allete2008-10ka.htm
United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
Form
10-K/A
Amendment
No. 1
(Mark
One)
|
R
|
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For the fiscal year
ended December 31,
2008
|
£
|
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For the transition
period from ______________ to ______________
Commission
File No. 1-3548
ALLETE,
Inc.
(Exact
name of registrant as specified in its charter)
Minnesota
|
|
41-0418150
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
30
West Superior Street, Duluth, Minnesota 55802-2093
(Address
of principal executive offices, including zip code)
(218)
279-5000
(Registrant’s
telephone number, including area code)
Securities
Registered Pursuant to Section 12(b) of the Act:
Title
of Each Class
|
|
Name
of Each Stock Exchange
on
Which Registered
|
Common
Stock, without par value
|
|
New
York Stock Exchange
|
Securities
Registered Pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes R No
£
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes £ No
R
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes R No
£
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’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. R
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company (as
defined in Rule 12b-2 of the Act).
Large
Accelerated Filer R
|
Accelerated
Filer £
|
Non-Accelerated
Filer £
|
Smaller
Reporting Company £
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes £ No
R
The
aggregate market value of voting stock held by nonaffiliates on June 30, 2008,
was $1,293,602,666.
As of
February 1, 2009, there were 32,624,876 shares of ALLETE Common Stock, without
par value, outstanding.
EXPLANATORY
NOTE
This
Annual Report on Form 10-K/A constitutes Amendment No. 1 (the “Amendment”) to
ALLETE, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2008,
which was originally filed with the Securities and Exchange Commission (“SEC”)
on February 13, 2009. This Amendment is being filed solely to submit
previously omitted summarized financial data on the American Transmission
Company, LLC (ATC), an independent transmission company in which ALLETE’s
subsidiary, Rainy River Energy Corporation – Wisconsin has an approximate 8
percent non-voting interest. The “ATC Summarized Financial Data” section is part
of Note 5 to the consolidated financial statements included in Item 8 Financial
Statements and Supplementary Data. Except as indicated in the preceding sentence
and for the updated consent and certifications, this Amendment does not modify
or update other disclosures in, or exhibits to, the Annual Report on Form
10-K.
ALLETE
2008 Form 10-K/A, Amendment No. 1
Index
|
Page
|
Safe
Harbor Statement Under the Private Securities Litigation Reform Act of
1995
|
4
|
|
|
Part
II
|
|
Item
8.
|
Financial
Statements and Supplementary Data
|
5
|
Item
9A.
|
Controls
and Procedures
|
5
|
|
|
|
|
Part
IV
|
|
|
Item
15.
|
Exhibits
and Financial Statement Schedules
|
6
|
|
|
Signatures
|
10
|
Consolidated
Financial Statements
|
12
|
ALLETE
2008 Form 10-K/A, Amendment No. 1
Safe Harbor
Statement
Under
the Private Securities Litigation Reform Act of 1995
Statements
in this report that are not statements of historical facts may be considered
“forward-looking” and, accordingly, involve risks and uncertainties that could
cause actual results to differ materially from those discussed. Although such
forward-looking statements have been made in good faith and are based on
reasonable assumptions, there is no assurance that the expected results will be
achieved. Any statements that express, or involve discussions as to, future
expectations, risks, beliefs, plans, objectives, assumptions, events,
uncertainties, financial performance or growth strategies (often, but not
always, through the use of words or phrases such as “anticipates,” “believes,”
“estimates,” “expects,” “intends,” “plans,” “projects,” “will likely result,”
“will continue,“ “could,” “may,” “potential,” “target,” “outlook” or words of
similar meaning) are not statements of historical facts and may be
forward-looking.
In
connection with the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, we are hereby filing cautionary statements identifying
important factors that could cause our actual results to differ materially from
those projected, or expectations suggested, in forward-looking statements made
by or on behalf of ALLETE in this Annual Report on Form 10-K, in presentations,
on our website, in response to questions or otherwise. These statements are
qualified in their entirety by reference to, and are accompanied by, the
following important factors, in addition to any assumptions and other factors
referred to specifically in connection with such forward-looking
statements:
·
|
our
ability to successfully implement our strategic
objectives;
|
·
|
our
ability to manage expansion and integrate acquisitions;
|
·
|
prevailing
governmental policies, regulatory actions, and legislation including those
of the United States Congress, state legislatures, the FERC, the MPUC, the
PSCW, and various local and county regulators, and city administrators,
about allowed rates of return, financings, industry and rate structure,
acquisition and disposal of assets and facilities, real estate
development, operation and construction of plant facilities, recovery of
purchased power, capital investments and other expenses, present or
prospective wholesale and retail competition (including but not limited to
transmission costs), zoning and permitting of land held for resale and
environmental matters;
|
·
|
the
potential impacts of climate change and future regulation to restrict the
emissions of GHG on our Regulated Operations;
|
·
|
effects
of restructuring initiatives in the electric industry;
|
·
|
economic
and geographic factors, including political and economic
risks;
|
·
|
changes
in and compliance with laws and regulations;
|
·
|
weather
conditions;
|
·
|
natural
disasters and pandemic diseases;
|
·
|
war
and acts of terrorism;
|
·
|
wholesale
power market conditions;
|
·
|
population
growth rates and demographic patterns;
|
·
|
effects
of competition, including competition for retail and wholesale
customers;
|
·
|
changes
in the real estate market;
|
·
|
pricing
and transportation of commodities;
|
·
|
changes
in tax rates or policies or in rates of inflation;
|
·
|
project
delays or changes in project costs;
|
·
|
availability
and management of construction
materials and skilled construction labor for capital
projects;
|
·
|
changes
in operating expenses, capital and land
development expenditures;
|
·
|
global
and domestic economic conditions affecting us or our
customers;
|
·
|
our
ability to access capital markets and
bank financing;
|
·
|
changes
in interest rates and the performance of the financial
markets;
|
·
|
our
ability to replace a mature workforce and retain qualified, skilled and
experienced personnel; and
|
·
|
the
outcome of legal and administrative proceedings (whether civil or
criminal) and settlements that affect the business and profitability of
ALLETE.
|
|
|
Additional
disclosures regarding factors that could cause our results and performance to
differ from results or performance anticipated by this report are discussed in
Item 1A under the heading “Risk Factors” beginning on page 20
of our 2008 Form 10-K. Any forward-looking statement speaks only
as of the date on which such statement is made, and we undertake no obligation
to update any forward-looking statement to reflect events or circumstances after
the date on which that statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for management to predict all of these factors, nor can it assess the
impact of each of these factors on the businesses of ALLETE or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statement. Readers are
urged to carefully review and consider the various disclosures made by us in
this Form 10-K/A and in our other reports filed with the SEC that attempt to
advise interested parties of the factors that may affect our
business.
ALLETE
2008 Form 10-K/A, Amendment No. 1
Item
8.
|
Financial
Statements and Supplementary Data
|
See our
consolidated financial statements as of December 31, 2008 and 2007, and for each
of the three years in the period ended December 31, 2008, and supplementary
data, also included, which are indexed in Item 15(a).
Item
9A.
|
Controls
and Procedures
|
Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures
Under the
supervision and with the participation of management, including our principal
executive officer and principal financial officer, we conducted an evaluation of
the effectiveness of the design and operation of ALLETE’s disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934 (“Exchange Act”)). Based upon those evaluations, our
principal executive officer and principal financial officer have concluded that
such disclosure controls and procedures are effective to provide assurance that
information required to be disclosed in ALLETE’s reports filed or submitted
under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in the SEC’s rules and forms and such information is
accumulated and communicated to our management, including our principal
executive and principal financial officer, to allow timely decisions regarding
required disclosure.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. There has been no change in our internal control over financial
reporting that occurred during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting. Based on our evaluation under the framework in
Internal Control—Integrated Framework, our management concluded that our
internal control over financial reporting was effective as of December 31,
2008.
The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2008, has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which
is included herein.
ALLETE
2008 Form 10-K/A, Amendment No. 1
Part
IV
Item
15. Exhibits
and Financial Statement Schedules
(a)
|
Certain
Documents Filed as Part of this Form 10-K/A
|
|
(1)
|
Financial
Statements
|
Page
|
|
|
ALLETE
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
11
|
|
|
Consolidated
Balance Sheet at December 31, 2008 and 2007
|
12
|
|
|
For
the Three Years Ended December 31, 2008
|
|
|
|
|
Consolidated
Statement of Income
|
13
|
|
|
|
Consolidated
Statement of Cash Flows
|
14
|
|
|
|
Consolidated
Statement of Shareholders’ Equity
|
15
|
|
|
Notes
to Consolidated Financial Statements
|
16
|
(2)
|
Financial
Statement Schedules
|
|
|
|
Schedule
II – ALLETE Valuation and Qualifying Accounts and Reserves
|
47
|
|
All
other schedules have been omitted either because the information is not
required to be reported by ALLETE or because the information is included
in the consolidated financial statements or the notes.
|
(3)
|
Exhibits
including those incorporated by reference.
|
|
Exhibit
Number
|
*3(a)1
|
-
|
Articles
of Incorporation, amended and restated as of May 8, 2001 (filed as Exhibit
3(b) to the March 31, 2001, Form 10-Q, File No.
1-3548).
|
|
*3(a)2
|
-
|
Amendment
to Articles of Incorporation, effective 12:00 p.m. Eastern Time on
September 20, 2004 (filed as Exhibit 3 to the September 21, 2004,
Form 8-K, File No. 1-3548).
|
|
*3(a)3
|
-
|
Amendment
to Certificate of Assumed Name, filed with the Minnesota Secretary of
State on May 8, 2001 (filed as Exhibit 3(a) to the March 31, 2001, Form
10-Q, File No. 1-3548).
|
|
*3(b)
|
-
|
Bylaws,
as amended effective August 24, 2004 (filed as Exhibit 3 to the August 25,
2004, Form 8-K, File No. 1-3548).
|
|
*4(a)1
|
-
|
Mortgage
and Deed of Trust, dated as of September 1, 1945, between Minnesota Power
& Light Company (now ALLETE) and The Bank of New York Mellon (formerly
Irving Trust Company) and Douglas J. MacInnes (successor to Richard H.
West), Trustees (filed as Exhibit 7(c), File No.
2-5865).
|
|
*4(a)2
|
-
|
Supplemental
Indentures to ALLETE’s Mortgage and Deed of Trust:
|
|
|
|
Number
|
Dated
as of
|
Reference
File
|
Exhibit
|
|
|
|
First
|
March
1, 1949
|
2-7826
|
7(b)
|
|
|
|
Second
|
July
1, 1951
|
2-9036
|
7(c)
|
|
|
|
Third
|
March
1, 1957
|
2-13075
|
2(c)
|
|
|
|
Fourth
|
January
1, 1968
|
2-27794
|
2(c)
|
|
|
|
Fifth
|
April
1, 1971
|
2-39537
|
2(c)
|
|
|
|
Sixth
|
August
1, 1975
|
2-54116
|
2(c)
|
|
|
|
Seventh
|
September
1, 1976
|
2-57014
|
2(c)
|
|
|
|
Eighth
|
September
1, 1977
|
2-59690
|
2(c)
|
|
|
|
Ninth
|
April
1, 1978
|
2-60866
|
2(c)
|
|
|
|
Tenth
|
August
1, 1978
|
2-62852
|
2(d)2
|
|
|
|
Eleventh
|
December
1, 1982
|
2-56649
|
4(a)3
|
|
|
|
Twelfth
|
April
1, 1987
|
33-30224
|
4(a)3
|
|
|
|
Thirteenth
|
March
1, 1992
|
33-47438
|
4(b)
|
|
|
|
Fourteenth
|
June
1, 1992
|
33-55240
|
4(b)
|
|
|
|
Fifteenth
|
July
1, 1992
|
33-55240
|
4(c)
|
|
|
|
Sixteenth
|
July
1, 1992
|
33-55240
|
4(d)
|
|
|
|
Seventeenth
|
February
1, 1993
|
33-50143
|
4(b)
|
|
|
|
Eighteenth
|
July
1, 1993
|
33-50143
|
4(c)
|
|
|
|
Nineteenth
|
February
1, 1997
|
1-3548
(1996 Form 10-K)
|
4(a)3
|
|
|
|
Twentieth
|
November
1, 1997
|
1-3548
(1997 Form 10-K)
|
4(a)3
|
|
|
|
Twenty-first
|
October
1, 2000
|
333-54330
|
4(c)3
|
|
|
|
Twenty-second
|
July
1, 2003
|
1-3548
(June 30, 2003 Form 10-Q)
|
4
|
|
|
|
Twenty-third
|
August
1, 2004
|
1-3548
(Sept. 30, 2004 Form 10-Q)
|
4(a)
|
|
|
|
Twenty-fourth
|
March
1, 2005
|
1-3548
(March 31, 2005 Form 10-Q)
|
4
|
|
|
|
Twenty-fifth
|
December
1, 2005
|
1-3548
(March 31, 2006 Form 10-Q)
|
4
|
|
|
|
Twenty-sixth
|
October
1, 2006
|
1-3548
(2006 Form 10-K)
|
4
|
|
|
|
Twenty-seventh
|
February
1, 2008
|
1-3548
(2007 Form 10-K)
|
4(a)3
|
|
|
|
Twenty-eighth
|
May
1, 2008
|
1-3548
(June 30, 2008 Form 10-Q)
|
4
|
ALLETE
2008 Form 10-K/A, Amendment No. 1
Exhibit
Number
|
**4(a)3
|
-
|
Twenty-ninth
Supplemental Indenture, dated as of November 1, 2008, between ALLETE and
The Bank of New York Mellon and Douglas J. MacInnes, as
Trustees.
|
|
**4(a)4
|
-
|
Thirtieth
Supplemental Indenture, dated as of January 1, 2009, between ALLETE and
The Bank of New York Mellon and Douglas J. MacInnes, as
Trustees.
|
|
*4(b)1
|
-
|
Indenture
of Trust, dated as of August 1, 2004, between the City of Cohasset,
Minnesota and U.S. Bank National Association, as Trustee relating to $111
Million Collateralized Pollution Control Refunding Revenue Bonds (filed as
Exhibit 4(b) to the September 30, 2004, Form 10-Q, File No.
1-3548).
|
|
*4(b)2
|
-
|
Loan
Agreement, dated as of August 1, 2004, between the City of Cohasset,
Minnesota and ALLETE relating to $111 Million Collateralized Pollution
Control Refunding Revenue Bonds (filed as Exhibit 4(c) to the September
30, 2004, Form 10-Q, File No. 1-3548).
|
|
*4(c)1
|
-
|
Mortgage
and Deed of Trust, dated as of March 1, 1943, between Superior Water,
Light and Power Company and Chemical Bank & Trust Company and Howard
B. Smith, as Trustees, both succeeded by U.S. Bank Trust N.A., as Trustee
(filed as Exhibit 7(c), File No. 2-8668).
|
|
*4(c)2
|
-
|
Supplemental
Indentures to Superior Water, Light and Power Company’s Mortgage and Deed
of Trust:
|
|
|
|
Number
|
Dated
as of
|
Reference
File
|
Exhibit
|
|
|
|
First
|
March
1, 1951
|
2-59690
|
2(d)(1)
|
|
|
|
Second
|
March
1, 1962
|
2-27794
|
2(d)1
|
|
|
|
Third
|
July
1, 1976
|
2-57478
|
2(e)1
|
|
|
|
Fourth
|
March
1, 1985
|
2-78641
|
4(b)
|
|
|
|
Fifth
|
December
1, 1992
|
1-3548
(1992 Form 10-K)
|
4(b)1
|
|
|
|
Sixth
|
March
24, 1994
|
1-3548
(1996 Form 10-K)
|
4(b)1
|
|
|
|
Seventh
|
November
1, 1994
|
1-3548
(1996 Form 10-K)
|
4(b)2
|
|
|
|
Eighth
|
January
1, 1997
|
1-3548
(1996 Form 10-K)
|
4(b)3
|
|
|
|
Ninth
|
October
1, 2007
|
1-3548
(2007 Form 10-K)
|
4(c)3
|
|
|
|
Tenth
|
October
1, 2007
|
1-3548
(2007 Form 10-K)
|
4(c)4
|
|
**4(c)3
|
-
|
Eleventh
Supplemental Indenture, dated as of December 1, 2008, between Superior
Water, Light and Power Company and U.S. Bank National Association, as
Trustees.
|
|
*4(d)
|
-
|
Amended
and Restated Rights Agreement, dated as of July 12, 2006, between ALLETE
and the Corporate Secretary of ALLETE, as Rights Agent (filed as Exhibit 4
to the July 14, 2006, Form 8-K, File No. 1-3548).
|
|
*10(a)
|
-
|
Power
Purchase and Sale Agreement, dated as of May 29, 1998, between Minnesota
Power, Inc. (now ALLETE) and Square Butte Electric Cooperative (filed as
Exhibit 10 to the June 30, 1998, Form 10-Q, File No.
1-3548).
|
|
*10(c)
|
-
|
Master
Agreement (without Appendices and Exhibits), dated December 28, 2004, by
and between Rainy River Energy Corporation and Constellation Energy
Commodities Group, Inc. (filed as Exhibit 10(c) to the 2004 Form 10-K,
File No. 1-3548).
|
|
*10(d)1
|
-
|
Fourth
Amended and Restated Committed Facility Letter (without Exhibits), dated
January 11, 2006, by and among ALLETE and LaSalle Bank National
Association, as Agent (filed as Exhibit 10 to the January 17, 2006, Form
8-K, File No. 1-3548).
|
|
*10(d)2
|
-
|
First
Amendment to Fourth Amended and Restated Committed Facility Letter dated
June 19, 2006, by and among ALLETE and LaSalle Bank National Association,
as Agent (filed as Exhibit 10(a) to the June 30, 2006, Form 10-Q,
File No. 1-3548).
|
|
**10(d)3
|
-
|
Second
Amendment to Fourth Amended and Restated Committed Facility Letter dated
December 14, 2006, by and among ALLETE and LaSalle Bank National
Association, as Agent.
|
|
*10(e)1
|
-
|
Financing
Agreement between Collier County Industrial Development Authority and
ALLETE dated as of July 1, 2006 (filed as Exhibit 10(b)1 to the
June 30, 2006, Form 10-Q, File No. 1-3548).
|
|
*10(e)2
|
-
|
Letter
of Credit Agreement, dated as of July 5, 2006, among ALLETE, the
Participating Banks and Wells Fargo Bank, National Association, as
Administrative Agent and Issuing Bank (filed as Exhibit 10(b)2 to the
June 30, 2006, Form 10-Q, File No. 1-3548).
|
|
*10(g)
|
-
|
Agreement
(without Exhibit) dated December 16, 2005, among ALLETE, Wisconsin Public
Service Corporation and WPS Investments, LLC (filed as Exhibit 10 to the
December 21, 2005 Form 8-K, File No. 1-3548).
|
|
+*10(h)1
|
-
|
Minnesota
Power (now ALLETE) Executive Annual Incentive Plan, as amended, effective
January 1, 1999 with amendments through January 2003 (filed as Exhibit 10
to the September 30, 2003, Form 10-Q, File No. 1-3548).
|
|
+*10(h)2
|
-
|
November
2003 Amendment to the ALLETE Executive Annual Incentive Plan (filed as
Exhibit 10(t)2 to the 2003 Form 10-K, File No. 1-3548).
|
|
+*10(h)3
|
-
|
July
2004 Amendment to the ALLETE Executive Annual Incentive Plan (filed as
Exhibit 10(a) to the June 30, 2004, Form 10-Q, File No.
1-3548).
|
|
+*10(h)4
|
-
|
January
2007 Amendment to the ALLETE Executive Annual Incentive Plan (filed
as Exhibit 10(h)4 to the 2006 Form 10-K, File No.
1-3548).
|
ALLETE
2008 Form 10-K/A, Amendment No. 1
Exhibit
Number
|
+*10(h)5
|
-
|
Form
of ALLETE Executive Annual Incentive Plan 2006 Award (filed as Exhibit 10
to the February 17, 2006, Form 8-K, File No. 1-3548).
|
|
|
+*10(h)6
|
-
|
Form
of ALLETE Executive Annual Incentive Plan Awards Effective
2007 (filed as Exhibit 10(h)7 to the 2006 Form 10-K, File No.
1-3548).
|
|
|
**+10(h)7
|
-
|
Form
of ALLETE Executive Annual Incentive Plan Form of Awards Effective
2009.
|
|
|
+*10(i)1
|
-
|
ALLETE
and Affiliated Companies Supplemental Executive Retirement Plan, as
amended and restated, effective January 1, 2004 (filed as Exhibit 10(u) to
the 2003 Form 10-K, File No. 1-3548).
|
|
|
+*10(i)2
|
-
|
January
2005 Amendment to the ALLETE and Affiliated Companies Supplemental
Executive Retirement Plan (filed as Exhibit 10(b) to the March 31, 2005,
Form 10-Q, File No. 1-3548).
|
|
|
+*10(i)3
|
-
|
August
2006 Amendments to the ALLETE and Affiliated Companies Supplemental
Executive Retirement Plan (filed as Exhibit 10(a) to the September 30,
2006, Form 10-Q, File No. 1-3548).
|
|
|
**+10(i)4
|
-
|
ALLETE
and Affiliated Companies Supplemental Executive Retirement Plan I (SERP
I), as amended and restated, effective January 1, 2009.
|
|
|
**+10(i)5
|
-
|
ALLETE
and Affiliated Companies Supplemental Executive Retirement Plan II (SERP
II), effective January 1, 2009.
|
|
|
**+10(i)6
|
-
|
January
2009 Amendment to the ALLETE and Affiliated Companies Supplemental
Executive Retirement Plan II (SERP II), effective January 20,
2009.
|
|
|
+*10(j)1
|
-
|
Minnesota
Power and Affiliated Companies Executive Investment Plan I, as amended and
restated, effective November 1, 1988 (filed as Exhibit 10(c) to the 1988
Form 10-K, File No. 1-3548).
|
|
|
+*10(j)2
|
-
|
Amendments
through December 2003 to the Minnesota Power and Affiliated Companies
Executive Investment Plan I (filed as Exhibit 10(v)2 to the 2003 Form
10-K, File No. 1-3548).
|
|
|
+*10(j)3
|
-
|
July
2004 Amendment to the Minnesota Power and Affiliated Companies Executive
Investment Plan I (filed as Exhibit 10(b) to the June 30, 2004, Form 10-Q,
File No. 1-3548).
|
|
|
+*10(j)4
|
-
|
August
2006 Amendment to the Minnesota Power and Affiliated Companies Executive
Investment Plan I (filed as Exhibit 10(b) to the September 30, 2006,
Form 10-Q, File No. 1-3548).
|
|
|
+*10(k)1
|
-
|
Minnesota
Power and Affiliated Companies Executive Investment Plan II, as amended
and restated, effective November 1, 1988 (filed as Exhibit 10(d) to the
1988 Form 10-K, File No. 1-3548).
|
|
|
+*10(k)2
|
-
|
Amendments
through December 2003 to the Minnesota Power and Affiliated Companies
Executive Investment Plan II (filed as Exhibit 10(w)2 to the 2003 Form
10-K, File No. 1-3548).
|
|
|
+*10(k)3
|
-
|
July
2004 Amendment to the Minnesota Power and Affiliated Companies Executive
Investment Plan II (filed as Exhibit 10(c) to the June 30, 2004, Form
10-Q, File No. 1-3548).
|
|
|
+*10(k)4
|
-
|
August
2006 Amendment to the Minnesota Power and Affiliated Companies Executive
Investment Plan II (filed as Exhibit 10(c) to the September 30, 2006,
Form 10-Q, File No. 1-3548).
|
|
|
+*10(l)
|
-
|
Deferred
Compensation Trust Agreement, as amended and restated, effective January
1, 1989 (filed as Exhibit 10(f) to the 1988 Form 10-K, File No.
1-3548).
|
|
|
+*10(m)1
|
-
|
ALLETE
Executive Long-Term Incentive Compensation Plan as amended and restated
effective January 1, 2006 (filed as Exhibit 10 to the May 16,
2005, Form 8-K, File No. 1-3548).
|
|
|
+*10(m)2
|
-
|
Form
of ALLETE Executive Long-Term Incentive Compensation Plan 2006
Nonqualified Stock Option Grant (filed as Exhibit 10(a)1 to the January
30, 2006, Form 8-K, File No. 1-3548).
|
|
|
+*10(m)3
|
-
|
Form
of ALLETE Executive Long-Term Incentive Compensation Plan 2006 Performance
Share Grant (filed as Exhibit 10(a)2 to the January 30, 2006, Form 8-K,
File No. 1-3548).
|
|
|
+*10(m)4
|
-
|
Form
of ALLETE Executive Long-Term Incentive Compensation Plan 2006 Long-Term
Cash Incentive Award – President of ALLETE Properties (filed as Exhibit
10(a)3 to the January 30, 2006, Form 8-K, File No.
1-3548).
|
|
|
+*10(m)5
|
-
|
Form
of ALLETE Executive Long-Term Incentive Compensation Plan 2006 Stock Grant
– President of ALLETE Properties (filed as Exhibit 10(a)4 to the January
30, 2006, Form 8-K, File No. 1-3548).
|
|
|
+*10(m)6
|
-
|
Form
of ALLETE Executive Long-Term Incentive Compensation Plan Nonqualified
Stock Option Grant Effective 2007 (filed as Exhibit 10(m)6 to the
2006 Form 10-K, File No. 1-3548).
|
|
|
+*10(m)7
|
-
|
Form
of ALLETE Executive Long-Term Incentive Compensation Plan Performance
Share Grant Effective 2007 (filed as Exhibit 10(m)7 to the 2006 Form
10-K, File No. 1-3548).
|
|
|
+*10(m)8
|
-
|
Form
of ALLETE Executive Long-Term Incentive Compensation Plan Long-Term Cash
Incentive Award Effective 2007 (filed as Exhibit 10(m)8 to the 2006
Form 10-K, File No. 1-3548).
|
|
|
+*10(m)9
|
-
|
Form
of ALLETE Executive Long-Term Incentive Compensation Plan Stock Grant
Effective 2007 (filed as Exhibit 10(m)9 to the 2006 Form 10-K, File
No. 1-3548).
|
|
|
+*10(m)10
|
-
|
Form
of ALLETE Executive Long-Term Incentive Compensation Plan Performance
Share Grant Effective 2008 (filed as Exhibit 10(m)10 to the 2007 Form
10-K, File No. 1-3548).
|
|
|
**+10(m)11
|
-
|
Form
of ALLETE Executive Long-Term Incentive Compensation Plan Performance
Share Grant Effective 2009.
|
|
ALLETE
2008 Form 10-K/A, Amendment No. 1
Exhibit
Number
|
**+10(m)12
|
-
|
Form
of ALLETE Executive Long-Term Incentive Compensation Plan – Restricted
Stock Unit Grant Effective 2009.
|
|
|
+*10(n)1
|
-
|
Minnesota
Power (now ALLETE) Director Stock Plan, effective January 1, 1995 (filed
as Exhibit 10 to the March 31, 1995 Form 10-Q, File No.
1-3548).
|
|
|
+*10(n)2
|
-
|
Amendments
through December 2003 to the Minnesota Power (now ALLETE) Director Stock
Plan (filed as Exhibit 10(z)2 to the 2003 Form 10-K, File No.
1-3548).
|
|
|
+*10(n)3
|
-
|
July
2004 Amendment to the ALLETE Director Stock Plan (filed as Exhibit 10(e)
to the June 30, 2004, Form 10-Q, File No. 1-3548).
|
|
|
+*10(n)4
|
-
|
January
2007 Amendment to the ALLETE Director Stock Plan (filed as Exhibit
10(n)4 to the 2006 Form 10-K, File No. 1-3548).
|
|
|
+*10(n)5
|
-
|
ALLETE
Non-Management Director Compensation Summary Effective February 15,
2007 (filed as Exhibit 10(n)6 to the 2006 Form 10-K, File No.
1-3548).
|
|
|
+*10(o)1
|
-
|
Minnesota
Power (now ALLETE) Director Compensation Deferral Plan Amended and
Restated, effective January 1, 1990 (filed as Exhibit 10(ac) to the 2002
Form 10-K, File No. 1-3548).
|
|
|
+*10(o)2
|
-
|
October
2003 Amendment to the Minnesota Power (now ALLETE) Director Compensation
Deferral Plan (filed as Exhibit 10(aa)2 to the 2003 Form 10-K, File No.
1-3548).
|
|
|
+*10(o)3
|
-
|
January
2005 Amendment to the ALLETE Director Compensation Deferral Plan (filed as
Exhibit 10(c) to the March 31, 2005, Form 10-Q, File No.
1-3548).
|
|
|
+*10(o)4
|
-
|
August
2006 Amendment to the ALLETE Director Compensation Deferral Plan (filed as
Exhibit 10(d) to the September 30, 2006, Form 10-Q, File No.
1-3548).
|
|
|
**+10(o)5
|
-
|
ALLETE
Non-Employee Director Compensation Deferral Plan II, effective January 1,
2009.
|
|
|
+*10(p)
|
-
|
ALLETE
Director Compensation Trust Agreement, effective October 11, 2004 (filed
as Exhibit 10(a) to the September 30, 2004, Form 10-Q, File No.
1-3548).
|
|
|
+*10(q)
|
-
|
ALLETE
Change of Control Severance Pay Plan Effective February 13,
2008 (filed as Exhibit 10(q) to the 2007 Form 10-K, File No.
1-3548).
|
|
|
**12
|
-
|
Computation
of Ratios of Earnings to Fixed Charges.
|
|
|
**21
|
-
|
Subsidiaries
of the Registrant.
|
|
|
23(a)
|
-
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
**23(b)
|
-
|
Consent
of General Counsel.
|
|
|
31(a)
|
-
|
Rule
13a-14(a)/15d-14(a) Certification by the Chief Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
31(b)
|
-
|
Rule
13a-14(a)/15d-14(a) Certification by the Chief Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
32
|
-
|
Section
1350 Certification of Annual Report by the Chief Executive Officer and
Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
|
|
**99
|
-
|
ALLETE
News Release dated February 13, 2009, announcing earnings for the year
ended December 31, 2008.
(This exhibit has been furnished and shall not be deemed “filed” for
purposes of Section 18 of the Securities Exchange Act of 1934, nor
shall it be deemed incorporated by reference in any filing under the
Securities Act of 1933, except as shall be expressly set forth by specific
reference in such filing.)
|
|
SWL&P
is a party to other long-term debt instruments, $6,370,000 of City of Superior,
Wisconsin, Collateralized Utility Revenue Refunding Bonds Series 2007A and
$6,130,000 of City of Superior, Wisconsin, Collateralized Utility Revenue Bonds
Series 2007B, that, pursuant to Regulation S-K, Item 601(b)(4)(iii), are
not filed as exhibits since the total amount of debt authorized under each of
these omitted instruments does not exceed 10 percent of our total consolidated
assets. We will furnish copies of these instruments to the SEC upon its
request.
We are a
party to another long-term debt instrument, $38,995,000 of City of Cohasset,
Minnesota, Variable Rate Demand Revenue Refunding Bonds (ALLETE, formerly
Minnesota Power & Light Company, Project) Series 1997A, Series 1997B and
Series 1997C that, pursuant to Regulation S-K, Item 601(b)(4)(iii), is not
filed as an exhibit since the total amount of debt authorized under this omitted
instrument does not exceed 10 percent of our total consolidated assets. We will
furnish copies of this instrument to the SEC upon its request.
*
|
Incorporated
herein by reference as indicated.
|
+
|
Management
contract or compensatory plan or arrangement required to be filed as an
exhibit to this report pursuant to Item 15(b) of Form
10-K.
|
**
|
Exhibits
previously filed with the 2008 Form 10-K (File No. 1-03548) have not been
re-filed with this Form 10-K/A.
|
ALLETE
2008 Form 10-K/A, Amendment No. 1
Signatures
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
ALLETE,
Inc.
|
|
|
Dated:
February 26, 2009
|
By
|
/s/
Steven Q. DeVinck
|
|
Steven
Q. DeVinck
|
|
Controller
and Principal Accounting
Officer
|
Report of Independent
Registered Public Accounting Firm
To the Board of Directors
and Shareholders of ALLETE, Inc,
In our
opinion, the accompanying consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of ALLETE, Inc. and its subsidiaries (the Company) at
December 31, 2008 and 2007, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible for these
financial statements, for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in Management's Report on Internal Control Over
Financial Reporting appearing under Item 9A. Our responsibility is to express
opinions on these financial statements, on the financial statement schedule, and
on the Company's internal control over financial reporting based on our
integrated audits. We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
As
discussed in Note 11 to the consolidated financial statements, in 2007 the
Company adopted the provisions of FIN 48, "Accounting for Uncertainty in Income
Taxes - an Interpretation of FASB Statement No. 109."
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate
PricewaterhouseCoopers
LLP
Minneapolis,
MN
February
13, 2009, except for the "ATC Summarized Financial Data" section of Note 5, as
to which the date is February 26, 2009
ALLETE
2008 Form 10-K/A, Amendment No. 1
Consolidated
Financial Statements
ALLETE
Consolidated Balance Sheet
December
31
|
2008
|
2007
|
Millions
|
|
|
|
|
|
Assets
|
|
|
Current
Assets
|
|
|
Cash
and Cash Equivalents
|
$102.0
|
$23.3
|
Short-Term
Investments
|
–
|
23.1
|
Accounts
Receivable (Less Allowance of $0.7 and $1.0)
|
76.3
|
79.5
|
Inventories
|
49.7
|
49.5
|
Prepayments
and Other
|
24.3
|
39.1
|
Total
Current Assets
|
252.3
|
214.5
|
Property,
Plant and Equipment – Net
|
1,387.3
|
1,104.5
|
Investment
in ATC
|
76.9
|
65.7
|
Other
Investments
|
136.9
|
148.1
|
Other
Assets
|
281.4
|
111.4
|
Total
Assets
|
$2,134.8
|
$1,644.2
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
Liabilities
|
|
|
Current
Liabilities
|
|
|
Accounts
Payable
|
$75.7
|
$72.7
|
Accrued
Taxes
|
12.9
|
14.8
|
Accrued
Interest
|
8.9
|
7.8
|
Long-Term
Debt Due Within One Year
|
10.4
|
11.8
|
Deferred
Profit on Sales of Real Estate
|
–
|
2.7
|
Notes
Payable
|
6.0
|
–
|
Other
|
36.8
|
27.3
|
Total
Current Liabilities
|
150.7
|
137.1
|
Long-Term
Debt
|
588.3
|
410.9
|
Deferred
Income Taxes
|
169.6
|
144.2
|
Other
Liabilities
|
389.3
|
200.1
|
Minority
Interest
|
9.8
|
9.3
|
Total
Liabilities
|
1,307.7
|
901.6
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
Common
Stock Without Par Value, 43.3 Shares Authorized
|
|
|
32.6
and 30.8 Shares Outstanding
|
534.1
|
461.2
|
Unearned
ESOP Shares
|
(54.9)
|
(64.5)
|
Accumulated
Other Comprehensive Loss
|
(33.0)
|
(4.5)
|
Retained
Earnings
|
380.9
|
350.4
|
Total
Shareholders’ Equity
|
827.1
|
742.6
|
Total
Liabilities and Shareholders’ Equity
|
$2,134.8
|
$1,644.2
|
The
accompanying notes are an integral part of these statements.
ALLETE
2008 Form 10-K/A, Amendment No. 1
ALLETE
Consolidated Statement of Income
For
the Year Ended December 31
|
2008
|
2007
|
2006
|
Millions
Except Per Share Amounts
|
|
|
|
|
|
|
|
Operating
Revenue
|
$801.0
|
$841.7
|
$767.1
|
Operating
Expenses
|
|
|
|
Fuel
and Purchased Power
|
305.6
|
347.6
|
281.7
|
Operating
and Maintenance
|
318.1
|
313.9
|
298.4
|
Depreciation
|
55.5
|
48.5
|
48.7
|
Total
Operating Expenses
|
679.2
|
710.0
|
628.8
|
Operating
Income from Continuing Operations
|
121.8
|
131.7
|
138.3
|
Other
Income (Expense)
|
|
|
|
Interest
Expense
|
(26.3)
|
(22.6)
|
(25.0)
|
Equity
Earnings in ATC
|
15.3
|
12.6
|
3.0
|
Other
|
15.6
|
15.5
|
11.9
|
Total
Other Income (Expense)
|
4.6
|
5.5
|
(10.1)
|
Income
from Continuing Operations Before Minority
|
|
|
|
Interest
and Income Taxes
|
126.4
|
137.2
|
128.2
|
Income
Tax Expense
|
43.4
|
47.7
|
46.3
|
Minority
Interest
|
0.5
|
1.9
|
4.6
|
Income
from Continuing Operations
|
82.5
|
87.6
|
77.3
|
Loss
from Discontinued Operations – Net of Tax
|
–
|
–
|
(0.9)
|
Net
Income
|
$82.5
|
$87.6
|
$76.4
|
|
|
|
|
Average
Shares of Common Stock
|
|
|
|
Basic
|
29.2
|
28.3
|
27.8
|
Diluted
|
29.3
|
28.4
|
27.9
|
|
|
|
|
Basic
Earnings (Loss) Per Share of Common Stock
|
|
|
|
Continuing
Operations
|
$2.82
|
$3.09
|
$2.78
|
Discontinued
Operations
|
–
|
–
|
(0.03)
|
|
$2.82
|
$3.09
|
$2.75
|
Diluted
Earnings (Loss) Per Share of Common Stock
|
|
|
|
Continuing
Operations
|
$2.82
|
$3.08
|
$2.77
|
Discontinued
Operations
|
–
|
–
|
(0.03)
|
|
$2.82
|
$3.08
|
$2.74
|
|
|
|
|
Dividends
Per Share of Common Stock
|
$1.72
|
$1.64
|
$1.45
|
The
accompanying notes are an integral part of these statements.
ALLETE
2008 Form 10-K/A, Amendment No. 1
ALLETE
Consolidated Statement of Cash Flows
For
the Year Ended December 31
|
2008
|
2007
|
2006
|
Millions
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
|
Net
Income
|
$82.5
|
$87.6
|
$76.4
|
Loss
from Discontinued Operations
|
–
|
–
|
0.9
|
Allowance
for Funds Used During Construction
|
(3.3)
|
(3.8)
|
(0.5)
|
Income
from Equity Investments, Net of Dividends
|
(3.1)
|
(2.7)
|
(1.8)
|
Gain
on Sale of Assets
|
(4.8)
|
(2.2)
|
–
|
Gain
on Sale of Available-for-sale Securities
|
(6.4)
|
–
|
–
|
Loss
on Impairment of Investments
|
–
|
0.3
|
–
|
Depreciation
Expense
|
55.5
|
48.5
|
48.7
|
Deferred
Income Tax Expense
|
38.8
|
14.0
|
27.8
|
Minority
Interest
|
0.5
|
1.9
|
4.6
|
Stock
Compensation Expense
|
1.8
|
2.0
|
1.8
|
Bad
Debt Expense
|
0.7
|
1.0
|
0.7
|
Changes
in Operating Assets and Liabilities
|
|
|
|
Accounts
Receivable
|
2.4
|
(6.6)
|
7.5
|
Inventories
|
(0.2)
|
(6.1)
|
(10.3)
|
Prepayments
and Other
|
11.2
|
(11.7)
|
(2.3)
|
Accounts
Payable
|
(14.1)
|
9.4
|
5.1
|
Other
Current Liabilities
|
5.9
|
(10.0)
|
0.2
|
Other
Assets
|
(2.5)
|
0.8
|
(4.3)
|
Other
Liabilities
|
(12.8)
|
0.7
|
1.0
|
Net
Operating Activities for Discontinued Operations
|
–
|
–
|
(13.5)
|
Cash
from Operating Activities
|
152.1
|
123.1
|
142.0
|
Investing
Activities
|
|
|
|
Proceeds
from Sale of Available-for-sale Securities
|
62.3
|
449.7
|
608.8
|
Payments
for Purchase of Available-for-sale Securities
|
(44.8)
|
(368.3)
|
(596.4)
|
Investment
in ATC
|
(7.4)
|
(8.7)
|
(51.4)
|
Changes
to Investments
|
(0.1)
|
(10.9)
|
(0.6)
|
Additions
to Property, Plant and Equipment
|
(301.1)
|
(210.2)
|
(101.8)
|
Proceeds
from Sale of Assets
|
20.4
|
1.5
|
–
|
Other
|
(5.4)
|
(7.2)
|
(15.0)
|
Net
Investing Activities from Discontinued Operations
|
–
|
–
|
2.2
|
Cash
for Investing Activities
|
(276.1)
|
(154.1)
|
(154.2)
|
Financing
Activities
|
|
|
|
Issuance
of Common Stock
|
71.1
|
20.6
|
15.8
|
Issuance
of Long-Term Debt
|
198.7
|
123.9
|
77.8
|
Issuance
of Notes Payable
|
6.0
|
–
|
–
|
Reductions
of Long-Term Debt
|
(22.7)
|
(90.7)
|
(78.9)
|
Dividends
on Common Stock and Distributions to Minority Shareholders
|
(50.4)
|
(44.3)
|
(43.9)
|
Net
Decrease in Book Overdrafts
|
–
|
–
|
(3.4)
|
Cash
from (for) Financing Activities
|
202.7
|
9.5
|
(32.6)
|
Change
in Cash and Cash Equivalents
|
78.7
|
(21.5)
|
(44.8)
|
Cash
and Cash Equivalents at Beginning of Period
|
23.3
|
44.8
|
89.6
|
Cash
and Cash Equivalents at End of Period
|
$102.0
|
$23.3
|
$44.8
|
The
accompanying notes are an integral part of these statements.
ALLETE
2008 Form 10-K/A, Amendment No. 1
ALLETE
Consolidated Statement of Shareholders’ Equity
|
|
|
Accumulated
|
|
|
|
Total
|
|
Other
|
Unearned
|
|
|
Shareholders’
|
Retained
|
Comprehensive
|
ESOP
|
Common
|
|
Equity
|
Earnings
|
Income
(Loss)
|
Shares
|
Stock
|
Millions
|
|
|
|
|
|
Balance
at December 31, 2005
|
$602.8
|
$272.1
|
$(12.8)
|
$(77.6)
|
$421.1
|
|
|
|
|
|
|
Comprehensive
Income
|
|
|
|
|
|
Net
Income
|
76.4
|
76.4
|
|
|
|
Other
Comprehensive Income – Net of Tax
|
|
|
|
|
|
Unrealized
Gains on Securities – Net
|
1.9
|
|
1.9
|
|
|
Additional
Pension Liability
|
6.4
|
|
6.4
|
|
|
Total
Comprehensive Income
|
84.7
|
|
|
|
|
Adjustment
to initially apply SFAS 158 – Net of Tax
|
(4.3)
|
|
(4.3)
|
|
|
Common
Stock Issued – Net
|
17.6
|
|
|
|
17.6
|
Dividends
Declared
|
(40.7)
|
(40.7)
|
|
|
|
ESOP
Shares Earned
|
5.7
|
|
|
5.7
|
|
Balance
at December 31, 2006
|
665.8
|
307.8
|
(8.8)
|
(71.9)
|
438.7
|
|
|
|
|
|
|
Comprehensive
Income
|
|
|
|
|
|
Net
Income
|
87.6
|
87.6
|
|
|
|
Other
Comprehensive Income – Net of Tax
|
|
|
|
|
|
Unrealized
Gains on Securities – Net
|
1.1
|
|
1.1
|
|
|
Defined
Benefit Pension and Other Postretirement Plans
|
3.2
|
|
3.2
|
|
|
Total
Comprehensive Income
|
91.9
|
|
|
|
|
Adjustment
to initially apply FIN 48
|
(0.7)
|
(0.7)
|
|
|
|
Common
Stock Issued – Net
|
22.5
|
|
|
|
22.5
|
Dividends
Declared
|
(44.3)
|
(44.3)
|
|
|
|
ESOP
Shares Earned
|
7.4
|
|
|
7.4
|
|
Balance
at December 31, 2007
|
742.6
|
350.4
|
(4.5)
|
(64.5)
|
461.2
|
|
|
|
|
|
|
Comprehensive
Income
|
|
|
|
|
|
Net
Income
|
82.5
|
82.5
|
|
|
|
Other
Comprehensive Income – Net of Tax
|
|
|
|
|
|
Unrealized
Loss on Securities – Net
|
(6.0)
|
|
(6.0)
|
|
|
Reclassification
Adjustment for Gains Included in Income
|
(3.7)
|
|
(3.7)
|
|
|
Defined
Benefit Pension and Other Postretirement Plans
|
(18.8)
|
|
(18.8)
|
|
|
Total
Comprehensive Income
|
54.0
|
|
|
|
|
Adjustment
to initially apply FAS 158 measurement date
|
(1.6)
|
(1.6)
|
|
|
|
Common
Stock Issued – Net
|
72.9
|
|
|
|
72.9
|
Dividends
Declared
|
(50.4)
|
(50.4)
|
|
|
|
ESOP
Shares Earned
|
9.6
|
|
|
9.6
|
|
Balance
at December 31, 2008
|
$827.1
|
$380.9
|
$(33.0)
|
$(54.9)
|
$534.1
|
The
accompanying notes are an integral part of these statements.
ALLETE
2008 Form 10-K/A, Amendment No. 1
Notes
to Consolidated Financial Statements
Note
1. Operations and Significant Accounting
Policies
Financial Statement
Preparation. References in this report to “we,” “us” and “our” are to
ALLETE and its subsidiaries, collectively. We prepare our financial statements
in conformity with accounting principles generally accepted in the United States
of America. These principles require management to make informed judgments, best
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses. Actual results could differ from those
estimates.
Principles of Consolidation.
Our consolidated financial statements include the accounts of ALLETE and all of
our majority-owned subsidiary companies. All material intercompany balances and
transactions have been eliminated in consolidation.
Business Segments. In
2008, we changed our reportable segments (see Note 2. Business Segments.) Our
Regulated Operations and Investments and Other segments were determined in
accordance with SFAS 131, “Disclosures about Segments of an Enterprise and
Related Information.” Segmentation is based on the manner in which we operate,
assess, and allocate resources to the business. We measure performance of our
operations through budgeting and monitoring of contributions to consolidated net
income by each business segment. Discontinued Operations includes our Water
Services businesses, the majority of which were sold in 2003. (See Note 12.
Discontinued Operations.)
Regulated Operations includes retail and
wholesale rate-regulated electric, natural gas, and water services in
northeastern Minnesota and northwestern Wisconsin along with our Investment in
ATC. Minnesota Power provides regulated utility electric service to 142,000
retail customers in northeastern Minnesota. SWL&P, a wholly-owned
subsidiary, provides regulated utility electric, natural gas and water service
in northwestern Wisconsin to 15,000 electric customers, 12,000 natural gas
customers and 10,000 water customers. Approximately 40 percent of revenue from
regulated operations is from Large Power Customers (36 percent of consolidated
revenue). Large Power Customers consist of five taconite producers, four paper
and pulp mills, two pipeline companies and one manufacturer under
all-requirements contracts with expiration dates extending from April 2009
through December 2015. Revenue of $100.2 million (12.5 percent of consolidated
revenue) was received from one taconite producer in 2008 (12.0 percent in 2007;
11.6 percent in 2006). Regulated utility rates are under the jurisdiction of
Minnesota, Wisconsin and federal regulatory authorities. Billings are
rendered on a cycle basis. Revenue is accrued for service provided but not
billed. Regulated utility electric rates include adjustment clauses that: (1)
bill or credit customers for fuel and purchased energy costs above or below the
base levels in rate schedules; (2) bill retail customers for the recovery of
conservation improvement program expenditures not collected in base rates; and
(3) bill customers for the recovery of certain environmental expenditures. Fuel
and purchased power expense is deferred to match the period in which the revenue
for fuel and purchased power expense is collected from customers pursuant to the
fuel adjustment clause. Our Investment in ATC includes our approximate 8 percent
equity ownership interest in ATC, a Wisconsin-based utility that owns and
maintains electric transmission assets in parts of Wisconsin, Michigan,
Minnesota and Illinois. ATC provides transmission service under rates regulated
by the FERC that are set in accordance with the FERC’s policy of establishing
the independent operation and ownership of, and investment in, transmission
facilities. (See Note 6. Investments.)
Investments and Other is
comprised primarily of BNI Coal, our coal mining operations in North Dakota, and
ALLETE Properties, our Florida real estate business. This segment also includes
emerging technology investments ($7.4 million at December 31, 2008), a small
amount of non-rate base generation, approximately 7,000 acres of land for sale
in Minnesota, and earnings on cash and short-term investments.
BNI Coal,
a wholly-owned subsidiary, mines and sells lignite coal to two North Dakota
mine-mouth generating units, one of which is Square Butte. In 2008, Square Butte
supplied approximately 55 percent (250 MWs) of its output to Minnesota Power
under a long-term contract. (See Note 8. Commitments, Guarantees and
Contingencies.) Coal sales are recognized when delivered at the cost of
production plus a specified profit per ton of coal delivered.
ALLETE
Properties is our real estate business that has operated in Florida since 1991.
Our current strategy is to complete and maintain key entitlements and
infrastructure improvements which enhance values without requiring significant
additional investment, and position the current property portfolio for a
maximization of value and cash flow when market conditions improve.
Full
profit recognition is recorded on sales upon closing, provided cash collections
are at least 20 percent of the contract price and the other requirements of SFAS
66, “Accounting for Sales of Real Estate,” are met. In certain cases, where
there are obligations to perform significant development activities after the
date of sale, we recognize profit on a percentage-of-completion basis in
accordance with SFAS 66. Pursuant to this method of accounting, gross profit is
recognized based upon the relationship of development costs incurred as of that
date to the total estimated development costs of the parcels, including related
amenities or common costs of the entire project. Revenue and cost of real estate
sold in excess of the amount recognized based on the percentage-of-completion
method is deferred and recognized as revenue and cost of real estate sold during
the period in which the related development costs are incurred. Deferred revenue
and cost of real estate sold are recorded net as Deferred Profit on Sales of
Real Estate on our consolidated balance sheet. On December 31, 2008, we had no
deferred profit recorded on our consolidated balance sheet. Certain contracts
allow us to receive participation revenue from land sales to third parties if
various formula-based criteria are achieved.
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
1. Operations and Significant Accounting Policies
(Continued)
In
certain cases, we pay fees or construct improvements to mitigate offsite traffic
impacts. In return, we receive traffic impact fee credits as a result of some of
these expenditures. We recognize revenue from the sale of traffic impact fee
credits when payment is received.
Land held
for sale is recorded at the lower of cost or fair value determined by the
evaluation of individual land parcels and is included in Investments on our
consolidated balance sheet. Real estate costs include the cost of land acquired,
subsequent development costs and costs of improvements, capitalized development
period interest, real estate taxes and payroll costs of certain employees
devoted directly to the development effort. These real estate costs incurred are
capitalized to the cost of real estate parcels based upon the relative sales
value of parcels within each development project in accordance with SFAS 67,
“Accounting for Costs and Initial Rental Operations of Real Estate Projects.”
The cost of real estate includes the actual costs incurred and the estimate of
future completion costs allocated to the real estate sold based upon the
relative sales value method.
Whenever
events or circumstances indicate that the carrying value of the real estate may
not be recoverable, impairments would be recorded and the related assets would
be adjusted to their estimated fair value, less costs to sell.
As part
of our emerging technology portfolio, we have several minority investments in
venture capital funds and direct investments in privately-held, start-up
companies. We account for our investment in venture capital funds under the
equity method and account for our direct investments in privately-held companies
under the cost method because of our ownership percentage. Long-term investments
include auction rate securities and variable rate demand notes, and are
classified as available-for-sale securities. All income generated from these
short-term investments is recorded as interest income. (See Note 6.
Investments.)
Property, Plant and Equipment.
Property, plant and equipment are recorded at original cost and are reported on
the balance sheet net of accumulated depreciation. Expenditures for additions
and significant replacements and improvements are capitalized; maintenance and
repair costs are expensed as incurred. Expenditures for major plant overhauls
are also accounted for using this same policy. Gains or losses on non-rate base
property, plant and equipment are recognized when they are retired or otherwise
disposed. When regulated utility property, plant and equipment are retired or
otherwise disposed, no gain or loss is recognized, pursuant to SFAS 71,
“Accounting for the Effects of Certain Types of Regulations.” Our Regulated
Utility operations capitalize AFUDC, which includes both an interest and equity
component. (See Note 3. Property Plant and Equipment.)
Long-Lived Asset Impairments.
We account for our long-lived assets at depreciated historical cost. A
long-lived asset is tested for recoverability whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable. We
conduct this assessment using SFAS 144, “Accounting for the Impairment and
Disposal of Long-Lived Assets.” Judgments and uncertainties affecting the
application of accounting for asset impairment include economic conditions
affecting market valuations, changes in our business strategy, and changes in
our forecast of future operating cash flows and earnings. We would recognize an
impairment loss only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted future cash flows. Management judgment is
involved in both deciding if testing for recoverability is necessary and in
estimating undiscounted future cash flows.
Accounts Receivable. Accounts
receivable are reported on the balance sheet net of an allowance for doubtful
accounts. The allowance is based on our evaluation of the receivable portfolio
under current conditions, overall portfolio quality, review of specific problems
and such other factors that, in our judgment, deserve recognition in estimating
losses.
Accounts
Receivable
|
|
December
31
|
2008
|
2007
|
Millions
|
|
|
|
|
|
Trade
Accounts Receivable
|
|
|
Billed
|
$61.1
|
$63.9
|
Unbilled
|
15.9
|
16.6
|
Less:
Allowance for Doubtful Accounts
|
0.7
|
1.0
|
Total
Accounts Receivable – Net
|
$76.3
|
$79.5
|
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
1. Operations and Significant Accounting Policies
(Continued)
Inventories. Inventories are
stated at the lower of cost or market. Amounts removed from inventory are
recorded on an average cost basis.
Inventories
|
|
December
31
|
2008
|
2007
|
Millions
|
|
|
|
|
|
Fuel
|
$16.6
|
$22.1
|
Materials
and Supplies
|
33.1
|
27.4
|
Total
Inventories
|
$49.7
|
$49.5
|
Unamortized Discount and Premium on
Debt. Discount and premium on debt are deferred and amortized over the
terms of the related debt instruments using the effective interest
method.
Cash and Cash Equivalents. We
consider all investments purchased with original maturities of three months or
less to be cash equivalents.
Supplemental
Statement of Cash Flow Information
Consolidated
Statement of Cash Flows
|
|
Supplemental
Disclosure
|
|
For
the Year Ended December 31
|
2008
|
2007
|
2006
|
Millions
|
|
|
|
|
|
|
|
Cash
Paid During the Period for
|
|
|
|
Interest
– Net of Amounts Capitalized
|
$25.2
|
$26.3
|
$25.3
|
Income
Taxes
|
$6.5
|
$34.2
|
$32.4
(a)
|
|
|
|
|
Noncash
Investing Activities
|
|
|
|
Accounts
Payable for Capital Additions to Property, Plant and
Equipment
|
$17.1
|
$9.8
|
$7.1
|
AFUDC
– Equity
|
$3.3
|
$3.8
|
$0.5
|
(a)
|
Net
of a $24.3 million cash refund.
|
Available-for-Sale Securities.
Available-for-sale securities are recorded at fair value with unrealized
gains and losses included in accumulated other comprehensive income (loss), net
of tax. Unrealized losses that are other than temporary are recognized in
earnings. Our auction rate securities (ARS) and variable rate demand notes,
classified as available-for-sale securities, are recorded at cost because their
cost approximates fair market value. These ARS were historically auctioned every
35 days to set new rates and provide a liquidating event in which investors
could either buy or sell securities. The auctions have been unable to sustain
themselves during 2008 due to the overall lack of credit market liquidity and we
have been unable to liquidate all of our ARS. As a result, we have classified
the ARS as long-term investments and have the ability to hold these securities
to maturity, until called by the issuer, or until liquidity returns to this
market. We use the specific identification method as the basis for determining
the cost of securities sold. Our policy is to review available-for-sale
securities for other than temporary impairment on a quarterly basis by assessing
such factors as the share price trends and the impact of overall market
conditions. (See Note 6. Investments.)
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
1. Operations and Significant Accounting Policies
(Continued)
Accounting for Stock-Based
Compensation. Effective January 1, 2006, we adopted the fair value
recognition provisions of SFAS 123R, “Share-Based Payment,” using the modified
prospective transition method. Under this method, we recognize compensation
expense for all share-based payments granted after January 1, 2006, and those
granted prior to but not yet vested as of January 1, 2006. Under the fair value
recognition provisions of SFAS 123R, we recognize stock-based compensation net
of an estimated forfeiture rate and only recognize compensation expense for
those shares expected to vest over the required service period of the
award. (See Note 15. Employee Stock and Incentive Plans.)
Prepayments
and Other Current Assets
|
|
|
December
31
|
2008
|
2007
|
Millions
|
|
|
Deferred
Fuel Adjustment Clause
|
$13.1
|
$26.5
|
Other
|
11.2
|
12.6
|
Total
Prepayments and Other Current Assets
|
$24.3
|
$39.1
|
Other
Assets
|
|
|
December
31
|
2008
|
2007
|
Millions
|
|
|
Deferred
Regulatory Assets (See Note 5. Regulatory Matters)
|
$249.3
|
$76.6
|
Other
|
32.1
|
34.8
|
Total
Other Assets
|
$281.4
|
$111.4
|
|
|
|
Other
Liabilities
|
|
|
December
31
|
2008
|
2007
|
Millions
|
|
|
Future
Benefit Obligation Under Defined Benefit Pension and Other Postretirement
Plans
|
$251.8
|
$71.6
|
Deferred
Regulatory Liabilities (See Note 5. Regulatory Matters)
|
50.0
|
31.3
|
Asset
Retirement Obligation (See Note 3. Property, Plant and
Equipment)
|
39.5
|
36.5
|
Other
|
48.0
|
60.7
|
Total
Other Liabilities
|
$389.3
|
$200.1
|
Environmental Liabilities. We
review environmental matters for disclosure on a quarterly basis. Accruals for
environmental matters are recorded when it is probable that a liability has been
incurred and the amount of the liability can be reasonably estimated, based on
current law and existing technologies. These accruals are adjusted periodically
as assessment and remediation efforts progress or as additional technical or
legal information becomes available. Accruals for environmental liabilities are
included in the balance sheet at undiscounted amounts and exclude claims for
recoveries from insurance or other third parties. Costs related to environmental
contamination treatment and cleanup are charged to operating expense unless
recoverable in rates from customers. (See Note 8. Commitments, Guarantees and
Contingencies.)
Income Taxes. We file a
consolidated federal income tax return. We account for income taxes using the
liability method as prescribed by SFAS 109, “Accounting for Income Taxes.” Under
the liability method, deferred income tax assets and liabilities are established
for all temporary differences in the book and tax basis of assets and
liabilities, based upon enacted tax laws and rates applicable to the periods in
which the taxes become payable. Due to the effects of regulation on Minnesota
Power, certain adjustments made to deferred income taxes are, in turn, recorded
as regulatory assets or liabilities. Investment tax credits have been recorded
as deferred credits and are being amortized to income tax expense over the
service lives of the related property. Effective January 1, 2007, we adopted the
provisions of FIN 48, “Accounting for Uncertainty in Income Taxes – an
Interpretation of FASB Statement No. 109.” Under this provision we are required
to recognize in our financial statements the largest tax benefit of a tax
position that is “more-likely-than-not” to be sustained, on audit, based solely
on the technical merits of the position as of the reporting date. Only tax
positions that meet the “more-likely-than-not” threshold may be recognized, and
the term “more-likely-than-not” means more than 50 percent. (See Note 11. Income
Tax Expense.)
Excise Taxes. We collect
excise taxes from our customers levied by government entities. These taxes are
stated separately on the billing to the customer and recorded as a liability to
be remitted to the government entity. We account for the collection and payment
of these taxes on the net basis.
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
1. Operations and Significant Accounting Policies
(Continued)
New Accounting Standards.
SFAS 157. In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements,” to increase
consistency and comparability in fair value measurements by defining fair value,
establishing a framework for measuring fair value in GAAP, and expanding
disclosures about fair value measurements. SFAS 157 emphasizes that fair
value is a market-based measurement, not an entity-specific measurement. It
clarifies the extent to which fair value is used to measure recognized assets
and liabilities, the inputs used to develop the measurements, and the effect of
certain measurements on earnings for the period. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and is applied on a prospective basis. In February 2008, the FASB issued FSP FAS
157-1, "Application of FAS 157 to FAS 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under FAS 13", which excludes FAS 13, "Accounting for Leases," and
its related interpretive accounting pronouncements that address leasing
transactions, from the scope of FAS 157.
Also in
February 2008, the FASB issued FSP FAS 157-2, "Effective Date of FASB
Statement 157," which delayed the effective date of SFAS 157 for all
nonrecurring fair value measurements of nonfinancial assets and liabilities
until fiscal years beginning after November 15, 2008. The Company elected
to defer the adoption of the nonrecurring fair value measurement disclosures of
nonfinancial assets and liabilities. The adoption of FSP FAS 157-2 is not
expected to have a material impact on our consolidated financial position,
results of operations, or cash flows.
The
implementation of SFAS 157 for financial assets and financial liabilities and
FSP FAS 157-1, effective January 1, 2008, did not have a material impact on our
consolidated financial position and results of operations. (See Note
6. Investments.) We are currently assessing the impact of SFAS 157 for
nonfinancial assets and nonfinancial liabilities, but it is not expected to have
a material impact on our consolidated financial position, results of operations,
or cash flows.
In October 2008, the FASB issued FSP
FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for
That Asset Is Not Active.” This FSP amends SFAS 157, to clarify
various application issues with regard to the measurement principles of SFAS 157
when the market for financial assets is not active. This FSP became effective on
October 10, 2008, and is applicable to prior periods for which financial
statements have not yet been issued. The adoption of FSP FAS 157-3 did not have
a material impact on our consolidated financial position, results of operations,
or cash flows.
SFAS 159. In February 2007, the
FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial
Liabilities,” which is an elective, irrevocable election to measure eligible
financial instruments and certain other assets and liabilities at fair value on
an instrument-by-instrument basis. The election may only be applied at specified
election dates and to instruments in their entirety rather than to portions of
instruments. Upon initial election, the entity reports the difference between
the instruments’ carrying value and their fair value as a cumulative-effect
adjustment to the opening balance of retained earnings. At each subsequent
reporting date, an entity reports in earnings, unrealized gains and losses on
items for which the fair value option has been elected. SFAS 159 is effective
for financial statements issued for fiscal years beginning after November 15,
2007, and is applied on a prospective basis. We have elected not to adopt the
provisions of SFAS 159 at this time.
SFAS 160. In December 2007,
the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial
Statements – an amendment of Accounting Research Bulletin (ARB) 51,” to improve
the relevance, comparability, and transparency of the financial information a
reporting entity provides in its consolidated financial statements. SFAS 160
amends ARB 51 to establish accounting and reporting standards for noncontrolling
interests in subsidiaries and to make certain consolidation procedures
consistent with the requirements of SFAS 141R. It defines a noncontrolling
interest in a subsidiary as an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial statements. SFAS
160 changes the way the consolidated income statement is presented by requiring
consolidated net income to include amounts attributable to the parent and the
noncontrolling interest. SFAS 160 establishes a single method of accounting for
changes in a parent’s ownership interest in a subsidiary which do not result in
deconsolidation. SFAS 160 also requires expanded disclosures that clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners of a subsidiary. SFAS 160 is effective for
financial statements issued for fiscal years beginning on or after December 15,
2008, and interim periods within those fiscal years. Early adoption is
prohibited. SFAS 160 shall be applied prospectively, with the exception of the
presentation and disclosure requirements which shall be applied retrospectively
for all periods presented. ALLETE Properties does have certain noncontrolling
interests in consolidated subsidiaries. If SFAS 160 had been applied as of
December 31, 2008, the $9.8 million reported as Minority Interest in the
Liabilities section on our consolidated balance sheet would have been reported
as $9.8 million of Noncontrolling Interest in Subsidiaries in the Equity section
of our consolidated balance sheet. Effective January 1, 2009, SFAS 160 will
impact the presentation of our consolidated balance sheet, but it is not
expected to have a material impact on our consolidated financial position,
results of operations, or cash flows.
FSP FAS 132(R)-1. In
December 2008, the FASB issued FSP FAS 132(R)-1. This FSP amends SFAS 132(R),
“Employers’ Disclosures about Pensions and Other Postretirement Benefits,” to
provide guidance on an employer’s disclosures about plan assets, including
employers’ investment strategies, major categories of plan assets,
concentrations of risk within plan assets, and valuation techniques used to
measure the fair value of plan assets. This FSP is effective for fiscal years
ending after December 15, 2009. Upon initial application, the provisions of this
FSP are not required for earlier periods that are presented for comparative
purposes. Early application of the provisions of this FSP is
permitted.
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
1. Operations and Significant Accounting Policies
(Continued)
FSP FAS 140-4 and FIN
46(R)-8. In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8. This pronouncement
amends SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities” to require public entities to provide additional
disclosures about the transfers of financial assets. The pronouncement also
amends FIN 46, “Consolidation of Variable Interest Entities,” requiring
additional disclosures about a company’s involvement with variable interest
entities and qualifying special purpose entities. This FSP is effective for the
first reporting period ending after December 15, 2008. We have adopted FSP FAS
140-R and FIN 46(R)-8 and have determined that ALLETE is not the primary
beneficiary of any variable interest entities it is associated with. FSP FAS
140-4 and FIN 46(R)-8 did not have a material impact on our consolidated
financial position, results of operations, or cash flows. (See Note 8.
Commitments, Guarantees and Contingencies.)
Note
2. Business Segments
In the
fourth quarter of 2008, we made changes to our reportable business segments in
our continuing effort to manage and measure performance of our operations based
on the nature of products and services provided and customers served.
Previously, we reported a Regulated Utility segment which included our regulated
utilities Minnesota Power and SWL&P. This prior segment is now combined with
our previously disclosed segment, Investment in ATC, and renamed Regulated
Operations. In addition, we combined the three previously reportable business
segments Non-regulated Energy Operations, Real Estate, and Other into one
reportable business segment called Investments and Other. The Real Estate
segment was not a key component of ALLETE’s business in 2008 and is not expected
to be significant in the future. The Investments and Other segment also includes
emerging technologies, and earnings on cash and short term investments. In 2008,
none of the components of the Investments and Other segment contribute revenue,
profit, or assets that are greater than 10 percent of consolidated revenue,
profit, or assets. We have recast our segment information for fiscal years ended
2007 and 2006 to reflect the new reportable business segments. Presented below
are the operating results and other financial information related to our
reportable business segments. For a description of our reportable business
segments, see Item 1. Business.
|
Regulated
|
Investments
|
|
Consolidated
|
Operations
|
and
Other
|
Millions
|
|
|
|
2008
|
|
|
|
Operating
Revenue
|
$801.0
|
$712.2
|
$88.8
|
Fuel
and Purchased Power
|
305.6
|
305.6
|
–
|
Operating
and Maintenance
|
318.1
|
239.3
|
78.8
|
Depreciation
Expense
|
55.5
|
50.7
|
4.8
|
Operating
Income from Continuing Operations
|
121.8
|
116.6
|
5.2
|
Interest
Expense
|
(26.3)
|
(24.0)
|
(2.3)
|
Equity
Earnings in ATC
|
15.3
|
15.3
|
–
|
Other
Income
|
15.6
|
3.6
|
12.0
|
Income
from Continuing Operations Before Minority Interest and Income
Taxes
|
126.4
|
111.5
|
14.9
|
Income
Tax Expense (Benefit)
|
43.4
|
43.6
|
(0.2)
|
Minority
Interest
|
0.5
|
–
|
0.5
|
Net
Income
|
$82.5
|
$67.9
|
$14.6
|
|
|
|
|
Total
Assets
|
$2,134.8
|
$1,832.1
|
$302.7
|
Capital
Additions
|
$322.9
|
$317.0
|
$5.9
|
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
2.
|
Business
Segments (Continued)
|
|
|
Regulated
|
Investments
|
|
Consolidated
|
Operations
|
and
Other
|
Millions
|
|
|
|
2007
|
|
|
|
Operating
Revenue
|
$841.7
|
$723.8
|
$117.9
|
Fuel
and Purchased Power
|
347.6
|
347.6
|
–
|
Operating
and Maintenance
|
313.9
|
229.3
|
84.6
|
Depreciation
Expense
|
48.5
|
43.8
|
4.7
|
Operating
Income from Continuing Operations
|
131.7
|
103.1
|
28.6
|
Interest
Expense
|
(22.6)
|
(21.0)
|
(1.6)
|
Equity
Earnings in ATC
|
12.6
|
12.6
|
–
|
Other
Income
|
15.5
|
4.1
|
11.4
|
Income
from Continuing Operations Before Minority Interest and Income
Taxes
|
137.2
|
98.8
|
38.4
|
Income
Tax Expense
|
47.7
|
36.4
|
11.3
|
Minority
Interest
|
1.9
|
–
|
1.9
|
Net
Income
|
$87.6
|
$62.4
|
$25.2
|
|
|
|
|
Total
Assets
|
$1,644.2
|
$1,396.6
|
$247.6
|
Capital
Additions
|
$223.9
|
$220.6
|
$3.3
|
|
|
Regulated
|
Investments
|
|
Consolidated
|
Operations
|
and
Other
|
Millions
|
|
|
|
2006
|
|
|
|
Operating
Revenue
|
$767.1
|
$639.2
|
$127.9
|
Fuel
and Purchased Power
|
281.7
|
281.7
|
–
|
Operating
and Maintenance
|
298.4
|
217.9
|
80.5
|
Depreciation
Expense
|
48.7
|
44.2
|
4.5
|
Operating
Income from Continuing Operations
|
138.3
|
95.4
|
42.9
|
Interest
Expense
|
(25.0)
|
(20.2)
|
(4.8)
|
Equity
Earnings in ATC
|
3.0
|
3.0
|
–
|
Other
Income
|
11.9
|
0.9
|
11.0
|
Income
from Continuing Operations Before Minority Interest and Income
Taxes
|
128.2
|
79.1
|
49.1
|
Income
Tax Expense
|
46.3
|
30.4
|
15.9
|
Minority
Interest
|
4.6
|
–
|
4.6
|
Income
from Continuing Operations
|
77.3
|
$48.7
|
$28.6
|
Loss
from Discontinued Operations – Net of Tax
|
(0.9)
|
|
|
Net
Income
|
$76.4
|
|
|
|
|
|
|
Total
Assets
|
$1,533.4
|
$1,197.0
|
$336.4
|
Capital
Additions
|
$109.4
|
$107.5
|
$1.9
|
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
3. Property, Plant and Equipment
Property,
Plant and Equipment
|
|
|
December
31
|
2008
|
2007
|
Millions
|
|
|
Regulated
Utility
|
$1,837.2
|
$1,683.0
|
Construction
Work in Progress
|
303.0
|
165.8
|
Accumulated
Depreciation
|
(806.8)
|
(796.8)
|
Regulated
Utility Plant – Net
|
1,333.4
|
1,052.0
|
Non-Rate
Base Energy Operations
|
94.0
|
89.9
|
Construction
Work in Progress
|
3.9
|
2.5
|
Accumulated
Depreciation
|
(47.2)
|
(43.2)
|
Non-Rate
Base Energy Operations Plant – Net
|
50.7
|
49.2
|
Other
Plant – Net
|
3.2
|
3.3
|
Property,
Plant and Equipment – Net
|
$1,387.3
|
$1,104.5
|
Depreciation
is computed using the straight-line method over the estimated useful lives of
the various classes of assets. The MPUC and the PSCW have approved depreciation
rates for our Regulated Utility plant.
Estimated
Useful Lives of Property, Plant and Equipment
|
|
|
|
|
|
Regulated
Utility –
|
Generation
|
3
to 35 years
|
Non-Rate Base
Operations
|
3
to 61 years
|
|
Transmission
|
42
to 61 years
|
Other
Plant
|
5
to 25 years
|
|
Distribution
|
14
to 65 years
|
|
|
Asset Retirement Obligations.
Pursuant to SFAS 143, “Accounting for Asset Retirement Obligations,” we
recognize, at fair value, obligations associated with the retirement of certain
tangible, long-lived assets that result from the acquisition, construction or
development and/or normal operation of the asset. Asset retirement obligations
(ARO) relate primarily to the decommissioning of our utility steam generating
facilities and land reclamation at BNI Coal, and are included in Other
Liabilities on our consolidated balance sheet. Removal costs associated with
certain distribution and transmission assets have not been recognized under SFAS
143 as these facilities have indeterminate useful lives. The associated
retirement costs are capitalized as part of the related long-lived asset and
depreciated over the useful life of the asset. Conditional asset retirement
obligations have been identified for treated wood poles and remaining
polychlorinated biphenyl and asbestos-containing assets; however, removal costs
have not been recognized because they are considered immaterial to our
consolidated financial statements.
Long-standing
ratemaking practices approved by applicable state and federal regulatory
commissions have allowed provisions for future plant removal costs in
depreciation rates. These plant removal cost recoveries were included in
accumulated depreciation. With the adoption of SFAS 143, accumulated plant
removal costs were reclassified either as AROs or as a regulatory liability for
non-ARO obligations. To the extent annual accruals for plant removal costs
determined under SFAS 143 differ from accruals under approved depreciation
rates, a regulatory asset has been established under SFAS 71. (See Note 5.
Regulatory Matters.)
Asset
Retirement Obligation
|
|
Millions
|
|
Obligation
at December 31, 2006
|
$27.2
|
Accretion
Expense
|
2.1
|
Additional
Liabilities Incurred in 2007
|
7.2
|
Obligation
at December 31, 2007
|
36.5
|
Accretion
Expense
|
2.0
|
Additional
Liabilities Incurred in 2008
|
1.0
|
Obligation
at December 31, 2008
|
$39.5
|
Note
4.
|
Jointly-Owned
Electric Facility
|
We own 80
percent of the 536-MW Boswell Energy Center Unit 4 (Boswell Unit 4). While we
operate the plant, certain decisions about the operations of Boswell Unit 4 are
subject to the oversight of a committee on which we and Wisconsin Public Power,
Inc., the owner of the other 20 percent of Boswell Unit 4, have equal
representation and voting rights. Each of us must provide our own financing and
is obligated to pay our ownership share of operating costs. Our share of direct
operating expenses of Boswell Unit 4 is included in operating expense on our
consolidated statement of income. Our 80 percent share of the original cost of
Boswell Unit 4, which is included in property, plant and equipment at December
31, 2008, was $328 million ($316 million at December 31, 2007). The
corresponding accumulated depreciation balance was $173 million at
December 31, 2008 ($170 million at December 31,
2007).
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
5.
|
Regulatory
Matters
|
Electric Rates. Entities
within our Regulated Operations segment file for periodic rate revisions with
the MPUC, the FERC or the PSCW.
On
February 8, 2008, the FERC approved Minnesota Power’s wholesale rate increase
effective March 1, 2008. Minnesota Power’s wholesale customers consist of
16 municipalities in Minnesota and 1 private utility in Wisconsin. The FERC
authorized an average 10.0 percent increase for wholesale municipal customers,
and an overall return on equity of 11.25 percent. Incremental revenue in 2008
from the FERC authorized wholesale rate increase was approximately $6
million.
In 2008
Minnesota Power entered into new contracts with all of our wholesale customers
with the exception of one small customer whose contract is now in the
cancellation period. The new contracts transition each customer to formula based
rates, which means rates can be adjusted annually based on changes in costs. The
new agreement with the private utility in Wisconsin is subject to PSCW
approval. In November 2008, we filed a request with the FERC to implement the
formula based rate provision in the new contracts. We anticipate final
resolution and implementation of new rates in the first quarter of
2009.
On May 2,
2008, Minnesota Power filed a rate increase request with the MPUC seeking an
average rate increase of 8.5 percent for retail customers. The rate filing seeks
a return on equity of 11.15 percent, and a capital structure consisting of 54.8
percent equity and 45.2 percent debt. On an annualized basis, the requested rate
increase would generate approximately $40 million in additional revenue. Interim
rates were effective on August 1, 2008, and resulted in an increase for retail
customers of approximately $36 million, or 7.5 percent, on an annualized basis,
subject to refund pending the final rate order. Incremental revenue in 2008 from
the interim retail rate increase was approximately $13 million. The transition
to a new base cost of fuel coincident with interim rates resulted in the
non-recovery through the fuel adjustment clause of approximately $19 million of
fuel and purchased power costs incurred in 2008. We have entered into a
stipulation and settlement agreement that would allow recovery of the $19
million in 2009 and which addresses specific concerns identified by interveners
in the rate case; the stipulation and settlement agreement is subject to MPUC
approval. The final rate order is expected in the second quarter of 2009. We
cannot predict the final level of rates that may be approved by the MPUC. Prior
to the May 2008 retail rate request Minnesota Power’s rates were based on a 1994
MPUC retail rate order that allowed for an 11.6 percent return on
equity.
SWL&P’s
current retail rates are based on a December 2008 PSCW retail rate order that
became effective January 1, 2009, and allows for an 11.1 percent return on
common equity. The new rates reflected a 3.5 percent average increase in retail
utility rates for SWL&P customers (a 13.4 percent increase in water rates, a
4.7 percent increase in electric rates, and a 0.6 percent decrease in natural
gas rates). On an annualized basis, the rate increase will generate
approximately $3 million in additional revenue.
In 2008,
81 percent of our consolidated operating revenue was under regulatory authority
(76 percent in 2007; 72 percent in 2006). The MPUC had regulatory authority over
approximately 62 percent of our consolidated operating revenue in 2008 (58
percent in 2007; 56 percent in 2006).
Deferred Regulatory Assets and Liabilities. Our regulated utility
operations are subject to the provisions of SFAS 71, “Accounting for the Effects
of Certain Types of Regulation.” We capitalize as regulatory assets incurred
costs which are probable of recovery in future utility rates. Regulatory
liabilities represent amounts
expected to be credited to customers in rates. Regulatory assets and
liabilities are
included in Other Assets and Other Liabilities on our consolidated balance sheet
except for deferred fuel adjustment clause charges which are included in
Prepayments and Other Current Assets (See Note 1. Operations and Significant
Accounting Policies). No regulatory assets or liabilities are currently earning
a return.
Deferred
Regulatory Assets and Liabilities
|
|
|
December
31
|
2008
|
2007
|
Millions
|
|
|
|
|
|
Regulatory
Assets
|
|
|
Income
Taxes
|
$12.2
|
$11.3
|
Premium
on Reacquired Debt
|
2.2
|
2.3
|
Future
Benefit Obligations Under
|
|
|
Defined
Benefit Pension and Other Postretirement Plans (See Note 14. Pension and
Other Postretirement Benefit Plans)
|
216.5
|
53.7
|
Deferred
MISO Costs
|
3.9
|
3.7
|
Asset
Retirement Obligation
|
5.1
|
3.6
|
Boswell
Unit 3 Environmental Rider
|
3.8
|
–
|
Other
|
5.6
|
2.0
|
|
249.3
|
76.6
|
Regulatory
Liabilities
|
|
|
Income
Taxes
|
28.7
|
31.3
|
Plant
Removal Obligations
|
15.9
|
–
|
Accrued
MISO Refund
|
4.7
|
–
|
Other
|
0.7
|
–
|
|
50.0
|
31.3
|
Net
Deferred Regulatory Assets
|
$199.3
|
$45.3
|
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
5. Regulatory Matters (Continued)
Investment in ATC. Our
wholly owned subsidiary Rainy River Energy, owns approximately 8 percent of ATC,
a Wisconsin-based utility that owns and maintains electric transmission assets
in parts of Wisconsin, Michigan, Minnesota and Illinois. ATC provides
transmission service under rates regulated by the FERC that are set in
accordance with the FERC’s policy of establishing the independent operation and
ownership of, and investment in, transmission facilities. We account for our
investment in ATC under the equity method of accounting, pursuant to EITF 03-16,
“Accounting for Investments in Limited Liability Companies.” As of December 31,
2008, our equity investment balance in ATC was $76.9 million ($65.7 million at
December 31, 2007). On January 30, 2009, we invested an additional $1.9 million
in ATC. In total, we expect to invest an additional $5 to $7 million
throughout 2009.
ALLETE’s
Interest in ATC
|
|
|
Year
Ended December 31
|
2008
|
2007
|
Millions
|
|
|
Equity
Investment Beginning Balance
|
$65.7
|
$53.7
|
Cash
Investments
|
7.4
|
8.7
|
Equity
in ATC Earnings
|
15.3
|
12.6
|
Distributed
ATC Earnings
|
(11.5)
|
(9.3)
|
Equity
Investment Ending Balance
|
$76.9
|
$65.7
|
The ATC summarized financial data
below was previously omitted from our Form 10-K filed February 13,
2009.
ATC
Summarized Financial Data
|
|
|
|
|
|
|
For
the Year Ended December 31
|
|
|
|
|
|
|
Income
Statement Data
|
|
2008
|
|
2007
|
|
2006
|
Millions
|
|
|
|
|
|
|
Revenue
|
$
|
466.6
|
$
|
408.0
|
$
|
340.7
|
Operating
Expense
|
|
209.0
|
|
198.2
|
|
179.4
|
Other
Expense
|
|
69.6
|
|
55.7
|
|
39.4
|
Net
Income
|
$
|
188.0
|
$
|
154.1
|
$
|
121.9
|
|
|
|
|
|
|
|
ALLETE’s
Equity in Net Income
|
$
|
15.3
|
$
|
12.6
|
$
|
3.0
|
|
|
|
|
|
|
|
Balance
Sheet Data
|
|
|
|
|
|
|
Millions
|
|
|
|
|
|
|
Current
Assets
|
$
|
50.8
|
$
|
48.3
|
$
|
33.5
|
Non-Current
Assets
|
|
2,480.0
|
|
2,189.0
|
|
1,853.7
|
Total
Assets
|
$
|
2,530.8
|
$
|
2,237.3
|
$
|
1,887.2
|
|
|
|
|
|
|
|
Current
Liabilities
|
$
|
252.0
|
$
|
317.1
|
$
|
305.3
|
Long-Term
Debt
|
|
1,109.4
|
|
899.1
|
|
648.9
|
Other
Non-Current Liabilities
|
|
120.2
|
|
108.5
|
|
125.7
|
Members’
Equity
|
|
1,049.2
|
|
912.6
|
|
807.3
|
Total
Liabilities and Members’ Equity
|
$
|
2,530.8
|
$
|
2,237.3
|
$
|
1,887.2
|
ALLETE
2008 Form 10-K/A, Amendment No. 1
Investments. At December 31,
2008, our long-term investment portfolio included the real estate assets of
ALLETE Properties, debt and equity securities consisting primarily of securities
held to fund employee benefits, our emerging technology portfolio, auction rate
securities, and land held for sale in Minnesota.
Investments
|
|
|
December
31
|
2008
|
2007
|
Millions
|
|
|
ALLETE
Properties
|
$84.9
|
$91.3
|
Available-for-sale
Securities
|
32.6
|
30.5
|
Emerging
Technology Portfolio
|
7.4
|
7.9
|
Other
|
12.0
|
18.4
|
Total
Investments
|
$136.9
|
$148.1
|
|
|
|
ALLETE
Properties
|
2008
|
2007
|
Millions
|
|
|
Land
Held for Sale Beginning Balance
|
$62.6
|
$58.0
|
Additions
during period: Capitalized Improvements
|
10.5
|
12.8
|
Deductions
during period: Cost of Real Estate Sold
|
(1.9)
|
(8.2)
|
Land
Held for Sale Ending Balance
|
71.2
|
62.6
|
Long-Term
Finance Receivables
|
13.6
|
15.3
|
Other (a)
|
0.1
|
13.4
|
Total
Real Estate Assets
|
$84.9
|
$91.3
|
(a)
|
Consisted
primarily of a shopping center that was sold on May 1, 2008. The pre-tax
gain of $4.5 million resulting from this sale is included in operating
revenue on the Consolidated Statement of
Income.
|
Land Held for Sale. Land
held for sale is recorded at the lower of cost or fair value determined by the
evaluation of individual land parcels. Land values are reviewed for
impairment and no impairments were recorded in 2008 (none in 2007).
Finance
Receivables. Finance receivables, which are collateralized by
property sold, accrue interest at market-based rates and are net of an allowance
for doubtful accounts of $0.1 million at December 31, 2008 ($0.2 million at
December 31, 2007). The majority are receivables having maturities up
to four years. Minority interest associated with real estate operations was $9.8
million at December 31, 2008 ($9.3 million at December 31,
2007).
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
6. Investments (Continued)
Available-for-Sale
Investments. We account for our
available-for-sale portfolio in accordance with SFAS 115, “Accounting for
Certain Investments in Debt and Equity Securities.” Our available-for-sale
securities portfolio consisted of securities in a grantor trust established to
fund certain employee benefits and auction rate securities.
Available-For-Sale
Securities
|
Millions
|
|
|
|
|
|
Gross
Unrealized
|
|
At December 31
|
Cost
|
Gain
|
(Loss)
|
Fair
Value
|
|
|
|
|
|
2008
|
$40.5
|
–
|
$(7.9)
|
$32.6
|
2007(a)
|
$45.3
|
$8.4
|
$(0.1)
|
$53.6
|
2006
|
$123.2
|
$7.0
|
$(0.1)
|
$130.1
|
(a)
|
Included
$23.1 million of auction rate securities that were classified as
Short-Term Investments and were subsequently reclassified in 2008 as
Investments.
|
|
|
|
Net
|
|
|
|
Unrealized
|
|
|
|
Gain
(Loss)
|
|
|
|
in
Other
|
Year
Ended
|
Net
|
Gross Realized
|
Comprehensive
|
December
31
|
Proceeds
|
Gain
|
(Loss)
|
Income
|
|
|
|
|
|
2008
|
$17.5
|
$6.5
|
$(0.1)
|
$(9.7)
|
2007
|
$81.4
|
–
|
–
|
$1.4
|
2006
|
$12.4
|
–
|
–
|
$2.5
|
Auction Rate Securities. As
of December 31, 2008, we held $15.2 million of investments ($23.1 million at
December 31, 2007) consisting of three auction rate municipal bonds
(auction rate securities) with stated maturity dates ranging between 15 and 28
years. These ARS consist of guaranteed student loans insured or reinsured by the
federal government. These ARS were historically auctioned every 35 days to
set new rates and provide a liquidating event in which investors could either
buy or sell securities. The auctions have been unable to sustain themselves
during 2008 due to the overall lack of credit market liquidity and we have been
unable to liquidate all of our ARS. As a result, we have classified the ARS as
long-term investments and have the ability to hold these securities to
maturity, until called by the issuer, or until liquidity returns to this market.
In the meantime, these securities will pay a default rate which is typically
above market interest rates.
The
Company has used a discounted cash flow model to determine the estimated fair
value of its investment in ARS as of December 31, 2008. The assumptions used in
preparing the discounted cash flow model include the following: estimated
interest rates, estimated discount rates (using yields of comparable traded
instruments adjusted for illiquidity and other risk factors), amount of cash
flows, and expected holding periods of the ARS. These inputs reflect the
Company’s judgments about assumptions that market participants would use in
pricing ARS including assumptions about risk. Based upon the results of the
discounted cash flow model and the fact that these ARS consist of guaranteed
student loans insured or reinsured by the federal government no other than
temporary impairment loss has been reported.
Emerging Technology Investments. The majority of our emerging
technology investments are minority investments in venture capital funds. We
account for our investment in venture capital funds under the equity method of
accounting. The total carrying value of our emerging technology portfolio was
$7.4 million at December 31, 2008. Our remaining commitment of $0.7 million
at December 31, 2008 may be invested in 2009. We do not have plans to make any
additional investments beyond this commitment. Based on our impairment analysis,
we did not record any impairment in 2008 ($0.5 million in 2007, none in
2006).
Concentration of Credit Risk.
Financial instruments that subject us to concentrations of credit risk consist
primarily of accounts receivable. Minnesota Power sells electricity to 12 Large
Power Customers. Receivables from these customers totaled approximately $11
million at December 31, 2008 ($14 million at December 31, 2007). Minnesota Power
does not obtain collateral to support utility receivables, but monitors the
credit standing of major customers. In addition, our taconite-producing Large
Power Customers are on a weekly billing cycle, which allows us to closely manage
collection of amounts due.
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
6. Investments (Continued)
Fair Value of Financial
Instruments. With the exception of the items listed below, the estimated
fair value of all financial instruments approximates the carrying amount. The
fair value for the items below were based on quoted market prices for the same
or similar instruments.
Financial
Instruments
|
|
|
December
31
|
Carrying
Amount
|
Fair
Value
|
Millions
|
|
|
Long-Term
Debt, Including Current Portion
|
|
|
2008
|
$598.7
|
$561.6
|
2007
|
$422.7
|
$410.9
|
Fair Value. Effective
January 1, 2008, the Company adopted SFAS 157 as discussed in Note 1, which,
among other things, requires enhanced disclosures about assets and liabilities
carried at fair value.
As
defined in SFAS 157, fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date (exit price). The Company utilizes market
data or assumptions that market participants would use in pricing the asset or
liability, including assumptions about risk and the risks inherent in the inputs
to the valuation technique. These inputs can be readily observable, market
corroborated, or generally unobservable. The Company primarily applies the
market approach for recurring fair value measurements and endeavors to utilize
the best available information. Accordingly, the Company utilizes valuation
techniques that maximize the use of observable inputs and minimize the use of
unobservable inputs. The Company is able to classify fair value balances based
on the observability of those inputs. SFAS 157 establishes a fair value
hierarchy that prioritizes the inputs used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1 measurement) and the lowest priority to
unobservable inputs (Level 3 measurement). The three levels of the fair value
hierarchy defined by SFAS 157 are as follows:
Level 1 –
Quoted prices are available in active markets for identical assets or
liabilities as of the reporting date. Active markets are those in which
transactions for the asset or liability occur in sufficient frequency and volume
to provide pricing information on an ongoing basis. Instruments in this category
include primarily mutual fund investments held to fund employee
benefits.
Level 2 –
Pricing inputs are other than quoted prices in active markets included in Level
1, which are either directly or indirectly observable as of the reporting date.
Level 2 includes those financial instruments that are valued using models or
other valuation methodologies. These models are primarily industry-standard
models that consider various assumptions, including quoted forward prices for
commodities, time value, volatility factors, and current market and contractual
prices for the underlying instruments, as well as other relevant economic
measures. Substantially all of these assumptions are observable in the
marketplace throughout the full term of the instrument, can be derived from
observable data or are supported by observable levels at which transactions are
executed in the marketplace. Instruments in this category represent the
Company’s deferred compensation obligation and fixed income
securities.
Level 3 –
Pricing inputs include significant inputs that are generally less observable
from objective sources. These inputs may be used with internally developed
methodologies that result in management’s best estimate of fair value. At each
balance sheet date, management performs an analysis of all instruments subject
to SFAS 157 and includes in Level 3 all of those whose fair value is based on
significant unobservable inputs. Instruments in this category include auction
rate securities consisting of guaranteed student loans classified as Level 3
investments as of December 31, 2008. The Company also holds certain financial
transmission rights (FTRs) related to our participation in MISO. These FTRs are
accounted for as derivatives. While our valuation of these FTRs is based on
Level 3 inputs, the fair value of our FTRs at December 31, 2008, is immaterial,
and as a result we have not presented them in the tables below.
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
6. Investments (Continued)
The
following table sets forth by level within the fair value hierarchy the
Company's financial assets and liabilities that were accounted for at fair value
on a recurring basis as of December 31, 2008. As required by SFAS 157, financial
assets and liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement. The Company's
assessment of the significance of a particular input to the fair value
measurement requires judgment, and may affect the valuation of fair value assets
and liabilities and their placement within the fair value hierarchy levels.
|
At
Fair Value as of December 31, 2008
|
Recurring Fair Value
Measures
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
|
Millions
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Mutual
Funds
|
|
$13.5
|
|
–
|
|
–
|
|
$13.5
|
Bonds
|
|
–
|
|
$3.3
|
|
–
|
|
3.3
|
Auction
Rate Securities
|
|
–
|
|
–
|
|
$15.2
|
|
15.2
|
Money
Market Funds
|
|
10.6
|
|
–
|
|
–
|
|
10.6
|
Total
Assets
|
|
$24.1
|
|
$3.3
|
|
$15.2
|
|
$42.6
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deferred
compensation obligation
|
|
–
|
|
$13.5
|
|
–
|
|
$13.5
|
Total
Liabilities
|
|
–
|
|
$13.5
|
|
–
|
|
$13.5
|
|
|
|
|
|
|
|
|
|
Total
Net Assets (Liabilities)
|
|
$24.1
|
|
$(10.2)
|
|
$15.2
|
|
$29.1
|
Recurring
Fair Value Measures as of December 31, 2008
|
Auction
Rate
|
Activity
in Level 3
|
Securities
|
Millions
|
|
Balance
as of January 1, 2008
|
–
|
|
Purchases,
sales, issuances and settlements, net (a)
|
$(10.0)
|
|
Level
3 transfers in
|
25.2
|
Balance
as of December 31, 2008
|
$15.2
|
(a)
|
Includes
a $5.2 million transfer of auction rate securities to our Voluntary
Employee Benefit Association trust used to fund postretirement health and
life benefits.
|
Note
7.
|
Short-Term
and Long-Term Debt
|
Short-Term Debt. Total
short-term debt outstanding at December 31, 2008, was $10.4 million ($11.8
million at December 31, 2007) and consisted of Long-Term Debt Due Within
One Year.
As of
December 31, 2008, we had bank lines of credit aggregating $160.5 million
($160.0 million at December 31, 2007), the majority of which expire in January
2012. These bank lines of credit make financing available through short-term
bank loans and provide credit support for commercial paper. At December 31,
2008, $7.3 million ($4.3 million at December 31, 2007) was drawn on our
lines of credit leaving a $153.2 million balance available for use ($155.7
million at December 31, 2007). There was no commercial paper issued as of
December 31, 2008 and 2007.
In
January 2006, we renewed, increased and extended a committed, syndicated,
unsecured revolving credit facility (Line) with Bank of America as Agent, and
four other banks, for $150 million. No individual bank has more than 25
percent participation in the Line. The line was subsequently extended for an
additional year in December 2006 and currently matures in January 2012. At our
request and subject to certain conditions, the Line may be increased to
$200 million and extended for two additional 12-month periods. The Line may
be used for general corporate purposes and working capital, and to provide
liquidity in support of our commercial paper program. We may prepay amounts
outstanding under the Line in whole or in part at our discretion without premium
or penalty. Additionally, we may irrevocably terminate or reduce the size of the
Line prior to maturity without premium or penalty. No funds were drawn under
this Line at December 31, 2008 and 2007.
On May
16, 2008, Florida Landmark Communities, Inc., a wholly owned subsidiary of
Lehigh Acquisition Corporation, renewed and extended a revolving development
loan with RBC Bank (successor by merger to CypressCoquina Bank) for $8.5
million. In October 2008, the revolving development loan was amended and
restated as a $10.0 million term loan. ALLETE Properties through its
subsidiaries also entered into a $3.0 million revolving development loan with
Intracoastal Bank. At December 31, 2008, $1.3 million was drawn on this line of
credit.
On May
21, 2008, BNI Coal, a wholly owned subsidiary of ALLETE, entered into a $6.0
million Promissory Note and Supplement (Line of Credit) with CoBANK, ACB. The
Line of Credit has a variable interest rate with the option to fix the rate
based on LIBOR plus a certain spread. The term of the Line of Credit is 12
months, with the option to renew annually. The Line of Credit is being used for
general corporate purposes. As of December 31, 2008, the full amount of
$6.0 million was drawn on the Line of Credit.
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
7. Short-Term and Long-Term Debt
(Continued)
Long-Term Debt. The aggregate
amount of long-term debt maturing during 2009 is $10.4 million
($4.7 million in 2010; $11.7 million in 2011; $2.9 million in 2012; $73.4
million in 2013; and $495.5 million thereafter). Substantially all of our
electric plant is subject to the lien of the mortgages collateralizing various
first mortgage bonds.
On
February 1, 2008, we issued $60 million in principal amount of First Mortgage
Bonds, 4.86% Series due April 1, 2013, in the private placement market. We have
the option to prepay all or a portion of the bonds at our discretion, subject to
a make-whole provision. The bonds are subject to additional terms and conditions
which are customary for this type of transaction. We used the proceeds from the
sale of the bonds to fund utility capital expenditures and for general corporate
purposes.
On May
14, 2008, we issued $75 million in principal amount of First Mortgage Bonds,
6.02% Series due May 1, 2023, in the private placement market. We have
the option to prepay all or a portion of the bonds at our discretion, subject to
a make-whole provision. The bonds are subject to additional terms and conditions
which are customary for this type of transaction. We intend used the proceeds
from the sale of the bonds to fund utility capital expenditures and for general
corporate purposes.
We issued
$80 million in principal amount of First Mortgage Bonds in the private placement
market in three series as follows:
Issue
Date
|
Maturity
|
Principal
Amount
|
Coupon
|
December
15, 2008
|
January
15, 2014
|
$18
Million
|
6.94%
|
December
15, 2008
|
January
15, 2016
|
$20
Million
|
7.70%
|
January
15, 2009
|
January
15, 2019
|
$42
Million
|
8.17%
|
We have
the option to prepay all or a portion of the bonds at our discretion, subject to
a make-whole provision. The bonds are subject to additional terms and conditions
which are customary for this type of transaction. We intend to use the proceeds
from the sale of the bonds to fund utility capital expenditures and for general
corporate purposes
Long-Term
Debt
|
|
|
December
31
|
2008
|
2007
|
Millions
|
|
|
|
|
|
First
Mortgage Bonds
|
|
|
4.86%
Series Due 2013
|
$60.0
|
–
|
6.94%
Series Due 2014
|
18.0
|
–
|
7.70%
Series Due 2016
|
20.0
|
–
|
5.28%
Series Due 2020
|
35.0
|
$35.0
|
4.95%
Pollution Control Series F Due 2022
|
111.0
|
111.0
|
6.02%
Series Due 2023
|
75.0
|
–
|
5.99%
Series Due 2027
|
60.0
|
60.0
|
5.69%
Series Due 2036
|
50.0
|
50.0
|
SWL&P
First Mortgage Bonds
|
|
|
7.25%
Series Due 2013
|
10.0
|
–
|
Senior
Unsecured Notes 5.99% Due 2017
|
50.0
|
50.0
|
Variable
Demand Revenue Refunding Bonds
Series
1997 A, B, and C Due 2009 – 2020
|
28.3
|
36.5
|
Industrial
Development Revenue Bonds 6.5% Due 2025
|
6.0
|
6.0
|
Industrial
Development Variable Rate Demand Refunding
|
|
|
Revenue
Bonds Series 2006 Due 2025
|
27.8
|
27.8
|
Other
Long-Term Debt, 2.0% – 8.0% Due 2009 – 2037
|
47.6
|
46.4
|
Total
Long-Term Debt
|
598.7
|
422.7
|
Less:
Due Within One Year
|
10.4
|
11.8
|
Net
Long-Term Debt
|
$588.3
|
$410.9
|
Financial Covenants. Our
long-term debt arrangements contain customary covenants. In addition, our lines
of credit and letters of credit supporting certain long-term debt arrangements
contain financial covenants. The most restrictive covenant requires
ALLETE to maintain a ratio of its Funded Debt to Total Capital of less than
or equal to 0.65 to 1.00 measured quarterly. As of December 31, 2008 our ratio
was approximately 0.40 to 1.00. Failure to meet this covenant could give
rise to an event of default, if not corrected after notice from the lender, in
which event ALLETE may need to pursue alternative sources of funding. Some of
ALLETE’s debt arrangements contain “cross-default” provisions that would result
in an event of default if there is a failure under other financing arrangements
to meet payment terms or to observe other covenants that would result in an
acceleration of payments due.
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
8. Commitments, Guarantees and
Contingencies
Off-Balance Sheet Arrangements.
Square Butte Power Purchase Agreement.
Minnesota Power has a power purchase agreement with Square Butte that extends
through 2026 (Agreement). It provides a long-term supply of low-cost energy to
customers in our electric service territory and enables Minnesota Power to meet
power pool reserve requirements. Square Butte, a North Dakota cooperative
corporation, owns a 455-MW coal-fired generating unit (Unit) near Center, North
Dakota. The Unit is adjacent to a generating unit owned by Minnkota Power, a
North Dakota cooperative corporation whose Class A members are also members of
Square Butte. Minnkota Power serves as the operator of the Unit and also
purchases power from Square Butte.
Minnesota
Power was entitled to approximately 55 percent of the Unit’s output under the
Agreement in 2008. Beginning January 1, 2009, our output entitlement will remain
50 percent for the remainder of the contract.
Minnesota
Power is obligated to pay its pro rata share of Square Butte’s costs based
on Minnesota Power’s entitlement to Unit output. Minnesota Power’s payment
obligation will be suspended if Square Butte fails to deliver any power, whether
produced or purchased, for a period of one year. Square Butte’s fixed costs
consist primarily of debt service. At December 31, 2008, Square Butte had
total debt outstanding of $315.1 million. Total annual debt service for Square
Butte is expected to be approximately $29 million in each of the years 2009
through 2013. Variable operating costs include the price of coal purchased from
BNI Coal, our subsidiary, under a long-term contract.
On May
13, 2008, we announced plans to develop several hundred megawatts of wind energy
in North Dakota and purchase an existing 250 kV DC transmission line to
transport this wind energy to customers while gradually reducing the supply of
energy currently delivered to our system on this same transmission line from
Square Butte’s coal-fired Milton R. Young Unit 2. The North Dakota wind project
is expected to complete the 2025 renewable energy supply requirements for our
retail load. In September 2008, we signed an agreement to purchase the
transmission line from Square Butte Electric Cooperative for approximately
$80 million. The transaction is subject to regulatory approvals and is
anticipated to close in 2009.
Minnesota
Power’s cost of power purchased from Square Butte during 2008 was $56.7 million
($57.3 million in 2007; $57.9 million in 2006). This reflects Minnesota
Power’s pro rata share of total Square Butte costs, based on the 55 percent
output entitlement in 2008, the 60 percent output entitlement in 2007 and the 66
percent output entitlement in 2006. Included in this amount was Minnesota
Power’s pro rata share of interest expense of $11.6 million in 2008 ($11.0
million in 2007; $12.6 million in 2006). Minnesota Power’s payments to Square
Butte are approved as a purchased power expense for ratemaking purposes by both
the MPUC and the FERC.
Wind Power Purchase Agreements.
We have two wind power purchase agreements with an affiliate of NextEra
Energy to purchase the output from two wind facilities, Oliver Wind I and II
located near Center, North Dakota. We began purchasing the output from Oliver
Wind I, a 50-MW facility, in December 2006 and the output from Oliver Wind II, a
48-MW facility in November 2007. Each agreement is for 25 years and provides for
the purchase of all output from the facilities.
The power
purchase agreements (PPA) described above have been evaluated under the
provisions of FIN 46-R. We have determined that either we have no variable
interest in the PPA, or where we do have variable interests, we are not the
primary beneficiary; therefore, consolidation is not required. These conclusions
are based on the following factors: we have no equity investment in these
facilities and do not incur actual or expected losses related to the loss of
facility value, and we do not exude significant control over the operations of
each of these facilities. Our financial exposure relating to these PPAs relates
to our fixed capacity and energy payments, which are disclosed
above.
Leasing Agreements. BNI Coal
is obligated to make lease payments for a dragline totaling $2.8 million
annually for the lease term which expires in 2027. BNI Coal has the option at
the end of the lease term to renew the lease at a fair market rental, to
purchase the dragline at fair market value, or to surrender the dragline and pay
a $3.0 million termination fee. We lease other properties and equipment under
operating lease agreements with terms expiring through 2016. The aggregate
amount of minimum lease payments for all operating leases is $8.3 million in
2009, $8.2 million in 2010, $8.3 million in 2011, $8.2 million in 2012,
$7.8 million in 2013 and $52.9 million thereafter. Total rent and lease expense
was $8.5 million in 2008 ($8.4 million in 2007; $8.3 million in
2006).
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
8. Commitments, Guarantees and Contingencies
(Continued)
On
January 24, 2008, we received a letter from BNSF alleging that the Company
defaulted on a material obligation under the Company’s Coal Transportation
Agreement (CTA). In the notice, BNSF claimed the Company underpaid approximately
$1.6 million for coal transportation services in 2006 and that failure to pay
such amount plus interest may result in BNSF’s termination of the CTA. We
believe we do not owe the amount claimed. On April 1, 2008, to ensure that BNSF
did not attempt to terminate the CTA, we paid under protest the full amount
claimed by BNSF and filed a demand for arbitration of the issue. On April 22,
2008, BNSF filed a counterclaim in the arbitration disputing our position that
we are entitled to a refund from BNSF of $1.5 million plus interest for amounts
that we overpaid for 2007 deliveries. The arbitration is proceeding in
connection with the claim regarding 2006 payments and the counterclaim regarding
2007 payments, and we are unable to predict the outcome at this time. The
delivered costs of fuel for the Company’s generation are recoverable from
Minnesota Power’s utility customers through the fuel adjustment
clause.
Fuel Clause Recovery of MISO Day 2
Costs. Under a December 2006 MPUC order, we are allowed to accumulate
MISO Day 2 administrative charges as a regulatory asset until we file our next
rate case, at which time recovery for such charges will be determined. The
balance of this regulatory asset is $3.9 million on December 31, 2008, and we
are currently recovering these charges in interim rates. The final rate order is
expected in the second quarter of 2009. We cannot predict the final level of
rates that may be approved by the MPUC
Emerging Technology Portfolio.
We have investments in emerging technologies through minority investments in
venture capital funds structured as limited liability companies, and direct
investments in privately-held, start-up companies. We have committed to make
additional investments in certain emerging technology venture capital funds. The
remaining commitment of $0.7 million at December 31, 2008 may be invested
in 2009. We do not have plans to make any additional investments beyond this
commitment.
Environmental Matters. Our
businesses are subject to regulation of environmental matters by various
federal, state and local authorities. Due to future restrictive environmental
requirements through legislation and/or rulemaking, we anticipate that potential
expenditures for environmental matters will be material and will require
significant capital investments. We review environmental matters on a quarterly
basis. Accruals for environmental matters are recorded when it is probable that
a liability has been incurred and the amount of the liability can be reasonably
estimated, based on current law and existing technologies. These accruals are
adjusted periodically as assessment and remediation efforts progress or as
additional technical or legal information becomes available. Accruals for
environmental liabilities are included in the balance sheet at undiscounted
amounts and exclude claims for recoveries from insurance or other third parties.
Costs related to environmental contamination treatment and cleanup are charged
to expense unless recoverable in rates from customers.
EPA Clean Air Interstate
Rule. In March 2005, the EPA announced the Clean Air Interstate Rule
(CAIR) that sought to reduce and permanently cap emissions of SO2, NOX and
particulates in the eastern United States. Minnesota in included as one of
the 28 states considered as “significantly contributing” to air quality
standards non-attainment in other downwind states. On July 11, 2008, the United
States Court of Appeals for the District of Columbia Circuit (Court) vacated the
CAIR and remanded the rulemaking to the EPA for reconsideration while also
granting our petition that the EPA reconsider including Minnesota as a CAIR
state. In September 2008, the EPA and others petitioned the Court for a
rehearing or alternatively requested that the CAIR be remanded without a court order. In December
2008, the Court granted the request that the CAIR be remanded without a court
order, effectively reinstating a January 1, 2009, compliance date for the CAIR,
including Minnesota. However, Minnesota Power has been assured by the EPA that
it intends to publish a rule amending the CAIR to stay its effectiveness with
respect to Minnesota until completion of the EPA’s determination of whether
Minnesota should be included as a CAIR state. Minnesota Power anticipates the
EPA will act regarding this Minnesota administrative stay of the CAIR before
CAIR compliance reporting would be required in 2010.
On
remand, the EPA has been instructed by the Court to remedy the CAIR’s “more than
several fatal flaws” and to reevaluate the inclusion of Minnesota as a CAIR
state. If the EPA revises the CAIR, the EPA would need to specifically justify
including Minnesota with those states subject to such revised rules. If the CAIR
ultimately goes into effect in Minnesota, we expect we will have to
supplement ongoing emission control retrofits by providing for CAIR related
emission allowance purchases, supplemental emission reductions or a combination
of both. Though we anticipate that emission reduction measures taken with AREA
and Boswell Unit 3 emission control retrofits will suffice to satisfy
environmental requirements for the next several years, it is uncertain when or
how the CAIR will change as a result of EPA’s rulemaking on remand.
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
8. Commitments, Guarantees and Contingencies
(Continued)
Environmental
Matters (Continued)
Minnesota Regional Haze. The
regional haze rule requires States to submit state implementation plans (SIPs)
to the EPA to address regional haze visibility impairment in 156
federally-protected parks and wilderness areas. Under the regional haze rule,
certain large stationary sources of visibility-impairing emissions that were put
in place between 1962 and 1977 are required to install emission controls, known
as best available retrofit technology (BART). We have certain steam units
(Boswell Unit 3 and Taconite Harbor Unit 3) that are subject to BART
requirements.
Pursuant
to the regional haze rule, Minnesota was required to develop its SIP by December
2007. As a mechanism for demonstrating progress towards meeting the long-term
regional haze goal, in April 2007 the MPCA advanced a draft conceptual SIP which
relied on the implementation of CAIR. However, a formal SIP was never filed due
to the Court’s review of CAIR as more fully described above under “EPA Clean Air
Interstate Rule.” Subsequently, the MPCA has requested that companies with BART
eligible units complete and submit a BART emissions control retrofit study,
which we did as to Taconite Harbor Unit 3 in November 2008. The retrofit work
currently underway on Boswell Unit 3 meets the BART requirement for that unit.
It is uncertain what controls will ultimately be required by the MPCA at
Taconite Harbor Unit 3 in connection with the regional haze rule.
EPA Clean Air Mercury Rule.
In March 2005, the EPA also announced the Clean Air Mercury Rule (CAMR) that
would have reduced and permanently capped emissions of electric utility mercury
emissions in the continental United States. In February 2008, the Court
overturned the CAMR and remanded the rulemaking to the EPA for reconsideration.
In October 2008, the Department of Justice (DOJ), on behalf of the EPA,
petitioned the Supreme Court to review the Court’s decision in the CAMR case. It
is uncertain how the Supreme Court will respond. Cost estimates for complying
with future mercury regulations under the Clean Air Act are therefore premature
at this time.
New Source Review. On August
8, 2008, Minnesota Power received a Notice of Violation (NOV) from the United
States EPA asserting violations of the New Source Review (NSR) requirements of
the Clean Air Act at Boswell Units 1-4 and Laskin Unit 2. The NOV also asserts
that the Boswell Unit 4 Title V permit was violated. The NOV asserts that
seven projects undertaken at these coal-fired plants between the years 1981 and
2000 should have been reviewed under the NSR requirements. Minnesota Power
believes the projects were in full compliance with the Clean Air Act, NSR
requirements and applicable permits.
The EPA
has been conducting a nationwide enforcement initiative since 1999 relating to
NSR requirements. In 2000, 2001, and 2002 Minnesota Power received requests from
the EPA pursuant to Section 114(a) of the Clean Air Act seeking information
regarding capital expenditures with respect to Boswell and Laskin. Minnesota
Power responded to these requests; however, we had no further communications
from the EPA regarding the information provided until receipt of the
NOV.
We are
engaged in discussions with the EPA regarding resolution of these matters, but
we are unable to predict the outcome of these discussions. Since 2006, Minnesota
Power has significantly reduced, and continues to reduce, emissions at Boswell
and Laskin. The resolution could result in civil penalties and the installation
of control technology, some of which is already planned or completed for other
regulatory requirements. Any costs of installing pollution control technology
would likely be eligible for recovery in rates over time subject to MPUC and
FERC approval in a rate proceeding. We are unable to predict the ultimate
financial impact or the resolution of these matters at this time.
Manufactured Gas Plant
Site. We are reviewing and addressing environmental conditions at a
former manufactured gas plant site within the City of Superior, Wisconsin and
formerly operated by SWL&P. We have been working with the WDNR to
determine the extent of contamination and the remediation of contaminated
locations. We have accrued a $0.5 million liability for this site at
December 31, 2008, and have recorded a corresponding regulatory asset as we
expect recovery of remediation costs to be allowed by the PSCW.
Real Estate. As of December
31, 2008, ALLETE Properties, through its subsidiaries, had surety bonds
outstanding of $21.4 million primarily related to performance and
maintenance obligations to governmental entities to construct improvements in
the company’s various projects. The remaining work to be completed on these
improvements is estimated to be approximately $10.2 million, and ALLETE
Properties does not believe it is likely that any of these outstanding bonds
will be drawn upon.
Community Development District
Obligations. Town Center. In March 2005, the Town
Center District issued $26.4 million of tax-exempt, 6% Capital Improvement
Revenue Bonds, Series 2005, which are payable through property tax assessments
on the land owners over 31 years (by May 1, 2036). The bond proceeds were used
to pay for the construction of a portion of the major infrastructure
improvements at Town Center. The bonds are payable from and secured by the
revenue derived from assessments imposed, levied and collected by the Town
Center District. The assessments represent an allocation of the costs of the
improvements, including bond financing costs, to the lands within the Town
Center District benefiting from the improvements. The assessments were billed to
Town Center landowners effective November 2006. To the extent that we still
own land at the time of the assessment, in accordance with EITF 91-10,
“Accounting for Special Assessments and Tax Increment Financing Entities,” we
will incur the cost of our portion of these assessments, based upon our
ownership of benefited property. At December 31, 2008, we owned approximately 69
percent of the assessable land in the Town Center District (approximately 69
percent at December 31, 2007). As we sell property, the obligation to pay
special assessments will pass to the new landowners. Under current accounting
rules, these bonds are not reflected as debt on our consolidated balance
sheet.
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
8. Commitments, Guarantees and
Contingencies (Continued)
Palm Coast Park. In May 2006, the Palm Coast
Park District issued $31.8 million of tax-exempt, 5.7% Special Assessment
Bonds, Series 2006, which are payable through property tax assessments on the
land owners over 31 years (by May 1, 2037). The bond proceeds were used to pay
for the construction of a portion of the major infrastructure improvements at
Palm Coast Park and to mitigate traffic and environmental impacts. The
bonds are payable from and secured by the revenue derived from assessments
imposed, levied and collected by the Palm Coast Park District. The assessments
represent an allocation of the costs of the improvements, including bond
financing costs, to the lands within the Palm Coast Park District benefiting
from the improvements. The assessments were billed to Palm Coast Park
landowners effective November 2007. To the extent that we still own land at the
time of the assessment, in accordance with EITF 91-10, “Accounting for Special
Assessments and Tax Increment Financing Entities,” we will incur the cost of our
portion of these assessments, based upon our ownership of benefited property. At
December 31, 2008, we owned 86 percent of the assessable land in the Palm
Coast Park District (86 percent at December 31, 2007). As we sell property, the
obligation to pay special assessments will pass to the new landowners. Under
current accounting rules, these bonds are not reflected as debt on our
consolidated balance sheet.
Other. We are involved in
litigation arising in the normal course of business. Also in the normal course
of business, we are involved in tax, regulatory and other governmental audits,
inspections, investigations and other proceedings that involve state and federal
taxes, safety, compliance with regulations, rate base and cost of service
issues, among other things. While the resolution of such matters could have a
material effect on earnings and cash flows in the year of resolution, none of
these matters are expected to materially change our present liquidity position,
or have a material adverse effect on our financial condition.
Note
9.
|
Common
Stock and Earnings Per Share
|
Our
Articles of Incorporation contain provisions that, under certain circumstances,
would restrict the payment of common stock dividends. As of December 31, 2008,
no retained earnings were restricted as a result of these
provisions.
Summary
of Common Stock
|
Shares
|
Equity
|
|
Thousands
|
Millions
|
|
|
|
Balance
at December 31, 2005
|
30,143
|
$421.1
|
2006 Employee Stock Purchase
Plan
|
12
|
0.5
|
Invest Direct (a)
|
218
|
10.0
|
Options
and Stock Awards
|
63
|
7.1
|
Balance
at December 31, 2006
|
30,436
|
$438.7
|
2007 Employee Stock
Purchase Plan
|
17
|
0.7
|
Invest
Direct (a)
|
331
|
15.1
|
Options
and Stock Awards
|
43
|
6.7
|
Balance
at December 31, 2007
|
30,827
|
$461.2
|
2008 Employee Stock
Purchase Plan
|
17
|
0.6
|
Invest
Direct (a)
|
161
|
6.9
|
Options
and Stock Awards
|
24
|
4.6
|
Equity
Issuance Program
|
1,556
|
60.8
|
Balance
at December 31, 2008
|
32,585
|
$534.1
|
(a)
|
Invest
Direct is ALLETE’s direct stock purchase and dividend reinvestment
plan.
|
Equity Issuance Program. On
February 19, 2008, we entered into a Distribution Agreement with KCCI, Inc. with
respect to the issuance and sale of up to 2.5 million shares of our common
stock, without par value. The shares may be offered for sale, from time to time,
in accordance with the terms of the Distribution Agreement, which terminates on
June 30, 2009. For the year ended December 31, 2008, 1,556,200 shares of common
stock have been issued under this agreement resulting in net proceeds of $60.8
million.
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
9.
|
Common
Stock and Earnings Per Share
(Continued)
|
The
Rights, which are currently not exercisable or transferable apart from our
common stock, entitle the holder to purchase one-and-a-half one-hundredths
(three two-hundredths) of a share of ALLETE’s Junior Serial Preferred
Stock A, without par value. The purchase price, as defined in the Rights
Plan, remains at $90. These Rights would become exercisable if a person or group
acquires beneficial ownership of 15 percent or more of our common stock or
announces a tender offer which would increase the person’s or group’s beneficial
ownership interest to 15 percent or more of our common stock, subject to certain
exceptions. If the 15 percent threshold is met, each Right entitles the holder
(other than the acquiring person or group) to receive, upon payment of the
purchase price, the number of shares of common stock (or, in certain
circumstances, cash, property or other securities of ours) having a market value
equal to twice the exercise price of the Right. If we are acquired in a merger
or business combination, or more than 50 percent of our assets or earning power
are sold, each exercisable Right entitles the holder to receive, upon payment of
the purchase price, the number of shares of common stock of the acquiring or
surviving company having a value equal to twice the exercise price of the Right.
Certain stock acquisitions will also trigger a provision permitting the Board of
Directors to exchange each Right for one share of our common stock.
The
Rights are nonvoting and may be redeemed by us at a price of $0.005 per Right at
any time they are not exercisable. One million shares of Junior Serial Preferred
Stock A have been authorized and are reserved for issuance under the Rights
Plan.
Earnings Per Share. The
difference between basic and diluted earnings per share arises from outstanding
stock options and performance share awards granted under our Executive and
Director Long-Term Incentive Compensation Plans. In accordance with SFAS 128,
“Earnings Per Share,” for 2008, 0.6 million options to purchase shares of common
stock were excluded from the computation of diluted earnings per share because
the option exercise prices were greater than the average market prices, and
therefore, their effect would be anti-dilutive (0.2 million shares were excluded
for 2007 and none in 2006).
Reconciliation
of Basic and Diluted
|
|
|
|
Earnings
Per Share
|
|
Dilutive
|
|
For
the Year Ended December 31
|
Basic
|
Securities
|
Diluted
|
Millions
Except Per Share Amounts
|
|
|
|
|
|
|
|
2008
|
|
|
|
Income
from Continuing Operations
|
$82.5
|
–
|
$82.5
|
Common
Shares
|
29.2
|
0.1
|
29.3
|
Per
Share from Continuing Operations
|
$2.82
|
–
|
$2.82
|
|
|
|
|
2007
|
|
|
|
Income
from Continuing Operations
|
$87.6
|
–
|
$87.6
|
Common
Shares
|
28.3
|
0.1
|
28.4
|
Per
Share from Continuing Operations
|
$3.09
|
–
|
$3.08
|
|
|
|
|
2006
|
|
|
|
Income
from Continuing Operations
|
$77.3
|
–
|
$77.3
|
Common
Shares
|
27.8
|
0.1
|
27.9
|
Per
Share from Continuing Operations
|
$2.78
|
–
|
$2.77
|
Note
10. Other Income (Expense)
For
the Year Ended December 31
|
2008
|
2007
|
2006
|
Millions
|
|
|
|
Loss
on Emerging Technology Investments
|
$(0.7)
|
$(1.3)
|
$(0.9)
|
AFUDC
- Equity
|
3.3
|
3.8
|
0.5
|
Debt
Prepayment Premium and Unamortized Debt Issuance Costs
|
–
|
–
|
(0.6)
|
Investments
and Other Income
|
13.0
|
13.0
|
12.9
|
Total
Other Income
|
$15.6
|
$15.5
|
$11.9
|
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
11. Income Tax Expense
Income
Tax Expense
|
|
|
|
|
|
|
Year
Ended December 31
|
2008
|
|
2007
|
|
2006
|
|
Millions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Tax Expense
|
|
|
|
|
|
|
Federal
|
$6.2
|
|
$26.5
|
|
$8.9
|
(a)
|
State
|
(1.6)
|
|
7.2
|
|
9.6
|
|
Total
Current Tax Expense
|
4.6
|
|
33.7
|
|
18.5
|
|
Deferred
Tax Expense
|
|
|
|
|
|
|
Federal
|
29.3
|
|
10.7
|
|
28.0
|
(a)
|
State
|
13.4
|
|
4.7
|
|
2.0
|
|
Change
in Valuation Allowance
|
(2.9)
|
|
(0.3)
|
|
(1.1)
|
|
Investment
Tax Credit Amortization
|
(1.0)
|
|
(1.1)
|
|
(1.1)
|
|
Total
Deferred Tax Expense
|
38.8
|
|
14.0
|
|
27.8
|
|
Income
Tax Expense for Continuing Operations
|
43.4
|
|
47.7
|
|
46.3
|
|
Income
Tax Expense (Benefit) for Discontinued Operations
|
–
|
|
–
|
|
(0.6)
|
|
Total
Income Tax Expense
|
$43.4
|
|
$47.7
|
|
$45.7
|
|
(a)
|
Included
a current federal tax benefit of $24.3 million and a deferred federal tax
expense of $24.3 million related to the refund from the
Kendall County capital loss
carryback.
|
Reconciliation
of Taxes from Federal Statutory
|
|
|
|
Rate
to Total Income Tax Expense for Continuing Operations
|
|
|
|
Year
Ended December 31
|
2008
|
2007
|
2006
|
Millions
|
|
|
|
Income
from Continuing Operations
Before
Minority Interest and Income Taxes
|
$126.4
|
$137.2
|
$128.2
|
Statutory
Federal Income Tax Rate
|
35%
|
35%
|
35%
|
Income
Taxes Computed at 35% Statutory Federal Rate
|
$44.2
|
$48.0
|
$44.9
|
Increase
(Decrease) in Tax Due to:
|
|
|
|
Amortization
of Deferred Investment Tax Credits
|
(1.0)
|
(1.1)
|
(1.1)
|
State
Income Taxes – Net of Federal Income Tax Benefit
|
4.8
|
7.4
|
6.5
|
Depletion
|
(0.8)
|
(0.9)
|
(1.1)
|
Employee
Benefits
|
0.2
|
0.4
|
0.1
|
Domestic
Manufacturing Deduction
|
(0.1)
|
(1.1)
|
(0.6)
|
Regulatory
Differences for Utility Plant
|
(1.6)
|
(2.2)
|
(0.9)
|
Positive
Resolution of Audit Issues
|
–
|
(1.6)
|
–
|
Other
|
(2.3)
|
(1.2)
|
(1.5)
|
Total
Income Tax Expense for Continuing Operations
|
$43.4
|
$47.7
|
$46.3
|
The
effective tax rate on income from continuing operations before minority interest
was a 34.3 percent for 2008; (34.8 percent for 2007; 36.1 percent for 2006). The
2008 effective tax rate was impacted by deductions for Medicare health subsidies
(included in Employee Benefits, above), domestic manufacturing deduction,
AFUDC-Equity (included in Regulatory Differences for Utility Plant, above),
investment tax credits, wind production tax credits, depletion, recognition of a
benefit on the reversal of a previously uncertain tax position ($1.7 million
included in Other, above) and a benefit for the reversal of a state income tax
valuation allowance ($2.9 million included in State Income Taxes, above). The
2007 effective tax rate was impacted by state income tax audit settlements ($1.6
million), deductions for Medicare health subsidies (included in Employee
Benefits, above), domestic manufacturing deduction, AFUDC-Equity (included in
Regulatory Differences for Utility Plant, above), investment tax credits and
depletion.
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
11. Income Tax Expense (Continued)
Deferred
Tax Assets and Liabilities
|
|
|
December
31
|
2008
|
2007
|
Millions
|
|
|
|
|
|
Deferred
Tax Assets
|
|
|
Employee
Benefits and Compensation (a)
|
$125.2
|
$80.5
|
Property
Related
|
36.4
|
26.5
|
Investment
Tax Credits
|
10.7
|
11.4
|
Other
|
16.3
|
13.4
|
Gross
Deferred Tax Assets
|
188.6
|
131.8
|
Deferred
Tax Asset Valuation Allowance
|
(0.4)
|
(3.3)
|
Total
Deferred Tax Assets
|
$188.2
|
$128.5
|
Deferred
Tax Liabilities
|
|
|
Property
Related
|
$235.6
|
$201.7
|
Regulatory
Asset for Benefit Obligations
|
87.7
|
21.6
|
Unamortized
Investment Tax Credits
|
15.1
|
16.1
|
Employee
Benefits and Compensation
|
1.2
|
19.5
|
Fuel
Clause Adjustment
|
5.3
|
10.7
|
Other
|
14.0
|
8.1
|
Total
Deferred Tax Liabilities
|
$358.9
|
$277.7
|
Accumulated
Deferred Income Taxes
|
$170.7
|
$149.2
|
|
|
|
Recorded
as:
|
|
|
Net
Current Deferred Tax Liabilities (b)
|
$1.1
|
$5.0
|
Net
Long-Term Deferred Tax Liabilities
|
169.6
|
144.2
|
Net
Deferred Tax Liabilities
|
$170.7
|
$149.2
|
(a)
|
Includes
Unfunded Employee Benefits
|
(b)
|
Included
in Other Current Liabilities.
|
Uncertain Tax Positions.
Effective January 1, 2007, we adopted the provisions of FIN 48, “Accounting for
Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109.” As a
result of the implementation of FIN 48, we recognized a $1.0 million increase in
the liability for unrecognized tax benefits. The adoption of FIN 48 also
resulted in a reduction in retained earnings of $0.7 million, a reduction of
deferred tax liabilities of $0.8 million and an increase in accrued interest of
$0.5 million. Subsequent to the implementation of FIN 48, ALLETE’s gross
unrecognized tax benefits were $10.4 million. Of this total, $6.8 million (net
of federal tax benefit on state issues) represents the amount of unrecognized
tax benefits that, if recognized, would favorably impact the effective income
tax rate.
Uncertain
Tax Positions
|
|
Millions
December
31, 2007
|
Gross
Unrecognized Income Tax Benefits
|
Balance
at January 1, 2007
|
$10.4
|
Additions for Tax Positions Related to the Current Year
|
0.8
|
Reductions for Tax Positions Related to the Current Year
|
–
|
Additions for Tax Positions Related to Prior Years
|
–
|
Reduction for Tax Positions Related to Prior Years
|
(2.4)
|
Settlements
|
(3.5)
|
Balance
at December 31, 2007
|
$5.3
|
Less:
Tax Attributable to Temporary Items and Federal Benefit on State
Tax
|
(2.3)
|
Total
Unrecognized Tax Benefits that, if Recognized, Would Impact the Effective
Income Tax Rate as of December 31, 2007
|
$3.0
|
|
|
December
31, 2008
|
|
Balance
at January 1, 2008
|
$5.3
|
Additions
for Tax Positions Related to the Current Year
|
0.7
|
Reductions
for Tax Positions Related to the Current Year
|
–
|
Additions
for Tax Positions Related to Prior Years
|
4.5
|
Reduction
for Tax Positions Related to Prior Years
|
(2.5)
|
Settlements
|
–
|
Balance
at December 31, 2008
|
$8.0
|
Less:
Tax Attributable to Temporary Items and Federal Benefit on State
Tax
|
(6.8)
|
Total
Unrecognized Tax Benefits that, if Recognized, Would Impact the Effective
Tax Rate as of December 31, 2008
|
$1.2
|
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
11. Income Tax Expense (Continued)
We
recognize interest related to unrecognized tax benefits in interest expense and
penalties in operating expenses in the Consolidated Statement of Income. As of
December 31, 2007, the Company had $0.9 million of accrued interest and no
accrued penalties related to unrecognized tax benefits included in the
Consolidated Balance Sheet. As of December 31, 2008, the liability for the
payment of interest is $0.6 million with no penalties.
We file
income tax returns in the U.S. federal and various state jurisdictions. ALLETE
is no longer subject to federal examination for years before 2005 or state
examinations for years before 2004.
We expect
that the total amount of unrecognized tax benefits as of December 31, 2008, will
change by less than $1.0 million in the next 12 months due to statute
expirations.
Note
12. Discontinued Operations
Water Services. Financial
results for 2006 reflected additional legal and administrative expenses incurred
by the Company to exit the Water Services businesses. There were no discontinued
operations in 2008 or 2007.
Discontinued
Operations
|
|
Summary
Income Statement
|
|
For
the Year Ended December 31
|
2006
|
Millions
|
|
Loss
on Disposal
|
|
Water
Services
|
$(1.5)
|
|
(1.5)
|
Income
Tax Expense (Benefit)
|
|
Water
Services
|
(0.6)
|
|
(0.6)
|
Net
Loss on Disposal
|
(0.9)
|
Loss
from Discontinued Operations
|
$(0.9)
|
Note
13. Other Comprehensive Income (Loss)
Other
Comprehensive Income (Loss)
|
Pre-Tax
|
Tax
Expense
|
Net-of-Tax
|
Year
Ended December 31
|
Amount
|
(Benefit)
|
Amount
|
Millions
|
|
|
|
|
|
|
|
2008
|
|
|
|
Unrealized
Loss on Securities During the Year
|
$(9.7)
|
$(3.7)
|
$(6.0)
|
Reclassification
Adjustment for Gains Included in Income
|
(6.4)
|
(2.7)
|
(3.7)
|
Defined
Benefit Pension and Other Postretirement Plans
|
(32.1)
|
(13.3)
|
(18.8)
|
Other
Comprehensive Loss
|
$(48.2)
|
$(19.7)
|
$(28.5)
|
|
|
|
|
2007
|
|
|
|
Unrealized
Gain on Securities During the Year
|
$1.4
|
$0.3
|
$1.1
|
Defined
Benefit Pension and Other Postretirement Plans
|
5.5
|
2.3
|
3.2
|
Other
Comprehensive Income
|
$6.9
|
$2.6
|
$4.3
|
|
|
|
|
2006
|
|
|
|
Unrealized
Gain on Securities During the Year
|
$2.5
|
$0.6
|
$1.9
|
Defined
Benefit Pension and Other Postretirement Plans
|
11.0
|
4.6
|
6.4
|
Other
Comprehensive Income
|
$13.5
|
$5.2
|
$8.3
|
Accumulated
Other Comprehensive Income (Loss)
December
31
|
2008
|
2007
|
Millions
|
|
|
|
|
|
Unrealized
Gain (Loss) on Securities
|
$(4.6)
|
$5.1
|
Defined
Benefit Pension and Other Postretirement Plans
|
(28.4)
|
(9.6)
|
Total
Accumulated Other Comprehensive Loss
|
$(33.0)
|
$(4.5)
|
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
14. Pension and Other Postretirement Benefit
Plans
We have
noncontributory defined benefit pension plans covering eligible employees. The
plans provide defined benefits based on years of service and final average pay.
We also have defined contribution pension plans covering substantially all
employees; employer contributions are made through our employee stock ownership
plan. (See Note 15. Employee Stock and Incentive Plans.) In 2008, we made a
total of $10.9 million in contributions to ALLETE’s defined benefit pension
plans (no contributions were made in 2007).
On August
9, 2006, ALLETE’s Board of Directors approved amendments to the Minnesota Power
and Affiliated Companies Retirement Plan A (Retirement Plan A) and the Minnesota
Power and Affiliated Companies Retirement Savings and Stock Ownership Plan
(RSOP). Retirement Plan A was amended to suspend further crediting service
pursuant to the plan, effective as of September 30, 2006, and to close
Retirement Plan A to new participants. Participants will continue to accrue
benefits under the plan for future pay increases. In conjunction with this
change, the Board of Directors took action to increase benefits employees will
receive under the RSOP. The modification of Retirement Plan A required us to
re-measure our pension expense as of August 9, 2006. As a result of the
re-measurement, Retirement Plan A pension expense for 2006 was reduced by
$0.2 million.
We have
postretirement health care and life insurance plans covering eligible employees.
The postretirement health plans are contributory with participant contributions
adjusted annually. Postretirement health and life benefits are funded through a
combination of Voluntary Employee Benefit Association trusts (VEBAs),
established under section 501(c)(9) of the Internal Revenue Code, and an
irrevocable grantor trust. Contributions deductible for income tax purposes are
made directly to the VEBAs; nondeductible contributions are made to the
irrevocable grantor trust. Amounts are transferred from the irrevocable grantor
trust to the VEBAs when they become deductible for income tax purposes. In 2008,
$10.1 million was transferred from the grantor trust to the VEBAs ($6.2 million
in 2007; $3.6 million in 2006). In 2008, including the amount transferred from
the grantor trust, we made a total of $13.8 million in contributions to ALLETE’s
postretirement health and life plan ($12.6 million in 2007).
We expect
to contribute approximately $30 - $35 million to our defined benefit pension
plans and $11 million to our postretirement health and life plans in 2009. We
are unable to predict contribution levels to our defined benefit pension or
postretirement health and life plans after 2009.
In
September 2006, the FASB issued SFAS 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans” (SFAS 158). SFAS 158 requires
that employers recognize on a prospective basis the funded status of their
defined benefit pension and other postretirement plans on their consolidated
balance sheet and recognize as a component of other comprehensive income, net of
tax, the gains or losses and prior service costs or credits that arise during
the period but that are not recognized as components of net periodic benefit
cost. SFAS 158 also requires additional disclosures in the notes to financial
statements. SFAS 158 was effective for fiscal years ending after
December 15, 2006.
The
defined benefit pension and postretirement health and life benefit costs
recognized annually by our regulated companies are expected to be recovered
through rates filed with our regulatory jurisdictions. As a result, these
amounts that are required to otherwise be recognized in accumulated other
comprehensive income under the provisions of SFAS 158 have been recognized as a
long-term regulatory asset on our consolidated balance sheet, in accordance with
the requirements of SFAS 71. The defined benefit pension and postretirement
health and life benefit costs associated with our other non-rate base operations
are recognized in accumulated other comprehensive income, in accordance with
SFAS 158.
Pursuant
to SFAS 158, we were required to change our measurement date from September
30 to December 31 during the year ended December 31, 2008. On January 1, 2008,
ALLETE recorded three months of pension expense as a reduction to retained
earnings in the amount of $1.6 million, net of tax, to reflect the impact of
this measurement date change. Also on January 1, 2008, we recorded $0.8 million
relating to three months of amortization for transition obligations, prior
service costs, and prior gains and losses within accumulated other comprehensive
income.
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
14. Pension and Other Postretirement Benefit
Plans (Continued)
|
December
31,
|
September
30,
|
Pension
Obligation and Funded Status
|
2008
|
2007
|
Millions
|
|
|
Accumulated
Benefit Obligation
|
$406.6
|
$384.9
|
|
|
|
Change
in Benefit Obligation
|
|
|
Obligation,
Beginning of Year
|
$421.9
|
$417.7
|
Service
Cost
|
7.3
|
5.3
|
Interest
Cost
|
31.8
|
23.4
|
Actuarial
Loss (Gain)
|
3.2
|
(5.6)
|
Benefits
Paid
|
(29.9)
|
(21.6)
|
Participant
Contributions
|
6.1
|
2.7
|
Obligation,
End of Year
|
$440.4
|
$421.9
|
Change
in Plan Assets
|
|
|
Fair
Value, Beginning of Year
|
$405.6
|
$364.7
|
Actual
Return on Plan Assets
|
(120.2)
|
58.9
|
Employer
Contribution
|
18.2
|
3.6
|
Benefits
Paid
|
(29.9)
|
(21.6)
|
Fair
Value, End of Year
|
$273.7
|
$405.6
|
Funded
Status, End of Year
|
$(166.7)
|
$(16.3)
|
|
|
|
Net
Pension Amounts Recognized in Consolidated Balance Sheet Consist
of:
|
|
|
Noncurrent
Assets
|
–
|
$29.3
|
Current
Liabilities
|
$(0.9)
|
$(0.8)
|
Noncurrent
Liabilities
|
$(165.8)
|
$(44.8)
|
The
pension costs that are reported as a component within our consolidated balance
sheet, reflected in regulatory long-term assets and accumulated other
comprehensive income, consist of the following:
Unrecognized
Pension Costs
|
|
|
Year
Ended December 31
|
2008
|
2007
|
Millions
|
|
|
Net
Loss
|
$193.2
|
$31.1
|
Prior
Service Cost
|
2.4
|
3.2
|
Transition
Obligation
|
–
|
–
|
Total
Unrecognized Pension Costs
|
$195.6
|
$34.3
|
Components
of Net Periodic Pension Expense
|
|
|
|
Year
Ended December 31
|
2008
|
2007
|
2006
|
Millions
|
|
|
|
Service
Cost
|
$5.8
|
$5.3
|
$9.1
|
Interest
Cost
|
25.4
|
23.4
|
22.2
|
Expected
Return on Plan Assets
|
(32.5)
|
(30.6)
|
(28.6)
|
Amortization
of Loss
|
1.6
|
4.9
|
4.6
|
Amortization
of Prior Service Costs
|
0.6
|
0.6
|
0.6
|
Net
Pension Expense
|
$0.9
|
$3.6
|
$7.9
|
Other
Changes in Plan Assets and Benefit Obligations Recognized in
Other
Comprehensive Income and Regulatory Assets
|
|
|
Year
Ended December 31
|
2008
|
2007
|
Millions
|
|
|
Net
Loss (Gain)
|
$164.0
|
$(35.4)
|
Amortization
of Prior Service Costs
|
(0.6)
|
(0.6)
|
Amortization
of Loss (Gain)
|
(1.6)
|
(3.3)
|
Total
Recognized in Other Comprehensive Income and Regulatory
Assets
|
$161.8
|
$(39.3)
|
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
14. Pension and Other Postretirement Benefit
Plans (Continued)
Information
for Pension Plans with an
|
December
31,
|
September
30,
|
Accumulated
Benefit Obligation in Excess of Plan Assets
|
2008
|
2007
|
Millions
|
|
|
Projected
Benefit Obligation
|
$440.4
|
$170.6
|
Accumulated
Benefit Obligation
|
$406.6
|
$188.3
|
Fair
Value of Plan Assets
|
$273.7
|
$145.3
|
|
December
31,
|
September
30,
|
Postretirement
Health and Life Obligation and Funded Status
|
2008
|
2007
|
Millions
|
|
|
Change
in Benefit Obligation
|
|
|
Obligation,
Beginning of Year
|
$153.7
|
$138.9
|
Service
Cost
|
5.0
|
4.2
|
Interest
Cost
|
11.7
|
7.9
|
Actuarial
Loss
|
4.0
|
7.5
|
Participant
Contributions
|
2.0
|
1.4
|
Benefits
Paid
|
(9.5)
|
(6.2)
|
Obligation,
End of Year
|
$166.9
|
$153.7
|
Change
in Plan Assets
|
|
|
Fair
Value, Beginning of Year
|
$90.9
|
$78.9
|
Actual
Return on Plan Assets
|
(25.2)
|
9.6
|
Employer
Contribution
|
20.3
|
6.8
|
Participant
Contributions
|
1.9
|
1.4
|
Benefits
Paid
|
(9.3)
|
(5.8)
|
Fair
Value, End of Year
|
$78.6
|
$90.9
|
Funded
Status, End of Year
|
$(88.3)
|
$(62.8)
|
|
|
|
Net
Postretirement Health and Life Amounts Recognized in Consolidated Balance
Sheet Consist of:
|
|
|
Current
Liabilities
|
$(0.7)
|
$(0.6)
|
Noncurrent
Liabilities
|
$(87.6)
|
$(62.2)
|
Under
SFAS 106, “Employers’ Accounting for Postretirement Benefits Other Than
Pensions,” only assets in the VEBAs are treated as plan assets in the above
table for the purpose of determining funded status. In addition to the
postretirement health and life assets reported in the previous table, we had
$14.1 million in an irrevocable grantor trusts at December 31, 2008 ($30.5
million at December 31, 2007). We consolidate the irrevocable grantor trusts and
it is included in Investments on our consolidated balance sheet.
The
postretirement health and life costs that are reported as a component within our
consolidated balance sheet, reflected in regulatory long-term assets and
accumulated other comprehensive income, consist of the following:
Unrecognized
Postretirement Health and Life Costs
|
|
|
Year
Ended December 31
|
2008
|
2007
|
Millions
|
|
|
Net
Loss
|
$59.2
|
$22.7
|
Prior
Service Cost
|
–
|
(0.1)
|
Transition
Obligation
|
9.4
|
12.6
|
Total
Unrecognized Postretirement Health and Life Costs
|
$68.6
|
$35.2
|
Components
of Net Periodic Postretirement Health and Life Expense
|
|
|
Year
Ended December 31
|
2008
|
2007
|
2006
|
Millions
|
|
|
|
Service
Cost
|
$4.0
|
$4.2
|
$4.4
|
Interest
Cost
|
9.4
|
7.8
|
7.4
|
Expected
Return on Plan Assets
|
(7.2)
|
(6.5)
|
(5.6)
|
Amortization
of Loss
|
1.4
|
1.0
|
1.7
|
Amortization
of Transition Obligation
|
2.5
|
2.4
|
2.4
|
Net
Postretirement Health and Life Expense
|
$10.1
|
$8.9
|
$10.3
|
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
14. Pension and Other Postretirement Benefit Plans
(Continued)
Other
Changes in Plan Assets and Benefit Obligations Recognized in
Other
Comprehensive Income and Regulatory Assets
|
|
|
Year
Ended December 31
|
2008
|
2007
|
Millions
|
|
|
Net
Loss (Gain)
|
$38.3
|
$4.5
|
Amortization
of Transition Obligation
|
(2.5)
|
(2.5)
|
Amortization
of Prior Service Costs
|
–
|
–
|
Amortization
of Loss (Gain)
|
(1.4)
|
(0.9)
|
Total
Recognized in Other Comprehensive Income and Regulatory
Assets
|
$34.4
|
$1.1
|
|
|
Postretirement
|
Estimated
Future Benefit Payments
|
Pension
|
Health and
Life
|
Millions
|
|
|
2009
|
$24.1
|
$7.0
|
2010
|
$25.6
|
$7.8
|
2011
|
$26.5
|
$8.7
|
2012
|
$27.4
|
$9.3
|
2013
|
$28.6
|
$10.0
|
Years
2014 – 2018
|
$160.0
|
$59.5
|
The
pension and postretirement health and life costs recorded in other long-term
assets and accumulated other comprehensive income expected to be recognized as a
component of net pension and postretirement benefit costs for the year ending
December 31, 2009, are as follows:
|
|
Postretirement
|
|
Pension
|
Health
and Life
|
Millions
|
|
|
Net
Loss
|
$3.4
|
$2.5
|
Prior
Service Costs
|
$0.6
|
–
|
Transition
Obligations
|
–
|
$2.5
|
Total
Pension and Postretirement Health and Life Costs
|
$4.0
|
$5.0
|
Weighted-Average
Assumptions
|
December
31,
|
September
30,
|
Used
to Determine Benefit Obligation
|
2008
|
2007
|
Discount
Rate
|
6.12%
|
6.25%
|
Rate
of Compensation Increase
|
4.3
– 4.6%
|
4.3
– 4.6%
|
Health
Care Trend Rates
|
|
|
Trend
Rate
|
9%
|
10%
|
Ultimate
Trend Rate
|
5%
|
5%
|
Year
Ultimate Trend Rate Effective
|
2012
|
2012
|
Weighted-Average
Assumptions
|
|
|
|
Used
to Determine Net Periodic Benefit Costs
|
|
|
|
Year
Ended December 31
|
2008
|
2007
|
2006
|
Discount
Rate
|
6.25%
|
5.75%
|
5.50%
|
Expected
Long-Term Return on Plan Assets (a)
|
|
|
|
Pension
|
9.0%
|
9.0%
|
9.0%
|
Postretirement
Health and Life
|
7.2
– 9.0%
|
5.0
– 9.0%
|
5.0
– 9.0%
|
Rate
of Compensation Increase
|
4.3
– 4.6%
|
4.3
– 4.6%
|
3.5
– 4.5%
|
(a) The
expected long term rate of return used to determine net periodic benefit
expenses for 2009 has been reduced to 8.5 percent.
In
establishing the expected long-term return on plan assets, we consider the
diversification and allocation of plan assets, the actual long-term historical
performance for the type of securities invested in, the actual long-term
historical performance of plan assets, and the impact of current economic
conditions, if any, on long-term historical returns.
Currently
for plan valuation purposes, the discount rate is determined considering
high-quality long-term corporate bond rates at the valuation date. The discount
rate is compared to the Citigroup Pension Discount Curve adjusted for ALLETE’s
specific cash flows.
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
14. Pension and Other Postretirement Benefit Plans
(Continued)
Sensitivity
of a One-Percentage-Point
|
One
Percent
|
One
Percent
|
Change
in Health Care Trend Rates
|
Increase
|
Decrease
|
Millions
|
|
|
Effect
on Total of Postretirement Health and Life Service and Interest
Cost
|
$2.0
|
$(1.7)
|
Effect
on Postretirement Health and Life Obligation
|
$19.5
|
$(16.2)
|
|
Pension
|
Postretirement
Health
and Life (a)
|
Actual
Plan Asset Allocations
|
2008
|
2007
|
2008
|
2007
|
Equity
Securities
|
46%
|
61%
|
47%
|
66%
|
Debt
Securities
|
32%
|
25%
|
40%
|
24%
|
Real
Estate
|
6%
|
2%
|
–
|
–
|
Private
Equity
|
16%
|
9%
|
9%
|
5%
|
Cash
|
–
|
3%
|
4%
|
5%
|
|
100%
|
100%
|
100%
|
100%
|
(a)
|
Includes
VEBAs and irrevocable grantor
trusts.
|
Pension
plan equity securities did not include ALLETE common stock at December 31, 2008
or September 30, 2007.
To
achieve strong returns within managed risk, we diversify our asset portfolio to
approximate the target allocations in the table below. Equity securities are
diversified among domestic companies with large, mid and small market
capitalizations, as well as investments in international companies. In addition,
all debt securities must have a Standard & Poor’s credit rating of A or
higher.
|
|
Postretirement
|
Plan
Asset Target Allocations
|
Pension
|
Health and Life
(a)
|
Equity
Securities
|
55%
|
55%
|
Debt
Securities
|
24%
|
24%
|
Real
Estate
|
9%
|
9%
|
Private
Equity
|
11%
|
11%
|
Cash
|
1%
|
1%
|
|
100%
|
100%
|
(a) Includes
VEBAs and irrevocable grantor trusts.
FSP
106-2, “Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (Act)” provides
accounting and disclosure guidance for employers that sponsor postretirement
health care plans that provide prescription drug benefits. FSP 106-2 requires
that the accumulated postretirement benefit obligation and postretirement
benefit cost reflect the impact of the Act upon adoption. We provide
postretirement health benefits that include prescription drug benefits which
qualify us for the federal subsidy under the Act. The expected reimbursement for
Medicare health subsidies reduced our after-tax postretirement medical expense
by $1.2 million for 2008 ($2.3 million for 2007; $2.4 million in 2006). In 2005
we enrolled with the Centers for Medicare and Medicaid Services’ (CMS) and began
recovering the subsidy in 2007. We received $0.3 million in 2007 for 2006, and
expect to receive a reimbursement in 2009 for 2007.
Note
15. Employee Stock and Incentive Plans
Employee Stock Ownership Plan.
We sponsor a leveraged employee stock ownership plan (ESOP) within the RSOP. As
of their date of hire, all employees of ALLETE, SWL&P and Minnesota Power
Affiliate Resources are eligible to contribute to the plan. In 1990, the ESOP
issued a $75 million note (term not to exceed 25 years at 10.25 percent) to us
as consideration for 2.8 million shares (1.9 million shares adjusted for stock
splits) of our newly issued common stock. The note was refinanced in 2006 at 6
percent. We make annual contributions to the ESOP equal to the ESOP’s debt
service less available dividends received by the ESOP. The majority of dividends
received by the ESOP are used to pay debt service, with the balance distributed
to participants. The ESOP shares were initially pledged as collateral for its
debt. As the debt is repaid, shares are released from collateral and allocated
to participants based on the proportion of debt service paid in the year. As
shares are released from collateral, we report compensation expense equal to the
current market price of the shares less dividends on allocated shares. Dividends
on allocated ESOP shares are recorded as a reduction of retained earnings;
available dividends on unallocated ESOP shares are recorded as a reduction of
debt and accrued interest. ESOP compensation expense was $10.3 million in 2008
($9.2 million in 2007; $6.9 million in 2006).
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
15. Employee Stock and Incentive Plans
(Continued)
Pursuant
to AICPA Statement of Position 93-6, “Employers’ Accounting for Employee Stock
Ownership Plans,” unallocated ALLETE common stock currently held and purchased
by the ESOP will be treated as unearned ESOP shares and not considered as
outstanding for earnings per share computations. ESOP shares are included in
earnings per share computations after they are allocated to
participants.
Year
Ended December 31
|
2008
|
2007
|
2006
|
Millions
|
|
|
|
ESOP
Shares
|
|
|
|
Allocated
|
2.0
|
1.8
|
1.7
|
Unallocated
|
1.9
|
2.2
|
2.5
|
Total
|
3.9
|
4.0
|
4.2
|
Fair
Value of Unallocated Shares
|
$61.3
|
$87.1
|
$115.2
|
Stock-Based Compensation.
Stock Incentive Plan.
Under our Executive Long-Term Incentive Compensation Plan (Executive
Plan), share-based awards may be issued to key employees through a broad range
of methods, including non-qualified and incentive stock options, performance
shares, performance units, restricted stock, stock appreciation rights and other
awards. There are 1.5 million shares of common stock reserved for issuance under
the Executive Plan, with 0.7 million of these shares available for issuance as
of December 31, 2008.
We had a
Director Long-Term Stock Incentive Plan (Director Plan) which expired on January
1, 2006. No grants have been made since 2003 under the Director Plan.
Approximately 3,879 options were outstanding under the Director Plan at
December 31, 2008.
We
currently have the following types of share-based awards
outstanding:
Non-Qualified Stock Options.
The options allow for the purchase of shares of common stock at a price equal to
the market value of our common stock at the date of grant. Options become
exercisable beginning one year after the grant date, with one-third vesting each
year over three years. Options may be exercised up to ten years following the
date of grant. In the case of qualified retirement, death or disability, options
vest immediately and the period over which the options can be exercised is three
years. Employees have up to three months to exercise vested options upon
voluntary termination or involuntary termination without cause. All options are
cancelled upon termination for cause. All options vest immediately upon
retirement, death, disability or a change of control, as defined in the award
agreement. We determine the fair value of options using the Black-Scholes
option-pricing model. The estimated fair value of options, including the effect
of estimated forfeitures, is recognized as expense on the straight-line basis
over the options’ vesting periods, or the accelerated vesting period if the
employee is retirement eligible.
The
following assumptions were used in determining the fair value of stock options
granted during 2008, under the Black-Scholes option-pricing model:
|
2008
|
2007
|
2006
|
Risk-Free
Interest Rate
|
2.8%
|
4.8%
|
4.5%
|
Expected
Life
|
5
Years
|
5
Years
|
5
Years
|
Expected
Volatility
|
20%
|
20%
|
20%
|
Dividend
Growth Rate
|
4.4%
|
5.0%
|
5.0%
|
The
risk-free interest rate for periods within the contractual life of the option is
based on the U.S. Treasury yield curve in effect at the grant date. Expected
volatility is estimated based on the historic volatility of our stock and the
stock of our peer group companies. We utilize historical option exercise and
employee pre-vesting termination data to estimate the option life. The dividend
growth rate is based upon historical growth rates in our dividends.
Performance Shares. Under
these awards, the number of shares earned is contingent upon attaining specific
performance targets over a three-year performance period. In the case of
qualified retirement, death or disability during a performance period, a
pro-rata portion of the award will be earned at the conclusion of the
performance period based on the performance goals achieved. In the case of
termination of employment for any reason other than qualified retirement, death
or disability, no award will be earned. If there is a change in control, a
pro-rata portion of the award will be paid based on the greater of actual
performance up to the date of the change in control or target performance. The
fair value of these awards is equal to the grant date fair value which is
estimated based upon the assumed share-based payment three years from the date
of grant. Compensation cost is recognized over the three-year performance period
based on our estimate of the number of shares which will be earned by the award
recipients.
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
15. Employee Stock and Incentive Plans
(Continued)
Employee Stock Purchase Plan
(ESPP). Under our ESPP, eligible employees may purchase ALLETE common
stock at a 5 percent discount from the market price. Because the discount is not
greater than 5 percent, we are not required by SFAS 123R to apply fair value
accounting to these awards.
RSOP. Shares held in our RSOP
are excluded from SFAS 123R and are accounted for in accordance with the AICPA
Statement of Position No. 93-6, “Employers’ Accounting for Employee Stock
Ownership Plans.”
The
following share-based compensation expense amounts were recognized in our
consolidated statement of income for the periods presented since our adoption of
SFAS 123R.
Share-Based
Compensation Expense
|
|
|
|
For
the Year Ended December 31
|
2008
|
2007
|
2006
|
Millions
|
|
|
|
Stock
Options
|
$0.7
|
$0.8
|
$0.8
|
Performance
Shares
|
1.1
|
1.0
|
1.0
|
Total
Share-Based Compensation Expense
|
$1.8
|
$1.8
|
$1.8
|
|
|
|
|
Income
Tax Benefit
|
$0.7
|
$0.7
|
$0.7
|
There
were no capitalized stock-based compensation costs at December 31, 2008, 2007,
or 2006.
As of
December 31, 2008, the total unrecognized compensation cost for the performance
share awards not yet recognized in our statements of income was $1.3 million.
This amount is expected to be recognized over a weighted-average period of 1.7
years.
The
following table presents information regarding our outstanding stock options for
the year ended December 31, 2008.
|
|
|
|
Weighted-Average
|
|
|
Weighted-Average
|
Aggregate
|
Remaining
|
|
Number
of
|
Exercise
|
Intrinsic
|
Contractual
|
|
Options
|
Price
|
Value
|
Term
|
|
|
|
Millions
|
|
Outstanding
at December 31, 2007
|
510,992
|
$39.83
|
$(0.1)
|
6.8
years
|
Granted
|
180,815
|
$39.10
|
|
|
Exercised
|
(16,627)
|
$25.56
|
|
|
Forfeited
|
(2,761)
|
$39.39
|
|
|
Outstanding
at December 31, 2008
|
672,419
|
$39.99
|
$(5.2)
|
6.9
years
|
Exercisable
at December 31, 2008
|
406,894
|
$34.48
|
$(2.7)
|
5.7
years
|
Fair
Value of Options
|
|
|
|
|
Granted
During the Year
|
$3.97
|
|
|
|
The
weighted-average grant-date fair value of options was $6.18 for 2008 ($6.92 for
2007; $6.48 for 2006). The intrinsic value of a stock award is the amount by
which the fair value of the underlying stock exceeds the exercise price of the
award. The total intrinsic value of options exercised was $0.2 million during
2008 ($0.4 million in 2007; $0.6 million in 2006).
At
December 31, 2008, options outstanding consisted of 0.1 million with exercise
prices ranging from $18.85 to $29.79, 0.4 million with exercise prices ranging
from $37.76 to $41.35 and 0.2 million with exercise prices ranging from $44.15
to $48.65. The options with exercise prices ranging from $18.85 to $29.79 have
an average remaining contractual life of 3.0 years; all are exercisable at
December 31, 2008, at a weighted average price of $26.91. The options with
exercise prices ranging from $37.76 to $41.35 have an average remaining
contractual life of 7.3 years; less than 0.2 million are exercisable on December
31, 2008, at a weighted average price of $39.52. The options with exercise
prices ranging from $44.15 to $48.65 have an average remaining contractual life
of 7.5 years; all are exercisable on December 31, 2008, at a weighted average
price of $46.25.
ALLETE
2008 Form 10-K/A, Amendment No. 1
Note
15. Employee Stock and Incentive Plans
(Continued)
Performance Shares. The
following table presents information regarding our non-vested performance shares
for the year ended December 31, 2008.
|
|
Weighted-Average
|
|
Number
of
|
Grant
Date
|
|
Shares
|
Fair
Value
|
Non-vested
at December 31, 2007
|
68,501
|
$45.63
|
Granted
|
36,684
|
54.05
|
Unearned
Grant Award
|
(23,624)
|
42.80
|
Forfeited
|
(2,323)
|
50.87
|
Non-vested
at December 31, 2008
|
79,238
|
50.22
|
Less than
0.1 million performance share were granted in February 2008 for the performance
period ending in 2010. The ultimate issuance is contingent upon the attainment
of certain future performance goals of ALLETE during the performance periods.
The grant date fair value of the performance share awards was $1.8
million.
No
performance shares were awarded in February 2008 for the three-year performance
period ending in 2007, as performance targets were not met. However, in
accordance with SFAS No. 123R, no compensation expense previously recognized in
connection with those grants will be reversed.
Note
16. Quarterly Financial Data
(Unaudited)
Information
for any one quarterly period is not necessarily indicative of the results which
may be expected for the year.
Quarter
Ended
|
Mar.
31
|
Jun.
30
|
Sept.
30
|
Dec.
31
|
Millions
Except Earnings Per Share
|
|
|
|
|
2008
|
|
|
|
|
Operating
Revenue
|
$213.4
|
$189.8
|
$201.7
|
$196.1
|
Operating
Income
|
$31.3
|
$17.5
|
$33.2
|
$39.8
|
Net
Income
|
$23.6
|
$10.7
|
$24.7
|
$23.5
|
Earnings
Per Share of Common Stock
|
|
|
|
|
Basic
|
$0.82
|
$0.37
|
$0.85
|
$0.78
|
Diluted
|
$0.82
|
$0.37
|
$0.85
|
$0.78
|
|
|
|
|
|
2007
|
|
|
|
|
Operating
Revenue
|
$205.3
|
$223.3
|
$200.8
|
$212.3
|
Operating
Income
|
$40.7
|
$33.3
|
$24.3
|
$33.4
|
Net
Income
|
$26.3
|
$22.6
|
$16.5
|
$22.2
|
Earnings
Per Share of Common Stock
|
|
|
|
|
Basic
|
$0.93
|
$0.80
|
$0.58
|
$0.78
|
Diluted
|
$0.93
|
$0.80
|
$0.58
|
$0.77
|
ALLETE
2008 Form 10-K/A, Amendment No. 1
Schedule
II
ALLETE
Valuation
and Qualifying Accounts and Reserves
|
Balance
at
|
Additions
|
Deductions
|
Balance
at
|
|
Beginning
|
Charged
|
Other
|
from
|
End
of
|
For
the Year Ended December 31
|
of
Year
|
to
Income
|
Changes
|
Reserves
(a)
|
Period
|
Millions
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
Deducted from Related Assets
|
|
|
|
|
|
Reserve
For Uncollectible Accounts
|
|
|
|
|
|
2008 Trade
Accounts Receivable
|
$1.0
|
$1.0
|
–
|
$1.3
|
$0.7
|
Finance
Receivables – Long-Term
|
0.2
|
–
|
–
|
0.1
|
0.1
|
2007 Trade
Accounts Receivable
|
1.1
|
1.0
|
–
|
1.1
|
1.0
|
Finance
Receivables – Long-Term
|
0.2
|
–
|
–
|
–
|
0.2
|
2006 Trade
Accounts Receivable
|
1.0
|
0.7
|
–
|
0.6
|
1.1
|
Finance
Receivables – Long-Term
|
0.6
|
_
|
_
|
0.4
|
0.2
|
Deferred
Asset Valuation Allowance
|
|
|
|
|
|
2008 Deferred
Tax Assets
|
3.3
|
(2.9)
|
–
|
–
|
0.4
|
2007 Deferred
Tax Assets
|
3.6
|
(0.3)
|
–
|
–
|
3.3
|
2006 Deferred
Tax Assets
|
4.1
|
(1.1)
|
$0.6
|
–
|
3.6
|
(a) Includes
uncollectible accounts written off.
ALLETE
2008 Form 10-K/A, Amendment No. 1