLATION

         During  1998  Congress  is  expected  to  continue  to debate  proposed
legislation  which,  if  enacted,  would  promote  customer  choice  and a  more
competitive  electric  market.  The  Company is  actively  participating  in the
dialogue and debate on these issues in various  forums,  principally to advocate
fairness  and  parity for all power and energy  competitors  in any  deregulated
markets that may be created by new  legislation.  While Congress is not expected
to pass  legislation in 1998, the Company cannot predict the timing or substance
of any future  legislation  which  might  ultimately  be enacted.  However,  the
Company will take the necessary steps to maintain its competitive  position as a
low-cost and long-term supplier to large industrial customers.

         Legislative  activity is evolving both in Minnesota and  Wisconsin.  An
electric  Energy Task Force comprised of  representatives  of both houses of the
Minnesota legislature continues to study a variety of issues related to industry
restructuring.  In Minnesota  legislation has been introduced,  but the Governor
and  legislative  leadership  have indicated  that no action to restructure  the
industry  will be taken in 1998.  The  Company is also  promoting  property  tax
reform  before the Minnesota  legislature  in order to eliminate the taxation of
personal  property that results in an  inequitable  tax burden among current and
potential  competitors in local markets.  The Wisconsin  legislature is pursuing
electric utility industry restructuring,  including the possible formation of an
independent transmission system operator within the state.

FRANCHISES

         Minnesota Power holds  franchises to construct and maintain an electric
distribution and  transmission  system in 85 cities and towns located within its
electric service territory. SWL&P holds franchises in 15 cities and towns within
its service  territory.  The remaining  cities and towns served do not require a
franchise to operate within their boundaries.

ENVIRONMENTAL MATTERS

         Certain  businesses  included  in  the  Company's  Electric  Operations
segment  are  subject  to  regulation  by  various  federal,   state  and  local
authorities with respect to air quality,  water quality,  solid wastes and other
environmental   matters.  The  Company  considers  these  businesses  to  be  in
substantial compliance with those environmental regulations currently applicable
to its operations and believes all necessary  permits to conduct such operations
have been  obtained.  The Company does not currently  anticipate  that potential
capital  expenditures  for  environmental  matters  will be  material.  However,
because  environmental  laws  and  regulations  are  constantly  evolving,   the
character,  scope  and  ultimate  costs of  environmental  compliance  cannot be
estimated.

         AIR

         CLEAN AIR ACT. The federal Clean Air Act  Amendments of 1990 (Clean Air
Act) require that specified fossil-fueled  generating plants obtain air emission
permits from the EPA (or, when delegated,  from  individual  state and pollution
control  agencies),  and meet new sulfur  dioxide and  nitrogen  oxide  emission
standards  beginning January 1, 1995 (Phase I) and that virtually all generating
plants meet more strict emission standards beginning January 1, 2000 (Phase II).
None of  Minnesota  Power's  generating  facilities  are  covered by the Phase I
requirements  of the  Clean  Air Act  for  sulfur  dioxide.  However,  Phase  II
requirements apply to the Company's Boswell,  Laskin and Hibbard plants, as well
as Square Butte.

         The Clean Air Act creates emission  allowances for sulfur dioxide based
on formulas  relating to the  permitted  1985  emissions  rate and a baseline of
average fossil fuel consumed in the years 1985, 1986 and 1987. Each allowance is
an authorization  to emit one ton of sulfur dioxide,  and each utility must have
sufficient   allowances  to  cover  its  annual  emissions.   Minnesota  Power's
generating  facilities  in  Minnesota  burn mainly  low-sulfur  western coal and
Square  Butte,  located  in  North  Dakota,  burns  lignite  coal.  All of these
facilities  are equipped with  pollution  control  equipment  such as scrubbers,
baghouses  or  electrostatic  precipitators.  Phase II sulfur  dioxide  emission
requirements are currently being met by Boswell Unit 4. Some moderate reductions
in emissions  may be necessary  for Boswell Units 1, 2 and 3, 

                                      -9-


Laskin  Units 1 and 2, and  Square  Butte to meet the  Phase II  sulfur  dioxide
emission  requirements.  The Company believes it is in a good position to comply
with the sulfur dioxide standards without extensive modifications.  Any required
reductions at the Minnesota  generating  facilities  are expected to be achieved
through the use of lower  sulfur  coal.  Square  Butte  anticipates  meeting its
sulfur dioxide  requirements  through increased use of existing  scrubbers or by
purchasing  additional  allowances.  The estimated  cost to meet sulfur  dioxide
requirements at Square Butte is $500,000 to $600,000 per year.

         Pursuant to the Clean Air Act, the EPA has  established  nitrogen oxide
limitations  for Phase II  generating  units.  To meet Phase II  nitrogen  oxide
limitations,  the  Company has spent $4.2  million and will spend an  additional
$1.8 million in 1998 on advanced low emission  burner  technology and associated
control  equipment to operate the Boswell and Laskin  facilities at or below the
compliance standards.  Options for complying with the nitrogen oxide limitations
at Square Butte are being studied at this time and include operational  changes,
capital  expenditures  and  seeking  regulatory  relief.  The EPA decided not to
promulgate nitrogen oxide limitations for the type of boilers at Hibbard.

         The Company has obtained all necessary  Title V air  operating  permits
from the MPCA for applicable facilities to conduct its electric operations.

                          AIR QUALITY EMISSION PERMITS
- - - --------------------------------------------------------------------------------

    Facility            Effective Date             Expiration Date
    --------            --------------             ---------------
    Boswell             March 24, 1997             March 24, 2002
    Laskin              May 12, 1997               May 12, 2002
    Hibbard             July 14, 1997              July 14, 2002

- - - --------------------------------------------------------------------------------

         CLIMATE CHALLENGE.  The Company is participating in a voluntary program
(Climate  Challenge)  with the United  States  Department  of Energy to identify
activities  that the Company has taken and additional  measures that the Company
may undertake on a voluntary basis that will result in  limitations,  reductions
or  sequestrations of greenhouse gas emissions by the year 2000. The Company has
agreed to participate in this voluntary program provided that such participation
is consistent with the Company's integrated resource planning process,  does not
have a  material  adverse  effect on the  Company's  competitive  position  with
respect to rates and costs,  and  continues to be  acceptable  to the  Company's
regulators.  The costs to Minnesota  Power  associated  with  Climate  Challenge
participation are minor, reflecting program facilitation and voluntary reporting
costs.

         KYOTO  PROTOCOL.  On  December  11, 1997 the United  Nations  Framework
Convention on Climate Change agreed upon a draft international treaty, the Kyoto
Protocol (Protocol), which, if ratified, would call for reductions in greenhouse
gas emissions.  The United  States'  target is to achieve a 7 percent  reduction
below  1990  emission  levels by the  period  2008-2012.  The  Protocol  must be
ratified by the United  States Senate by March 15, 1999;  however,  the Protocol
does not currently  satisfy the guidance  provided in a 1997 Senate  resolution.
The Company  currently  cannot  predict when or if the Protocol will be ratified
nor can it determine the impact such ratification would have on the Company.

         WATER

         The Federal Water Pollution Control Act of 1972 (FWPCA),  as amended by
the Clean Water Act of 1977 and the Water Quality Act of 1987,  established  the
National  Pollutant  Discharge  Elimination  System (NPDES) permit program.  The
FWPCA requires that NPDES permits be obtained from the EPA (or, when  delegated,
from individual state pollution control agencies) for any wastewater  discharged
into  navigable  waters.  The Company has obtained all necessary  NPDES permits,
including  NPDES storm water permits for applicable  facilities,  to conduct its
electric operations.

                                      -10-


             NATIONAL POLLUTANT DISCHARGE ELIMINATION SYSTEM PERMITS
- - - --------------------------------------------------------------------------------

Facility                       Effective Date              Expiration Date
- - - --------                       --------------              ---------------
Boswell                        February 4, 1993            December 31, 1997 (a)
Laskin                         December 22, 1993           October 31, 1998 (b)
Hibbard                        September 29, 1994          June 30, 1999
Arrowhead DC Terminal          June 17, 1996               March 31, 2001
General Office Building/ 
 Lake Superior Plaza           January 6, 1998             December 31, 2002
Square Butte                   July 1, 1995                June 30, 2000

- - - --------------------------------------------------------------------------------
(a) On June 27, 1997 a renewal  application for this permit was submitted to the
    MPCA.  A new permit is expected to be issued in the second  quarter of 1998.
    Permits are  extended by the timely  filing of a renewal  application  which
    stays the expiration of the previously issued permit.
(b) A renewal  application  for this permit is due April 30,  1998.  The renewal
    application is expected to be filed on or before March 30, 1998.

         The Company holds FERC licenses authorizing the ownership and operation
of seven  hydroelectric  generating projects with a total generating capacity of
about 118 MW.

                    FERC LICENSES FOR HYDROELECTRIC PROJECTS
- - - --------------------------------------------------------------------------------

                     Name Plate
Facility               Rating         Effective Date       Expiration Date
- - - --------             ----------       --------------       ---------------
                         MW

Pillager                 1.5          May 12, 1997         May 11, 1998 (a)
Blanchard               18.0          December 1, 1987     August 24, 2003 (b)
Winton                   4.0          March 1, 1981        October 31, 2003 (b)
Little Falls             4.7          January 1, 1994      December 31, 2023
Prairie River            1.1          January 1, 1994      December 31, 2023
Sylvan                   1.8          January 1, 1994      December 31, 2023
St. Louis River         87.6          July 1, 1995         June 30, 2035 (c)
- - - --------------------------------------------------------------------------------
(a) The FERC issued an annual license to the Company under the existing  license
    terms and conditions. This annual license is effective until the new license
    is issued. An application to relicense this facility was filed with the FERC
    on May 11, 1995.  The FERC will perform an  engineering,  environmental  and
    economic analysis of that application in order to determine whether to issue
    a new  license  for the  project.  FERC  scoping  meetings  to  discuss  any
    environmental  and  operational  issues related to this project were held in
    October  1996 with the  resource  agencies  and the  public.  The FERC staff
    sought input related to any water quality,  fishery,  terrestrial,  cultural
    and  recreation  issues that the agencies and public have prior to preparing
    the  environmental  assessment  for this project.  To date,  no  substantive
    issues  have  been  raised by the  resource  agencies  or the  public in the
    license process.
(b) The Company is currently in the planning  stages for the relicensing of this
    facility.
(c) The  Company  filed a request  for  rehearing  of the  FERC's  order for the
    purpose of challenging certain terms and conditions of the license which, if
    accepted by the Company, would alter the Company's operation of the project.
    In 1996 the FERC issued an order on rehearing  in response to the  rehearing
    request and  extended  the license  term from 30 to 40 years  because of the
    anticipated  impact  of  the  FERC's  mandates  to  mitigate   environmental
    consequences of the project. The FERC also directed the Company to negotiate
    with the Fond du Lac Band of Lake  Superior  Chippewa  (Fond du Lac  Band) a
    reasonable annual charge for the use of tribal lands within the project.  In
    June 1996 the Company filed in the U.S. Court of Appeals for the District of
    Columbia Circuit a petition for review of the license as issued by the FERC.
    Separate petitions for review were also filed in June 1996 in the same court
    by the  U.S.  Department  of the  Interior  and the  Fond du Lac  Band,  two
    intervenors in the licensing proceedings.  The issues to be resolved concern
    the terms and  conditions  of the license  which will  govern the  Company's
    operation  and   maintenance  of  the  project.   In  July  1996  the  court
    consolidated  the three  petitions  for review.  In October 1996 the Company
    filed with the court an unopposed motion for a procedural  schedule pursuant
    to which the  briefing of the issues  would be  completed  in May 1997.  The
    motion was granted by the court;  however,  the  briefing  schedule has been
    suspended  while  the  Company  and  the  Fond  du Lac  Band  negotiate  the
    reasonable fee for use of tribal lands as mandated by the new license.  Both
    parties have  informed the court that these  negotiations  may resolve other
    disputed issues,  and they are obligated to report to the court periodically
    the status of these  discussions.  Beginning in 1996,  and most  recently in
    February  1998,  the Company filed  requests with the FERC for extensions of
    time to comply with certain plans and studies  required by the license which
    might  conflict  with  the  settlement  discussions.  The  FERC  granted  an
    extension until August 1, 1998 to comply with those requirements.

                                      -11-


         SOLID AND HAZARDOUS WASTE

         The  Resource  Conservation  and  Recovery  Act of 1976  regulates  the
management and disposal of solid wastes.  As a result of this  legislation,  the
EPA has promulgated  various  hazardous waste rules.  The Company is required to
notify the EPA of hazardous  waste activity and routinely  submits the necessary
annual reports to the EPA.

         In response to EPA Region V's request for utilities to  participate  in
their Great Lakes Initiative by voluntarily  removing remaining  polychlorinated
biphenyl   (PCB)   inventories,   the  Company  has  scheduled   replacement  of
PCB-contaminated  oil from  substation  equipment by 2000 and the removal of PCB
capacitors by 2006. The total cost is expected to be between $1.5 million and $2
million of which  $400,000 was expended  through  December 31, 1997. The Company
expects to spend about $110,000 in 1998.

         MINING CONTROL AND RECLAMATION

         BNI Coal's mining operations are governed by the Federal Surface Mining
Control  and  Reclamation  Act of 1977.  This Act,  together  with the rules and
regulations  adopted  thereunder by the  Department  of the Interior,  Office of
Surface  Mining  Reclamation  and  Enforcement  (OSM),  governs the  approval or
disapproval of all mining permits on federally owned land and the actions of the
OSM in approving or disapproving  state regulatory  programs  regulating  mining
activities.  The North Dakota Reclamation of Strip Mined Lands Act and rules and
regulations  enacted  thereunder in 1969, as  subsequently  amended by the North
Dakota Mining and Reclamation Act and rules and regulations  enacted  thereunder
in 1977,  govern the  reclamation  of surface  mined lands and are  generally as
stringent or more stringent than the federal rules and  regulations.  Compliance
is monitored  by the North Dakota  Public  Service  Commission.  The federal and
state laws and  regulations  require a wide range of procedures  including water
management,  topsoil and subsoil segregation,  stockpiling and revegetation, and
the posting of performance bonds to assure compliance. In general these laws and
regulations require the reclaiming of mined lands to a level of usefulness equal
to or greater than that available  before active mining.  The Company  considers
BNI Coal to be in substantial  compliance with those  environmental  regulations
currently  applicable to its  operations  and believes all necessary  permits to
conduct such operations have been obtained.

                                 WATER SERVICES

         Water  Services are  comprised of regulated  and  non-regulated  wholly
owned  subsidiaries  of  the  Company.  Water  Services  have  been  laying  the
groundwork  for  future  growth in  several  new  areas of the  water  business.
Non-regulated   subsidiaries  have  initiated   marketing  the  Company's  water
expertise outside traditional utility boundaries.

         REGULATED SUBSIDIARIES

         -    FLORIDA  WATER,  the largest  investor  owned  water  supplier in
              Florida,   owns  and  operates  water  and  wastewater   treatment
              facilities  within that state.  As of  December  31, 1997  Florida
              Water  served  119,000  water  customers  and  52,000   wastewater
              treatment customers.

              In 1997 Florida Water sold certain water and wastewater assets to
              Orange  County in Florida for $13.1  million.  These assets served
              about 4,000 customers.  The transaction resulted in a $4.7 million
              after-tax gain.
 
         -    HEATER owns and operates four  companies  which provide water and
              wastewater  treatment services primarily in North Carolina.  As of
              December 31, 1997 these  companies  served 28,000 water  customers
              and 2,000 wastewater treatment customers.
              
              In 1997 the NCUC  approved  the  transfer of LaGrange  Waterworks
              Corporation  (LaGrange) to Heater.  The Company  exchanged  96,000
              shares of common stock, with a market value of approximately  $3.4
              million,  for the outstanding shares of LaGrange.  The transaction
              was  accounted  for as a pooling of  interest.  LaGrange  provides
              water services to approximately 5,300 customers near Fayetteville,
              North Carolina.

                                      -12-


         NON-REGULATED SUBSIDIARIES

          -   INSTRUMENTATION  SERVICES,  INC.  provides  predictive maintenance
              and  instrumentation  consulting services  to water and wastewater
              utilities,  and  other  industrial  operations  throughout  the
              southeastern part of the United States as well as Texas and 
              Minnesota.

         -    U.S.  MAINTENANCE AND MANAGEMENT  SERVICES  CORPORATION was 
              incorporated in 1997 to complement ISI's operations.  U.S.  
              Maintenance and Management provides  maintenance  services to 
              water and wastewater utilities and other industrial operations 
              primarily in Florida.
 
         -    AMERICAS' WATER SERVICES  CORPORATION  was  incorporated in 1997.
              Headquartered  near  Chicago,  Illinois,  Americas'  Water  offers
              contract  management,   operations  and  maintenance  services  to
              governments and industries throughout the Americas.

REGULATORY ISSUES

         FLORIDA PUBLIC SERVICE COMMISSION

         -    1991 RATE CASE REFUNDS.  In 1995 the Florida First District Court
              of  Appeals  (Court  of  Appeals)   reversed  a  1993  FPSC  order
              establishing  uniform  rates for most of Florida  Water's  service
              areas.  With  "uniform  rates," all customers in each uniform rate
              area pay the same  rates  for water and  wastewater  services.  In
              response to the Court of Appeals'  order,  in August 1996 the FPSC
              ordered Florida Water to issue refunds to those customers who paid
              more since  October 1993 under  uniform rates than they would have
              paid  under  stand-alone  rates.  This  order  did  not  permit  a
              balancing  surcharge  to  customers  who paid less  under  uniform
              rates.  Florida Water appealed,  and the Court of Appeals ruled in
              June 1997 that the FPSC could not order refunds without  balancing
              surcharges.  In response to the Court of Appeals' ruling, the FPSC
              issued an order on January 26, 1998 that would not require Florida
              Water to refund about $12.5 million,  which included interest,  to
              customers who paid more under uniform rates.

              In the same  January 26, 1998 order,  the FPSC  required  Florida
              Water to refund $2.5 million,  the amount paid by customers in the
              Spring Hill service area from January 1996 through June 1997 under
              uniform rates which exceeded the amount these customers would have
              paid under a modified  stand-alone  rate  structure.  No balancing
              surcharge  was  permitted.  The FPSC ordered  this refund  because
              Spring Hill  customers  continued to pay uniform rates after other
              customers  began  paying  modified   stand-alone  rates  effective
              January 1996 pursuant to the FPSC's  interim rate order in Florida
              Water's  1995 Rate Case.  The FPSC did not include  Spring Hill in
              this  interim  rate order  because  Hernando  County  had  assumed
              jurisdiction  over Spring Hill's rates. In June 1997 Florida Water
              reached an agreement with Hernando County to revert to stand-alone
              rates for Spring Hill customers.

              Customer groups which paid more under uniform rates have appealed
              the FPSC's  January 26, 1998 order.  The Company has also appealed
              the $2.5 million  refund  order.  No provision for refund has been
              recorded.

         -    1995 RATE CASE.  Florida  Water  requested an $18.1  million rate
              increase in June 1995 for all water and  wastewater  customers  of
              Florida  Water  regulated  by the FPSC.  In October  1996 the FPSC
              issued its final order approving an $11.1 million annual increase.
              In November  1996 Florida Water filed with the Court of Appeals an
              appeal of the FPSC's final order seeking judicial review of issues
              relating  to  the  amount  of  investment  in  utility  facilities
              recoverable in rates from current customers.  Other parties to the
              rate case also filed appeals.  In June 1997, as part of the review
              process,  the FPSC  allowed  Florida  Water to  resume  collecting
              approximately  $1 million,  on an annual  basis,  in new  customer
              connection  fees.  Oral  argument  on the  appeal was heard by the
              Court of Appeals on February  10,  1998.  The Company is unable to
              predict the timing or outcome of the appeals process.

         -    HILLSBOROUGH  COUNTY  RATES.  On July 2, 1997 Florida Water filed
              for  a  rate  change  with  the   Hillsborough   County  Utilities
              Department.  Florida  Water  filed  for  an  annual  interim  rate

                                      -13-


              increase of $848,845  (43.1  percent) and a final rate increase of
              $877,607 (44.6 percent).  Interim rates became effective on August
              18, 1997.  Hearings are scheduled for April, May and June 1998. It
              is anticipated  that final rates will be implemented in July 1998.
              The Company is unable to predict the outcome of this case.

         NORTH CAROLINA UTILITIES COMMISSION

         On  September  30, 1997 Heater  filed with the NCUC for a $1.1  million
annual increase for its water and wastewater customers.  The hearing was held on
March 10,  1998.  The annual  increase  in  operating  revenue is expected to be
$343,000.  The test year was adjusted for customer growth and consumption  which
substantially  decreased the annual rate increase  required.  A final order from
the NCUC is expected in May 1998.

CAPITAL EXPENDITURE PROGRAM

         Capital  expenditures  for Water  Services  totaled $22 million  during
1997.   Expenditures  were  funded  with  internally  generated  funds.  Capital
expenditures  for the Company's Water Services are expected to be $22 million in
1998 to meet  environmental  standards,  expand water and  wastewater  treatment
facilities  to  accommodate   customer  growth,   and  for  water   conservation
initiatives.  Capital  expenditures  are  expected to total  approximately  $110
million during the period 1999 through 2002.

COMPETITION

         Water Services provide water and wastewater services at regulated rates
within exclusive service territories granted by regulators.

         With  respect  to  non-regulated   businesses  within  Water  Services,
significant  competition  exists  for the  provision  of the  types of  services
provided by Americas' Water.  Although a few private contractors control a large
percentage of the market for contract  management,  operations  and  maintenance
services,  the Company believes that the current and anticipated  growth in that
market will allow for emerging companies like Americas' Water to succeed.

FRANCHISES

         Florida Water provides water and wastewater  treatment  services in 21
counties  regulated by the FPSC and holds  franchises in three  counties which
have retained  authority to regulate such  operations.  (See  Regulatory Issues
- - - - Florida Public Service Commission.)

         Water  and  wastewater  services  provided  by  Heater  are  under  the
jurisdiction of the NCUC. The commission  grants franchises for Heater's service
territory when the rates are authorized.

ENVIRONMENTAL MATTERS

         The  Company's  Water  Services  are subject to  regulation  by various
federal, state and local authorities with respect to water quality, solid wastes
and other  environmental  matters.  The Company  considers  these  businesses to
generally  be in  compliance  with  those  environmental  regulations  currently
applicable  to its  operations  and have the permits  necessary  to conduct such
operations.  The Company does not currently  anticipate  that potential  capital
expenditures  for  environmental  matters  will be  material.  However,  because
environmental laws and regulations are constantly evolving, the character, scope
and ultimate costs of environmental compliance cannot be estimated.

         UNIVERSITY SHORES AND SEABOARD FACILITIES

         In 1993 the EPA  notified  Florida  Water  of  alleged  exceedences  of
effluent  limitations in its NPDES permit for Florida Water's  University Shores
wastewater  facility in Orange County,  Florida.  During 1993 and 1994,  Florida
Water  periodically  corresponded  and met with the EPA  concerning  the alleged
exceedences  of the permit.  The matters at issue were resolved in February 1994
when the  University  Shores  facility  was modified  such that  effluent was no
longer  discharged to surface waters.  In 1992 the EPA notified Florida Water of
alleged  exceedences  of effluent  limitations  in the NPDES  permit for Florida
Water's Seaboard wastewater treatment facility in Hillsborough County,  Florida.
Between 1992 and 1994, 

                                      -14-


Florida Water periodically  corresponded and met with the EPA concerning alleged
exceedences of the permit. In March 1994 the matters at issue were resolved when
the  facility  was  taken  out  of  service  and  the   collection   system  was
interconnected  with the  City of Tampa  utilities.  In 1997 the  United  States
Department of Justice (DOJ),  on behalf of the EPA,  served Florida Water with a
complaint in a civil action in the U.S.  District Court for the Middle  District
of Florida  (District  Court).  The suit sought  civil  penalties  not to exceed
$25,000 per day for each alleged violation of effluent  limitations in the NPDES
permits  occurring at the University Shores and Seaboard  wastewater  facilities
from February 1992 through  March 1994. In 1998 Florida  Water,  the DOJ and the
EPA executed a Consent  Decree as a settlement of the  complaint  filed in 1997.
The Consent  Decree  requires  Florida  Water to pay a $250,000  civil  penalty;
complete a Supplemental Environmental Project totaling $200,000; and complete an
additional  environmental  project totaling $450,000.  After a 30 day period for
notice and public  comment,  the Consent  Decree will be filed with the District
Court for approval.

                               AUTOMOTIVE SERVICES

         Automotive  Services  include  wholly owned  subsidiaries  operating as
integral  parts of the vehicle  auction  business:  ADESA,  a network of vehicle
auctions; AFC, a finance company; and Great Rigs, an auto transport company. The
Company acquired 80  percent  of  ADESA, including  AFC and Great Rigs, on  July
1, 1995. The Company  increased its ownership  interest to 83 percent in January
1996 and acquired the remaining 17 percent  interest in August 1996.  Automotive
Services plans on growth through selective acquisitions and expanding services.

         -    ADESA is the third largest  vehicle auction network in the United
              States.  Headquartered  in Indianapolis,  Indiana,  ADESA owns and
              operates 25 vehicle  auction  facilities  in the United States and
              Canada  through  which  used cars and other  vehicles  are sold to
              franchised  automobile  dealers  and  licensed  used car  dealers.
              Sellers at ADESA's  auctions  include  domestic  and foreign  auto
              manufacturers,  car  dealers,  automotive  fleet/lease  companies,
              banks and  finance  companies.  During  1997 ADESA sold one of its
              auction facilities in Florida,  acquired a new auction facility in
              Sacramento,  California and 80 percent of another auction facility
              in Columbus, Indiana.

              PROFESSIONAL  AUTO  REMARKETING   (PAR),  a  division  of  ADESA,
              provides  customized  remarketing  services to various  businesses
              with fleet operations.
  
         -    AUTOMOTIVE FINANCE  CORPORATION  provides inventory financing for
              wholesale and retail automobile dealers who purchase vehicles from
              ADESA auctions, independent auctions and other auction chains. AFC
              is  headquartered  in  Indianapolis,  Indiana,  and  has  57  loan
              production  offices which are located at most ADESA  auctions,  as
              well as at or near independently  owned auto auctions.  From these
              offices car dealers  obtain credit to purchase  vehicles at any of
              the over 300  auctions  approved by AFC.  During 1997 AFC added 25
              loan production  offices. In early 1998 three more loan production
              offices were added.

         -    GREAT  RIGS  is one  of the  nation's  largest  independent  used
              automobile  transport carriers with 110 leased automotive carriers
              operating  as an integral  part of the vehicle  auction  business.
              Headquartered in Moody, Alabama,  Great Rigs offers customers pick
              up and delivery  through 11 strategically  located  transportation
              hubs.  Customers  of  Great  Rigs  include  ADESA  auctions,   car
              dealerships,  vehicle  manufacturers,  leasing companies,  finance
              companies and other auctions.  Major customers include GE Capital,
              Nissan,  Ford Motor Credit and General Motors  Acceptance Corp. By
              the end of second  quarter 1998,  Great Rigs expects to expand its
              fleet to 150 automobile carriers.

CAPITAL EXPENDITURE PROGRAM

         Capital   expenditures   for   automobile   auction  site   relocation,
development  and facility  improvements  were $11 million  during 1997.  Capital
expenditures for Automotive  Services are expected to be $24 million in 1998 and
to total  approximately $47 million during the period 1999 through 2002. Capital

                                      -15-

expenditures  in 1998 are for on-going  improvements  and relocation of existing
vehicle auction facilities, and associated information systems.

COMPETITION

         Within the automobile auction industry,  ADESA's  competition  includes
independently  owned  auctions  as well as major  chains and  associations  with
auctions in  geographic  proximity.  ADESA  competes  with other  auctions for a
supply of vehicles to be sold on consignment for automobile  dealers,  financial
institutions  and other  sellers.  ADESA  also  competes  for a supply of rental
repurchase vehicles from automobile  manufacturers for auction at factory sales.
Automobile  manufacturers often choose between auctions across multi-state areas
in distributing rental repurchase  vehicles.  ADESA competes for these customers
by attempting to attract a large number of dealers to purchase  vehicles,  which
ensures competitive prices and supports the volume of vehicles auctioned.  ADESA
also competes by providing a full range of services  including  dealer inventory
financing,   reconditioning   services  which  prepare   vehicles  for  auction,
transporting  vehicles and the prompt processing of sale  transactions.  Another
factor affecting the industry,  the impact of which is yet to be determined,  is
the  entrance  of large  used car  dealerships  called  "superstores"  that have
emerged in densely populated markets.

         AFC is well positioned as a provider of floorplan financing services to
the used vehicle industry.  AFC's competition  includes other specialty lenders,
as well as banks and other  financial  institutions.  AFC  competes  with  other
floorplan providers and strives to distinguish itself based upon convenience and
quality of service.  A key  component of AFC's program is  conveniently  located
loan production  offices with personnel  available to assist automobile  dealers
with  their  financing  needs.  As part of AFC's  continued  effort  to focus on
providing  other  financing  services  to dealers,  in 1997 AFC entered  into an
agreement  with ACC Consumer  Finance Corp.  (ACC).  ACC has  subsequently  been
acquired by Household  International.  Together  these two companies will test a
program designed to promote ACC's retail financing of used vehicles floorplanned
by AFC.

ENVIRONMENTAL MATTERS

         Certain  businesses in the Company's  Automotive  Services  segment are
subject to  regulation  by various  federal,  state and local  authorities  with
respect to air quality,  water  quality,  solid  wastes and other  environmental
matters. The Company considers these businesses to be in substantial  compliance
with those environmental  regulations currently applicable to its operations and
believes all necessary  permits to conduct such  operations  have been obtained.
The Company does not currently  anticipate that potential  capital  expenditures
for environmental matters will be material.  However, because environmental laws
and regulations are constantly evolving, the character, scope and ultimate costs
of environmental compliance cannot be estimated.

                                   INVESTMENTS

         The  Investments  segment is comprised of a  securities  portfolio,  an
investment in a financial guaranty  reinsurance and insurance company,  and real
estate operations.

         PORTFOLIO AND REINSURANCE

         -    SECURITIES  PORTFOLIO.  The  Company's  securities  portfolio  is
              managed by selected outside managers as well as internal managers.
              It is intended to provide stable  earnings and  liquidity,  and is
              available for investment in existing businesses,  acquisitions and
              other corporate  purposes.  The Company's objective is to maintain
              corporate  liquidity  between 7 percent  and 10  percent  of total
              assets  ($150  million  to $200  million).  The  Company  plans to
              continue to concentrate in  market-neutral  investment  strategies
              designed  to  provide  stable  and  acceptable   returns   without
              sacrificing needed liquidity.  The securities  portfolio is hedged
              against market  downturns and aimed at an after-tax return between
              7 percent  and 9 percent.  While  these  returns  may seem  modest
              compared to broader market indices over the past three years,  the
              Company believes its hedge strategy is a wise course in a volatile
              economic

                                      -16-

              environment.  Returns  will  continue  to  be  partially dependent
              on general market conditions.  The Company's  investment in the 
              securities  portfolio at December 31, 1997 was $184 million
              ($155 million at December 31, 1996).

         -    REINSURANCE.  Minnesota  Power owns 3.3 million shares of Capital
              Re, a specialty insurance and reinsurance  business.  Capital Re's
              product lines  currently  include  financial  guaranty,  mortgage,
              title, financial, credit and specialty reinsurance,  and specialty
              insurance through its  participation in Lloyds of London.  Capital
              Re trades on the New York Stock  Exchange  under the  symbol  KRE.
              Minnesota  Power's  ownership  represents  21  percent  of  the 16
              million total  outstanding  shares of Capital Re. The market value
              of the  Company's  investment  in Capital  Re was $203  million at
              December  31, 1997 ($152  million at December 31, 1996) based on a
              Capital Re share price of $62 5/16 ($46 5/8 at December 31, 1996).
              The Company  accounts for its  investment  in Capital Re under the
              equity method and the carrying  value was $119 million at December
              31, 1997.  Capital Re will continue to be a core  component of the
              Company's Investment segment.

         -    OTHER.  Since 1985 the Company has invested about $8 million as a
              shareholder in Utech Venture Capital  Corporation  (Utech).  Utech
              manages a group of  venture  capital  funds  that  seek  long-term
              capital appreciation by making investments in companies developing
              advanced  technologies  to be used by the  utility  industry.  The
              Company is committed to invest an additional  $14 million over the
              next five years.  Minnesota  Power has  recognized  dividends  and
              return of  capital  from the  funds in the year they are paid.  As
              successful  companies  "go  public" or are sold,  investors,  like
              Minnesota  Power,  may realize income as the stock is sold and the
              cash distributed. 
              
              In  1997   Minnesota   Power  loaned  $4  million  to  Car  Canada
              Corporation,  a start-up  retail car  "superstore"  business  with
              stores in Ottawa and Toronto.  The Company holds a 10 percent note
              due 2002 for the principal  amount of the loan.  The note has five
              equal  payments  due at the end of years  one  through  five.  The
              Company also holds  detachable  warrants that can be exercised for
              25 percent of the outstanding shares of Car Canada in exchange for
              approximately $18,000. The warrants are exercisable  automatically
              in an initial public offering,  or sale, or merger of the firm and
              any other time at the sole option of Minnesota Power.

         REAL ESTATE OPERATIONS

         The Company owns 80 percent of Lehigh,  a Florida  real estate  company
which owns property in three different locations. The real estate strategy is to
continue to acquire large  community  properties at low cost, add value and sell
them at going market prices.

         -    LEHIGH ACRES  properties  include 2,500 acres of land and  
              approximately  4,000 home sites near Fort Myers, Florida.

         -    SUGARMILL  WOODS  properties  include  1,000 home sites in Citrus
              County, Florida.

         -    PALM COAST  properties  include 2,700 home sites and 12,000 acres
              of  residential,  commercial  and  industrial  land at Palm Coast,
              Florida.  Palm Coast is a planned  community between St. Augustine
              and Daytona Beach.

ENVIRONMENTAL MATTERS

         Certain businesses  included in the Company's  Investments  segment are
subject to  regulation  by various  federal,  state and local  authorities  with
respect to air quality,  water  quality,  solid  wastes and other  environmental
matters. The Company considers these businesses to be in substantial  compliance
with those environmental  regulations currently applicable to its operations and
believes all necessary  permits to conduct such  operations  have been obtained.
The Company does not currently  anticipate that potential  capital  expenditures
for environmental matters will be material.  However, because environmental laws
and regulations are constantly evolving, the character, scope and ultimate costs
of environmental compliance cannot be estimated.

                                      -17-



EXECUTIVE OFFICERS OF THE REGISTRANT                                          
                                                                  Initial
Executive Officers                                             Effective Date
- - - ------------------                                             --------------

John A. Cirello, Age 54
     Executive Vice President and President and
         Chief Executive Officer - MP Water Resources
         Group Inc.                                            July 24, 1995

Donnie R. Crandell, Age 54
     Senior Vice President and President - MP Real Estate
         Holdings, Inc.                                        January 1, 1996
     Senior Vice President - Corporate Development             December 1, 1994
     Retired                                                   February 28, 1994
     Vice President - Corporate Development                    March 1, 1993

Robert D. Edwards, Age 53
     Executive Vice President and President - MP Electric      July 26, 1995
     Executive Vice President and Chief Operating Officer      March 1, 1993
     Group Vice President - Corporate Services and
         Chief Financial Officer                               January 1, 1991

John E. Fuller, Age 54
     Senior Vice President and President and
         Chief Executive Officer - AFC                         April 23, 1997
     President and
         Chief Executive Officer - AFC                         January 1, 1994

Laurence H. Fuller, Age 49
     Vice President - Corporate Development                    February 10, 1997

David G. Gartzke, Age 54
     Senior Vice President - Finance and Chief 
      Financial Officer                                        December 1, 1994
     Vice President - Finance and Chief Financial Officer      March 1, 1993
     Vice President - Finance and Treasurer                    January 1, 1991

James P. Hallett, Age 44
     Executive Vice President and President and
         Chief Executive Officer - ADESA                       April 23, 1997
President and Chief Executive Officer - ADESA                  August 21, 1996

Philip R. Halverson, Age 50
     Vice President, General Counsel and Secretary             January 1, 1996
     General Counsel and Corporate Secretary                   March 1, 1993
     General Counsel and Assistant Secretary                   January 23, 1991

James A. Roberts, Age 47
     Vice President - Corporate Relations                      January 1, 1996

Edwin L. Russell, Age 53
     Chairman, President and Chief Executive Officer           May 14, 1996
     President and Chief Executive Officer                     January 22, 1996
     President                                                 May 9, 1995

Mark A. Schober, Age 42
     Controller                                                March 1, 1993

James K. Vizanko, Age 44
     Treasurer                                                 March 1, 1993


                                      -18-


         
         All of the executive officers above, except Mr. Cirello,  Mr. Crandell,
Mr. John Fuller,  Mr. Laurence  Fuller,  Mr. Hallet and Mr.  Russell,  have been
employed  by the  Company for more than five years in  executive  or  management
positions.

         -    Mr. Cirello was president of Metcalf & Eddy Services,  Inc. from 
              1992 to 1995,  responsible  for $64 million in water/wastewater 
              operation services.

         -    Mr. Crandell was director of business development of the Company,
              vice president of Topeka Group  Incorporated and vice president of
              business  development for Topeka Group Incorporated prior to March
              1, 1993.

         -    Mr. John Fuller was previously  president and 50 percent owner of
              CITA, Inc., which he founded in 1987 (CITA was renamed  Automotive
              Finance  Corporation in December 1993 and sold to ADESA in January
              1994).

         -    Mr. Laurence Fuller was previously  senior vice  president,  new 
              business  development and strategic planning, for Diners Club 
              International, a subsidiary of Citicorp, Inc.

         -    Mr.  Hallet was  previously  executive  vice  president of ADESA 
              and  president of ADESA's  Canadian operations.
              
         -    Mr.  Russell  was  previously  group vice president of J. M. Huber
              Corporation, a $1.5  billion diversified manufacturing and natural
              resources company.

         Prior to  election to the  positions  shown  above,  Mr.  Roberts,  Mr.
Schober and Mr.  Vizanko held other  positions with the Company after January 1,
1993.

         -    Mr. Roberts was director of corporate relations.

         -    Mr. Schober was director of internal audit.

         -    Mr. Vizanko was director of investments and analysis.

         There are no family relationships between any executive officers of the
Company. All officers and directors are elected or appointed annually.

         The present term of office of the above executive  officers  extends to
the first  meeting of the  Company's  Board of  Directors  after the next annual
meeting of shareholders. Both meetings are scheduled for May 12, 1998.

                                      -19-



ITEM 2.  PROPERTIES.

ELECTRIC OPERATIONS

         The Company had an annual and all-time record net peak load of 1,476 MW
on February 10, 1997.  Information with respect to existing power supply sources
is shown below.


                                                   Unit         Year         Net Winter           Net Electric
     Power Supply                                   No.       Installed      Capability           Requirements
- - - -------------------------------------------------------------------------------------------------------------------
                                                                                 MW              MWh         %
                                                                                          
     Steam
       Coal-Fired
           Boswell Energy Center
              near Grand Rapids, MN                  1          1958             69
                                                     2          1960             69
                                                     3          1973            350
                                                     4          1980            428
                                                                             ------
                                                                                916           5,618,246    43.7%
                                                                             ------
           Laskin Energy Center
              Hoyt Lakes, MN                         1          1953             55
                                                     2          1953             55
                                                                             ------
                                                                                110             537,875     4.2
                                                                             ------
       Purchased Steam
           M. L. Hibbard
              Duluth, MN                             3          1949             33                 814       -
                                                                             ------          ----------  ------
                      Total Steam                                             1,059           6,156,935    47.9
                                                                             ------          ----------  ------

     Hydro
       Group consisting of ten stations in MN                  Various          118             578,020     4.5
                                                                             ------          ----------  ------

     Purchased Power
       Square Butte burns lignite in Center, ND                                 322           2,307,308    18.0
       All other - net                                                            -           3,802,005    29.6
                                                                             ------          ----------  ------
                      Total Purchased Power                                     322           6,109,313    47.6
                                                                             ------          ----------  ------

     For the Year Ended December 31, 1997                                     1,499          12,844,268   100.0%
- - - -------------------------------------------------------------------------------------------------------------------


         The Company has electric  transmission  and  distribution  lines of 500
kilovolts  (kV) (8 miles),  230 kV (606  miles),  161 kV (43  miles),  138 kV (6
miles),  115 kV (1,260  miles) and less than 115 kV (6,176  miles).  The Company
owns  and   operates   176   substations   with  a  total   capacity   of  8,533
megavoltamperes.  Some of the transmission and distribution  lines  interconnect
with other utilities.

         The  Company  owns and has a  substantial  investment  in  offices  and
service buildings,  area headquarters,  an energy control center,  repair shops,
motor  vehicles,   construction   equipment  and  tools,  office  furniture  and
equipment,  and leases offices and storerooms in various  localities  within the
Company's service territory.  It also owns miscellaneous  parcels of real estate
not presently used in Electric Operations.

         Substantially  all of the  electric  plant of the Company is subject to
the lien of its Mortgage and Deed of Trust which  secures first  mortgage  bonds
issued by the Company.  The Company's  properties  are held by it in fee and are
free from other encumbrances,  subject to minor exceptions, none of which are of
such a nature as to  substantially  impair the usefulness to the Company of such
properties. Other property, including certain offices and equipment, is utilized
under  leases.  In general,  some of the electric  lines are located on land not
owned in fee,  but are covered by  necessary  consents  of various  governmental
authorities or by appropriate  rights obtained from owners of private  property.
These  consents  and rights are deemed  adequate  for the purposes for which the
properties  are being used.  In  September  1990 the  Company  sold a portion of
Boswell  Unit 4 to WPPI.  WPPI has the right to use the  Company's  transmission
line facilities to transport its share of generation.

                                      -20-


         Substantially  all of the plant of SWL&P is  subject to the lien of its
Mortgage and Deed of Trust which secures first mortgage bonds issued by SWL&P.

         A large  dragline,  shop complex,  and certain  other less  significant
property  and  equipment  items at BNI Coal are leased  under a leveraged  lease
agreement that expires in 2002.  Certain computer and other equipment are leased
under operating lease agreements that expire in 2000 and 2007, respectively. All
other property and equipment is owned by BNI Coal.

         The Company is a member of the  Mid-Continent  Area Power Pool  (MAPP).
The MAPP enhances electric service reliability, and provides the opportunity for
members  to enter into  various  wholesale  power  transactions  and  coordinate
planning,   installation  and  operation  of  new  generation  and  transmission
facilities.  The MAPP  membership  consists of various  electric power suppliers
located  in  North  Dakota,  South  Dakota,  eastern  Montana,  Nebraska,  Iowa,
Minnesota,  Wisconsin,  upper Michigan,  Kansas,  Manitoba and Saskatchewan, and
marketers and brokers  located  throughout  North  America.  The electric  power
suppliers are  investor-owned  utilities  including the Company,  rural electric
generation and  transmission  cooperatives,  public power  districts,  municipal
electric  systems,   municipal   organizations,   and  the  Western  Area  Power
Administration - Billings,  Montana. MAPP operates pursuant to an agreement that
was approved by MAPP members on March 15, 1996,  accepted by the FERC and became
effective on November 1, 1996.

WATER SERVICES

         Florida  Water is the  largest  investor  owned  provider  of water and
wastewater  services in Florida,  serving  more than  170,000  customers  in 145
service  areas.  Florida  Water  maintains 149 water and  wastewater  facilities
throughout  the state with plants  ranging in size from 6 connections to greater
than 25,000  connections.  Florida Water  provides its customers with 14 billion
gallons  of  water  per  year  primarily  from  Florida's  underground  aquifer.
Substantially all of Florida Water's properties used in its water and wastewater
operations are encumbered by a mortgage.

         Heater  has  water  and  wastewater  systems  located  in  subdivisions
surrounding Raleigh, North Carolina and Fayetteville, North Carolina. Water 
supply is  primarily  from  ground  water  deep  wells. Community  ground  water
systems  vary in size  from 25  connections  to  6,000 connections.   Some  
systems  are  supplied  by  purchased  water.   Heater  has approximately  223 
systems and 436 wells serving 28,000  customers.  Heater also has 8 wastewater  
treatment plants,  ranging in size from 35,000 gallons per day (gpd) to 250,000
gpd, and 19 lift stations located in its wastewater  collection systems. These 
systems serve approximately 2,000 customers. Substantially all of Heater's  
properties used in its water and wastewater  operations are encumbered by a 
mortgage.


INVESTMENTS

         Property within the Company's real estate operations  consists of 2,500
acres of land and approximately 4,000 home sites near Fort Myers, Florida; 1,000
home sites in Citrus County,  Florida;  and 2,700 home sites and 12,000 acres of
residential, industrial and commercial land at Palm Coast, Florida.

                                      -21-


AUTOMOTIVE SERVICES

         The following table sets forth the vehicle auctions  currently owned or
leased by ADESA. Each auction has a multi-lane,  drive-through auction facility,
as well as additional buildings for reconditioning,  registration,  maintenance,
body work, and other ancillary and administrative services. Each auction also 
has secure parking areas in which it stores vehicles for  auction.  All  vehicle
auction  property  owned by ADESA is subject  to liens  securing  various  notes
payable.


                                                                                      Year               No.
                                                                                   Operations          Auction
ADESA Auctions                            Location                                  Commenced           Lanes
- - - -------------------------------------------------------------------------------------------------------------------
                                                                                              
United States
    ADESA Birmingham                      Moody, Alabama                              1987               10
    ADESA Sacramento <F1>                 Sacramento, California                      1997                5
    ADESA Jacksonville                    Jacksonville, Florida                       1996                6
    ADESA South Florida <F1><F2>          Opa-Locka, Florida (near Miami)             1994                7
    ADESA Southern Indiana <F1><F3>       Columbus, Indiana                           1997                3
    ADESA Indianapolis                    Plainfield, Indiana                         1983               10
    ADESA Lexington                       Lexington, Kentucky                         1982                6
    ADESA Boston <F1>                     Framingham, Massachusetts                   1995               11
    ADESA New Jersey                      Manville, New Jersey                        1996                8
    ADESA Buffalo                         Akron, New York                             1992               10
    ADESA Charlotte <F1>                  Charlotte, North Carolina                   1994                8
    ADESA Cincinnati/Dayton               Franklin, Ohio                              1986                8
    ADESA Cleveland <F1>                  Northfield, Ohio                            1994                8
    ADESA Pittsburgh                      Mercer, Pennsylvania                        1971                7
    ADESA Knoxville <F1>                  Lenoir City, Tennessee                      1984                6
    ADESA Memphis                         Memphis, Tennessee                          1990                6
    ADESA Austin <F1>                     Austin, Texas                               1990                6
    ADESA Dallas                          Mesquite, Texas                             1990                6
    ADESA Houston                         Houston, Texas                              1995                3
    ADESA San Antonio                     San Antonio, Texas                          1989                5
    ADESA Wisconsin                       Portage, Wisconsin                          1984                5

Canada
    ADESA Moncton <F1>                    Moncton, New Brunswick                      1996                2
    ADESA Halifax <F1>                    Lr. Sackville, Nova Scotia                  1993                2
    ADESA Ottawa                          Vars, Ontario                               1990                5
    ADESA Montreal                        St. Eustache, Quebec                        1974                8

- - - -------------------------------------------------------------------------------------------------------------------
<FN>
<F1>   Leased auction facilities. (See Note 14.)
<F2>   ADESA owns 51 percent of this auction business.
<F3>   ADESA owns 80 percent of this auction business.
</FN>


         AFC has loan production  offices in 57 locations  across North America.
Many offices are within  auction  facilities  operated by ADESA and  independent
auctions.

         Great Rigs leases its fleet of 110 automobile  carriers under operating
leases.


ITEM 3.  LEGAL PROCEEDINGS.

         Material  legal  and  regulatory   proceedings   are  included  in  the
discussion of the Company's business in Item 1 and are incorporated by reference
herein.

                                      -22-




ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of 1997.


                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 
MATTERS.

         The Company has paid dividends without interruption on its common stock
since 1948. A quarterly  dividend of $.51 per share on the common stock was paid
on March 2, 1998 to the holders of record on February  16, 1998.  The  Company's
common stock is listed on the New York Stock Exchange. Dividends paid per share,
and the high and low  prices  for the  Company's  common  stock for the  periods
indicated  as reported  by The Wall Street  Journal,  Midwest  Edition,  were as
follows:

                                                              Dividends
                             Price Range                   Paid Per Share
                             -----------                   --------------
      Quarter             High          Low              Quarterly     Annual
- - - --------------------------------------------------------------------------------

1997  -   First        $ 29         $ 27 1/4              $ .51
      -   Second         30 5/8       27                    .51
      -   Third          36 5/16      30 1/4                .51
      -   Fourth         44           35 3/16               .51         $2.04

1996  -   First        $ 29 3/4     $ 26 1/8              $ .51
      -   Second         29           26                    .51
      -   Third          28 3/4       26                    .51
      -   Fourth         28 7/8       26 3/8                .51         $2.04
- - - --------------------------------------------------------------------------------

         The amount  and timing of  dividends  payable on the  Company's  common
stock are within the sole  discretion  of the Company's  Board of Directors.  In
1997 the Company  paid out 82 percent of its per share  earnings  in  dividends.
Through increased  earnings,  the Company's goal is to reduce dividend payout to
between 75 percent and 80 percent of per share earnings.

         The Company's Articles of Incorporation, and Mortgage and Deed of Trust
contain provisions which under certain  circumstances would restrict the payment
of common stock  dividends.  As of December 31, 1997 no retained  earnings  were
restricted  as a  result  of these  provisions.  At March  2,  1998  there  were
approximately 37,000 common stock shareholders of record.

                                      -23-



ITEM 6.  SELECTED FINANCIAL DATA.

         Financial   information  presented  in  the  table  below  may  not  be
comparable  between periods due to: (1) the Company's  purchase of 80 percent of
ADESA,  including  AFC and Great  Rigs,  on July 1,  1995,  another 3 percent in
January  1996 and the  remaining  17  percent  in August  1996;  and (2) and the
Company's  sale of its interest in the paper and pulp  business to  Consolidated
Papers, Inc. on June 30, 1995.




                                                 1997           1996            1995           1994           1993
- - - -------------------------------------------------------------------------------------------------------------------
                                                                  Millions except per share amounts
                                                                                            
Operating Revenue and Income                    $953.6         $846.9         $672.9         $582.2          $582.5

Income (Loss)
   Continuing Operations                         $77.6          $69.2          $61.9          $59.5           $64.4
   Discontinued Operations                           -              -            2.8            1.8            (1.8)
                                                ------         ------         ------          -----          ------
Net Income                                       $77.6          $69.2          $64.7 <F1>     $61.3 <F2>      $62.6
                                                ======         ======         ======          =====          ======

Basic and Diluted Earnings Per Share
   Continuing Operations                        $ 2.47         $ 2.28         $ 2.06          $1.99           $2.27
   Discontinued Operations                           -              -            .10            .07            (.07)
                                                ------         ------         ------          -----          ------
     Total                                      $ 2.47         $ 2.28         $ 2.16          $2.06           $2.20
                                                ======         ======         ======          =====          ======

Dividends Per Share                              $2.04          $2.04          $2.04          $2.02           $1.98

Total Assets                                  $2,172.3       $2,146.0       $1,947.6       $1,807.8        $1,760.5

Long-Term Debt                                  $685.4         $694.4         $639.5         $601.3          $611.0
Redeemable Preferred Stock                       $20.0          $20.0          $20.0          $20.0           $20.0
Cumulative Quarterly Income
   Preferred Securities                          $75.0          $75.0              -              -               -

- - - -------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Included $14.7 million from the recognition of tax benefits  associated with
     real estate  operations and a $3.8 million reduction associated with exiting
     the equipment manufacturing business.

<F2> Included  $11.8 million from the sale of certain  water plant  assets,  $3.6
     million from the  recognition  of escrow funds  associated  with real estate
     operations,  a $5.9 million decrease from the write-off of an investment and
     a $3 million loss from the equipment manufacturing business.
</FN>



ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

         The  management's  discussion  and analysis of financial  condition and
results of operations  appearing on pages 18 through 31 of the  Minnesota  Power
1997  Annual  Report are  incorporated  by  reference  in this Form 10-K  Annual
Report.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The financial  statements,  together  with the report  thereon of Price
Waterhouse  LLP dated  January 26, 1998  appearing on pages 32 through 50 of the
Minnesota Power 1997 Annual Report,  are  incorporated by reference in this Form
10-K Annual Report.


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
FINANCIAL DISCLOSURE.

         Not applicable.

                                      -24-



                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The  information  required for this Item is  incorporated  by reference
herein from the "Election of Directors" section in the Company's Proxy Statement
for the 1998 Annual Meeting of Shareholders, except for information with respect
to executive officers which is set forth in Part I hereof.

ITEM 11.  EXECUTIVE COMPENSATION.

         The  information  required for this Item is  incorporated  by reference
herein from the  "Compensation of Executive  Officers"  section in the Company's
Proxy Statement for the 1998 Annual Meeting of Shareholders.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The  information  required for this Item is  incorporated  by reference
herein from the "Security Ownership of Certain Beneficial Owners and Management"
section  in the  Company's  Proxy  Statement  for the  1998  Annual  Meeting  of
Shareholders.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The  information  required for this Item is  incorporated  by reference
herein from the "Compensation  Committee  Interlocks and Insider  Participation"
section  in the  Company's  Proxy  Statement  for the  1998  Annual  Meeting  of
Shareholders.

                                      -25-




                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.


(a)  Certain Documents Filed as Part of Form 10-K.

     (1)  Financial Statements

                                                                     Pages in
                                                                  Annual Report*
                                                                  --------------
             Minnesota Power
             Report of Independent Accountants                         31
             Consolidated Balance Sheet at December 31, 1997
              and 1996                                                 32
             For the three years ended December 31, 1997
                 Consolidated Statement of Income                      34
                 Consolidated Statement of Retained Earnings           34
                 Consolidated Statement of Cash Flows                  35
             Notes to Consolidated Financial Statements               36-50
- - - ---------------
*  Incorporated by reference herein from the Minnesota Power 1997 Annual Report.


                                                                      Page
                                                                      ----
     (2)  Financial Statement Schedules
             Report of Independent Accountants on Financial 
              Statement Schedule                                       32
             Minnesota Power and Subsidiaries Schedule:
                   II-Valuation and Qualifying Accounts 
                    and Reserves                                       33

      All other schedules have been omitted either because the information is
not  required  to be  reported  by the  Company or because  the  information  is
included in the consolidated financial statements or the notes thereto.


     (3) Exhibits including those incorporated by reference


Exhibit
Number
- - - -------

     *2  -    Agreement  and Plan of Merger by and  among  Minnesota  Power &
              Light Company,  AC Acquisition  Sub, Inc.,  ADESA  Corporation and
              Certain  ADESA  Management  Shareholders  dated  February 23, 1995
              (filed  as  Exhibit 2 to Form 8-K dated  March 3,  1995,  File No.
              1-3548).

 *3(a)1  -    Articles of Incorporation, restated as of July 27, 1988 (filed as 
              Exhibit 3(a), File No. 33-24936).

 *3(a)2  -    Certificate  Fixing Terms of Serial  Preferred  Stock A, $7.125 
              Series (filed as Exhibit 3(a)2,  File No. 33-50143).

 *3(a)3  -    Certificate  Fixing Terms of Serial  Preferred  Stock A, $6.70 
              Series (filed as Exhibit  3(a)3,  File No. 33-50143).

  *3(b)  -    Bylaws as amended January 23, 1991 (filed as Exhibit 3(b), File 
              No. 33-45549).

                                      -26-


Exhibit
Number
- - - -------

*4(a)1   -    Mortgage and Deed of Trust, dated as of September 1, 1945, between
              the Company and Irving Trust Company (now The Bank of New York)and
              Richard H. West (W.T. Cunningham, successor), Trustees (filed as 
              Exhibit 7(c), File No. 2-5865).

 *4(a)2  -    Supplemental Indentures to Mortgage and Deed of Trust:

                                                  Reference
              Number         Dated as of            File                 Exhibit
              ------         -----------            ----                 -------

              First          March 1, 1949        2-7826                   7(b)
              Second         July 1, 1951         2-9036                   7(c)
              Third          March 1, 1957        2-13075                  2(c)
              Fourth         January 1, 1968      2-27794                  2(c)
              Fifth          April 1, 1971        2-39537                  2(c)
              Sixth          August 1, 1975       2-54116                  2(c)
              Seventh        September 1, 1976    2-57014                  2(c)
              Eighth         September 1, 1977    2-59690                  2(c)
              Ninth          April 1, 1978        2-60866                  2(c)
              Tenth          August 1, 1978       2-62852                  2(d)2
              Eleventh       December 1, 1982     2-56649                  4(a)3
              Twelfth        April 1, 1987        33-30224                 4(a)3
              Thirteenth     March 1, 1992        33-47438                 4(b)
              Fourteenth     June 1, 1992         33-55240                 4(b)
              Fifteenth      July 1, 1992         33-55240                 4(c)
              Sixteenth      July 1, 1992         33-55240                 4(d)
              Seventeenth    February 1, 1993     33-50143                 4(b)
              Eighteenth     July 1, 1993         33-50143                 4(c)
              Nineteenth     February 1, 1997     1-3548 (1996 Form 10-K)  4(c)

  4(a)3  -    Twentieth Supplemental Indenture,  dated as of November 1, 1997,
              between  the  Company  and The Bank of New York  (formerly  Irving
              Trust Company) and W.T. Cunningham (successor to Richard H. West),
              Trustees.
              
  *4(b)  -    Mortgage  and Deed of Trust,  dated as of March 1,  1943,  between
              Superior Water,  Light and Power Company and Chemical Bank & Trust
              Company and Howard B. Smith, as Trustees,  both succeeded by First
              Bank N.A., as Trustee (filed as Exhibit 7(c), File No. 2-8668), as
              supplemented and modified by First Supplemental  Indenture thereto
              dated as of March 1, 1951  (filed  as  Exhibit  2(d)(1),  File No.
              2-59690),  Second Supplemental Indenture thereto dated as of March
              1,  1962  (filed  as  Exhibit  2(d)1,  File  No.  2-27794),  Third
              Supplemental  Indenture  thereto  dated  July 1,  1976  (filed  as
              Exhibit 2(e)1, File No. 2-57478),  Fourth  Supplemental  Indenture
              thereto dated as of March 1, 1985 (filed as Exhibit 4(b), File No.
              2-78641),   Fifth  Supplemental  Indenture  thereto  dated  as  of
              December 1, 1992 (filed as Exhibit 4(b)1 to Form 10-K for the year
              ended  December 31, 1992,  File No.  1-3548),  Sixth  Supplemental
              Indenture,  dated as of March 24, 1994 (filed as Exhibit  4(b)1 to
              Form 10-K for the year ended December 31, 1996,  File No. 1-3548),
              Seventh  Supplemental  Indenture,  dated as of  November  1,  1994
              (filed as Exhibit  4(b)2 to Form 10-K for the year ended  December
              31,  1996,  File No.  1-3548) and Eighth  Supplemental  Indenture,
              dated as of January 1, 1997  (filed as Exhibit  4(b)3 to Form 10-K
              for the year ended December 31, 1996, File No. 1-3548).

                                      -27-


Exhibit
Number
- - - -------

  *4(c)  -    Indenture,  dated as of March 1, 1993,  between  Southern States  
              Utilities,  Inc.  (now Florida  Water  Services  Corporation)  and
              Nationsbank of Georgia,  National  Association (now SunTrust Bank,
              Central Florida,  N.A.), as Trustee (filed as Exhibit 4(d) to Form
              10-K for the year ended December 31, 1992,  File No.  1-3548),  as
              supplemented and modified by First Supplemental  Indenture,  dated
              as of March 1, 1993  (filed as Exhibit  4(c)1 to Form 10-K for the
              year  ended   December  31,  1996,   File  No.   1-3548),   Second
              Supplemental  Indenture,  dated as of March  31,  1997  (filed  as
              Exhibit 4 to Form 10-Q for the quarter ended March 31, 1997,  File
              No. 1-3548) and Third Supplemental Indenture,  dated as of May 28,
              1997 (filed as Exhibit 4 to Form 10-Q for the  quarter  ended June
              30, 1997, File No. 1-3548).

  *4(d)  -    Amended and Restated Trust Agreement, dated as of March 1, 1996,
              relating to MP&L  Capital I's 8.05%  Cumulative  Quarterly  Income
              Preferred Securities,  between the Company, as Depositor,  and The
              Bank of New  York,  The Bank of New  York  (Delaware),  Philip  R.
              Halverson,  David G.  Gartzke  and James K.  Vizanko,  as Trustees
              (filed as Exhibit  4(a) to Form 10-Q for the  quarter  ended March
              31, 1996, File No. 1-3548).

  *4(e)  -    Amendment  No. 1, dated April 11, 1996,  to Amended and Restated
              Trust  Agreement,  dated  as of March 1,  1996,  relating  to MP&L
              Capital I's 8.05% Cumulative Quarterly Income Preferred Securities
              (filed as Exhibit  4(b) to Form 10-Q for the  quarter  ended March
              31, 1996, File No. 1-3548).

  *4(f)  -    Indenture,  dated as of March 1, 1996, relating to the Company's
              8.05% Junior Subordinated Debentures,  Series A, Due 2015, between
              the Company and The Bank of New York, as Trustee (filed as Exhibit
              4(c) to Form 10-Q for the quarter  ended March 31, 1996,  File No.
              1-3548).

  *4(g)  -    Guarantee Agreement, dated as of March 1, 1996, relating to MP&L
              Capital   I's  8.05%   Cumulative   Quarterly   Income   Preferred
              Securities, between the Company, as Guarantor, and The Bank of New
              York,  as  Trustee  (filed  as  Exhibit  4(d) to Form 10-Q for the
              quarter ended March 31, 1996, File No. 1-3548).

  *4(h)  -    Agreement as to Expenses and Liabilities,  dated as of March 20,
              1996,  relating  to MP&L  Capital I's 8.05%  Cumulative  Quarterly
              Income Preferred Securities,  between the Company and MP&L Capital
              I (filed as Exhibit 4(e) to Form 10-Q for the quarter  ended March
              31, 1996, File No. 1-3548).

  *4(i)  -    Officer's  Certificate,  dated March 20, 1996,  establishing the
              terms of the 8.05% Junior Subordinated  Debentures,  Series A, Due
              2015  issued in  connection  with the 8.05%  Cumulative  Quarterly
              Income Preferred Securities of MP&L Capital I.

  *4(j)  -    Rights  Agreement dated as of July 24, 1996,  between  Minnesota
              Power & Light  Company and the  Corporate  Secretary  of Minnesota
              Power & Light Company, as Rights Agent (filed as Exhibit 4 to Form
              8-K dated August 2, 1996, File No. 1-3548).

  *4(k)  -    Indenture,  dated as of May 15,  1996,  relating  to the  ADESA
              Corporation's  7.70%  Senior  Notes,  Series A, Due 2006,  between
              ADESA  Corporation  and The Bank of New York, as Trustee (filed as
              Exhibit  4(k) to Form 10-K for the year ended  December  31, 1996,
              File No. 1-3548).

  *4(l)  -    Guarantee of Minnesota  Power & Light  Company,  dated as of May
              30, 1996,  relating to the ADESA Corporation's 7.70% Senior Notes,
              Series  A, Due 2006  (filed as  Exhibit  4(l) to Form 10-K for the
              year ended December 31, 1996, File No. 1-3548).

                                      -28-


Exhibit
Number
- - - -------

  *4(m)  -    ADESA Corporation  Officer's  Certificate  1-D-1,  dated May 30,
              1996,  relating to the ADESA  Corporation's  7.70%  Senior  Notes,
              Series  A, Due 2006  (filed as  Exhibit  4(m) to Form 10-K for the
              year ended December 31, 1996, File No. 1-3548).

 *10(a)  -    Asset  Holdings III, L.P.  Note Purchase  Agreement,  dated as of 
              November  22,  1994  (filed as Exhibit  10(i) to Form 10-K for the
              year ended December 31, 1995, File No. 1-3548).

 *10(b)  -    Lease and Development  Agreement,  dated as of November 28, 1994
              between  Asset  Holdings  III,  L.P.,  as  Lessor  and  A.D.E.  of
              Knoxville,  Inc.,  as Lessee  (filed as Exhibit 10(j) to Form 10-K
              for the year ended December 31, 1995, File No. 1-3548).

 *10(c)  -    Lease and Development  Agreement,  dated as of November 28, 1994
              between Asset Holdings III,  L.P., as Lessor and  ADESA-Charlotte,
              Inc.,  as Lessee (filed as Exhibit 10(k) to Form 10-K for the year
              ended December 31, 1995, File No. 1-3548).

 *10(d)  -    Lease and Development  Agreement,  dated as of December 21, 1994
              between  Asset  Holdings  III,  L.P.,  as Lessor and Auto  Dealers
              Exchange of Concord,  Inc.,  as Lessee  (filed as Exhibit 10(l) to
              Form 10-K for the year ended December 31, 1995, File No. 1-3548).

 *10(e)  -    Guaranty and Purchase  Option  Agreement  between Asset Holdings
              III,  L.P.  and ADESA  Corporation,  dated as of November 28, 1994
              (filed as Exhibit  10(m) to Form 10-K for the year ended  December
              31, 1995, File No. 1-3548).

 *10(f)  -    Receivables  Purchase  Agreement  dated as of December 31, 1996,
              among AFC  Funding  Corporation,  as  Seller,  Automotive  Finance
              Corporation,  as  Servicer,  Pooled  Accounts  Receivable  Capital
              Corporation,  as Purchaser,  and Nesbitt Burns Securities Inc., as
              Agent  (filed as  Exhibit  10(f) to Form  10-K for the year  ended
              December 31, 1996, File No. 1-3548).

 *10(g)  -    First  Amendment to Receivables Purchase Agreement,  dated as of 
              February  28,  1997,  among AFC  Funding  Corporation,  as Seller,
              Automotive  Finance  Corporation,  as  Servicer,  Pooled  Accounts
              Receivable Capital  Corporation,  as Purchaser,  and Nesbitt Burns
              Securities Inc., as Agent (filed as Exhibit 10(g) to Form 10-K for
              the year ended December 31, 1996, File No. 1-3548).

 *10(h)  -    Second Amendment to Receivables  Purchase  Agreement,  dated as of
              August  15,  1997,  among  AFC  Funding  Corporation,  as  Seller,
              Automotive  Finance  Corporation,  as  Servicer,  Pooled  Accounts
              Receivable Capital  Corporation,  as Purchaser,  and Nesbitt Burns
              Securities  Inc.,  as Agent  (filed as Exhibit 10 to Form 10-Q for
              the quarter ended September 30, 1997, File No. 1-3548).

 *10(i)  -    Purchase  and Sale  Agreement  dated as of  December  31,  1996,
              between AFC Funding Corporation and Automotive Finance Corporation
              (filed as Exhibit  10(h) to Form 10-K for the year ended  December
              31, 1996, File No. 1-3548).

+*10(j)  -    Minnesota Power Executive Annual Incentive Plan, effective January
              1, 1996  (filed as  Exhibit  10(a) to Form 10-K for the year ended
              December 31, 1995, File No. 1-3548).

+*10(k)  -    Minnesota Power and Affiliated Companies  Supplemental Executive
              Retirement Plan, as amended and restated, effective August 1, 1994
              (filed as Exhibit  10(b) to Form 10-K for the year ended  December
              31, 1995, File No. 1-3548).

+*10(l)  -    Executive  Investment  Plan-I, as amended and restated,  effective
              November 1, 1988 (filed as Exhibit 10(c) to Form 10-K for the year
              ended December 31, 1988, File No. 1-3548).

                                      -29-


Exhibit
Number
- - - -------

+*10(m)  -    Executive  Investment Plan-II, as amended and restated,  effective
              November 1, 1988 (filed as Exhibit 10(d) to Form 10-K for the year
              ended December 31, 1988, File No. 1-3548).

+*10(n)  -    Deferred Compensation Trust Agreement,  as amended and restated,  
              effective January 1, 1989 (filed as Exhibit 10(f) to Form 10-K for
              the year ended December 31, 1988, File No. 1-3548).

+*10(o)  -    Executive  Long-Term  Incentive  Plan, as amended and restated,  
              effective January 1, 1994 (filed as Exhibit 10(e) to Form 10-K for
              the year ended December 31, 1994, File No. 1-3548).

+*10(p)  -    Minnesota Power Executive  Long-Term  Incentive Compensation Plan,
              effective January 1, 1996 (filed as Exhibit 10(a) to Form 10-Q for
              the quarter ended June 30, 1996, File No. 1-3548).

+*10(q)  -    Directors'  Long-Term  Incentive Plan, as amended and restated, 
              effective January 1, 1994 (filed as Exhibit 10(f) to Form 10-K for
              the year ended December 31, 1994, File No. 1-3548).

+*10(r)  -    Minnesota  Power  Director  Stock Plan,  effective January 1, 1995
              (filed as Exhibit 10 to Form 10-Q for the quarter  ended March 31,
              1995, File No. 1-3548).

+*10(s)  -    Minnesota  Power  Director  Long-Term  Stock  Incentive  Plan,  
              effective January 1, 1996 (filed as Exhibit 10(b) to Form 10-Q for
              the quarter ended June 30, 1996, File No. 1-3548).

     12  -    Computation of Ratios of Earnings to Fixed Charges and 
              Supplemental Ratios of Earnings to Fixed Charges.

     13  -    Minnesota  Power 1997 Annual Report -  Management's  Discussion  
              and Analysis of Financial Condition and Results of Operations, and
              the  Company's  financial  statements  listed in Item 14 (a)(1) of
              this report.

    *21  -    Subsidiaries of the Registrant (reference is made to the Company's
              Form U-3A-2 for the year ended December 31, 1997, File No. 69-78).

  23(a)  -    Consent of Independent Accountants.

  23(b)  -    Consent of General Counsel.

     27  -    Financial Data Schedule.

- - - ---------------------
*    Incorporated herein by reference as indicated.
+    Management  contract or  compensatory  plan or  arrangement  required to be
     filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K.


(b) Reports on Form 8-K.

     Report on Form 8-K dated and filed on  February  20, 1998 with  respect to 
     Item 7.  Financial  Statements  and Exhibits.

                                      -30-



                        REPORT OF INDEPENDENT ACCOUNTANTS
                         ON FINANCIAL STATEMENT SCHEDULE


To the Board of Directors
   of Minnesota Power

Our audits of the consolidated  financial statements referred to in our
report dated January 26, 1998  appearing on page 32 of the 1997 Annual Report to
Shareholders  of  Minnesota  Power  (which  report  and  consolidated  financial
statements  are  incorporated  by reference in this Annual  Report on Form 10-K)
also included an audit of the Financial  Statement Schedule listed in Item 14(a)
of this Form 10-K. In our opinion,  the Financial  Statement  Schedule  presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.


Price Waterhouse LLP


PRICE WATERHOUSE LLP
Minneapolis, Minnesota
January 26, 1998


                                      -31-



                                                                    Schedule II


                                            MINNESOTA POWER AND SUBSIDIARIES

                                     VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                                  FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                                         Millions



                                                                  Additions
                                         Balance at               ---------                Deductions     Balance at
                                          Beginning        Charged         Other             from          End of
                                           of Year        to Income       Changes         Reserves<F1>     Period
- - - -------------------------------------------------------------------------------------------------------------------
                                                                                          
Reserve deducted from related assets
   Provision for uncollectible accounts
    1997 Trade accounts receivable         $ 6.6          $ 14.4          $ 0.2            $  8.6           $12.6
         Other accounts receivable           1.5             0.4              -               0.2             1.7
    1996 Trade accounts receivable           3.3             4.7            1.4               2.8             6.6
         Other accounts receivable           1.2             0.2            0.2               0.1             1.5
    1995 Trade accounts receivable           1.0             3.0            1.5               2.2             3.3
         Other accounts receivable           2.8             0.2              -               1.8             1.2
  Deferred asset valuation allowance
    1997 Deferred tax assets                 0.7            (0.4)             -                 -             0.3
    1996 Deferred tax assets <F2>            8.9            (8.2)             -                 -             0.7
    1995 Deferred tax assets <F2>           26.8           (17.9)             -                 -             8.9

- - - -------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Provision for uncollectible accounts includes bad debts written off.
<F2> The deferred tax asset  valuation  allowance was reduced by $8.2 million in
     1996 ($18.4 million in 1995) based on a detailed analysis of projected cash
     flow as a result of a new  business  strategy  for real estate  operations.
     (See Note 15.)
</FN>

                                      -32-


                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.





                                               MINNESOTA POWER & LIGHT COMPANY
                                                        (Registrant)


Dated:   March 25, 1998                        By       EDWIN L. RUSSELL
                                                  ------------------------------
                                                        Edwin L. Russell
                                                     Chairman, President and
                                                     Chief Executive Officer




         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates indicated.



              Signature                   Title                     Date
              ---------                   -----                     ----


        EDWIN L. RUSSELL                                        March 25, 1998
- - - -----------------------------      Chairman, President,
        Edwin L. Russell          Chief Executive Officer
                                        and Director  
                                               



        D.G. GARTZKE                                           March 25, 1998
- - - -----------------------------     Senior Vice President -
        D.G. Gartzke                   Finance and
                                  Chief Financial Officer      
                                          



        MARK A. SCHOBER                  Controller             March 25, 1998
- - - -----------------------------
        Mark A. Schober


                                      -33-




           Signature                      Title                     Date
           ---------                      -----                     ----



        KATHLEEN BREKKEN                 Director               March 25, 1998
- - - -----------------------------
        Kathleen Brekken

        MERRILL K. CRAGUN                Director               March 25, 1998
- - - -----------------------------
        Merrill K. Cragun

        DENNIS E. EVANS                  Director               March 25, 1998
- - - -----------------------------
        Dennis E. Evans

        PETER J. JOHNSON                 Director               March 25, 1998
- - - -----------------------------
        Peter J. Johnson

        GEORGE L. MAYER                  Director               March 25, 1998
- - - -----------------------------
        George L. Mayer

        PAULA F. MCQUEEN                 Director               March 25, 1998
- - - -----------------------------
        Paula F. McQueen

        ROBERT S. NICKOLOFF              Director               March 25, 1998
- - - -----------------------------
        Robert S. Nickoloff

        JACK I. RAJALA                   Director               March 25, 1998
- - - -----------------------------
        Jack I. Rajala

        EDWIN L. RUSSELL                 Director               March 25, 1998
- - - -----------------------------
        Edwin L. Russell

        AREND J. SANDBULTE               Director               March 25, 1998
- - - -----------------------------
        Arend J. Sandbulte

        NICK SMITH                       Director               March 25, 1998
- - - -----------------------------
        Nick Smith

        BRUCE W. STENDER                 Director               March 25, 1998
- - - -----------------------------
        Bruce W. Stender

        DONALD C. WEGMILLER              Director               March 25, 1998
- - - -----------------------------
        Donald C. Wegmiller

                                      -34-