ALLETE
Annual Report 2017

Plain-text annual report

United StatesSecurities and Exchange CommissionWashington, D.C. 20549Form 10-K(Mark One) TAnnual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2017 £Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______________ to ______________Commission File Number 1-3548ALLETE, 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 exchange on which registeredCommon Stock, without par value New York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act:NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x 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 x 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 12months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx 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’sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growthcompany. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.(Check one): Large Accelerated Filer xAccelerated Filer ¨Non-Accelerated Filer ¨ Smaller Reporting Company ¨Emerging Growth Company ¨If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x The aggregate market value of voting stock held by nonaffiliates on June 30, 2017 , was $3,637,956,646 . As of February 1, 2018 , there were 51,143,656 shares of ALLETE Common Stock, without par value, outstanding. Documents Incorporated By ReferencePortions of the Proxy Statement for the 2018 Annual Meeting of Shareholders are incorporated by reference in Part III.IndexDefinitions4 Forward-Looking Statements6 Part I8 Item 1. Business8 Regulated Operations9 Electric Sales / Customers9 Seasonality12 Power Supply12 Transmission and Distribution14 Investment in ATC15 Properties15 Regulatory Matters16 Regional Organizations17 Minnesota Legislation18 Competition18 Franchises19 Energy Infrastructure and Related Services19 ALLETE Clean Energy19 U.S. Water Services20 Corporate and Other21 BNI Energy21 ALLETE Properties21 Non-Rate Base Generation and Miscellaneous22 Environmental Matters22 Employees23 Availability of Information23 Executive Officers of the Registrant24 Item 1A. Risk Factors25 Item 1B. Unresolved Staff Comments32 Item 2. Properties32 Item 3. Legal Proceedings33 Item 4. Mine Safety Disclosures33Part II33 Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities33 Item 6. Selected Financial Data35 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations35 Overview36 2017 Compared to 201638 2016 Compared to 201542 Critical Accounting Policies46 Outlook48 Liquidity and Capital Resources56 Capital Requirements59 Environmental and Other Matters60 Market Risk60 Recently Adopted Accounting Standards61 Item 7A. Quantitative and Qualitative Disclosures about Market Risk61 Item 8. Financial Statements and Supplementary Data62 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure62ALLETE, Inc. 2017 Form 10-K2Index Item 9A. Controls and Procedures62 Item 9B. Other Information62Part III63 Item 10. Directors, Executive Officers and Corporate Governance63 Item 11. Executive Compensation63 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters64 Item 13. Certain Relationships and Related Transactions, and Director Independence64 Item 14. Principal Accounting Fees and Services64Part IV 65 Item 15. Exhibits and Financial Statement Schedules65 Item 16. Form 10-K Summary70 Signatures71 Report of Independent Registered Public Accounting Firm73 Consolidated Financial Statements - Audited75 Consolidated Balance Sheet75 Consolidated Statement of Income76 Consolidated Statement of Comprehensive Income77 Consolidated Statement of Cash Flows78 Consolidated Statement of Equity79 Notes to Consolidated Financial Statements80 Note 1. Operations and Significant Accounting Policies80 Note 2. Property, Plant and Equipment91 Note 3. Jointly-Owned Facilities and Projects92 Note 4. Regulatory Matters92 Note 5. Investment in ATC99 Note 6. Acquisitions100 Note 7. Goodwill and Intangible Assets105 Note 8. Investments106 Note 9. Fair Value106 Note 10. Short-Term and Long-Term Debt110 Note 11. Commitments, Guarantees and Contingencies112 Note 12. Common Stock and Earnings Per Share120 Note 13. Income Tax Expense122 Note 14. Reclassifications Out of Accumulated Other Comprehensive Income (Loss)124 Note 15. Pension and Other Postretirement Benefit Plans125 Note 16. Employee Stock and Incentive Plans135 Note 17. Business Segments138 Note 18. Quarterly Financial Data (Unaudited)141Schedule II142ALLETE, Inc. 2017 Form 10-K3DefinitionsThe following abbreviations or acronyms are used in the text. References in this report to “we,” “us” and “our” are to ALLETE, Inc. and its subsidiaries,collectively.Abbreviation or AcronymTermAFUDCAllowance for Funds Used During Construction - the cost of both debt and equity funds used to finance utility plantadditions during construction periodsALLETEALLETE, Inc.ALLETE Clean EnergyALLETE Clean Energy, Inc. and its subsidiariesALLETE PropertiesALLETE Properties, LLC and its subsidiariesALLETE Transmission HoldingsALLETE Transmission Holdings, Inc.ArcelorMittalArcelorMittal USA, Inc.ASCAccounting Standards CodificationATCAmerican Transmission Company LLCBasinBasin Electric Power CooperativeBisonBison Wind Energy CenterBNI EnergyBNI Energy, Inc. and its subsidiaryBoswellBoswell Energy CenterCamp RipleyCamp Ripley Solar ArrayCIPConservation Improvement ProgramCliffsCleveland-Cliffs Inc.CO 2Carbon DioxideCompanyALLETE, Inc. and its subsidiariesDCDirect CurrentEISEnvironmental Impact StatementEITEEnergy-Intensive Trade-ExposedEPAUnited States Environmental Protection AgencyERP Iron OreERP Iron Ore, LLCESOPEmployee Stock Ownership PlanFASBFinancial Accounting Standards BoardFERCFederal Energy Regulatory CommissionForm 8-KALLETE Current Report on Form 8-KForm 10-KALLETE Annual Report on Form 10-KForm 10-QALLETE Quarterly Report on Form 10-QGAAPGenerally Accepted Accounting Principles in the United States of AmericaGHGGreenhouse GasesGNTLGreat Northern Transmission LineInvest DirectALLETE’s Direct Stock Purchase and Dividend Reinvestment PlanIRPIntegrated Resource PlanItem ___Item ___ of this Form 10-KkVKilovolt(s)kW / kWhKilowatt(s) / Kilowatt-hour(s)LaskinLaskin Energy CenterLIBORLondon Interbank Offered RateMagnetationMagnetation, LLCManitoba HydroManitoba Hydro-Electric BoardMBtuMillion British thermal unitsALLETE, Inc. 2017 Form 10-K4Definitions (continued)Abbreviation or AcronymTermMesabi MetallicsMesabi Metallics Company, LLCMinnesota PowerAn operating division of ALLETE, Inc.Minnkota PowerMinnkota Power Cooperative, Inc.MISOMidcontinent Independent System Operator, Inc.Montana-Dakota UtilitiesMontana-Dakota Utilities Co., a division of MDU Resources Group, Inc.Moody’sMoody’s Investors Service, Inc.MPCAMinnesota Pollution Control AgencyMPUCMinnesota Public Utilities CommissionMW / MWhMegawatt(s) / Megawatt-hour(s)NDPSCNorth Dakota Public Service CommissionNERCNorth American Electric Reliability CorporationNOLNet Operating LossNO 2Nitrogen DioxideNO XNitrogen OxidesNorthern States PowerNorthern States Power Company, a subsidiary of Xcel Energy Inc.Northshore MiningNorthshore Mining Company, a wholly-owned subsidiary of CliffsNote ___Note ___ to the consolidated financial statements in this Form 10-KNYSENew York Stock ExchangeOliver Wind IOliver Wind I Energy CenterOliver Wind IIOliver Wind II Energy CenterPalm Coast Park DistrictPalm Coast Park Community Development District in FloridaPolyMetPolyMet Mining Corp.PPA / PSAPower Purchase Agreement / Power Sales AgreementPPACAPatient Protection and Affordable Care Act of 2010PSCWPublic Service Commission of WisconsinRSOPRetirement Savings and Stock Ownership PlanSECSecurities and Exchange CommissionShell EnergyShell Energy North America (US), L.P.Silver Bay PowerSilver Bay Power Company, a wholly-owned subsidiary of CliffsSO 2Sulfur DioxideSquare ButteSquare Butte Electric Cooperative, a North Dakota cooperative corporationStandard & Poor’sS&P Global RatingsSWL&PSuperior Water, Light and Power CompanyTaconite HarborTaconite Harbor Energy CenterTaconite RidgeTaconite Ridge Energy CenterTenaskaTenaska Energy, Inc. and Tenaska Energy Holdings, LLCThomsonThomson Energy CenterTCJATax Cuts and Jobs Act of 2017 (Public Law 115-97)Tonka WaterTonka Equipment CompanyTown Center DistrictTown Center at Palm Coast Community Development District in FloridaTransAltaTransAlta Energy Marketing (U.S.) Inc.United TaconiteUnited Taconite LLC, a wholly-owned subsidiary of CliffsUPM BlandinUPM, Blandin paper mill owned by UPM-Kymmene CorporationU.S.United States of AmericaU.S. Water ServicesU.S. Water Services Holding Company and its subsidiariesUSS CorporationUnited States Steel CorporationWTGWind Turbine GeneratorALLETE, Inc. 2017 Form 10-K5Forward-Looking StatementsStatements in this report that are not statements of historical facts are considered “forward-looking” and, accordingly, involve risks and uncertainties that couldcause actual results to differ materially from those discussed. Although such forward-looking statements have been made in good faith and are based on reasonableassumptions, there can be 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 orphrases such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “projects,” “likely,” “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 providing this cautionary statement to identifyimportant factors that could cause our actual results to differ materially from those indicated in forward-looking statements made by or on behalf of ALLETE inthis 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 areaccompanied by, the following important factors, in addition to any assumptions and other factors referred to specifically in connection with such forward-lookingstatements that could cause our actual results to differ materially from those indicated in the forward-looking statements:•our ability to successfully implement our strategic objectives;•global and domestic economic conditions affecting us or our customers;•changes in and compliance with laws and regulations;•changes in tax rates or policies or in rates of inflation;•the outcome of legal and administrative proceedings (whether civil or criminal) and settlements;•weather conditions, natural disasters and pandemic diseases;•our ability to access capital markets and bank financing;•changes in interest rates and the performance of the financial markets;•project delays or changes in project costs;•changes in operating expenses and capital expenditures and our ability to raise revenues from our customers in regulated rates or sales price increases at ourEnergy Infrastructure and Related Services businesses;•the impacts of commodity prices on ALLETE and our customers;•our ability to attract and retain qualified, skilled and experienced personnel;•effects of emerging technology;•war, acts of terrorism and cyberattacks;•our ability to manage expansion and integrate acquisitions;•population growth rates and demographic patterns;•wholesale power market conditions;•federal and state regulatory and legislative actions that impact regulated utility economics, including our allowed rates of return, capital structure, ability tosecure financing, industry and rate structure, acquisition and disposal of assets and facilities, operation and construction of plant facilities and utilityinfrastructure, recovery of purchased power, capital investments and other expenses, including present or prospective environmental matters;•effects of competition, including competition for retail and wholesale customers;•effects of restructuring initiatives in the electric industry;•the impacts on our Regulated Operations segment of climate change and future regulation to restrict the emissions of GHG;•effects of increased deployment of distributed low-carbon electricity generation resources;•the impacts of laws and regulations related to renewable and distributed generation;•pricing, availability and transportation of fuel and other commodities and the ability to recover the costs of such commodities;•our current and potential industrial and municipal customers’ ability to execute announced expansion plans;•real estate market conditions where our legacy Florida real estate investment is located may not improve;•the success of efforts to realize value from, invest in, and develop new opportunities in, our Energy Infrastructure and Related Services businesses; and•factors affecting our Energy Infrastructure and Related Services businesses, including fluctuations in the volume of customer orders, unanticipated costincreases, changes in legislation and regulations impacting the industries in which the customers served operate, the effects of weather, creditworthiness ofcustomers, ability to obtain materials required to perform services, and changing market conditions.ALLETE, Inc. 2017 Form 10-K6Forward Looking Statements (Continued)Additional disclosures regarding factors that could cause our results or performance to differ from those anticipated by this report are discussed in Part 1, Item 1Aunder the heading “Risk Factors” of this Form 10-K. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertakeno 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 occurrenceof 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 ofeach 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 fromthose contained in any forward-looking statement. Readers are urged to carefully review and consider the various disclosures made by ALLETE in this Form 10-Kand in other reports filed with the SEC that attempt to identify the risks and uncertainties that may affect ALLETE’s business.ALLETE, Inc. 2017 Form 10-K7Part IItem 1. BusinessRegulated Operations includes our regulated utilities, Minnesota Power and SWL&P, as well as our investment in ATC, a Wisconsin-based regulated utility thatowns and maintains electric transmission assets in portions of Wisconsin, Michigan, Minnesota and Illinois. Minnesota Power provides regulated utility electricservice in northeastern Minnesota to approximately 145,000 retail customers. Minnesota Power also has 16 non-affiliated municipal customers in Minnesota.SWL&P is a Wisconsin utility and a wholesale customer of Minnesota Power. SWL&P provides regulated utility electric, natural gas and water service innorthwestern Wisconsin to approximately 15,000 electric customers, 13,000 natural gas customers and 10,000 water customers. Our regulated utility operationsinclude retail and wholesale activities under the jurisdiction of state and federal regulatory authorities . (See Note 4. Regulatory Matters.)ALLETE Clean Energy focuses on developing, acquiring, and operating clean and renewable energy projects. ALLETE Clean Energy currently owns andoperates, in four states, approximately 535 MW of nameplate capacity wind energy generation that is contracted under PSAs of various durations. ALLETE CleanEnergy also engages in the development of wind energy facilities to operate under long-term PSAs or for sale to others upon completion.U.S. Water Services provides integrated water management for industry by combining chemical, equipment, engineering and service for customized solutions toreduce water and energy usage, and improve efficiency.Corporate and Other is comprised of BNI Energy, our coal mining operations in North Dakota, ALLETE Properties, our legacy Florida real estate investment,other business development and corporate expenditures, unallocated interest expense, a small amount of non-rate base generation, approximately 5,000 acres ofland in Minnesota, and earnings on cash and investments.ALLETE is incorporated under the laws of Minnesota. Our corporate headquarters are in Duluth, Minnesota. Statistical information is presented as ofDecember 31, 2017 , unless otherwise indicated. All subsidiaries are wholly-owned unless otherwise specifically indicated. References in this report to “we,” “us”and “our” are to ALLETE and its subsidiaries, collectively.Year Ended December 31201720162015 (a) Consolidated Operating Revenue – Millions$1,419.3$1,339.7$1,486.4 Percentage of Consolidated Operating Revenue Regulated Operations75%75%67%ALLETE Clean Energy6%6%18%U.S. Water Services11%10%8%Corporate and Other8%9%7% 100%100%100%(a)Includes the construction and sale of a wind energy facility by ALLETE Clean Energy to Montana-Dakota Utilities for $197.7 million in 2015.For a detailed discussion of results of operations and trends, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.For business segment information, see Note 1. Operations and Significant Accounting Policies, and Note 17. Business Segments.ALLETE, Inc. 2017 Form 10-K8REGULATED OPERATIONSElectric Sales / CustomersRegulated Utility Kilowatt-hours Sold Year Ended December 312017%2016%2015%Millions Retail and Municipal Residential1,09671,10281,1138Commercial1,420101,442101,46210Industrial7,327506,456456,63546Municipal799581668336Total Retail and Municipal10,642729,8166910,04370Other Power Suppliers4,039284,316314,31030Total Regulated Utility Kilowatt-hours Sold14,68110014,13210014,353100Industrial Customers . In 2017 , industrial customers represented 50 percent of total regulated utility kWh sales. Our industrial customers are primarily in thetaconite mining, iron concentrate, paper, pulp and secondary wood products, and pipeline industries.Industrial Customer Kilowatt-hours Sold Year Ended December 312017%2016%2015%Millions Taconite/Iron Concentrate4,930673,906614,00060Paper, Pulp and Secondary Wood Products1,104151,303201,45622Pipelines and Other Industrial1,293181,247191,17918Total Industrial Customer Kilowatt-hours Sold7,3271006,4561006,635100Six taconite facilities served by Minnesota Power made up approximately 70 percent of 2016 iron ore pellet production in the U.S. according to data from theMinnesota Department of Revenue 2017 Mining Tax Guide. Sales to taconite customers and iron concentrate customers represented 4,930 million kWh, or 67percent , of total industrial customer kWh sales in 2017 . Taconite, an iron-bearing rock of relatively low iron content, is abundantly available in northernMinnesota and an important domestic source of raw material for the steel industry. Taconite processing plants use large quantities of electric power to grind theiron-bearing rock, and agglomerate and pelletize the iron particles into taconite pellets. Iron concentrate reclamation facilities also use large quantities of electricityto extract and process iron-bearing tailings left from previous mining operations to produce iron ore concentrate.Minnesota Power’s taconite customers are capable of producing up to approximately 41 million tons of taconite pellets annually. Taconite pellets produced inMinnesota are primarily shipped to North American steel making facilities that are part of the integrated steel industry. Steel produced from these North Americanfacilities is used primarily in the manufacture of automobiles, appliances, pipe and tube products for the gas and oil industry, and in the construction industry.Historically, less than five percent of Minnesota taconite production has been exported outside of North America. Minnesota Power also provides electric service tothree iron concentrate facilities capable of producing up to approximately 4 million tons of iron concentrate per year. Iron concentrate is used in the production oftaconite pellets. These iron concentrate facilities are owned in whole, or in part, by ERP Iron Ore and are currently idled. (See Item 7. Management’s Discussionand Analysis – Outlook – Industrial Customers and Prospective Additional Load.)There has been a general historical correlation between U.S. steel production and Minnesota taconite production. The American Iron and Steel Institute, anassociation of North American steel producers, reported that U.S. raw steel production operated at approximately 74 percent of capacity in 2017 ( 71 percent in2016 and in 2015 ). The World Steel Association, an association of over 160 steel producers, national and regional steel industry associations, and steel researchinstitutes representing approximately 85 percent of world steel production, projected U.S. steel consumption in 2018 will increase by approximately 1 percentcompared to 2017 .ALLETE, Inc. 2017 Form 10-K9REGULATED OPERATIONS (Continued)Industrial Customers (Continued)The following table reflects Minnesota Power’s taconite customers’ production levels for the past ten years:Minnesota Power Taconite Customer ProductionYear Tons (Millions) 2017 * 372016 282015 312014 392013 372012 392011 392010 352009 172008 39Source: Minnesota Department of Revenue 2017 Mining Tax Guide for years 2008 - 2016.* Preliminary data from the Minnesota Department of Revenue.Minnesota Power’s taconite customers may experience annual variations in production levels due to such factors as economic conditions, short-term demandchanges or maintenance outages. We estimate that a one million ton change in Minnesota Power’s taconite customers’ production would impact our annualearnings per share by approximately $0.04 , net of expected power marketing sales at current prices. Changes in wholesale electric prices or customer contractualdemand nominations could impact this estimate. Minnesota Power proactively sells power in the wholesale power markets that is temporarily not required byindustrial customers to optimize the value of its generating facilities. Long-term reductions in taconite production or a permanent shut down of a taconite customermay lead Minnesota Power to file a general rate case to recover lost revenue.In addition to serving the taconite industry, Minnesota Power serves a number of customers in the paper, pulp and secondary wood products industry, whichrepresented 1,104 million kWh, or 15 percent , of total industrial customer kWh sales in 2017 . Minnesota Power also has agreements to provide steam for two ofits paper and pulp customers for use in the customers’ operations. The four major paper and pulp mills we serve reported operating at, or near, full capacity in 2017; however, the smaller of UPM Blandin’s two paper machines was closed in the fourth quarter of 2017. (See Item 7. Management’s Discussion and Analysis –Outlook – Industrial Customers and Prospective Additional Load.)Large Power Customer Contracts. Minnesota Power has nine Large Power Customer contracts, each serving requirements of 10 MW or more of customer load.The customers consist of six taconite facilities, two iron concentrate reclamation facilities and four paper and pulp mills. Certain facilities have common ownershipand are served under combined contracts.Large Power Customer contracts require Minnesota Power to have a certain amount of generating capacity available. In turn, each Large Power Customer isrequired to pay a minimum monthly demand charge that covers the fixed costs associated with having this capacity available to serve the customer, including areturn on common equity. Most contracts allow customers to establish the level of megawatts subject to a demand charge on a four-month basis and require that aportion of their megawatt needs be committed on a take-or-pay basis for at least a portion of the term of the agreement. In addition to the demand charge, eachLarge Power Customer is billed an energy charge for each kWh used that recovers the variable costs incurred in generating electricity. Five of the Large PowerCustomer contracts have interruptible service which provides a discounted demand rate in exchange for the ability to interrupt the customers during systememergencies. Minnesota Power also provides incremental production service for customer demand levels above the contractual take-or-pay levels. There is nodemand charge for this service and energy is priced at an increment above Minnesota Power’s cost. Incremental production service is interruptible.ALLETE, Inc. 2017 Form 10-K10REGULATED OPERATIONS (Continued)Large Power Customer Contracts (Continued)All contracts with Large Power Customers continue past the contract termination date unless the required advance notice of cancellation has been given. Therequired advance notice of cancellation varies from two to four years. Such contracts minimize the impact on earnings that otherwise would result from significantreductions in kWh sales to such customers. Large Power Customers are required to take all of their purchased electric service requirements from Minnesota Powerfor the duration of their contracts. The rates and corresponding revenue associated with capacity and energy provided under these contracts are subject to changethrough the same regulatory process governing all retail electric rates. (See Item 1. Business – Regulated Operations – Regulatory Matters – Electric Rates.)Minnesota Power, as permitted by the MPUC, requires its taconite-producing Large Power Customers to pay weekly for electric usage based on monthly energyusage estimates. These customers receive estimated bills based on Minnesota Power’s estimate of the customer’s energy usage, forecasted energy prices and fueladjustment clause estimates. Minnesota Power’s taconite‑producing Large Power Customers have generally predictable energy usage on a week-to-week basis andany differences that occur are trued-up the following month.Contract Status for Minnesota Power Large Power CustomersAs of February 1, 2018CustomerIndustryLocationOwnershipEarliestTermination DateArcelorMittal – Minorca MineTaconiteVirginia, MNArcelorMittal S.A.December 31, 2025Hibbing Taconite Co. (a)TaconiteHibbing, MN62.3% ArcelorMittal S.A.23.0% Cliffs14.7% USS CorporationFebruary 28, 2022United Taconite and Northshore MiningTaconiteEveleth, MN and Babbitt,MNCliffsDecember 31, 2026USS Corporation(USS – Minnesota Ore) (a)(b)TaconiteMt. Iron, MN and Keewatin,MNUSS CorporationFebruary 28, 2022Magnetation (c)Iron ConcentrateColeraine, MN and Bovey,MNERP Iron OreDecember 31, 2025Boise, Inc.PaperInternational Falls, MNPackaging Corporation of AmericaDecember 31, 2023UPM Blandin (a)(d)PaperGrand Rapids, MNUPM-Kymmene CorporationFebruary 28, 2022NewPage CorporationPaper and PulpDuluth, MNVerso CorporationDecember 31, 2022Sappi Cloquet LLC (a)Paper and PulpCloquet, MNSappi LimitedFebruary 28, 2022(a)The contract will terminate four years from the date of written notice from either Minnesota Power or the customer. No notice of contract cancellation has been given byeither party. Thus, the earliest date of cancellation is February 28, 2022.(b)USS Corporation owns both the Minntac Plant in Mountain Iron, MN, and the Keewatin Taconite Plant in Keewatin, MN.(c)On January 30, 2017, ERP Iron Ore, LLC purchased substantially all of Magnetation’s assets pursuant to an asset purchase agreement approved by the U.S. BankruptcyCourt for the District of Minnesota. (See Item 7. Management’s Discussion and Analysis – Outlook – Industrial Customers and Prospective Additional Load.)(d)The smaller of UPM Blandin’s two paper machines was closed in the fourth quarter of 2017. (See Item 7. Management’s Discussion and Analysis – Outlook – IndustrialCustomers and Prospective Additional Load.)Residential and Commercial Customers. In 2017 , residential and commercial customers represented 17 percent of total regulated utility kWh sales.Municipal Customers. In 2017 , municipal customers represented 5 percent of total regulated utility kWh sales. All of the municipal contracts include atermination clause requiring a three -year notice to terminate.ALLETE, Inc. 2017 Form 10-K11REGULATED OPERATIONS (Continued)Municipal Customers (Continued)Minnesota Power’s wholesale electric contract with the Nashwauk Public Utilities Commission is effective through at least December 31, 2032. No terminationnotice may be given for this contract prior to July 1, 2029. The wholesale electric service contracts with SWL&P and another municipal customer are effectivethrough at least February 28, 2021, and through June 30, 2019, respectively. Under the agreement with SWL&P, no termination notice has been given. The othermunicipal customer provided a contract termination notice in June 2016. Minnesota Power currently provides approximately 29 MW of average monthly demandto this customer. The rates included in these three contracts are set each July 1 based on a cost-based formula methodology, using estimated costs and a rate ofreturn that is equal to Minnesota Power’s authorized rate of return for Minnesota retail customers. The formula-based rate methodology also provides for a yearlytrue-up calculation for actual costs incurred.Minnesota Power’s wholesale electric contracts with 14 municipal customers are effective through at least December 31, 2024. No termination notices may begiven prior to three years before maturity. These contracts include fixed capacity charges through 2018; beginning in 2019, the capacity charge will be determinedusing a cost-based formula methodology with limits on the annual change from the previous year’s capacity charge. The base energy charge for each year of thecontract term will be set each January 1, subject to monthly adjustment, and will also be determined using a cost-based formula methodology.Other Power Suppliers. The Company also enters into off-system sales with Other Power Suppliers. These sales are at market‑based prices into the MISO marketon a daily basis or through bilateral agreements of various durations.Basin PSA. Minnesota Power has an agreement to sell 100 MW of capacity and energy to Basin for a ten-year period which expires in April 2020. The capacitycharge is based on a fixed monthly schedule with a minimum annual escalation provision. The energy charge is based on a fixed monthly schedule and provides forannual escalation based on the cost of fuel. The agreement also allows Minnesota Power to recover a pro rata share of increased costs related to emissions thatoccur during the last five years of the contract. Minnesota Power has an additional agreement to sell 100 MW of capacity to Basin at fixed rates for a two-yearperiod that began in June 2016.Minnkota Power PSA. Minnesota Power has a PSA with Minnkota Power where Minnesota Power is selling a portion of its entitlement from Square Butte toMinnkota Power, resulting in Minnkota Power’s net entitlement increasing and Minnesota Power’s net entitlement decreasing until Minnesota Power’s share iseliminated at the end of 2025 . Of Minnesota Power’s 50 percent output entitlement, it sold approximately 28 percent to Minnkota Power in 2017 ( 28 percent in2016 and in 2015 ). (See Note 11. Commitments, Guarantees and Contingencies.)Silver Bay Power PSA . In 2016, Minnesota Power and Silver Bay Power entered into a long-term PSA through 2031. Silver Bay Power supplies approximately 90MW of load to Northshore Mining, an affiliate of Silver Bay Power, which has been served predominately through self-generation by Silver Bay Power. In theyears 2016 through 2019, Minnesota Power is supplying Silver Bay Power with at least 50 MW of energy and Silver Bay Power has the option to purchaseadditional energy from Minnesota Power as it transitions away from self-generation. On December 31, 2019, Silver Bay Power will cease self-generation andMinnesota Power will supply the energy requirements for Silver Bay Power.SeasonalityThe operations of our industrial customers, which make up a large portion of our electric sales, are not typically subject to significant seasonal variations. (SeeElectric Sales / Customers. ) As a result, Minnesota Power is generally not subject to significant seasonal fluctuations in electric sales; however, Minnesota Powerand SWL&P electric and natural gas sales to other customers may be affected by seasonal differences in weather. In general, peak electric sales occur in the winterand summer months with fewer electric sales in the spring and fall months. Peak sales of natural gas generally occur in the winter months. Additionally, ourregulated utilities have historically generated fewer sales and less revenue when weather conditions are milder in the winter and summer.Power SupplyIn order to meet its customers’ electric requirements, Minnesota Power utilizes a mix of its own generation and purchased power. As of December 31, 2017 ,Minnesota Power’s generating capability is primarily coal-fired, but also includes natural gas-fired and biomass co-fired generation, hydroelectric generation, windenergy generation and solar generation. In 2017, Minnesota Power had record hydroelectric and wind energy generation. Purchased power primarily consists oflong-term coal, wind and hydro PPAs as well as market purchases. The following table reflects Minnesota Power’s generating capabilities as of December 31, 2017, and total electrical supply for 2017 . Minnesota Power had an annual net peak load of 1,599 MW on December 27, 2017 .ALLETE, Inc. 2017 Form 10-K12REGULATED OPERATIONS (Continued)Power Supply (Continued) Year Ended UnitYearNet December 31, 2017Regulated Utility Power SupplyNo.InstalledCapability Generation and Purchases MW MWh%Coal-Fired Boswell Energy Center1195867(a) in Cohasset, MN2196068(a) 31973355 41980468(b) 958 6,286,85841.4Taconite Harbor Energy Center1195775 in Schroeder, MN2195775 150(c)——Total Coal-Fired 1,108 6,286,85841.4Biomass Co-Fired / Natural Gas Hibbard Renewable Energy Center in Duluth, MN3 & 41949, 195162 4,502—Laskin Energy Center in Hoyt Lakes, MN1 & 21953110 5,6150.1Total Biomass Co-Fired / Natural Gas 172 10,1170.1Hydro (d) Group consisting of ten stations in MNMultipleMultiple120 773,7075.1Wind (e) Taconite Ridge Energy Center in Mt. Iron, MNMultiple200825 56,5940.4Bison Wind Energy Center in Oliver and Morton Counties, NDMultiple2010-2014497 1,775,47411.7Total Wind 522 1,832,06812.1Solar Camp Ripley Solar Array near Little Falls, MNMultiple201610 17,1290.1Total Generation 1,932 8,919,87958.8 Long-Term Purchased Power Lignite Coal - Square Butte near Center, ND (f) 1,739,78111.5Wind - Oliver County, ND 341,7852.2Hydro - Manitoba Hydro in Manitoba, Canada 305,5322.0Total Long-Term Purchased Power 2,387,09815.7Other Purchased Power (g) 3,867,86525.5Total Purchased Power 6,254,96341.2Total Regulated Utility Power Supply 1,932 15,174,842100.0(a)In 2016, Minnesota Power announced that Boswell Units 1 and 2 will be retired in 2018. (See Item 7. Management’s Discussion and Analysis of Financial Condition andResults of Operations – Outlook – EnergyForward.)(b)Boswell Unit 4 net capability shown above reflects Minnesota Power’s ownership percentage of 80 percent. WPPI Energy owns 20 percent of Boswell Unit 4. (See Note 3.Jointly-Owned Facilities and Projects.)(c)Taconite Harbor Units 1 and 2 were idled in 2016. (See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Outlook –EnergyForward.)(d)Hydro consists of 10 stations with 34 generating units.(e)Taconite Ridge consists of 10 WTGs and Bison consists of 165 WTGs.(f)Minnesota Power has a PSA with Minnkota Power whereby Minnesota Power is selling a portion of its entitlement from Square Butte to Minnkota Power. (See ElectricSales / Customers.)(g)Includes short-term market purchases in the MISO market and from Other Power Suppliers.ALLETE, Inc. 2017 Form 10-K13REGULATED OPERATIONS (Continued)Power Supply (Continued)Fuel . Minnesota Power purchases low-sulfur, sub-bituminous coal from the Powder River Basin region located in Montana and Wyoming. Coal consumption in2017 for electric generation at Minnesota Power’s coal-fired generating stations was 3.8 million tons (4.2 million tons in 2016 ; 4.4 million tons in 2015 ). As ofDecember 31, 2017 , Minnesota Power had coal inventories of 1.2 million tons (1.4 million tons as of December 31, 2016 ). Minnesota Power has coal supplyagreements providing for the purchase of a significant portion of its coal requirements through December 2018 and a portion of its coal requirements throughDecember 2021. In 2018 , Minnesota Power expects to obtain coal under these coal supply agreements and in the spot market. Minnesota Power continues toexplore other future coal supply options and believes that adequate supplies of low-sulfur, sub‑bituminous coal will continue to be available.Minnesota Power also has coal transportation agreements in place for the delivery of a significant portion of its coal requirements through December 2018. Thecosts of fuel and related transportation costs for Minnesota Power’s generation are recoverable from Minnesota Power’s utility customers through the fueladjustment clause.Coal Delivered to Minnesota PowerYear Ended December 31201720162015Average Price per Ton$36.50$35.87$27.00Average Price per MBtu$2.01$1.98$1.49Long-Term Purchased Power . Minnesota Power has contracts to purchase capacity and energy from various entities, including output from certain coal, wind,hydro and solar generating facilities.Our PPAs are detailed in Note 11. Commitments, Guarantees and Contingencies, with additional disclosure provided in the following paragraph.Square Butte PPA. Under the PPA with Square Butte that extends through 2026, Minnesota Power is entitled to 50 percent of the output of Square Butte’s 455 MWcoal-fired generating unit. (See Note 11. Commitments, Guarantees and Contingencies.) BNI Energy mines and sells lignite coal to Square Butte. This lignitesupply is sufficient to provide fuel for the anticipated useful life of the generating unit. Square Butte’s cost of lignite consumed in 2017 was approximately $1.71per MBtu ($1.57 per MBtu in 2016 ; $1.55 per MBtu in 2015 ). (See Electric Sales / Customers – Minnkota Power PSA .)Transmission and DistributionWe have electric transmission and distribution lines of 500 kV (8 miles), 345 kV (242 miles), 250 kV (466 miles), 230 kV (717 miles), 161 kV (43 miles), 138 kV(190 miles), 115 kV (1,280 miles) and less than 115 kV (6,334 miles). We own and operate 167 substations with a total capacity of 8,540 megavoltamperes. Someof our transmission and distribution lines interconnect with other utilities.CapX2020. Minnesota Power was a participant in the CapX2020 initiative which represented an effort to ensure electric transmission and distribution reliability inMinnesota and the surrounding region for the future. CapX2020, which consisted of electric cooperatives and municipal and investor-owned utilities, includingMinnesota’s largest transmission owners, assessed the transmission system and projected growth in customer demand for electricity through 2020. MinnesotaPower participated in three CapX2020 projects which were completed and placed in service in 2011, 2012 and 2015.Great Northern Transmission Line. As a condition of the 250 MW long-term PPA entered into with Manitoba Hydro, construction of additional transmissioncapacity is required. As a result, Minnesota Power and Manitoba Hydro proposed construction of the GNTL, an approximately 220 -mile 500 -kV transmission linebetween Manitoba and Minnesota’s Iron Range in order to strengthen the electric grid, enhance regional reliability and promote a greater exchange of sustainableenergy.ALLETE, Inc. 2017 Form 10-K14REGULATED OPERATIONS (Continued)Transmission and Distribution (Continued)In 2015, a certificate of need was approved by the MPUC. Based on this approval, Minnesota Power’s portion of the investments and expenditures for the projectare eligible for cost recovery under its existing transmission cost recovery rider and are anticipated to be included in future transmission cost recovery filings. (SeeNote 4. Regulatory Matters.) Also in 2015, the FERC approved our request to recover on construction work in progress related to the GNTL from MinnesotaPower’s wholesale customers. In an April 2016 order, the MPUC approved the route permit for the GNTL which largely follows Minnesota Power’s preferredroute, including the international border crossing, and in November 2016, the U.S. Department of Energy issued a presidential permit to cross the U.S.-Canadianborder, which was the final major regulatory approval needed before construction in the U.S. could begin. Site clearing and pre-construction activities commencedin the first quarter of 2017 with construction expected to be completed in 2020. Total project cost in the U.S., including substation work, is estimated to be between$560 million and $710 million , of which Minnesota Power’s portion is expected to be between $300 million and $350 million ; the difference will be recoveredfrom a subsidiary of Manitoba Hydro as contributions in aid of construction. Total project costs of $152.4 million have been incurred through December 31, 2017 ,of which $67.6 million has been recovered from a subsidiary of Manitoba Hydro.Manitoba Hydro must obtain regulatory and governmental approvals related to a new transmission line in Canada. In 2015, Manitoba Hydro submitted the finalpreferred route and EIS for the transmission line in Canada to the Manitoba Conservation and Water Stewardship for regulatory approval. In December 2016,Manitoba Hydro filed an application with the National Energy Board in Canada requesting authorization to construct and operate an international transmission line.Both provincial and federal approvals are pending. Construction of Manitoba Hydro’s hydroelectric generation facility commenced in 2014 and is anticipated to bein service by early 2021.Investment in ATCOur wholly-owned subsidiary, ALLETE Transmission Holdings, owns approximately 8 percent of ATC, a Wisconsin-based utility that owns and maintains electrictransmission assets in portions of Wisconsin, Michigan, Minnesota and Illinois. We account for our investment in ATC under the equity method of accounting. Asof December 31, 2017 , our equity investment in ATC was $118.7 million ( $135.6 million as of December 31, 2016 ). The decrease in our equity investment inATC in 2017 is due to the impact of the remeasurement of deferred income tax assets and liabilities resulting from the TCJA. (See Note 1. Operations andSignificant Accounting Policies, and Note 5. Investment in ATC.)In September 2016, the FERC issued an order reducing ATC’s authorized return on equity to 10.32 percent , or 10.82 percent including an incentive adder forparticipation in a regional transmission organization. Prior to this order, ATC had been allowed a return on equity of 12.2 percent which had been impacted byreductions for estimated refunds related to complaints filed with the FERC by several customers located within the MISO service area.In June 2016, a federal administrative law judge ruled on an additional complaint proposing a further reduction in the base return on equity to 9.70 percent , or10.20 percent including an incentive adder for participation in a regional transmission organization, subject to approval or adjustment by the FERC. A finaldecision from the FERC on the administrative law judge’s recommendation is pending. (See Note 4. Regulatory Matters.)ATC’s 10-year transmission assessment, which covers the years 2017 through 2026, identifies a need for between $2.8 billion and $3.6 billion in transmissionsystem investments. These investments by ATC, if undertaken, are expected to be funded through a combination of internally generated cash, debt and investorcontributions. As opportunities arise, we plan to make additional investments in ATC through general capital calls based upon our pro rata ownership interest inATC.PropertiesOur Regulated Operations businesses own office and service buildings, an energy control center, repair shops, electric plants, transmission facilities and storeroomsin various localities in Minnesota, Wisconsin and North Dakota. All of the electric plants are subject to mortgages, which collateralize the outstanding firstmortgage bonds of Minnesota Power and SWL&P. Most of the generating plants and substations are located on real property owned by Minnesota Power orSWL&P, subject to the lien of a mortgage, whereas most of the electric lines are located on real property owned by others with appropriate easement rights ornecessary permits from governmental authorities. WPPI Energy owns 20 percent of Boswell Unit 4. WPPI Energy has the right to use our transmission linefacilities to transport its share of Boswell generation. (See Note 3. Jointly-Owned Facilities and Projects.)ALLETE, Inc. 2017 Form 10-K15REGULATED OPERATIONS (Continued)Regulatory MattersWe are subject to the jurisdiction of various regulatory authorities and other organizations.Electric Rates. All rates and contract terms in our Regulated Operations are subject to approval by applicable regulatory authorities. Minnesota Power andSWL&P design their retail electric service rates based on cost of service studies under which allocations are made to the various classes of customers as approvedby the MPUC or the PSCW. Nearly all retail sales include billing adjustment clauses, which may adjust electric service rates for changes in the cost of fuel andpurchased energy, recovery of current and deferred conservation improvement program expenditures and recovery of certain transmission, renewable andenvironmental investments.Minnesota Public Utilities Commission. The MPUC has regulatory authority over Minnesota Power’s retail service area in Minnesota, retail rates, retail services,capital structure, issuance of securities and other matters. As authorized by the MPUC, Minnesota Power also recognizes revenue under cost recovery riders fortransmission, renewable and environmental investments.2016 Minnesota General Rate Case. In November 2016, Minnesota Power filed a retail rate increase request with the MPUC seeking an average increase ofapproximately 9 percent for retail customers. The rate filing sought a return on equity of 10.25 percent and a 53.81 percent equity ratio. On an annualized basis, therequested final rate increase would have generated approximately $55 million in additional revenue. In December 2016, Minnesota Power filed a request to modifyits original interim rate proposal reducing its requested interim rate increase to $34.7 million from the original request of approximately $49 million due to achange in its electric sales forecast. In December 2016 orders, the MPUC accepted the November 2016 filing as complete and authorized an annual interim rateincrease of $34.7 million beginning January 1, 2017 .On February 23, 2017, Minnesota Power filed an additional request to further reduce its requested interim rate increase. In an order dated April 13, 2017, theMPUC approved Minnesota Power’s updated retail rate request resulting in a reduction in the annual interim rate increase to $32.2 million beginning May 1, 2017.As a result of working with intervenors and further developments as the rate review progressed, Minnesota Power’s final rate request was adjusted toapproximately $49 million on an annualized basis. At a hearing on January 18, 2018, the MPUC made determinations regarding Minnesota Power’s general ratecase including allowing a return on common equity of 9.25 percent and a 53.81 percent equity ratio. Upon commencement of final rates, we expect additionalrevenue of approximately $13 million on an annualized basis. Final rates are expected to commence in the fourth quarter of 2018; interim rates will be collectedthrough this period which will be fully offset by the recognition of a corresponding reserve. As a result of the MPUC’s decisions on January 18, 2018, MinnesotaPower has recorded a reserve for an interim rate refund of approximately $32 million as of December 31, 2017 . The MPUC also disallowed recovery of MinnesotaPower’s regulatory asset for deferred fuel adjustment clause costs due to the anticipated adoption of a forward-looking fuel adjustment clause methodologyresulting in a $19.5 million pre-tax charge to Fuel, Purchased Power and Gas – Utility in 2017. An order from the MPUC setting forth the effective date of finalrates is expected by March 12, 2018. Minnesota Power will review this order for potential reconsideration of certain issues at that time.As part of its decision in Minnesota Power’s 2016 general rate case, the MPUC extended the depreciable lives of Boswell Unit 3, Unit 4 and common facilities to2050 primarily to mitigate rate increases for our customers, and shortened the depreciable lives of Boswell Unit 1 and Unit 2 to 2022, resulting in a decrease todepreciation expense of approximately $25 million pre-tax in 2017.ALLETE, Inc. 2017 Form 10-K16REGULATED OPERATIONS (Continued)Regulatory Matters (Continued)Energy-Intensive Trade-Exposed Customer Rates. An EITE customer ratemaking law was enacted in 2015 which established that it is the energy policy ofMinnesota to have competitive rates for certain industries such as mining and forest products. In 2015, Minnesota Power filed a rate schedule petition with theMPUC for EITE customers and a corresponding rider for EITE cost recovery. In a March 2016 order, the MPUC dismissed the petition without prejudice. In June2016, Minnesota Power filed a revised EITE petition with the MPUC which included additional information on the net benefits analysis, limits on eligiblecustomers and term lengths for the EITE discount. The rate adjustments were intended to be revenue and cash flow neutral to Minnesota Power. The MPUCapproved a reduction in rates for EITE customers in a December 2016 order and subsequently approved cost recovery in an order dated April 20, 2017; collectionof the discount was subject to the MPUC’s review of Minnesota Power’s compliance filing implementing approval of a recovery mechanism, with the subsequentorder issued on October 13, 2017, that modified the order dated April 20, 2017. During 2017, Minnesota Power provided discounts of $8.6 million which wererecorded as a receivable. On September 29, 2017, Minnesota Power informed its EITE customers that it had suspended the EITE discount due to a concern that itwas not revenue and cash flow neutral to Minnesota Power based on an MPUC decision at a hearing on September 7, 2017, as well as the interim rate reductionand decisions in its 2016 general rate case. Based on the MPUC’s decisions at a hearing on January 18, 2018, as part of Minnesota Power’s 2016 general rate case,Minnesota Power reinstated the EITE discount effective January 1, 2018. Minnesota Power expects the discount to EITE customers to be approximately $15million annually based on EITE customer current operating levels. While interim rates are in effect for Minnesota Power’s 2016 general rate case, EITE discountswill offset interim rate refund reserves for non-EITE customers.Additional regulatory proceedings pending with the MPUC are detailed in Note 4. Regulatory Matters.Public Service Commission of Wisconsin. The PSCW has regulatory authority over SWL&P’s retail sales of electricity, natural gas and water, issuances ofsecurities and other matters.2016 Wisconsin General Rate Case. SWL&P’s current retail rates are based on a 2017 PSCW retail rate order effective August 14, 2017, that allows for a 10.5percent return on common equity and a 55 percent equity ratio. SWL&P’s retail rates prior to August 14, 2017, were based on a 2012 PSCW retail rate order thatprovided for a 10.9 percent return on equity. The 2017 PSCW retail rate order authorizes SWL&P to collect on average a 2.9 percent increase in rates for retailcustomers ( 3.8 percent increase in electric rates; 4.8 percent decrease in natural gas rates; and 9.8 percent increase in water rates). On an annualized basis, SWL&Pexpects to collect additional revenue of $2.5 million .Federal Energy Regulatory Commission. The FERC has jurisdiction over the licensing of hydroelectric projects, the establishment of rates and charges fortransmission of electricity in interstate commerce, electricity sold at wholesale (including the rates for Minnesota Power’s municipal and wholesale customers),natural gas transportation, certain accounting and record‑keeping practices, certain activities of our regulated utilities and the operations of ATC. FERC jurisdictionalso includes enforcement of NERC mandatory electric reliability standards. Violations of FERC rules are subject to enforcement action by the FERC includingfinancial penalties up to $1 million per day per violation. Regulatory proceedings pending with the FERC are detailed in Note 4. Regulatory Matters.North Dakota Public Service Commission. The NDPSC has jurisdiction over site and route permitting of generation and transmission facilities in North Dakota.Regional OrganizationsMidcontinent Independent System Operator, Inc. Minnesota Power, SWL&P and ATC are members of MISO, a regional transmission organization. WhileMinnesota Power and SWL&P retain ownership of their respective transmission assets, their transmission networks are under the regional operational control ofMISO. Minnesota Power and SWL&P take and provide transmission service under the MISO open access transmission tariff. MISO continues its efforts to overseethe safe, cost-effective delivery of electric power across all or parts of 15 states and the Canadian province of Manitoba which includes nearly 176,000 MW ofgenerating capacity.North American Electric Reliability Corporation. The NERC has been certified by the FERC as the national electric reliability organization. The NERC ensuresthe reliability of the North American bulk power system. The NERC oversees eight regional entities that establish requirements, approved by the FERC, forreliable operation and maintenance of power generation facilities and transmission systems. Minnesota Power is subject to these reliability requirements and canincur significant penalties for non‑compliance.ALLETE, Inc. 2017 Form 10-K17REGULATED OPERATIONS (Continued)Regional Organizations (Continued)Midwest Reliability Organization (MRO). Minnesota Power and ATC are members of the MRO, one of the eight regional entities overseen by the NERC. TheMRO's primary responsibilities are to: ensure compliance with mandatory reliability standards by entities who own, operate or use the interconnected, internationalbulk power system; conduct assessments of the grid's ability to meet electricity demand in the region; and analyze regional system events.The MRO region spans the Canadian provinces of Saskatchewan and Manitoba, and all or parts of the states of Illinois, Iowa, Minnesota, Michigan, Montana,Nebraska, North Dakota, South Dakota and Wisconsin. The region includes more than 130 organizations that are involved in the production and delivery ofelectricity to more than 20 million people. These organizations include municipal utilities, cooperatives, investor-owned utilities, transmission system operators, afederal power marketing agency, Canadian Crown corporations and independent power producers.Minnesota LegislationRenewable Energy. Minnesota law requires 25 percent of electric utilities’ applicable retail and municipal energy sales in Minnesota to be from renewable energysources by 2025. Minnesota law also requires Minnesota Power to meet interim milestones of 12 percent by 2012, 17 percent by 2016 and 20 percent by 2020. Thelaw allows the MPUC to modify or delay meeting a milestone if implementation will cause significant ratepayer cost or technical reliability issues. If a utility is notin compliance with a milestone, the MPUC may order the utility to construct facilities, purchase renewable energy or purchase renewable energy credits. MinnesotaPower’s 2015 IRP, which was filed with the MPUC in 2015 and approved with modifications by the MPUC in a July 2016 order, includes an update on its plansand progress in meeting the Minnesota renewable energy milestones through 2025. (See Item 7. Management’s Discussion and Analysis of Financial Condition andResults of Operations – Outlook – EnergyForward.)Minnesota Power continues to execute its renewable energy strategy through renewable projects that will ensure it meets the identified state mandate at the lowestcost for customers. Minnesota Power has exceeded the interim milestone requirements to date with approximately 31 percent of its applicable retail and municipalenergy sales supplied by renewable energy sources in 2017 .Minnesota Solar Energy Standard. Minnesota law requires at least 1.5 percent of total retail electric sales, excluding sales to certain customers, to be generated bysolar energy by the end of 2020. At least 10 percent of the 1.5 percent mandate must be met by solar energy generated by or procured from solar photovoltaicdevices with a nameplate capacity of 40 kW or less and community solar garden subscriptions. In a 2016 order, the MPUC approved Camp Ripley, a 10 MW utilityscale solar project at the Camp Ripley Minnesota Army National Guard base and training facility near Little Falls, Minnesota, as eligible to meet the solar energystandard and for current cost recovery. Camp Ripley was completed in the fourth quarter of 2016. In a July 2016 order, the MPUC approved a community solargarden project in northeastern Minnesota, which is comprised of a 1 MW solar array owned and operated by a third party with the output purchased by MinnesotaPower and a 40 kW solar array that is owned and operated by Minnesota Power. Minnesota Power believes Camp Ripley and the community solar garden arrayswill meet approximately one-third of the overall mandate. Additionally, in an order dated February 10, 2017, the MPUC approved Minnesota Power’s proposal toincrease the amount of solar rebates available for customer-sited solar installations and recover costs of the program through Minnesota Power’s renewable costrecovery rider. The proposal to incentivize customer-sited solar installations and the community solar garden subscriptions is expected to meet a portion of therequired small scale solar mandate.CompetitionRetail electric energy sales in Minnesota and Wisconsin are made to customers in assigned service territories. As a result, most retail electric customers inMinnesota do not have the ability to choose their electric supplier. Large energy users of 2 MW and above that are located outside of a municipality are allowed tochoose a supplier upon MPUC approval. Minnesota Power serves 12 Large Power facilities over 10 MW, none of which have engaged in a competitive rateprocess. No other large commercial or small industrial customers in Minnesota Power’s service territory have sought a provider outside Minnesota Power’s serviceterritory since 1994. Retail electric and natural gas customers in Wisconsin do not have the ability to choose their energy supplier. In both states, however,electricity may compete with other forms of energy. Customers may also choose to generate their own electricity, or substitute other forms of energy for theirmanufacturing processes.ALLETE, Inc. 2017 Form 10-K18REGULATED OPERATIONS (Continued)Competition (Continued)In 2017 , 5 percent of total regulated utility kWh sales were to municipal customers in Minnesota by contract. These customers have the right to seek an energysupply from any wholesale electric service provider upon contract expiration. Minnesota Power’s wholesale electric contract with the Nashwauk Public UtilitiesCommission is effective through at least December 31, 2032. Minnesota Power wholesale electric contracts with 14 municipal customers are effective through atleast December 31, 2024. In June 2016, one of Minnesota Power’s municipal customers provided a contract termination notice effective June 30, 2019. (SeeElectric Sales / Customers. )The FERC has continued with its efforts to promote a more competitive wholesale market through open-access electric transmission and other means. As a result,our electric sales to Other Power Suppliers and our purchases to supply our retail and wholesale load are made in the competitive market.FranchisesMinnesota Power holds franchises to construct and maintain an electric distribution and transmission system in 91 cities. The remaining cities, villages and townsserved by Minnesota Power do not require a franchise to operate. SWL&P serves customers under electric, natural gas or water franchises in 1 city and 14 villagesor towns.ENERGY INFRASTRUCTURE AND RELATED SERVICESALLETE Clean EnergyALLETE Clean Energy focuses on developing, acquiring, and operating clean and renewable energy projects. ALLETE Clean Energy currently owns and operates,in four states, approximately 535 MW of nameplate capacity wind energy generation that is contracted under PSAs of various durations. ALLETE Clean Energyalso engages in the development of wind energy facilities to operate under long-term PSAs or for sale to others upon completion.ALLETE Clean Energy believes the market for renewable energy in North America is robust, driven by several factors including environmental regulation, taxincentives, societal expectations and continual technology advances. State renewable portfolio standards, and state or federal regulations to limit GHG emissionsare examples of environmental regulation or public policy that we believe will drive renewable energy development.ALLETE Clean Energy’s strategy includes the safe, reliable, optimal and profitable operation of its existing facilities. This includes a strong safety culture, thecontinuous pursuit of operational efficiencies at existing facilities and cost controls. ALLETE Clean Energy generally acquires facilities in liquid power marketsand its strategy includes the exploration of PSA extensions upon expiration of existing contracts.ALLETE Clean Energy will pursue growth through acquisitions or project development for others. ALLETE Clean Energy is targeting acquisitions of existingfacilities up to 200 MW each, which have long-term PSAs in place for the facilities’ output. At this time, ALLETE Clean Energy expects acquisitions will beprimarily wind or solar facilities in North America. ALLETE Clean Energy is also targeting the development of new facilities up to 200 MW each, which will havelong-term PSAs in place for the output or may be sold upon completion.Federal production tax credit qualification is important to development project economics, and ALLETE Clean Energy invested in equipment in late 2016 and late2017 to meet production tax credit safe harbor provisions which provides an opportunity to seek development of up to approximately 1,500 MW of qualified windprojects through 2021. ALLETE Clean Energy will also invest approximately $80 million through 2020 to requalify up to 385 WTGs at its Storm Lake I, StormLake II and Lake Benton wind energy facilities for production tax credits.ALLETE, Inc. 2017 Form 10-K19ENERGY INFRASTRUCTURE AND RELATED SERVICES (Continued)ALLETE Clean Energy (Continued)On January 3, 2017, ALLETE Clean Energy announced that it will develop a wind energy facility of up to 50 MW after securing a 25-year PSA with Montana-Dakota Utilities, which includes an option to purchase the facility upon completion. We expect Montana-Dakota Utilities to exercise the option in the first quarterof 2018; construction and sale is expected to be completed in December 2018. ALLETE Clean Energy constructed and sold a 107 MW wind energy facility toMontana-Dakota Utilities in 2015. On March 16, 2017, ALLETE Clean Energy announced it will build, own and operate a separate 100 MW wind energy facilitypursuant to a 20-year PSA with Northern States Power; construction is expected to begin in late 2018.ALLETE Clean Energy manages risk by having a diverse portfolio of assets, which includes PSA expiration, technology and geographic diversity. The currentportfolio of approximately 535 MW is subject to typical variations in seasonal wind with higher wind resources typically available in the winter months. Themajority of its planned maintenance leverages this seasonality and is performed during lower wind periods. The current mix of PSA expiration and geographiclocation for existing facilities is as follows:Wind Energy FacilityLocationCapacity MWPSA MWPSA ExpirationArmenia MountainPennsylvania100.5100%2024Chanarambie/VikingMinnesota97.5 PSA 1 12%2018PSA 2 88%2023CondonOregon50100%2022Lake BentonMinnesota104100%2028Storm Lake IIowa108100%2019Storm Lake IIIowa77 PSA 1 90%2019PSA 2 10%2032The majority of ALLETE Clean Energy’s wind operations are located on real property owned by others with appropriate easements rights or necessary consents ofgovernmental authorities. Two of ALLETE Clean Energy’s wind energy facilities are encumbered by liens against their assets securing financing.U.S. Water ServicesU.S. Water Services provides integrated water management for industry by combining chemical, equipment, engineering and service for customized solutions toreduce water and energy usage, and improve efficiency. U.S. Water Services is located in 49 states and Canada and has an established base of approximately 4,900 customers. U.S. Water Services differentiates itself from the competition by developing synergies between established solutions in engineering, equipment andchemical water treatment, and helping customers achieve efficient and sustainable use of their water and energy systems. U.S. Water Services is a leading providerto the biofuels industry, and also serves the commercial and institutional markets, food and beverage, light manufacturing, power generation, and midstream oil andgas industries, among others. U.S. Water Services principally relies upon recurring revenues from a diverse mix of industrial customers. U.S. Water Services sellscertain products which are seasonal in nature, with higher demand typically realized in warmer months; generally, lower sales occur in the first quarter of eachyear.Our strategy is to grow U.S. Water Services’ presence in North America by adding customers, products, markets and new geographies. We believe water scarcityand a growing emphasis on conservation will continue to drive significant growth in the industrial, commercial and governmental sectors leading to organicrevenue growth for U.S. Water Services. U.S. Water Services also expects to pursue periodic strategic tuck-in acquisitions with a purchase price in the $10 millionto $50 million range. Priority will be given to acquisitions which expand its geographic reach, add new technology or deepen its capabilities to serve its expandingcustomer base.On September 1, 2017, U.S. Water Services acquired Tonka Water for total consideration of $19.2 million. Tonka Water is a supplier of municipal and industrialwater treatment systems that will expand U.S. Water Services’ geographic and customer markets.U.S. Water Services leases an office and production facility at its headquarters in Minnesota as well as various office, warehouse and production facilities acrossthe United States.ALLETE, Inc. 2017 Form 10-K20CORPORATE AND OTHERBNI EnergyBNI Energy is a supplier of lignite coal in North Dakota, producing approximately 4 million tons annually and has an estimated 650 million tons of lignite coalreserves. Two electric generating cooperatives, Minnkota Power and Square Butte, consume virtually all of BNI Energy’s production of lignite under cost-plusfixed fee coal supply agreements extending through December 31, 2037. (See Item 1. Business – Regulated Operations – Power Supply – Long-Term PurchasedPower and Note 11. Commitments, Guarantees and Contingencies.) The mining process disturbs and reclaims between 200 and 250 acres per year. Laws requirethat the reclaimed land be at least as productive as it was prior to mining. As of December 31, 2017 , BNI Energy had a $25.0 million asset reclamation obligation($23.5 million as of December 31, 2016 ) included in Other Non-Current Liabilities on the Consolidated Balance Sheet. These costs are included in the cost-plusfixed fee contract, for which an asset reclamation cost receivable was included in Other Non-Current Assets on the Consolidated Balance Sheet. The assetreclamation obligation is guaranteed by surety bonds and a letter of credit. (See Note 11. Commitments, Guarantees and Contingencies.)ALLETE PropertiesALLETE Properties represents our legacy Florida real estate investment. Market conditions can impact land sales and could result in our inability to cover our costbasis, operating expenses or fixed carrying costs such as community development district assessments and property taxes.ALLETE Properties’ major projects in Florida are Town Center at Palm Coast and Palm Coast Park.Summary of Projects Residential Non-residentialAs of December 31, 2017 Acres (a) Units (b) Sq. Ft. (b)(c)Projects Town Center at Palm Coast 971 2,419 2,178,700Palm Coast Park 1,025 830 2,143,000Total Projects 1,996 3,249 4,321,700(a)Acreage amounts are approximate and shown on a gross basis, including wetlands.(b)Units and square footage are estimated. Density at build out may differ from these estimates.(c)Includes retail and non-retail commercial, office, industrial, warehouse, storage and institutional square footage.In addition to the two projects, ALLETE Properties has approximately 800 acres of other land available for sale.In recent years, market conditions for real estate in Florida have required us to review our land inventories for impairment. In 2015, the Company reevaluated itsstrategy related to the real estate assets of ALLETE Properties in response to market conditions and transaction activity. The revised strategy incorporated thepossibility of a bulk sale of its entire portfolio. Proceeds from a bulk sale would be strategically deployed to support growth in ALLETE Clean Energy and U.S.Water Services, collectively our Energy Infrastructure and Related Services businesses. ALLETE Properties also continues to pursue sales of individual parcelsover time. ALLETE Properties will continue to maintain key entitlements and infrastructure without making additional investments or acquisitions.In connection with implementing the revised strategy, management evaluated its impairment analysis for its real estate assets using updated assumptions todetermine estimated future net cash flows on an undiscounted basis. Estimated fair values were based upon current market data and pricing for individual parcels.Our impairment analysis incorporates a probability-weighted approach considering the alternative courses of sales noted above.Based on the results of the 2015 undiscounted cash flow analysis, the undiscounted future net cash flows were not adequate to recover the carrying value of the realestate assets leading to an adjustment of carrying value to estimated fair value. Estimated fair value was derived using Level 3 inputs, including current marketinterest in the property for a bulk sale of its entire portfolio, and discounted cash flow analysis of estimated selling price for sales over time. As a result, a non-cashimpairment charge of $36.3 million was recorded in 2015 to reduce the carrying value of the real estate to its estimated fair value.In 2017 and 2016, our qualitative assessments indicated that the cash flows were adequate to recover the carrying value of ALLETE Properties real estate assets.As a result, no impairment was recorded in 2017 or 2016.ALLETE, Inc. 2017 Form 10-K21CORPORATE AND OTHER (Continued)ALLETE Properties (Continued)Seller Financing. ALLETE Properties occasionally provides seller financing to certain qualified buyers. As of December 31, 2017 , outstanding financereceivables were $15.5 million , net of reserves, with maturities through 2022 . These finance receivables accrue interest at market-based rates and arecollateralized by the financed properties.Regulation. A substantial portion of our development properties in Florida are subject to federal, state and local regulations, and restrictions that may imposesignificant costs or limitations on our ability to develop the properties. Much of our property is vacant land and some is located in areas where development mayaffect the natural habitats of various protected wildlife species or in sensitive environmental areas such as wetlands.Non-Rate Base Generation and MiscellaneousCorporate and Other also includes other business development and corporate expenditures, unallocated interest expense, a small amount of non-rate basegeneration, approximately 5,000 acres of land in Minnesota, and earnings on cash and investments.As of December 31, 2017 , non-rate base generation consists of 29 MW of generation at Rapids Energy Center. In 2017 , we sold 0.1 million MWh of non-ratebase generation (0.1 million MWh in 2016 and in 2015 ).Non-Rate Base Power SupplyUnit No.YearInstalledYearAcquiredNetCapability (MW)Rapids Energy Center (a) in Grand Rapids, MN Steam – Biomass (b)6 & 71969, 1980200027Hydro4 & 51917, 194820002(a)The net generation is primarily dedicated to the needs of one customer, UPM Blandin in Grand Rapids, Minnesota. (See Item 7. Management’s Discussion and Analysis –Outlook – Industrial Customers and Prospective Additional Load.)(b)Rapids Energy Center’s fuel supply is supplemented by coal.ENVIRONMENTAL MATTERSOur businesses are subject to regulation of environmental matters by various federal, state and local authorities. A number of regulatory changes to the Clean AirAct, the Clean Water Act and various waste management requirements have recently been promulgated by both the EPA and state authorities. Minnesota Power’sfacilities are subject to additional requirements under many of these regulations. Minnesota Power is reshaping its generation portfolio, over time, to reduce itsreliance on coal, has installed cost-effective emission control technology, and advocates for sound science and policy during rulemaking implementation.We consider our businesses to be in substantial compliance with currently applicable environmental regulations and believe all necessary permits have beenobtained. We anticipate that with many state and federal environmental regulations finalized, or to be finalized in the near future, potential expenditures for futureenvironmental matters may be material and may require significant capital investments. Minnesota Power has evaluated various environmental compliancescenarios using possible outcomes of environmental regulations to project power supply trends and impacts on customers.We review environmental matters on a quarterly basis. Accruals for environmental matters are recorded when it is probable that a liability has been incurred andthe amount of the liability can be reasonably estimated based on current law and existing technologies. Accruals are adjusted as assessment and remediation effortsprogress or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in the Consolidated Balance Sheet atundiscounted amounts and exclude claims for recoveries from insurance or other third parties. Costs related to environmental contamination treatment and cleanupare expensed unless recoverable in rates from customers. (See Note 11. Commitments, Guarantees and Contingencies.)ALLETE, Inc. 2017 Form 10-K22EMPLOYEESAs of December 31, 2017 , ALLETE had 2,017 employees, of which 1,972 were full-time.Minnesota Power and SWL&P have an aggregate of 517 employees who are members of the International Brotherhood of Electrical Workers (IBEW) Local 31.The labor agreements with IBEW Local 31 expired on January 31, 2018. Negotiations are proceeding and we believe ratified agreements will be agreed upon in thefirst quarter of 2018. Minnesota Power, SWL&P and IBEW Local 31 are operating under the expired labor agreements until new contracts are agreed upon.BNI Energy has 179 employees, of which 136 are members of IBEW Local 1593. The labor agreement with IBEW Local 1593 expires on March 31, 2019.AVAILABILITY OF INFORMATIONALLETE makes its SEC filings, including its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments tothose reports filed or furnished pursuant to Section 13(e) or 15(d) of the Securities Exchange Act of 1934, available free of charge on ALLETE’s website,www.allete.com, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC.ALLETE, Inc. 2017 Form 10-K23EXECUTIVE OFFICERS OF THE REGISTRANTAs of February 15, 2018 , these are the executive officers of ALLETE:Executive OfficersInitial Effective Date Alan R. Hodnik, Age 58 Chairman, President and Chief Executive OfficerMay 10, 2011President and Chief Executive OfficerMay 1, 2010 Robert J. Adams, Age 55 Senior Vice President and Chief Financial OfficerMarch 4, 2017Senior Vice President – Energy-Centric Businesses and Chief Risk OfficerNovember 14, 2015Vice President – Energy-Centric Businesses and Chief Risk OfficerJune 23, 2014Vice President – Business Development and Chief Risk OfficerMay 13, 2008 Deborah A. Amberg, Age 52 Senior Vice President, Chief Strategy Officer – Regulated Operations and President – SWL&PNovember 26, 2016Senior Vice President, General Counsel and SecretaryJanuary 1, 2006 Patrick L. Cutshall, Age 52 Vice President and Corporate TreasurerDecember 18, 2017TreasurerJanuary 1, 2016 Steven W. Morris, Age 56 Vice President, Controller and Chief Accounting OfficerDecember 24, 2016ControllerMarch 3, 2014 Patrick K. Mullen, Age 57 Senior Vice President – External AffairsApril 10, 2017 Bradley W. Oachs, Age 60 Senior Vice President and President – Regulated OperationsNovember 26, 2016 Bethany M. Owen, Age 52 Senior Vice President and Chief Legal and Administrative OfficerNovember 26, 2016All of the executive officers have been employed by us for more than five years in executive or management positions. Prior to election to the position listed above,the following executives held other positions with the Company during the past five years.Mr. Morris was Director – Accounting.Mr. Cutshall was Director – Investments and Tax; Director – Investments.Mr. Oachs was Chief Operating Officer – Minnesota Power.Ms. Owen was Vice President – Information Technology Solutions and President – SWL&P.Mr. Mullen was Vice President – Marketing and Corporate Communications.There are no family relationships between any of the executive officers. All officers and directors are elected or appointed annually.The present term of office of the executive officers listed in the preceding table extends to the first meeting of our Board of Directors after the next annual meetingof shareholders. Both meetings are scheduled for May 8, 2018.ALLETE, Inc. 2017 Form 10-K24Item 1A. Risk FactorsThe risks and uncertainties discussed below could materially affect our business operations, financial position, results of operations and cash flows, and should becarefully considered by stakeholders. The risks and uncertainties in this section are not the only ones we face; additional risks and uncertainties that we are notpresently aware of, or that we currently consider immaterial, may also affect our business operations, financial position, results of operations and cash flows.Accordingly, the risks described below should be carefully considered together with other information set forth in this report and in future reports that we file withthe SEC.Entity-wide RisksWe rely on access to financing sources and capital markets. If we do not have access to capital on acceptable terms or are unable to obtain capital whenneeded, our ability to execute our business plans, make capital expenditures or pursue other strategic actions that we may otherwise rely on for futuregrowth would be adversely affected.We rely on access to financing sources and the capital markets, on acceptable terms and at reasonable costs, as sources of liquidity for capital requirements notsatisfied by our cash flows from operations. Market disruptions or a downgrade of our credit ratings may increase the cost of borrowing or adversely affect ourability to access and financing costs in the capital markets. Such disruptions or causes of a downgrade could include but are not limited to: the effects of the TCJAon the Company’s cash flow metrics; a loss of, or a reduction in sales to, Large Power Customers if we are unable to offset the related lost margins; weakeroperating performance; adverse regulatory outcomes; disproportionate increase in the contribution to net income from our Energy Infrastructure and RelatedServices businesses as compared to that from our Regulated Operations; deteriorating economic or capital market conditions; or volatility in commodity prices. If we are not able to access capital on acceptable terms in sufficient amounts and when needed, or at all, the ability to maintain our businesses or to implement ourbusiness plans would be adversely affected.Recent U.S. tax legislation could adversely impact our financial position, results of operations and cash flows.On December 22, 2017, the TCJA was enacted into law. The TCJA has significantly changed the U.S. Internal Revenue Code and the taxation of corporations. TheTCJA is unclear in certain respects and will require interpretations and the promulgation of regulations by the Internal Revenue Service, as well as state taxauthorities and it could be subject to potential amendments and technical corrections. The regulatory treatment of the impacts of the TCJA will be subject to thediscretion of the FERC and state regulatory authorities.On February 6, 2018, Standard & Poor’s downgraded its ratings outlook for ALLETE to negative from stable as a result, among other reasons, of the potentialnegative impact of the TCJA on certain financial metrics used by credit rating agencies to rate us. It is unclear when or how the capital markets and the credit ratingagencies will ultimately respond. Further, there may be other adverse effects resulting from the TCJA or regulatory agency responses to the TCJA that we have notyet identified. We are still quantifying the impacts of the TCJA on our businesses, and have reflected estimates for the impacts in our Consolidated FinancialStatements as of December 31, 2017, which may be adjusted in future periods as more information becomes available. The reduction in the federal corporateincome tax rate required us to remeasure our existing deferred income tax balances as of the date of enactment, resulting in a non‑cash benefit to earnings in ourALLETE Clean Energy and U.S. Water Services segments as well as a non-cash expense at our Corporate and Other businesses. The remeasurement of the existingdeferred income tax assets and liabilities for our Regulated Operations segment was recorded as regulatory assets, regulatory liabilities, and a change to ourinvestment in ATC resulting in no material impact on the 2017 results of operations for this segment. The benefits of the TCJA for customers of Minnesota Powerand SWL&P are expected to be passed back to those customers over time primarily based upon the normalization provisions of the U.S. Internal Revenue Codeover the life of the related property, plant and equipment with the remainder passed back based upon the determinations of regulatory authorities. The decrease inour investment in ATC is expected to be amortized into earnings over time. The final amount and timing over which the benefits of the TCJA will be passed backto customers has not been determined, and therefore, the full cash flow impacts are still uncertain.ALLETE, Inc. 2017 Form 10-K25Item 1A. Risk Factors (Continued)Entity-wide Risks (Continued)A deterioration in general economic conditions may have adverse impacts on our financial position, results of operations and cash flows.If economic conditions deteriorate on a national or regional level, it may have a negative impact on the Company’s financial position, results of operations and cashflows as well as on our customers. This impact may include volatility and unpredictability in the demand for the products and services offered by our businesses,the loss of existing customers, tempered growth strategies, production cutbacks or customer bankruptcies. An uncertain economy could also adversely affectexpenses including pension costs, interest costs, and uncollectible accounts, or lead to reductions in the value of certain real estate and other investments.We are subject to extensive state and federal legislation and regulation, compliance with which could have an adverse effect on our businesses.We are subject to, and affected by, extensive state and federal legislation and regulation. If it was determined that our businesses failed to comply with applicablelaws and regulations, we could become subject to fines or penalties or be required to implement additional compliance measures or actions, the cost of which couldbe material. Adoption of new laws, rules, regulations, principles, or practices by federal and state agencies, or changes to or a failure to comply with current laws,rules, regulations, principles, or practices and their interpretations, could have an adverse effect on our financial position, results of operations and cash flows.The inability to attract and retain a qualified workforce including, but not limited to, executive officers, key employees and employees with specializedskills, could have an adverse effect on our operations.The success of our business heavily depends on the leadership of our executive officers and key employees to implement our business strategy. The inability tomaintain a qualified workforce including, but not limited to, executive officers, key employees and employees with specialized skills, may negatively affect ourability to service our existing or new customers, or successfully manage our business or achieve our business objectives. Personnel costs may increase due tocompetitive pressures or terms of collective bargaining agreements with union employees.Market performance and other changes could decrease the value of pension and other postretirement benefit plan assets, which may result in significantadditional funding requirements and increased annual expenses.The performance of the capital markets impacts the values of the assets that are held in trust to satisfy future obligations under our pension and other postretirementbenefit plans. We have significant obligations to these plans and the trusts hold significant assets. These assets are subject to market fluctuations and will yielduncertain returns, which may fall below our projected rates of return. A decline in the market value of the pension and other postretirement benefit plan assetswould increase the funding requirements under our benefit plans if asset returns do not recover. Additionally, our pension and other postretirement benefit planliabilities are sensitive to changes in interest rates. As interest rates decrease, the liabilities increase, potentially increasing benefit expense and fundingrequirements. Our pension and other postretirement benefit plan costs are generally recoverable in our electric rates as allowed by our regulators or through ourcost-plus fixed fee coal supply agreements at BNI Energy; however, there is no certainty that regulators will continue to allow recovery of these rising costs in thefuture.We are exposed to significant reputational risk.The Company could suffer negative impacts to its reputation as a result of operational incidents, violations of corporate compliance policies, regulatory violations,or other events which may result in negative customer perception and increased regulatory oversight, each of which could have an adverse effect on our financialposition, results of operations and cash flows.Catastrophic events, such as natural disasters and acts of war, may adversely affect our operations.Catastrophic events such as fires, earthquakes, explosions, floods, ice storms, tornadoes, or similar occurrences, as well as acts of war, could adversely affect theCompany’s facilities, operations, financial position, results of operations and cash flows. Although the Company has contingency plans and employs crisismanagement to respond and recover operations in the event of a severe disruption resulting from such events, these measures may not be successful. Furthermore,despite these measures, if such an occurrence were to occur, our financial position, results of operations and cash flows could be adversely affected.ALLETE, Inc. 2017 Form 10-K26Item 1A. Risk Factors (Continued)Entity-wide Risks (Continued)We are vulnerable to acts of terrorism or cybersecurity attacks.Our operations may be targets of terrorist activities, including cybersecurity attacks, which could disrupt our ability to produce or distribute some portion of ourproducts. There have been cyber security attacks on U.S. energy infrastructure in the past and there may be such attacks in the future. Our generation, transmissionand distribution facilities, information technology systems and other infrastructure facilities and systems could be direct targets of, or otherwise be materiallyadversely affected by such activities. Computer viruses, terrorism, theft and sabotage could impact our systems and facilities, or those of third parties on which werely, which may disrupt our operations and adversely impact our results of operations. Our businesses require the continued operation of sophisticated informationtechnology systems and network infrastructure. Our technology systems, or those of third parties on which we rely, may be vulnerable to disability, failures orunauthorized access due to hacking, viruses, acts of war or terrorism and other causes. If those technology systems fail or are breached and not recovered in atimely manner, we may be unable to perform critical business functions and sensitive, confidential and other data could be compromised, which could have anadverse effect on our financial position, results of operations and cash flows.Government challenges to our tax positions, as well as tax law changes and the inherent difficulty in quantifying potential tax effects of business decisions,could adversely affect our results of operations and liquidity.We are required to make judgments in order to estimate federal and state tax obligations. These judgments include reserves for potential adverse outcomes for taxpositions that may be challenged by tax authorities. The obligations, which include income taxes and taxes other than income taxes, involve complex matters thatultimately could be litigated. We also estimate our ability to use tax benefits, including those in the form of carryforwards and tax credits that are recorded asdeferred tax assets on our Consolidated Balance Sheet. A disallowance of these tax benefits could have an adverse impact on our financial position, results ofoperations and cash flows.We plan to utilize our carryforwards and tax credits in the future to reduce our income tax obligations. If we cannot generate enough taxable income in the future toutilize all of our carryforwards and tax credits before they expire, we may incur adverse charges to earnings. If federal or state tax authorities disagree with thedeductions resulting from our tax planning strategies, our financial position, results of operations and cash flows may be adversely impacted.Regulated Operations RisksOur results of operations could be negatively impacted if our Large Power Customers experience an economic downturn, incur work stoppages, fail tocompete effectively, experience decreased demand or experience a decline in prices for their product.Minnesota Power’s nine Large Power Customers accounted for 25 percent of our 2017 consolidated operating revenue ( 22 percent in 2016 and in 2015 ), of whichone of these customers accounted for approximately 10 percent of consolidated revenue in 2017 ( 8 percent in 2016 and in 2015 ). These customers are involved incyclical industries that by their nature are adversely impacted by economic downturns and are subject to strong competition in the marketplace. Additionally, theNorth American paper and pulp industry also faces declining demand due to the impact of electronic substitution for print and changing customer needs.Accordingly, if our customers experience an economic downturn, incur a work stoppage (including strikes, lock-outs or other events), fail to compete effectively,experience decreased demand or experience a decline in prices for their product, there could be adverse effects on their operations and, consequently, this couldhave a negative impact on our results of operations if we are unable to remarket at similar prices the energy that would otherwise have been sold to such LargePower Customers.ALLETE, Inc. 2017 Form 10-K27Item 1A. Risk Factors (Continued)Regulated Operations Risks (Continued)Our utility operations are subject to an extensive legal and regulatory framework under federal and state laws as well as regulations imposed by otherorganizations that may have a negative impact on our business and results of operations.We are subject to an extensive legal and regulatory framework imposed under federal and state law including regulations administered by the FERC, MPUC,MPCA, PSCW, NDPSC and EPA as well as regulations administered by other organizations including the NERC. These laws and regulations relate to allowedrates of return, capital structure, financings, rate and cost structure, acquisition and disposal of assets and facilities, construction and operation of generation,transmission and distribution facilities (including the ongoing maintenance and reliable operation of such facilities), recovery of purchased power costs and capitalinvestments, approval of integrated resource plans and present or prospective wholesale and retail competition, among other things. Energy policy initiatives at thestate or federal level could increase incentives for distributed generation, municipal utility ownership, or local initiatives could introduce generation or distributionrequirements that could change the current integrated utility model. Our transmission systems and electric generation facilities are subject to the NERC mandatoryreliability standards, including cybersecurity standards. Compliance with these standards may lead to increased operating costs and capital expenditures. If it wasdetermined that we were not in compliance with these mandatory reliability standards or other statutes, rules and orders, we could incur substantial monetarypenalties and other sanctions, which could adversely affect our results of operations.These laws and regulations significantly influence our operations and may affect our ability to recover costs from our customers. We are required to have numerouspermits, licenses, approvals and certificates from the agencies and other organizations that regulate our business. We believe we have obtained the necessarypermits, licenses, approvals and certificates for our existing operations and that our business is conducted in accordance with applicable laws; however, we areunable to predict the impact on our operating results from the future regulatory activities of any of these agencies and other organizations. Changes in regulationsor the adoption of new regulations could have an adverse impact on our results of operations.Our ability to obtain rate adjustments to maintain reasonable rates of return depends upon regulatory action under applicable statutes and regulations, and wecannot provide assurance that rate adjustments will be obtained or reasonable authorized rates of return on capital will be earned. Minnesota Power and SWL&P,from time to time, file general rate cases with, or otherwise seek cost recovery authorization from, federal and state regulatory authorities. If Minnesota Power andSWL&P do not receive an adequate amount of rate relief in general rate cases, including if rates are reduced, if increased rates are not approved on a timely basisor costs are otherwise unable to be recovered through rates, or if cost recovery is not granted at the requested level, we may experience an adverse impact on ourfinancial position, results of operations and cash flows. We are unable to predict the impact on our business and results of operations from future legislation orregulatory activities of any of these agencies or organizations.Our operations present certain environmental risks that could adversely affect our financial position and results of operations, including effects ofenvironmental laws and regulations, physical risks associated with climate change and initiatives designed to reduce the impact of GHG emissions.We are subject to extensive environmental laws and regulations affecting many aspects of our present and future operations, including air quality, water quality andusage, waste management, reclamation, hazardous wastes, avian mortality and natural resources. These laws and regulations can result in increased capitalexpenditures, environmental emission allowance trading, operating and other costs, as a result of compliance, remediation, containment and monitoring obligations,particularly with regard to laws relating to power plant emissions, coal ash, water discharge and wind energy facilities.These laws and regulations could restrict the output of some existing facilities, limit the use of some fuels in the production of electricity, require the installation ofadditional pollution control equipment, require participation in environmental emission allowance trading, and lead to other environmental considerations andcosts, which could have an adverse impact on our business, operations and results of operations.These laws and regulations generally require us to obtain and comply with a wide variety of environmental licenses, permits, inspections and other approvals.Violations of these laws and regulations could expose us to regulatory and legal proceedings, disputes with, and legal challenges by, governmental authorities andprivate parties, as well as potential significant civil fines criminal penalties and other sanctions.Existing environmental regulations may be revised and new environmental regulations may be adopted or become applicable to us. Revised or additionalregulations which result in increased compliance costs or additional operating restrictions, particularly if those costs are not fully recoverable from customers,could have an adverse effect on our results of operations.ALLETE, Inc. 2017 Form 10-K28Item 1A. Risk Factors (Continued)Regulated Operations Risks (Continued)The scientific community generally accepts that emissions of GHG are linked to global climate change. Physical risks of climate change, such as more frequent ormore extreme weather events, changes in temperature and precipitation patterns, changes to ground and surface water availability, and other related phenomena,could affect some, or all, of our operations. Severe weather or other natural disasters could be destructive, which could result in increased costs. An extremeweather event within our utility service areas can also directly affect our capital assets, causing disruption in service to customers due to downed wires and poles ordamage to other operating equipment. These all have the potential to adversely affect our business and operations.There is significant uncertainty regarding if and when new laws or regulations will be adopted to reduce GHGs and the impact any such laws or regulations wouldhave on us. In 2017 , coal was the primary fuel source for 70 percent of the energy produced by our generating facilities. Any future limits on GHG emissionswould likely require us to incur significant capital expenditures and increases in operating costs, which if significant, could result in the closure of certain coal-firedenergy centers, an impairment of assets, or otherwise adversely affect our results of operations, particularly if such expenditures and costs are not fully recoverablefrom customers.We cannot predict the amount or timing of all future expenditures related to environmental matters because of uncertainty as to applicable regulations orrequirements. There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all potentially responsibleparties. Violations of certain environmental statutes, rules and regulations could expose ALLETE to third party disputes and potentially significant monetarypenalties, as well as other sanctions for non‑compliance.The operation and maintenance of our electric generation and transmission facilities are subject to operational risks that could adversely affect ourfinancial position, results of operations and cash flows.The operation of generating facilities involves many risks, including start-up operations risks, breakdown or failure of facilities, the dependence on a specific fuelsource, inadequate fuel supply, availability of fuel transportation, or the impact of unusual or adverse weather conditions or other natural events, as well as the riskof performance below expected levels of output or efficiency. A significant portion of our facilities contain older generating equipment, even if maintained inaccordance with good engineering practices, may require significant capital expenditures to continue operating at peak efficiency. Generation and transmissionfacilities and equipment are also likely to require periodic upgrades and improvements due to changing environmental standards and technological advances. Wecould be subject to costs associated with any unexpected failure to produce or deliver power, including failure caused by breakdown or forced outage, as well asrepairing damage to facilities due to storms, natural disasters, wars, sabotage, terrorist acts and other catastrophic events.Our ability to successfully and timely complete capital improvements to existing facilities or other capital projects is contingent upon many variables.We expect to incur significant capital expenditures in making capital improvements to our existing electric generation and transmission facilities and in thedevelopment and construction of new electric generation and transmission facilities. Should any such efforts be unsuccessful or not completed in a timely manner,we could be subject to additional costs or impairments which could have an adverse impact on our financial position and results of operation.Our electric generating operations may not have access to adequate and reliable transmission and distribution facilities necessary to deliver electricity toour customers.We depend on our own transmission and distribution facilities, as well as facilities owned by other utilities, to deliver the electricity produced and sold to ourcustomers, and to other energy suppliers. If transmission capacity is inadequate, our ability to sell and deliver electricity may be limited. We may have to forgosales or may have to buy more expensive wholesale electricity that is available in the capacity-constrained area. In addition, any infrastructure failure that interruptsor impairs delivery of electricity to our customers could negatively impact the satisfaction of our customers, which could have an adverse impact on our businessand results of operations.ALLETE, Inc. 2017 Form 10-K29Item 1A. Risk Factors (Continued)Regulated Operations Risks (Continued)Our results of operations could be impacted by declining wholesale power prices.Wholesale prices for electricity have declined in recent years primarily due to low natural gas prices. If there are reductions in demand from customers or if we losecustomers, we will market any available power to Other Power Suppliers in an effort to mitigate any earnings impact. Sales to Other Power Suppliers are sold atmarket-based prices into the MISO market on a daily basis or through bilateral agreements of various durations. Due to the low wholesale prices for electricity, wecan make no assurances that our power marketing efforts would fully offset any reduction in earnings resulting from the lower demand from existing customers orthe loss of customers.The price of electricity and fuel may be volatile.Volatility in market prices for electricity and fuel could adversely impact our financial position and results of operations and may result from:•severe or unexpected weather conditions and natural disasters;•seasonality;•changes in electricity usage;•transmission or transportation constraints, inoperability or inefficiencies;•availability of competitively priced alternative energy sources;•changes in supply and demand for energy;•changes in power production capacity;•outages at our generating facilities or those of our competitors;•availability of fuel transportation;•changes in production and storage levels of natural gas, lignite, coal, crude oil and refined products;•wars, sabotage, terrorist acts or other catastrophic events; and•federal, state, local and foreign energy, environmental, or other regulation and legislation.Fluctuations in our fuel and purchased power costs related to our retail and municipal customers are passed on to customers through the fuel adjustment clause.Volatility in market prices for our fuel and purchase power costs primarily impacts our sales to Other Power Suppliers.Demand for energy may decrease.Our results of operations are impacted by the demand for energy in our service territories. There could be lower demand for energy due to a loss of customers as aresult of economic conditions, customers constructing their own generation facilities, higher costs and rates charged to customers, or loss of service territory orfranchises. Further, energy conservation and technological advances that increased energy efficiency may temporarily or permanently reduce the demand forenergy products. In addition, we are impacted by state and federal regulations requiring mandatory conservation measures, which would reduce the demand forenergy products. Continuing technology improvements and regulatory developments may make customer and third party-owned generation technologies such asrooftop solar systems, WTGs, microturbines and battery storage systems more cost effective and feasible for more of our customers. If more customers utilize theirown generation, demand for energy from us would decline. There may not be future economic growth opportunities that would enable us to replace the lost energydemand from these customers. Therefore, a decrease in demand for energy could adversely impact our financial position, results of operations and cash flows.We may not be able to successfully implement our strategic objectives of growing load at our utilities if current or potential industrial or municipalcustomers are unable to successfully implement expansion plans, including the inability to obtain necessary governmental permits.As part of our long-term strategy, we pursue new wholesale and retail loads in and around our service territories. Currently, there are several companies innortheastern Minnesota that are in the process of developing natural resource-based projects that represent long-term growth potential and load diversity for ourRegulated Operations businesses. These projects may include construction of new facilities and restarts of old facilities, both of which require permitting andapprovals to be obtained before the projects can be successfully implemented. If a project does not obtain any necessary governmental (including environmental)permits and approvals or if these customers are unable to successfully implement expansion plans, our long-term strategy and thus our results of operations couldbe adversely impacted.ALLETE, Inc. 2017 Form 10-K30Item 1A. Risk Factors (Continued)Energy Infrastructure and Related Services RisksThe inability to successfully manage and grow our Energy Infrastructure and Related Services businesses could adversely affect our results of operations.Our Energy Infrastructure and Related Services businesses consist of ALLETE Clean Energy and U.S. Water Services. The Company's strategy for thesebusinesses includes adding customers, products, and new geographies, project development for others and growth through acquisitions. This strategy depends, inpart, on the Company’s ability to successfully identify and evaluate acquisition opportunities and consummate acquisitions on acceptable terms. The Company maycompete with other companies for these acquisition opportunities, which may increase the Company’s cost of making acquisitions and the Company may beunsuccessful in pursuing these acquisition opportunities. These companies may be able to pay more for acquisitions and may be able to identify, evaluate, bid forand purchase a greater number of assets than the Company’s financial or human resources permit. Additionally, tax law changes may adversely impact theeconomic characteristics of potential acquisitions or investments. If the Company is unable to execute its strategy of growth through acquisitions, projectdevelopment for others, or the addition of new customers, products and geographies, it may impede our long-term objectives and business strategy.Acquisitions are subject to uncertainties. If we are unable to successfully integrate and manage future acquisitions or strategic investments, this could have anadverse impact on our results of operations. Our actual results may also differ from our expectations due to factors such as the ability to obtain timely regulatory orgovernmental approvals, integration and operational issues and the ability to retain management and other key personnel.U.S. Water Services principally relies upon recurring revenues from a diverse mix of industrial customers. Some of these customers can be adversely affected bylow commodity prices such as those for ethanol and oil which may cause these customers to purchase less of U.S. Water Services’ products and services. If U.S.Water Services is unable to retain its existing customers, add new customers, or if it experiences reduced demand for its products and services, adverse impacts onour results of operations could occur that would prevent us from achieving our future growth expectations.The generation of electricity from ALLETE Clean Energy’s wind energy facilities depends heavily on suitable meteorological conditions.ALLETE Clean Energy’s facilities are geographically diverse; however, if wind conditions are unfavorable, ALLETE Clean Energy’s electricity generation andrevenue from its wind energy facilities may be substantially below its expectations. The electricity produced, production tax credits received, and revenuesgenerated by a wind energy facility are highly dependent on suitable wind conditions and associated weather conditions, which are beyond ALLETE CleanEnergy’s control. Furthermore, components of its systems could be damaged by severe weather, such as hailstorms, lightning or tornadoes. In addition, replacementand spare parts for key components of ALLETE Clean Energy’s diverse turbine portfolio may be difficult or costly to acquire or may be unavailable. Unfavorableweather and atmospheric conditions could impair the effectiveness of ALLETE Clean Energy’s assets or reduce their output beneath their rated capacity or requireshutdown of key equipment, impeding operation of its wind energy facilities.The operation and maintenance of ALLETE Clean Energy’s electric generation facilities are subject to operational risks that could adversely affect ourfinancial position, results of operations and cash flows.The operation of generating facilities involves many risks, including start-up operations risks, breakdown or failure of facilities, the dependence on the availabilityof wind resources, or the impact of unusual, adverse weather conditions or other natural events, as well as the risk of performance below expected levels of outputor efficiency. A portion of our facilities contain older generating equipment, even if maintained in accordance with good engineering practices, may requiresignificant capital expenditures to continue operating at peak efficiency. We could be subject to costs associated with any unexpected failure to produce and deliverpower, including failure caused by breakdown or forced outage, as well as repairing damage to facilities due to storms, natural disasters, wars, sabotage, terroristacts and other catastrophic events.ALLETE, Inc. 2017 Form 10-K31Item 1A. Risk Factors (Continued)Energy Infrastructure and Related Services Risks (Continued)As contracts with its counterparties expire, ALLETE Clean Energy may not be able to replace them with agreements on similar terms.ALLETE Clean Energy is party to PSAs which expire in various years between 2018 and 2032. These PSA expirations are prior to the end of the estimated usefullives of the respective wind energy facilities. If, for any reason, ALLETE Clean Energy is unable to enter into new agreements with existing or new counterpartieson similar terms once the current agreements expire, or sell energy in the wholesale market resulting in similar revenue, our financial position, results of operationsand cash flows could be adversely affected.Counterparties to ALLETE Clean Energy’s offtake agreements may not fulfill their obligations.ALLETE Clean Energy is party to PSAs under various durations with a limited number of creditworthy counterparties. If, for any reason, any of the counterpartiesunder these agreements do not fulfill their related contractual obligations, and ALLETE Clean Energy is unable to remarket the energy resulting in similar revenue,our financial position, results of operations and cash flows could be adversely affected.ALLETE has a significant amount of goodwill and intangible assets. A determination that goodwill or intangible assets have been impaired could result ina significant non-cash charge to earnings.We had approximately $226 million of goodwill and intangible assets recorded on our Consolidated Balance Sheet as of December 31, 2017 , relating to our initialacquisition of U.S. Water Services in 2015 as well as U.S. Water Services’ subsequent acquisitions. If we change our business strategy, fail to deliver on ourprojected results or if market or other conditions adversely affect the operations of U.S. Water Services, we may be required to record an impairment charge.Declines in projected operating cash flows at U.S. Water Services could also result in an impairment charge. An impairment charge would result in a non-cashcharge to earnings that could have an adverse effect on our results of operations.Corporate and Other RisksBNI Energy may be adversely impacted by its exposure to customer concentration, and environmental laws and regulations.BNI Energy sells lignite coal to two electric generating cooperatives, Minnkota Power and Square Butte, and could be adversely impacted if these customers wereunable or unwilling to fulfill their related contractual obligations. In addition, BNI Energy and its customers may be adversely impacted by environmental laws andregulations which could have an adverse effect on our financial position, results of operations and cash flows.Real estate market conditions where our legacy Florida real estate investment is located may not improve.The Company’s strategy related to the real estate assets of ALLETE Properties incorporates the possibility of a bulk sale of its entire portfolio, in addition to salesover time, however, continued adverse market conditions could impact the timing of land sales, which could result in little to no sales, while still incurringoperating expenses such as community development district assessments and property taxes, resulting in net operating losses at ALLETE Properties. Furthermore,weak market conditions could put the properties at risk for an impairment charge. An impairment charge would result in a non-cash charge to earnings that couldhave an adverse effect on our results of operations.Item 1B. Unresolved Staff CommentsNone.Item 2. PropertiesA discussion of our properties is included in Item 1. Business and is incorporated by reference herein.ALLETE, Inc. 2017 Form 10-K32Item 3. Legal ProceedingsDiscussions of material regulatory and environmental proceedings are included in Note 4. Regulatory Matters and Note 11. Commitments, Guarantees andContingencies, and are incorporated by reference herein.We are involved in litigation arising in the normal course of business. Also in the normal course of business, we are involved in tax, regulatory and othergovernmental audits, inspections, investigations and other proceedings that involve state and federal taxes, safety, and compliance with regulations, rate base andcost of service issues, among other things. We do not expect the outcome of these matters to have a material effect on our financial position, results of operations orcash flows.Item 4. Mine Safety DisclosuresThe Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requires issuers to include in periodic reports filed with the SEC certaininformation relating to citations or orders for violations of standards under the Federal Mine Safety and Health Act of 1977 (Mine Safety Act). Informationconcerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Act and this Item are included in Exhibit 95 to thisForm 10-K.Part IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesOur common stock is listed on the NYSE under the symbol ALE. We have paid dividends, without interruption, on our common stock since 1948. A quarterlydividend of $0.56 per share on our common stock is payable on March 1, 2018, to the shareholders of record on February 15, 2018. The timing and amount offuture dividends will depend upon earnings, cash requirements, the financial condition of the Company, applicable government regulations and other factorsdeemed relevant by the ALLETE Board of Directors.The following table shows dividends declared per share, and the high and low prices of our common stock for the periods indicated as reported by the NYSE: 2017 2016 Price RangeDividendsPrice RangeDividendsQuarterHighLowDeclaredHighLowDeclaredFirst$68.38$61.64$0.535$58.34$48.26$0.52Second$74.59$66.810.535$64.69$53.470.52Third$79.61$69.790.535$65.41$52.500.52Fourth$81.24$72.960.535$66.92$56.480.52Annual Total $2.14 $2.08As of February 1, 2018, there were approximately 23,000 common stock shareholders of record.ALLETE, Inc. 2017 Form 10-K33Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities (Continued)Performance Graph.The following graph compares ALLETE’s cumulative Total Shareholder Return on its common stock with the cumulative return of the S&P 500 Index and thePhiladelphia Utility Index. The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economythrough changes in the aggregate market value of 500 stocks representing all major industries. Because this composite index has a broad industry base, itsperformance may not closely track that of a composite index comprised solely of electric utilities. The Philadelphia Utility Index is a capitalization-weighted indexof 20 utility companies involved in the generation of electricity.The calculations assume a $100 investment on December 31, 2012, and reinvestment of dividends. 201220132014201520162017ALLETE$100$127$146$140$183$218S&P 500 Index$100$132$150$153$171$208Philadelphia Utility Index$100$111$143$152$178$201ALLETE, Inc. 2017 Form 10-K34Item 6. Selected Financial Data 20172016201520142013Millions Except Per Share Amounts Operating Revenue (a)$1,419.3$1,339.7$1,486.4$1,136.8$1,018.4Operating Expenses (a)$1,189.5$1,116.2$1,275.7$948.0$864.3Net Income (b)$172.2$155.8$141.5$125.5$104.7Less: Non-Controlling Interest in Subsidiaries (c)—0.50.40.7—Net Income Attributable to ALLETE (b)$172.2$155.3$141.1$124.8$104.7Common Stock Dividends108.7102.797.983.875.2Earnings Retained in Business (b)$63.5$52.6$43.2$41.0$29.5Shares Outstanding Year-End51.149.649.145.941.4Average (d) Basic50.849.348.342.939.7Diluted51.049.548.443.139.8Diluted Earnings Per Share (b)$3.38$3.14$2.92$2.90$2.63Total Assets (e)$5,080.0$4,876.9$4,864.4$4,329.1$3,458.6Long-Term Debt$1,439.2$1,370.4$1,556.7$1,263.2$1,074.9Return on Common Equity (b)8.6%8.4%8.0%8.6%8.3%Common Equity Ratio58%55%53%54%55%Dividends Declared per Common Share$2.14$2.08$2.02$1.96$1.90Dividend Payout Ratio (b)63%66%69%68%72%Book Value Per Share at Year-End$40.46$38.17$37.18$35.04$32.43Capital Expenditures by Segment Regulated Operations$177.1$121.8$224.4$583.5$326.3ALLETE Clean Energy56.1106.98.64.2—U.S. Water Services4.43.72.9——Corporate and Other28.915.415.916.613.2Total Capital Expenditures$266.5$247.8$251.8$604.3$339.5(a)In 2015, operating revenue and operating expenses included the construction and sale of a wind energy facility from ALLETE Clean Energy to Montana-Dakota Utilitiesfor $197.7 million and $162.9 million, respectively.(b)The year ended December 31, 2017, includes the impact of the remeasurement of deferred income tax assets and liabilities resulting from the TCJA. (See Note 1.Operations and Significant Accounting Policies.)(c)The non-controlling interest related to ALLETE Clean Energy’s Condon wind energy facility was acquired in April 2016. (See Note 6. Acquisitions.)(d)Excludes unallocated ESOP shares in 2013 and 2014.(e)During the first quarter of 2017, the Company identified an error related to the deferred income tax treatment associated with its Wholesale and Retail Contra AFUDCRegulatory Liability resulting in a decrease in Regulatory Assets and Deferred Income Taxes. The periods presented have been revised for the correction of the error. (SeeNote 1. Operations and Significant Accounting Policies.)Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion should be read in conjunction with our Consolidated Financial Statements and notes to those statements and the other financialinformation appearing elsewhere in this report. In addition to historical information, the following discussion and other parts of this Form 10-K contain forward-looking information that involves risks and uncertainties. Readers are cautioned that forward-looking statements should be read in conjunction with our disclosuresin this Form 10-K under the headings: “Forward‑Looking Statements” located on page 6 and “Risk Factors” located in Item 1A. The risks and uncertaintiesdescribed in this Form 10-K are not the only risks facing our Company. Additional risks and uncertainties that we are not presently aware of, or that we currentlyconsider immaterial, may also affect our business operations. Our business, financial condition or results of operations could suffer if the risks are realized.ALLETE, Inc. 2017 Form 10-K35OverviewBasis of Presentation. We present three reportable segments: Regulated Operations, ALLETE Clean Energy and U.S. Water Services. Our segments weredetermined in accordance with the guidance on segment reporting. We measure performance of our operations through budgeting and monitoring of contributionsto consolidated net income by each business segment.Regulated Operations includes our regulated utilities, Minnesota Power and SWL&P, as well as our investment in ATC, a Wisconsin-based regulated utility thatowns and maintains electric transmission assets in portions of Wisconsin, Michigan, Minnesota and Illinois. Minnesota Power provides regulated utility electricservice in northeastern Minnesota to approximately 145,000 retail customers. Minnesota Power also has 16 non-affiliated municipal customers in Minnesota.SWL&P is a Wisconsin utility and a wholesale customer of Minnesota Power. SWL&P provides regulated utility electric, natural gas and water service innorthwestern Wisconsin to approximately 15,000 electric customers, 13,000 natural gas customers and 10,000 water customers. Our regulated utility operationsinclude retail and wholesale activities under the jurisdiction of state and federal regulatory authorities . (See Note 4. Regulatory Matters.)ALLETE Clean Energy focuses on developing, acquiring, and operating clean and renewable energy projects. ALLETE Clean Energy currently owns andoperates, in four states, approximately 535 MW of nameplate capacity wind energy generation that is contracted under PSAs of various durations. ALLETE CleanEnergy also engages in the development of wind energy facilities to operate under long-term PSAs or for sale to others upon completion.U.S. Water Services provides integrated water management for industry by combining chemical, equipment, engineering and service for customized solutions toreduce water and energy usage, and improve efficiency.Corporate and Other is comprised of BNI Energy, our coal mining operations in North Dakota, ALLETE Properties, our legacy Florida real estate investment,other business development and corporate expenditures, unallocated interest expense, a small amount of non-rate base generation, approximately 5,000 acres ofland in Minnesota, and earnings on cash and investments.ALLETE is incorporated under the laws of Minnesota. Our corporate headquarters are in Duluth, Minnesota. Statistical information is presented as ofDecember 31, 2017 , unless otherwise indicated. All subsidiaries are wholly-owned unless otherwise specifically indicated. References in this report to “we,” “us”and “our” are to ALLETE and its subsidiaries, collectively.2017 Financial OverviewThe following net income discussion summarizes a comparison of the year ended December 31, 2017 , to the year ended December 31, 2016 .Net income attributable to ALLETE in 2017 was $172.2 million , or $3.38 per diluted share, compared to $155.3 million , or $3.14 per diluted share, in 2016 . Netincome in 2017 included the favorable impacts of $13.0 million after-tax, or $0.25 per share, for the remeasurement of deferred income tax assets and liabilitiesresulting from the TCJA (see Note 1. Operations and Significant Accounting Policies) and $7.9 million after-tax, or $0.16 per share, related to the regulatoryoutcome of the MPUC’s modification of its November 2016 order on the allocation of North Dakota investment tax credits. Net income in 2017 also included anon‑cash $11.4 million after-tax charge, or $0.22 per share, for the MPUC’s decision in Minnesota Power’s 2016 general rate case at a hearing on January 18,2018, disallowing recovery of Minnesota Power’s regulatory asset for deferred fuel adjustment clause costs due to the anticipated adoption of a forward-lookingfuel adjustment clause methodology. (See Note 4. Regulatory Matters.) Net income in 2016 included the favorable impact related to the change in fair value of thecontingent consideration liability of $13.6 million after-tax, or $0.28 per share. Net income in 2016 also included an adverse impact of $8.8 million after‑tax, or$0.18 per share, for the regulatory outcome of the November 2016 MPUC order on the allocation of North Dakota investment tax credits, a $3.3 million after‑tax,or $0.07 per share, goodwill impairment charge and a $0.9 million after-tax expense, or $0.02 per share, related to the repayment of long-term debt at ALLETEClean Energy. Earnings per share dilution in 2017 was $0.11 due to additional shares of common stock outstanding as of December 31, 2017 .ALLETE, Inc. 2017 Form 10-K362017 Financial Overview (Continued)Regulated Operations net income attributable to ALLETE was $128.4 million in 2017 , compared to $135.5 million in 2016 . Net income in 2017 at MinnesotaPower decreased $9.8 million after-tax reflecting a non-cash $11.4 million after-tax charge for the MPUC’s decision disallowing the recovery of MinnesotaPower’s regulatory asset for deferred fuel adjustment clause costs due to the anticipated adoption of a forward-looking fuel adjustment clause methodology. Inaddition, net income decreased due to lower kWh sales to other power suppliers as a result of higher industrial sales coupled with lower market prices, higherinterest and taxes other than income taxes, and lower kWh sales to residential, commercial and municipal customers due to milder temperatures in 2017. Thesedecreases were partially offset by lower depreciation expense of $14.6 million after-tax resulting from the MPUC’s decision to modify the depreciable lives atBoswell, and higher industrial kWh sales. Interim retail rate refund reserves fully offset the interim retail rates recognized during 2017 due to the regulatoryoutcome of the MPUC’s decisions in Minnesota Power’s 2016 general rate case on January 18, 2018. Our equity earnings in ATC for 2017 increased $2.6 millionafter‑tax primarily due to additional investments in ATC and period over period changes in ATC’s estimate of a refund liability related to MISO return on equitycomplaints.ALLETE Clean Energy net income attributable to ALLETE was $41.5 million in 2017 compared to $13.4 million in 2016 . Net income in 2017 reflected a $23.6million after-tax benefit due to the remeasurement of deferred income tax assets and liabilities resulting from the TCJA, increased production tax credits due to therequalification of WTGs for production tax credits at its Storm Lake I, Storm Lake II and Lake Benton wind energy facilities, lower operating and maintenanceexpenses, and lower interest expense compared to 2016. Net income in 2016 included a $3.3 million after-tax goodwill impairment charge and a $0.9 million after-tax expense related to the repayment of long-term debt. Net income in 2016 also included an allocation of earnings to a non‑controlling interest in the limitedliability company that owns the Condon wind energy facility, which was acquired by ALLETE Clean Energy in April 2016. (See Note 6. Acquisitions.)U.S. Water Services net income attributable to ALLETE was $10.7 million in 2017 , compared to $1.5 million in 2016 . Net income in 2017 reflected a $9.2million after-tax benefit due to the remeasurement of deferred income tax assets and liabilities resulting from the TCJA, and higher operating revenue, partiallyoffset by increased operating expenses as a result of investments for future growth in waste treatment and water safety applications. Net income in 2017 alsoincluded a net loss of $0.8 million primarily for transaction fees and amortization expense of the Tonka Water acquisition on September 1, 2017. (See Note 6.Acquisitions.)Corporate and Other net loss attributable to ALLETE was $8.4 million in 2017 , compared to net income of $4.9 million in 2016 . The net loss in 2017 includedadditional income tax expense of $19.8 million after-tax for the remeasurement of deferred income tax assets and liabilities resulting from the TCJA. The net lossin 2017 also included a $7.9 million after‑tax favorable impact for the regulatory outcome of the MPUC’s modification of its November 2016 order on theallocation of North Dakota investment tax credits, lower accretion expense relating to the contingent consideration liability, and lower interest expense. Net incomein 2016 included an after-tax gain of $13.6 million related to the change in fair value of the contingent consideration liability, partially offset by an $8.8 millionafter-tax adverse impact for the regulatory outcome of the November 2016 MPUC order.ALLETE, Inc. 2017 Form 10-K372017 Compared to 2016(See Note 17. Business Segments for financial results by segment.)Regulated OperationsYear Ended December 3120172016Millions Operating Revenue – Utility$1,063.8$1,000.7Fuel, Purchased Power and Gas – Utility396.9339.9Transmission Services – Utility71.265.2Operating and Maintenance223.1220.7Depreciation and Amortization132.6154.3Taxes Other than Income Taxes51.147.7Operating Income188.9172.9Interest Expense(57.0)(52.1)Equity Earnings in ATC22.518.5Other Income1.22.1Income Before Income Taxes155.6141.4Income Tax Expense27.25.9Net Income Attributable to ALLETE$128.4$135.5Operating Revenue – Utility increased $63.1 million , or 6 percent , from 2016 primarily due to the period over period impact of the regulatory outcomesrelated to the allocation of North Dakota investment tax credits, as well as higher fuel adjustment clause recoveries, conservation improvement programrecoveries and revenue from kWh sales, partially offset by lower FERC formula-based rates, financial incentives under the conservation improvement programand transmission revenue. Interim retail rate refund reserves fully offset the interim retail rates recognized during 2017.Revenue increased $29.3 million due to the period over period impact of the regulatory outcomes related to the allocation of North Dakota investment taxcredits. As a result of the favorable impact for the regulatory outcome of the MPUC’s modification of its November 2016 order on the allocation of NorthDakota investment tax credits, operating revenue increased approximately $14 million in 2017. In 2016, operating revenue decreased approximately$15 million as a result of the adverse impact for the regulatory outcome of the November 2016 MPUC order. (See Note 4. Regulatory Matters.)Fuel adjustment clause recoveries increased $24.4 million due to higher fuel and purchased power costs attributable to retail and municipal customers. (SeeOperating Expenses - Fuel, Purchased Power and Gas – Utility. )Conservation improvement program recoveries increased $7.2 million from 2016 primarily due to an increase in related expenditures. (See OperatingExpenses - Operating and Maintenance. )Revenue from kWh sales increased $3.9 million from 2016 primarily due to higher sales to Industrial customers. Sales to Industrial customers increased 13.5percent primarily due to increased taconite production and the commencement of a long‑term PSA with Silver Bay Power in June 2016. Sales to Other PowerSuppliers decreased 6.4 percent from 2016 as a result of increased sales to Industrial customers. Sales to Other Power Suppliers are sold at market‑based pricesinto the MISO market on a daily basis or through bilateral agreements of various durations; market prices were lower in 2017 compared to 2016. Sales toResidential, Commercial and Municipal customers decreased primarily due to milder temperatures in 2017.ALLETE, Inc. 2017 Form 10-K382017 Compared to 2016 (Continued)Regulated Operations (Continued) Kilowatt-hours Sold20172016QuantityVariance%VarianceMillions Regulated Utility Retail and Municipal Residential1,0961,102(6)(0.5)Commercial1,4201,442(22)(1.5)Industrial7,3276,45687113.5Municipal799816(17)(2.1)Total Retail and Municipal10,6429,8168268.4Other Power Suppliers4,0394,316(277)(6.4)Total Regulated Utility Kilowatt-hours Sold14,68114,1325493.9Revenue from electric sales to taconite and iron concentrate customers accounted for 22 percent of consolidated operating revenue in 2017 (18 percent in 2016). Revenue from electric sales to paper, pulp and secondary wood product customers accounted for 5 percent of consolidated operating revenue in 2017 (6percent in 2016 ). Revenue from electric sales to pipelines and other industrial customers accounted for 7 percent of consolidated operating revenue in 2017 (7percent in 2016 ).Interim retail rates for Minnesota Power were approved by the MPUC and became effective January 1, 2017. Interim retail rate refund reserves of $31.6million fully offset the interim retail rates recognized during 2017 due to the regulatory outcome of the MPUC’s decision in Minnesota Power’s 2016 generalrate case on January 18, 2018. (See Note 4. Regulatory Matters.)Revenue from wholesale customers under FERC formula-based rates decreased $4.9 million from 2016 primarily due to lower rates.Financial incentives under the conservation improvement program decreased $1.9 million from 2016 .Transmission revenue decreased $1.7 million primarily due to lower MISO-related revenue, partially offset by period over period changes in the estimate of arefund liability related to MISO return on equity complaints. (See Operating Expenses - Transmission Services – Utility. )Operating Expenses increased $47.1 million , or 6 percent , from 2016 .Fuel, Purchased Power and Gas – Utility expense increased $57.0 million , or 17 percent , from 2016 primarily due to increased kWh sales, higher fuel costsand a $19.5 million expense for the MPUC’s decision disallowing recovery of Minnesota Power’s regulatory asset for deferred fuel adjustment clause costs ata hearing on January 18, 2018, due to the anticipated adoption of a forward-looking fuel adjustment clause methodology. These increases were partially offsetby lower purchased power prices. Fuel and purchased power expense related to our retail and municipal customers is recovered through the fuel adjustmentclause. (See Operating Revenue – Utility. )Transmission Services – Utility expense increased $6.0 million , or 9 percent , from 2016 primarily due to higher MISO-related expense. (See OperatingRevenue – Utility. )Operating and Maintenance expense increased $2.4 million , or 1 percent , from 2016 primarily due to a $7.2 million increase in conservation improvementprogram expenses in 2017. Conservation improvement program expenses are recovered from certain retail customers. (See Operating Revenue – Utility. ) Thisincrease was partially offset by lower materials purchased for generation facilities. Operating and Maintenance expense in 2016 included a $3.6 million salestax refund, partially offset by higher storm restoration costs of $2.9 million related to severe wind storms across Minnesota Power’s service territory in July2016.ALLETE, Inc. 2017 Form 10-K392017 Compared to 2016 (Continued)Regulated Operations (Continued)Depreciation and Amortization expense decreased $21.7 million , or 14 percent , from 2016 primarily due to modifications of the depreciable lives forBoswell, partially offset by additional property, plant and equipment in service. At a hearing on January 18, 2018, the MPUC decided to extend thedepreciable lives of Boswell Unit 3, Unit 4 and common facilities to 2050, and shorten the depreciable lives of Boswell Unit 1 and Unit 2 to 2022, resulting ina net decrease to depreciation expense of approximately $25 million in 2017.Taxes Other than Income Taxes increased $3.4 million , or 7 percent , from 2016 primarily due to higher property tax expenses resulting from higher taxableplant.Interest Expense increased $4.9 million , or 9 percent , from 2016 primarily due to higher average interest rates. We record interest expense for RegulatedOperations primarily based on rate base and authorized capital structure, and allocate the balance to Corporate and Other.Equity Earnings in ATC increased $4.0 million , or 22 percent , from 2016 primarily due to additional investments in ATC and period over period changes inATC’s estimate of a refund liability related to MISO return on equity complaints. (See Note 5. Investment in ATC.)Income Tax Expense increased $21.3 million from 2016 primarily due to the period over period impact of the regulatory outcomes related to the allocation ofNorth Dakota investment tax credits and higher pre-tax income. The TCJA did not have an impact on income tax expense for our Regulated Operations as theremeasurement of deferred income tax assets and liabilities primarily resulted in the recording of regulatory assets and liabilities.In 2017, as a result of the favorable impact for the regulatory outcome of the MPUC’s modification of its November 2016 order on the allocation of NorthDakota investment tax credits, Regulated Operations increased operating revenue and reduced the corresponding regulatory liability by approximately $14million resulting in an income tax expense of $6.1 million. In addition, Regulated Operations recorded an income tax expense of $7.9 million for North Dakotainvestment tax credits transferred to Corporate and Other, resulting in no impact to net income for Regulated Operations. Corporate and Other recorded anoffsetting income tax benefit of $7.9 million for the North Dakota investment tax credits transferred from Regulated Operations.In 2016, as a result of the adverse impact for the regulatory outcome of the November 2016 MPUC order, Regulated Operations reduced operating revenueand recorded a corresponding regulatory liability for approximately $15 million resulting in an income tax benefit of $6.2 million. In addition, RegulatedOperations recorded an income tax benefit of $8.8 million for North Dakota investment tax credits transferred from Corporate and Other, resulting in noimpact to net income for Regulated Operations. Corporate and Other recorded an offsetting income tax expense of $8.8 million for the North Dakotainvestment tax credits transferred to Regulated Operations.ALLETE Clean EnergyYear Ended December 3120172016Millions Operating Revenue$80.5$80.5Net Income Attributable to ALLETE (a)$41.5$13.4(a)Results in 2017 include a $23.6 million after-tax benefit due to the remeasurement of deferred income tax assets and liabilities resulting from the TCJA.Operating Revenue is consistent with 2016 as lower kWh sales at the wind energy facilities resulting from lower wind resources were offset by higheramortization of PSAs. (See Note 1. Operations and Significant Accounting Policies.)ALLETE, Inc. 2017 Form 10-K402017 Compared to 2016 (Continued)ALLETE Clean Energy (Continued) Year Ended December 31, 20172016Production and Operating RevenuekWhRevenuekWhRevenueMillions Wind Energy Facility Lake Benton241.8$12.3254.7$12.8Storm Lake II152.610.0154.810.1Condon90.77.596.98.2Storm Lake I215.612.4222.311.6Chanarambie/Viking263.513.9278.813.4Armenia Mountain267.424.4268.224.4Total Production and Operating Revenue1,231.6$80.51,275.7$80.5Net Income Attributable to ALLETE increased $28.1 million from 2016 . Net income in 2017 included a $23.6 million after‑tax benefit due to theremeasurement of deferred income tax assets and liabilities resulting from the TCJA, increased production tax credits due to the requalification of WTGs atALLETE Clean Energy’s Storm Lake I, Storm Lake II and Lake Benton wind energy facilities, lower operating and maintenance expense, and lower interestexpense compared to 2016. Net income in 2016 included a $3.3 million after-tax goodwill impairment charge and a $0.9 million after-tax expense related tothe repayment of long-term debt. Net income in 2016 also included an allocation of earnings to a non-controlling interest in the limited liability company thatowns the Condon wind energy facility, which was acquired by ALLETE Clean Energy in April 2016. (See Note 6. Acquisitions.)U.S. Water ServicesYear Ended December 3120172016Millions Operating Revenue$151.8$137.5Net Income Attributable to ALLETE (a)$10.7$1.5(a)Results in 2017 include a $9.2 million after-tax benefit due to the remeasurement of deferred income tax assets and liabilities resulting from the TCJA.Operating Revenue increased $14.3 million from 2016 primarily due to the acquisitions of WEST in October 2016 and Tonka Water in September 2017. (SeeNote 6. Acquisitions.) Revenue from chemical sales and related services was $116.0 million in 2017 compared to $110.5 million in 2016. Revenue fromequipment sales was $35.8 million for 2017 compared to $27.0 million in 2016; equipment sales can significantly fluctuate from period to period.Net Income Attributable to ALLETE increased $9.2 million from 2016 . Net income in 2017 included a $9.2 million after‑tax benefit due to theremeasurement of deferred income tax assets and liabilities resulting from the TCJA, and higher operating revenue, partially offset by increased operatingexpenses as a result of investments for future growth in waste treatment and water safety applications. Net income in 2017 also included a net loss of $0.8million primarily for transaction fees and amortization expense of the Tonka Water acquisition on September 1, 2017. (See Note 6. Acquisitions.)Cash flow from operations for U.S. Water Services was approximately $12 million in 2017 compared to approximately $11 million in 2016.Corporate and OtherOperating Revenue increased $2.2 million , or 2 percent , from 2016 primarily due to an increase in revenue at BNI Energy, which operates under cost-plusfixed fee contracts, as a result of higher expenses and record coal sales in 2017, partially offset by a decrease in land sales at ALLETE Properties. Operatingrevenue in 2016 included the sale of ALLETE Properties’ Ormond Crossings project and Lake Swamp wetland mitigation bank for approximately $21 million.ALLETE, Inc. 2017 Form 10-K412017 Compared to 2016 (Continued)Corporate and Other (Continued)Net Loss Attributable to ALLETE was $8.4 million in 2017 compared to net income of $4.9 million in 2016 . The net loss in 2017 included a $19.8 millionafter-tax expense due to the remeasurement of deferred income tax assets and liabilities resulting from the TCJA. The net loss in 2017 also included a $7.9million after-tax favorable impact for the regulatory outcome of the MPUC’s modification of its November 2016 order on the allocation of North Dakotainvestment tax credits, lower accretion expense relating to the contingent consideration liability, and lower interest expense. Net income in 2016 included anafter‑tax gain of $13.6 million related to the change in fair value of the contingent consideration liability, partially offset by an $8.8 million after-tax adverseimpact for the regulatory outcome of the November 2016 MPUC order.Net income at BNI Energy was $4.5 million in 2017 which included a $3.1 million after-tax expense due to the remeasurement of deferred income tax assetsand liabilities resulting from the TCJA, partially offset by more tons sold; net income in 2016 was $6.8 million. The net loss at ALLETE Properties was$8.8 million in 2017 which included a $7.8 million after-tax expense for the remeasurement of deferred income tax assets and liabilities resulting from theTCJA; net income in 2016 was $0.7 million.Income Taxes – ConsolidatedFor the year ended December 31, 2017 , the effective tax rate was 7.9 percent (11.3 percent for the year ended December 31, 2016 ). The decrease from 2016was primarily due to the remeasurement of deferred income tax assets and liabilities resulting from the TCJA and increased production tax credits, partiallyoffset by higher pre-tax income. (See Regulated Operations - Income Tax Expense .) The effective rate deviated from the combined statutory rate ofapproximately 41 percent primarily due to the remeasurement of deferred income tax assets and liabilities resulting from the TCJA, and production tax credits.(See Note 13. Income Tax Expense.)2016 Compared to 2015(See Note 17. Business Segments for financial results by segment.)Regulated OperationsYear Ended December 3120162015Millions Operating Revenue – Utility$1,000.7$991.2Fuel, Purchased Power and Gas – Utility339.9336.0Transmission Services – Utility65.254.1Operating and Maintenance220.7229.6Depreciation and Amortization154.3135.1Taxes Other than Income Taxes47.746.2Operating Income172.9190.2Interest Expense(52.1)(53.9)Equity Earnings in ATC18.516.3Other Income2.13.4Income Before Income Taxes141.4156.0Income Tax Expense5.924.4Net Income Attributable to ALLETE$135.5$131.6Operating Revenue – Utility increased $ 9.5 million , or 1 percent , from 2015 primarily due to higher transmission revenue, cost recovery rider revenue,pricing on PSAs with Other Power Suppliers and FERC formula-based rates, partially offset by the adverse impact for the regulatory outcome of theNovember 2016 MPUC order related to the allocation of North Dakota investment tax credits as well as lower conservation improvement program recoveries.Transmission revenue increased $9.7 million primarily due to period over period changes in our estimate of a refund liability related to MISO return on equitycomplaints and higher MISO-related revenue. (See Operating Expenses - Transmission Services – Utility. )ALLETE, Inc. 2017 Form 10-K422016 Compared to 2015 (Continued)Regulated Operations (Continued)Cost recovery rider revenue increased $7.5 million primarily due to the completion of the Boswell Unit 4 environmental upgrade in the fourth quarter of 2015.Despite lower kWh sales, revenue increased $4.9 million from 2015 primarily due to higher pricing on PSAs with Other Power Suppliers in 2016. Sales toOther Power Suppliers are sold at market-based prices into the MISO market on a daily basis or through bilateral agreements of various durations. Sales toindustrial customers decreased 2.7 percent primarily due to reduced taconite production. In addition, demand revenue from industrial customers was down in2016 as a result of lower demand nominations. Kilowatt-hours Sold20162015QuantityVariance%VarianceMillions Regulated Utility Retail and Municipal Residential1,1021,113(11)(1.0)Commercial1,4421,462(20)(1.4)Industrial6,4566,635(179)(2.7)Municipal816833(17)(2.0)Total Retail and Municipal9,81610,043(227)(2.3)Other Power Suppliers4,3164,31060.1Total Regulated Utility Kilowatt-hours Sold14,13214,353(221)(1.5)Revenue from electric sales to taconite and iron concentrate customers accounted for 18 percent of consolidated operating revenue in 2016 (17 percent in 2015). Revenue from electric sales to paper, pulp and secondary wood product customers accounted for 6 percent of consolidated operating revenue in 2016 (6percent in 2015 ). Revenue from electric sales to pipelines and other industrial customers accounted for 7 percent of consolidated operating revenue in 2016 (6percent in 2015 ).Revenue from wholesale customers under FERC formula-based rates increased $3.8 million primarily due to additional environmental and other investments.Revenue decreased $15.0 million due to the adverse impact for the regulatory outcome of the November 2016 MPUC order related to the allocation of NorthDakota investment tax credits. (See Note 4. Regulatory Matters.)Conservation improvement program recoveries decreased $4.1 million from 2015 primarily due to a reduction in related expenditures. (See OperatingExpenses - Operating and Maintenance Expense. )Operating Expenses increased $26.8 million , or 3 percent , from 2015 .Fuel, Purchased Power and Gas – Utility expense increased $3.9 million , or 1 percent , from 2015 primarily due to higher fuel and purchased power prices in2016 compared to 2015, partially offset by lower kWh sales in 2016. Fuel and purchased power expense related to retail and municipal customers is recoveredthrough the fuel adjustment clause. Transmission Services – Utility expense increased $11.1 million , or 21 percent , from 2015 primarily due to higher MISO‑related expense and period overperiod changes in our estimate of a refund for MISO transmission expense related to MISO return on equity complaints. (See Operating Revenue and Note 4.Regulatory Matters.)Operating and Maintenance expense decreased $8.9 million , or 4 percent , from 2015 , primarily due to lower pension and other postretirement benefitexpenses (see Note 15. Pension and Other Postretirement Benefit Plans), a $3.6 million sales tax refund received in 2016 and a $4.1 million decrease inconservation improvement program expenses. Conservation improvement program expenses are recovered from certain retail customers. (See OperatingRevenue. ) Operating and Maintenance expense included higher storm restoration costs of $2.9 million related to severe wind storms across MinnesotaPower’s service territory in July 2016.ALLETE, Inc. 2017 Form 10-K432016 Compared to 2015 (Continued)Regulated Operations (Continued)Depreciation and Amortization expense increased $19.2 million , or 14 percent , from 2015 primarily due to additional property, plant and equipment inservice.Taxes Other than Income Taxes increased $1.5 million , or 3 percent , from 2015 primarily due to higher property tax expenses resulting from higher taxableplant.Interest Expense decreased $1.8 million , or 3 percent , from 2015 primarily due to lower average interest rates. We record interest expense for RegulatedOperations based on Minnesota Power’s rate base and authorized capital structure, and allocate the balance to Corporate and Other.Equity Earnings in ATC increased $2.2 million , or 13 percent , from 2015 primarily due to additional investments in ATC and period over period changes inATC’s estimate of a refund liability related to MISO return on equity complaints.Other Income decreased $1.3 million , or 38 percent , from 2015 primarily due to lower AFUDC–Equity.Income Tax Expense decreased $18.5 million , or 76 percent , from 2015 due to lower pre-tax income, higher production tax credits and the adverse impactfor the regulatory outcome of the November 2016 MPUC order related to the allocation of North Dakota investment tax credits. (See Note 4. RegulatoryMatters.)As a result of the adverse impact for the regulatory outcome of the November 2016 MPUC order, Regulated Operations reduced operating revenue andrecorded a corresponding regulatory liability for approximately $15 million resulting in an income tax benefit of $6.2 million in 2016. In addition, RegulatedOperations recorded an income tax benefit of $8.8 million for North Dakota investment tax credits transferred from Corporate and Other, resulting in noimpact to net income for Regulated Operations. Corporate and Other recorded an offsetting income tax expense of $8.8 million for the North Dakotainvestment tax credits transferred to Regulated Operations.ALLETE Clean EnergyYear Ended December 31,20162015Millions Operating Revenue$80.5$262.1Net Income Attributable to ALLETE$13.4$29.9Operating Revenue decreased $181.6 million from 2015 . Operating revenue in 2015 included the recognition of $197.7 million in revenue for theconstruction of a wind energy facility sold to Montana-Dakota Utilities in 2015. Operating revenue in 2016 was positively impacted by additional revenuegenerated from the operations of wind energy facilities acquired in April and July 2015. Year Ended December 31, 20162015Production and Operating RevenuekWhRevenuekWhRevenueMillions Wind Energy Facility Lake Benton254.7$12.8265.1$13.5Storm Lake II154.810.1186.411.7Condon96.98.284.17.8Storm Lake I222.311.6230.712.1Chanarambie/Viking278.813.4199.19.8Armenia Mountain268.224.4111.69.5Total Wind Energy Facilities1,275.780.51,077.064.4Development Fee (a)———197.7Total Production and Operating Revenue1,275.7$80.51,077.0$262.1(a) 2015 included the recognition of $162.9 million of cost of sales.ALLETE, Inc. 2017 Form 10-K442016 Compared to 2015 (Continued)ALLETE Clean Energy (Continued)Net Income Attributable to ALLETE decreased $16.5 million from 2015 . Net income for 2015 included the recognition of profit of $20.4 million after-tax forthe construction of a wind energy facility sold to Montana-Dakota Utilities. In 2015, net income also included $1.8 million after-tax expense in acquisitioncosts related to the Chanarambie/Viking and Armenia Mountain wind energy facilities. Net income in 2016 included a $3.3 million after-tax non-cashgoodwill impairment charge (see Note 1. Operations and Significant Accounting Policies) and a $0.9 million after-tax expense related to the repayment oflong-term debt. Earnings in 2016 were positively impacted by income generated from the operations of wind energy facilities acquired in April and July 2015.U.S. Water Services Year EndedPeriod February 10, 2015 December 31, 2016Through December 31, 2015Millions Operating Revenue$137.5$119.8Net Income Attributable to ALLETE$1.5$0.9Operating Revenue increased $17.7 million in 2016 compared to the period from February 10, 2015, to December 31, 2015 . The results for 2015 reflectoperations from the date of acquisition, February 10, 2015, through December 31, 2015 , and therefore, do not reflect a full year. Revenue from chemical salesand related services was $110.5 million in 2016 compared to $92.5 million in 2015. Revenue from equipment sales was $27.0 million for 2016 compared to$27.3 million in 2015; equipment sales can significantly fluctuate from period to period.Net Income Attributable to ALLETE increased $0.6 million in 2016 compared to the period from February 10, 2015, to December 31, 2015 . The results for2015 reflect operations from the date of acquisition, February 10, 2015, through December 31, 2015 , and therefore do not reflect a full year. Net income in2015 included an additional $1.9 million of after‑tax expense recognized as cost of sales related to purchase accounting for inventories and sales backlogwhich have been fully recognized as of December 31, 2016. Earnings in 2016 reflected increased investments in back office systems and support at U.S. WaterServices as we create a platform for future growth.Corporate and OtherOperating Revenue increased $7.7 million , or 7 percent , from 2015 primarily due to an increase in land sales at ALLETE Properties, which sold its OrmondCrossings project and Lake Swamp wetland mitigation bank in 2016. The increase was partially offset by a decrease in revenue at BNI Energy, which operatesunder cost-plus fixed fee contracts, as a result of lower expenses and fewer tons sold in 2016 compared to 2015.Net Income Attributable to ALLETE increased $26.2 million from 2015 . Net income in 2016 included an after-tax gain of $13.6 million related to the changein fair value of the U.S. Water Services contingent consideration liability and increased land sales at ALLETE Properties, partially offset by an adverse impactof $8.8 million after-tax for the regulatory outcome of the November 2016 MPUC order. ( Regulated Operations - Income Tax Expense. ) In 2015, the net lossincluded a $22.3 million after-tax non-cash impairment charge relating to the real estate assets of ALLETE Properties and $3.0 million after-tax expense inacquisition costs related to U.S. Water Services. Net income at BNI Energy increased to $6.8 million in 2016 compared to $6.7 million in 2015, and netincome at ALLETE Properties increased to $0.7 million in 2016 compared to a net loss of $23.3 million in 2015.Income Taxes – ConsolidatedFor the year ended December 31, 2016 , the effective tax rate was 15.2 percent (22.6 percent for the year ended December 31, 2015 ). The decrease from theyear ended December 31, 2015, was primarily due to increased production tax credits in 2016 related to additional wind energy generation. The effective ratedeviated from the combined statutory rate of approximately 41 percent primarily due to production tax credits. (See Note 13. Income Tax Expense.)ALLETE, Inc. 2017 Form 10-K45Critical Accounting PoliciesThe preparation of financial statements and related disclosures in conformity with GAAP requires management to make various estimates and assumptions thataffect amounts reported in the Consolidated Financial Statements. These estimates and assumptions may be revised, which may have a material effect on theConsolidated Financial Statements. Actual results may differ from these estimates and assumptions. These policies are discussed with the Audit Committee of ourBoard of Directors on a regular basis. We believe the following policies are most critical to our business and the understanding of our results of operations.Regulatory Accounting. Our regulated utility operations are accounted for in accordance with the accounting standards for the effects of certain types ofregulation. These standards require us to reflect the effect of regulatory decisions in our financial statements. Regulatory assets represent incurred costs that havebeen deferred as they are probable for recovery in customer rates. Regulatory liabilities represent obligations to make refunds to customers and amounts collectedin rates for which the related costs have not yet been incurred. The Company assesses quarterly whether regulatory assets and liabilities meet the criteria forprobability of future recovery or deferral. This assessment considers factors such as, but not limited to, changes in the regulatory environment and recent rateorders to other regulated entities under the same jurisdiction. If future recovery or refund of costs becomes no longer probable, the assets and liabilities would berecognized in current period net income or other comprehensive income. (See Note 4. Regulatory Matters.)Pension and Postretirement Health and Life Actuarial Assumptions. We account for our pension and other postretirement benefit obligations in accordancewith the accounting standards for defined benefit pension and other postretirement plans. These standards require the use of several important assumptions,including the expected long-term rate of return on plan assets, the discount rate and mortality assumptions, among others, in determining our obligations and theannual cost of our pension and other postretirement benefits. In establishing the expected long-term rate of return on plan assets, we determine the long-termhistorical performance of each asset class and adjust these for current economic conditions while utilizing the target allocation of our plan assets to forecast theexpected long-term rate of return. Our pension asset allocation as of December 31, 2017 , was approximately 53 percent equity securities, 38 percent debt, 5percent private equity and 4 percent real estate. Our postretirement health and life asset allocation as of December 31, 2017 , was approximately 64 percent equitysecurities, 31 percent debt and 5 percent private equity. Equity securities consist of a mix of market capitalization sizes with domestic and international securities.In 2017 , we used expected long-term rates of return of 7.50 percent in our actuarial determination of our pension expense and 6.00 percent to 7.50 percent in ouractuarial determination of our other postretirement expense. The actuarial determination uses an asset smoothing methodology for actual returns to reduce thevolatility of varying investment performance over time. We review our expected long-term rate of return assumption annually and will adjust it to respond tochanging market conditions. A one‑quarter percent decrease in the expected long-term rate of return would increase the annual expense for pension and otherpostretirement benefits by approximately $1.8 million , pre-tax.The discount rate is computed using a bond matching study which utilizes a portfolio of high quality bonds that produce cash flows similar to the projected costs ofour pension and other postretirement plans. In 2017 , we used discount rates of 4.53 percent and 4.57 percent in our actuarial determination of our pension andother postretirement expense, respectively. We review our discount rates annually and will adjust them to respond to changing market conditions. A one-quarterpercent decrease in the discount rate would increase the annual expense for pension and other postretirement benefits by approximately $1.1 million , pre‑tax.The mortality assumptions used to calculate our pension and other postretirement benefit obligations as of December 31, 2017 , considered a modified RP-2014mortality table and mortality projection scale. (See Note 15. Pension and Other Postretirement Benefit Plans.)Impairment of Long-Lived Assets. We review our long-lived assets, which include the legacy real estate assets of ALLETE Properties, for indicators ofimpairment in accordance with the accounting standards for property, plant and equipment on a quarterly basis.In accordance with the accounting standards for property, plant and equipment, if indicators of impairment exist, we test our long‑lived assets for recoverability bycomparing the carrying amount of the asset to the undiscounted future net cash flows expected to be generated by the asset. Cash flows are assessed at the lowestlevel of identifiable cash flows. The undiscounted future net cash flows are impacted by trends and factors known to us at the time they are calculated and ourexpectations related to: management’s best estimate of future sales prices; holding period and timing of sales; method of disposition; and future expendituresnecessary to maintain the operations.ALLETE, Inc. 2017 Form 10-K46Critical Accounting Policies (Continued)Taxation. We are required to make judgments regarding the potential tax effects of various financial transactions and our ongoing operations to estimate ourobligations to taxing authorities. These tax obligations include income taxes and taxes other than income taxes. Judgments related to income taxes require therecognition in our financial statements of the largest tax benefit of a tax position that is “more-likely-than-not” to be sustained on audit. Tax positions that do notmeet the “more-likely-than-not” criteria are reflected as a tax liability in accordance with the accounting standards for uncertainty in income taxes. We record avaluation allowance against our deferred tax assets to the extent it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized.We are subject to income taxes in various jurisdictions. We make assumptions and judgments each reporting period to estimate our income tax assets, liabilities,benefits and expenses. Judgments and assumptions are supported by historical data and reasonable projections. Our assumptions and judgments include theapplication of tax statutes and regulations, and projections of future federal taxable income, state taxable income, and state apportionment to determine our abilityto utilize NOL and credit carryforwards prior to their expiration. Significant changes in assumptions regarding future federal and state taxable income or a changein tax rates could require new or increased valuation allowances which could result in a material impact on our results of operations.Valuation of Goodwill and Intangible Assets. When we acquire a business, the assets acquired and liabilities assumed are recorded at their respective fair valuesas of the acquisition date. Determining the fair value of intangible assets acquired as part of a business combination requires us to make significant estimates. Theseestimates include the amount and timing of projected future cash flows, the discount rate used to discount those cash flows to present value, the assessment of theasset’s life cycle, and the consideration of legal, technical, regulatory, economic and competitive risks. The fair value assigned to intangible assets is determined byestimating the future cash flows of each project and discounting the net cash flows back to their present values. The discount rate used is determined at the time ofmeasurement in accordance with accepted valuation standards.Goodwill. Goodwill is the excess of the purchase price (consideration transferred) over the estimated fair value of net assets of acquired businesses. In accordancewith GAAP, goodwill is not amortized. The Company assesses whether there has been an impairment of goodwill annually in the fourth quarter and whenever anevent occurs or circumstances change that would indicate the carrying amount may be impaired. Impairment testing for goodwill is done at the reporting unit level.An impairment loss is recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The test forimpairment requires us to make several estimates about fair value, most of which are based on projected future cash flows. Our estimates associated with thegoodwill impairment test are considered critical due to the amount of goodwill recorded on our Consolidated Balance Sheet and the judgment required indetermining fair value, including projected future cash flows. The results of our annual impairment test are discussed in Note 1. Operations and SignificantAccounting Policies and Note 9. Fair Value in this Form 10-K. Goodwill was $148.3 million and $131.2 million as of December 31, 2017 , and December 31, 2016, respectively.Intangible Assets. Intangible assets include customer relationships, patents, non-compete agreements, land easements, trademarks and trade names. Intangibleassets with definite lives consist of customer relationships, which are amortized using an attrition model, and patents, non-compete agreements, land easements andcertain trade names, which are amortized on a straight-line basis with estimated useful lives ranging from approximately 1 year to approximately 20 years. Wereview definite-lived intangible assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable.Indefinite-lived intangible assets consist of trademarks and certain trade names, which are tested for impairment annually in the fourth quarter and whenever anevent occurs or circumstances change that would indicate that the carrying amount may be impaired. Impairment is calculated as the excess of the asset’s carryingamount over its fair value. Our impairment reviews are based on an estimated future cash flow approach that requires significant judgment with respect to futurerevenue and expense growth rates, selection of an appropriate discount rate, and other assumptions and estimates. We use estimates that are consistent with ourbusiness plans and a market participant view of the assets being evaluated. The results of our annual impairment test are discussed in Note 9. Fair Value in thisForm 10-K. Intangible assets, net of accumulated amortization, were $77.6 million and $82.2 million as of December 31, 2017 , and December 31, 2016 ,respectively.ALLETE, Inc. 2017 Form 10-K47OutlookALLETE is an energy company committed to earning a financial return that rewards our shareholders, allows for reinvestment in our businesses and sustainsgrowth. The Company has long-term objectives of achieving average annual earnings per share growth of 5 percent to 7 percent, and providing a dividend payoutcompetitive with our industry.ALLETE is predominately a regulated utility through Minnesota Power, SWL&P and an investment in ATC. ALLETE’s strategy is to remain predominately aregulated utility while investing in its Energy Infrastructure and Related Services businesses to complement its regulated businesses, balance exposure to theutility’s industrial customers and provide potential long-term earnings growth. ALLETE expects net income from Regulated Operations to be approximately 80percent of total consolidated net income in 2018 . Over the next several years, the contribution of the Energy Infrastructure and Related Services businesses to netincome is expected to increase as ALLETE grows these operations. ALLETE expects its businesses to provide regulated, contracted or recurring revenues, and tosupport sustained growth in net income and cash flow.Regulated Operations. Minnesota Power’s long-term strategy is to be the leading electric energy provider in northeastern Minnesota by providing safe, reliableand cost-competitive electric energy, while complying with environmental permit conditions and renewable energy requirements. Keeping the cost of energyproduction competitive enables Minnesota Power to effectively compete in the wholesale power markets and minimizes retail rate increases to help maintaincustomer viability. As part of maintaining cost competitiveness, Minnesota Power intends to reduce its exposure to possible future carbon and GHG legislation byreshaping its generation portfolio, over time, to reduce its reliance on coal. (See EnergyForward. ) We will monitor and review proposed environmental regulationsand may challenge those that add considerable cost with limited environmental benefit. Minnesota Power will continue to pursue customer growth opportunitiesand cost recovery rider approvals for transmission, renewable and environmental investments, as well as work with regulators to earn a fair rate of return.Regulatory Matters. Entities within our Regulated Operations segment are under the jurisdiction of the MPUC, FERC, PSCW and NDPSC. See Note 4. RegulatoryMatters for discussion of regulatory matters within these jurisdictions.2016 Minnesota General Rate Case. In November 2016, Minnesota Power filed a retail rate increase request with the MPUC seeking an average increase ofapproximately 9 percent for retail customers. The rate filing sought a return on equity of 10.25 percent and a 53.81 percent equity ratio. On an annualized basis, therequested final rate increase would have generated approximately $55 million in additional revenue. In December 2016, Minnesota Power filed a request to modifyits original interim rate proposal reducing its requested interim rate increase to $34.7 million from the original request of approximately $49 million due to achange in its electric sales forecast. In December 2016 orders, the MPUC accepted the November 2016 filing as complete and authorized an annual interim rateincrease of $34.7 million beginning January 1, 2017 .On February 23, 2017, Minnesota Power filed an additional request to further reduce its requested interim rate increase. In an order dated April 13, 2017, theMPUC approved Minnesota Power’s updated retail rate request resulting in a reduction in the annual interim rate increase to $32.2 million beginning May 1, 2017.As a result of working with intervenors and further developments as the rate review progressed, Minnesota Power’s final rate request was adjusted toapproximately $49 million on an annualized basis. At a hearing on January 18, 2018, the MPUC made determinations regarding Minnesota Power’s general ratecase including allowing a return on common equity of 9.25 percent and a 53.81 percent equity ratio. Upon commencement of final rates, we expect additionalrevenue of approximately $13 million on an annualized basis. Final rates are expected to commence in the fourth quarter of 2018; interim rates will be collectedthrough this period which will be fully offset by the recognition of a corresponding reserve. As a result of the MPUC’s decisions on January 18, 2018, MinnesotaPower has recorded a reserve for an interim rate refund of approximately $32 million as of December 31, 2017 . The MPUC also disallowed recovery of MinnesotaPower’s regulatory asset for deferred fuel adjustment clause costs due to the anticipated adoption of a forward-looking fuel adjustment clause methodologyresulting in a $19.5 million pre-tax charge to Fuel, Purchased Power and Gas – Utility in 2017. An order from the MPUC setting forth the effective date of finalrates is expected by March 12, 2018. Minnesota Power will review this order for potential reconsideration of certain issues at that time.As part of its decision in Minnesota Power’s 2016 general rate case, the MPUC extended the depreciable lives of Boswell Unit 3, Unit 4 and common facilities to2050 primarily to mitigate rate increases for our customers, and shortened the depreciable lives of Boswell Unit 1 and Unit 2 to 2022, resulting in a decrease todepreciation expense of approximately $25 million pre-tax in 2017.ALLETE, Inc. 2017 Form 10-K48Outlook (Continued)Regulatory Matters (Continued)Energy-Intensive Trade-Exposed Customer Rates. An EITE customer ratemaking law was enacted in 2015 which established that it is the energy policy ofMinnesota to have competitive rates for certain industries such as mining and forest products. In 2015, Minnesota Power filed a rate schedule petition with theMPUC for EITE customers and a corresponding rider for EITE cost recovery. In a March 2016 order, the MPUC dismissed the petition without prejudice. In June2016, Minnesota Power filed a revised EITE petition with the MPUC which included additional information on the net benefits analysis, limits on eligiblecustomers and term lengths for the EITE discount. The rate adjustments were intended to be revenue and cash flow neutral to Minnesota Power. The MPUCapproved a reduction in rates for EITE customers in a December 2016 order and subsequently approved cost recovery in an order dated April 20, 2017; collectionof the discount was subject to the MPUC’s review of Minnesota Power’s compliance filing implementing approval of a recovery mechanism, with the subsequentorder issued on October 13, 2017, that modified the order dated April 20, 2017. During 2017, Minnesota Power provided discounts of $8.6 million which wererecorded as a receivable. On September 29, 2017, Minnesota Power informed its EITE customers that it had suspended the EITE discount due to a concern that itwas not revenue and cash flow neutral to Minnesota Power based on an MPUC decision at a hearing on September 7, 2017, as well as the interim rate reductionand decisions in its 2016 general rate case. Based on the MPUC’s decisions at a hearing on January 18, 2018, as part of Minnesota Power’s 2016 general rate case,Minnesota Power reinstated the EITE discount effective January 1, 2018. Minnesota Power expects the discount to EITE customers to be approximately $15million annually based on EITE customer current operating levels. While interim rates are in effect for Minnesota Power’s 2016 general rate case, EITE discountswill offset interim rate refund reserves for non-EITE customers.2016 Wisconsin General Rate Case. SWL&P’s current retail rates are based on a 2017 PSCW retail rate order effective August 14, 2017, that allows for a 10.5percent return on common equity and a 55 percent equity ratio. SWL&P’s retail rates prior to August 14, 2017, were based on a 2012 PSCW retail rate order thatprovided for a 10.9 percent return on equity. The 2017 PSCW retail rate order authorizes SWL&P to collect on average a 2.9 percent increase in rates for retailcustomers ( 3.8 percent increase in electric rates; 4.8 percent decrease in natural gas rates; and 9.8 percent increase in water rates). On an annualized basis, SWL&Pexpects to collect additional revenue of $2.5 million .Industrial Customers and Prospective Additional LoadIndustrial Customers . Electric power is one of several key inputs in the taconite mining, iron concentrate, paper, pulp and secondary wood products, pipeline andother industries. Approximately 50 percent of our regulated utility kWh sales in 2017 ( 45 percent in 2016 and 46 percent in 2015 ) were made to our industrialcustomers. We expect industrial sales of approximately 7.0 million to 7.5 million MWh in 2018 (7.3 million MWh in 2017 ; 6.5 million MWh in 2016 ).Taconite and Iron Concentrate . Minnesota Power’s taconite customers are capable of producing up to approximately 41 million tons of taconite pellets annually.Taconite pellets produced in Minnesota are primarily shipped to North American steel making facilities that are part of the integrated steel industry. Steel producedfrom these North American facilities is used primarily in the manufacture of automobiles, appliances, pipe and tube products for the gas and oil industry, and in theconstruction industry. Historically, less than five percent of Minnesota taconite production has been exported outside of North America. Minnesota Power alsoprovides electric service to three iron concentrate facilities capable of producing up to approximately 4 million tons of iron concentrate per year. Iron concentrate isused in the production of taconite pellets. These iron concentrate facilities are owned in whole, or in part, by ERP Iron Ore and are currently idled. (See ERP IronOre / Magnetation .)There has been a general historical correlation between U.S. steel production and Minnesota taconite production. The American Iron and Steel Institute, anassociation of North American steel producers, reported that U.S. raw steel production operated at approximately 74 percent of capacity in 2017 ( 71 percent in2016 and in 2015 ). The World Steel Association, an association of over 160 steel producers, national and regional steel industry associations, and steel researchinstitutes representing approximately 85 percent of world steel production, projected U.S. steel consumption in 2018 will increase by approximately 1 percentcompared to 2017 .Minnesota Power’s taconite customers may experience annual variations in production levels due to such factors as economic conditions, short-term demandchanges or maintenance outages. We estimate that a one million ton change in Minnesota Power’s taconite customers’ production would impact our annualearnings per share by approximately $0.04 , net of expected power marketing sales at current prices. Changes in wholesale electric prices or customer contractualdemand nominations could impact this estimate. Minnesota Power proactively sells power in the wholesale power markets that is temporarily not required byindustrial customers to optimize the value of its generating facilities. Long-term reductions in taconite production or a permanent shut down of a taconite customermay lead Minnesota Power to file a general rate case to recover lost revenue.ALLETE, Inc. 2017 Form 10-K49Outlook (Continued)Industrial Customers and Prospective Additional Load (Continued)USS Corporation . In 2015, USS Corporation temporarily idled its Minnesota Ore Operations - Keetac plant in Keewatin, Minnesota, and a portion of itsMinnesota Ore Operations - Minntac plant in Mountain Iron, Minnesota. These actions were due to high inventory levels and ongoing adjustment of its steelproducing operations throughout North America. Global influences in the market, including a higher level of imports, unfairly traded products and reduced steelprices, were cited as having an impact. USS Corporation returned its Minntac plant to full production in 2015, and in the first quarter of 2017, USS Corporationrestarted its Keetac plant. USS Corporation has the capability to produce approximately 5 million tons and 15 million tons of taconite annually at its Keetac andMinntac plants, respectively.United Taconite . On May 16, 2017, Cliffs announced that production of a fully fluxed taconite pellet has started at its United Taconite facility. The productreplaces a flux pellet previously made at Cliffs’ indefinitely idled Empire operation in Michigan. United Taconite has the capability to produce approximately5 million tons of taconite annually.Northshore Mining . Cliffs has announced that it is investing further in Minnesota ore operations, specifically it plans to invest approximately $75 million through2020 to expand capacity for producing direct reduced-grade pellets at Northshore Mining. The additional direct reduced-grade pellets could be sold commerciallyor used to supply Cliff’s planned hot briquetted iron production plant in Toledo, Ohio. Minnesota Power has a long-term PSA through 2031 with Silver Bay Power,which provides the majority of the electric service requirements for Northshore Mining. (See Silver Bay Power .)Silver Bay Power . In 2016, Minnesota Power and Silver Bay Power entered into a long-term PSA through 2031. Silver Bay Power supplies approximately 90 MWof load to Northshore Mining, an affiliate of Silver Bay Power, which has been served predominately through self-generation by Silver Bay Power. In the years2016 through 2019, Minnesota Power is supplying Silver Bay Power with at least 50 MW of energy and Silver Bay Power has the option to purchase additionalenergy from Minnesota Power as it transitions away from self-generation. On December 31, 2019, Silver Bay Power will cease self-generation and MinnesotaPower will supply the energy requirements for Silver Bay Power.ERP Iron Ore / Magnetation . In 2015, Magnetation announced that it had filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code inthe U.S. Bankruptcy Court for the District of Minnesota, citing the significant decrease in global iron ore prices and its existing capital structure. In January 2016,Magnetation idled its Plant 2 facility in Bovey, Minnesota. In October 2016, the bankruptcy court approved plans to idle Magnetation’s Plant 4 facility near GrandRapids, Minnesota, and its pellet plant in Reynolds, Indiana, as well as terminate Magnetation’s pellet purchase agreement with AK Steel Corporation. Thecompany subsequently idled the facilities and stated it was preserving the plants and their value for a potential buyer. On January 30, 2017, ERP Iron Orepurchased substantially all of Magnetation’s assets pursuant to an asset purchase agreement approved by the bankruptcy court. Although we cannot predict whetherthe facilities will be restarted, Minnesota Power would serve the Plant 2 and Plant 4 facilities through ERP Iron Ore’s assumption of the existing electric serviceagreement.Paper, Pulp and Secondary Wood Products . Minnesota Power serves a number of customers in the paper, pulp and secondary wood products industry. The fourmajor paper and pulp mills we serve reported operating at, or near, full capacity in 2017 . Lower levels of production are expected in 2018 as a result of the closureof the smaller of the two paper machines located at UPM Blandin in the fourth quarter of 2017. (See UPM Blandin .)UPM Blandin . On October 24, 2017, UPM-Kymmene Corporation announced that in light of the global market situation for graphic papers, and to sustain itscompetitiveness and leading position in the market, it planned to permanently close the smaller of UPM Blandin’s two paper machines located in Grand Rapids,Minnesota; the closure was completed in the fourth quarter of 2017. Paper production related to the other paper machine is planned to continue at UPM Blandin.Minnesota Power provides electric and steam service to UPM Blandin.Prospective Additional Load. Minnesota Power is pursuing new wholesale and retail loads in and around its service territory. Currently, several companies innortheastern Minnesota continue to progress in the development of natural resource-based projects that represent long-term growth potential and load diversity forMinnesota Power. We cannot predict the outcome of these projects.Nashwauk Public Utilities Commission . Mesabi Metallics is a retail customer of the Nashwauk Public Utilities Commission, and Minnesota Power has a wholesaleelectric contract with the Nashwauk Public Utilities Commission for electric service through at least December 2032. Mesabi Metallics filed for bankruptcyprotection in July 2016, under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware. On June 13, 2017, the bankruptcycourt approved a settlement plan for a consortium led by Chippewa Capital Partners LLC to take control of the project, subject to certain stipulations. OnDecember 22, 2017, Mesabi Metallics emerged from bankruptcy under the ownership of Chippewa Capital Partners LLC.ALLETE, Inc. 2017 Form 10-K50Outlook (Continued)Industrial Customers and Prospective Additional Load (Continued)PolyMet . PolyMet is planning to start a new copper-nickel and precious metal (non-ferrous) mining operation in northeastern Minnesota. In 2015, PolyMetannounced the completion of the final EIS by state and federal agencies, which was subsequently published in the Federal Register and Minnesota EnvironmentalQuality Board Monitor. The Minnesota Department of Natural Resources (DNR) issued its Record of Decision in March 2016, finding the final EIS adequate. InJuly 2016, PolyMet submitted applications for water-related permits with the State of Minnesota, and in August 2016, an application for an air quality permit wassubmitted to the MPCA. In November 2016, PolyMet submitted a state permit to mine application to the DNR detailing its operational plans for the mine. OnJanuary 5, 2018, the DNR released PolyMet’s draft permit to mine and opened a public comment period through March 6, 2018. Public hearings were held inFebruary 2018 to review the draft permit to mine, as well as the MPCA’s recently released draft water quality permit, draft air quality permit and draft waterquality certification. The final EIS also requires Records of Decision by the federal agencies, which are expected in 2018, before final action can be taken on therequired federal permits to construct and operate the mining operation. On January 9, 2017, the U.S. Forest Service signed the Final Record of Decision authorizinga land exchange with PolyMet, which upon completion of title transfer will result in PolyMet obtaining surface rights to land needed to develop its miningoperation. Minnesota Power could supply between 45 MW and 50 MW of load under a ten-year power supply contract with PolyMet that would begin upon start-up of operations.EnergyForward. Minnesota Power is executing EnergyForward , a strategic plan for assuring reliability, protecting affordability and further improvingenvironmental performance. The plan includes completed and planned investments in wind, solar, natural gas and hydroelectric power, construction of additionaltransmission capacity, the installation of emissions control technology and the idling of certain coal-fired generating facilities.On July 28, 2017, Minnesota Power submitted a resource package to the MPUC requesting approval of PPAs for the output of a 250 MW wind energy facility anda 10 MW solar energy facility as well as approval of a 250 MW natural gas energy PPA. These agreements will be subject to MPUC approval of the constructionof a 525 MW to 550 MW combined-cycle natural gas-fired generating facility which will be jointly owned by Dairyland Power Cooperative and a subsidiary ofALLETE. Minnesota Power would purchase approximately 50 percent of the facility's output starting in 2025. In an order dated September 19, 2017, the MPUCapproved Minnesota Power’s request that approval for the natural gas energy PPA be decided through an administrative law judge process. The administrative lawjudge is expected to provide a recommendation by July 2018, and the Company anticipates a MPUC decision in the second half of 2018. The MPUC did not takeany action regarding the wind and solar energy PPAs which will be refiled separately from the natural gas energy PPA.Integrated Resource Plan. In 2015, Minnesota Power filed its 2015 IRP with the MPUC which contained steps in its EnergyForward strategic plan, and includedan analysis of a variety of existing and future energy resource alternatives and a projection of customer cost impact by class. In a July 2016 order, the MPUCapproved Minnesota Power’s 2015 IRP with modifications. The order accepted Minnesota Power’s plans for Taconite Harbor, directed Minnesota Power to retireBoswell Units 1 and 2 no later than 2022, required an analysis of generation and demand response alternatives to be filed with a natural gas resource proposal, andrequired Minnesota Power to conduct request for proposals for additional wind, solar and demand response resource additions subject to further MPUC approvals.In October 2016, Minnesota Power announced that Boswell Units 1 and 2 will be retired in 2018 as part of its EnergyForward strategic plan. In an order datedSeptember 19, 2017, the MPUC approved Minnesota Power’s request to extend the next IRP filing deadline until October 1, 2019. (See Note 4. RegulatoryMatters.)Renewable Energy. Minnesota Power’s 2015 IRP includes an update on its plans and progress in meeting the Minnesota renewable energy milestones through2025. Minnesota Power continues to execute its renewable energy strategy through renewable projects that will ensure it meets the identified state mandate at thelowest cost for customers. Minnesota Power has exceeded the interim milestone requirements to date and expects 28 percent of its applicable retail and municipalenergy sales will be supplied by renewable energy sources in 2018 . (See Item 1. Business – Regulated Operations – Minnesota Legislation and EnergyForward .)ALLETE, Inc. 2017 Form 10-K51Outlook (Continued)EnergyForward (Continued)Minnesota Solar Energy Standard . Minnesota law requires at least 1.5 percent of total retail electric sales, excluding sales to certain customers, to be generated bysolar energy by the end of 2020. At least 10 percent of the 1.5 percent mandate must be met by solar energy generated by or procured from solar photovoltaicdevices with a nameplate capacity of 40 kW or less and community solar garden subscriptions. In a 2016 order, the MPUC approved Camp Ripley, a 10 MW utilityscale solar project at the Camp Ripley Minnesota Army National Guard base and training facility near Little Falls, Minnesota, as eligible to meet the solar energystandard and for current cost recovery. Camp Ripley was completed in the fourth quarter of 2016. In a July 2016 order, the MPUC approved a community solargarden project in northeastern Minnesota, which is comprised of a 1 MW solar array owned and operated by a third party with the output purchased by MinnesotaPower and a 40 kW solar array that is owned and operated by Minnesota Power. Minnesota Power believes Camp Ripley and the community solar garden arrayswill meet approximately one-third of the overall mandate. Additionally, in an order dated February 10, 2017, the MPUC approved Minnesota Power’s proposal toincrease the amount of solar rebates available for customer-sited solar installations and recover costs of the program through Minnesota Power’s renewable costrecovery rider. The proposal to incentivize customer-sited solar installations and the community solar garden subscriptions is expected to meet a portion of therequired small scale solar mandate.Minnesota Power has approval for current cost recovery of investments and expenditures related to compliance with the Minnesota Solar Energy Standard.Currently, there is no approved customer billing rate for solar costs.Wind Energy . Minnesota Power’s wind energy facilities consist of Bison (497 MW) located in North Dakota and Taconite Ridge (25 MW) located in northeasternMinnesota. Minnesota Power also has two long-term wind energy PPAs with an affiliate of NextEra Energy, Inc. to purchase the output from Oliver Wind I ( 50 MW) and Oliver Wind II ( 48 MW) located in North Dakota.Minnesota Power uses the 465 -mile, 250 -kV DC transmission line that runs from Center, North Dakota, to Duluth, Minnesota, to transport increasing amounts ofwind energy from North Dakota while gradually phasing out coal-based electricity delivered to its system over this transmission line from Square Butte’s lignitecoal-fired generating unit. The DC transmission line capacity can be increased if renewable energy or transmission needs justify investments to upgrade the line.Updated customer billing rates for the renewable cost recovery rider, which includes investments and expenditures related to Bison, were approved by the MPUCin an order dated November 8, 2017, which allows Minnesota Power to charge retail customers on a current basis for the costs of constructing certain renewableinvestments plus a return on the capital invested.In a November 2016 order, the MPUC directed Minnesota Power to attribute all North Dakota investment tax credits realized from Bison to Minnesota Powerregulated retail customers. As a result of the adverse regulatory outcome, Minnesota Power recorded a regulatory liability, and a reduction in Operating Revenue ofapproximately $15 million in 2016. The North Dakota investment tax credits previously recognized as income tax credits in Corporate and Other were reversed in2016 resulting in an $8.8 million charge to net income in 2016. In December 2016, Minnesota Power submitted a request for reconsideration with the MPUC. In anorder dated February 14, 2017, the MPUC decided to reconsider its November 2016 order.In an order dated December 7, 2017, the MPUC modified its November 2016 order to allow Minnesota Power to account for North Dakota investment tax creditsbased on the long-standing regulatory precedents of stand-alone allocation methodology of accounting for income taxes. As a result of the favorable regulatoryoutcome, Minnesota Power recorded a reduction in its regulatory liability and an increase in Operating Revenue of approximately $14 million in 2017. The NorthDakota investment tax credits were reestablished as income tax credits in Corporate and Other, resulting in a $7.9 million increase to net income in 2017.The stand-alone method provides that income taxes (and credits) are calculated as if Minnesota Power was the only entity included in ALLETE’s consolidatedfederal and unitary state income tax returns. Minnesota Power has recorded a regulatory liability for North Dakota investment tax credits generated by itsjurisdictional activity and expected to be realized in the future. North Dakota investment tax credits attributable to ALLETE’s apportionment and income ofALLETE’s other subsidiaries are included in Corporate and Other operations.ALLETE, Inc. 2017 Form 10-K52Outlook (Continued)EnergyForward (Continued)Tenaska PPA. On May 10, 2017, Minnesota Power and an affiliate of Tenaska signed a long-term PPA that provides for Minnesota Power to purchase the energyand associated capacity from a 250 MW wind energy facility in southwest Minnesota for a 20 -year period beginning in 2020. The agreement provides for thepurchase of output from the facility at fixed energy prices. There are no fixed capacity charges, and Minnesota Power will only pay for energy as it is delivered.This agreement is subject to MPUC approval of the construction of a 525 MW to 550 MW combined-cycle natural gas-fired generating facility which will bejointly owned by Dairyland Power Cooperative and a subsidiary of ALLETE, and construction of the wind energy facility. (See Note 4. Regulatory Matters.)Manitoba Hydro . Minnesota Power has five long-term PPAs with Manitoba Hydro. The first PPA expires in May 2020 . Under this agreement, Minnesota Poweris purchasing 50 MW of capacity and the energy associated with that capacity. Both the capacity price and the energy price are adjusted annually by the change in agovernmental inflationary index. Under the second PPA, Minnesota Power is purchasing surplus energy through April 2022 . This energy-only agreement primarilyconsists of surplus hydro energy on Manitoba Hydro’s system that is delivered to Minnesota Power on a non-firm basis. The pricing is based on forward marketprices. Under this agreement, Minnesota Power will purchase at least one million MWh of energy over the contract term.The third PPA provides for Minnesota Power to purchase 250 MW of capacity and energy from Manitoba Hydro for 15 years beginning in 2020. The agreement issubject to construction of additional transmission capacity between Manitoba and the U.S., along with construction of new hydroelectric generating capacity inManitoba. (See Item 1. Business – Regulated Operations – Transmission and Distribution – Great Northern Transmission Line.) The capacity price is adjustedannually until 2020 by the change in a governmental inflationary index. The energy price is based on a formula that includes an annual fixed price componentadjusted for the change in a governmental inflationary index and a natural gas index, as well as market prices.The fourth PPA provides for Minnesota Power to purchase up to 133 MW of energy from Manitoba Hydro for 20 years beginning in 2020. The pricing under thisPPA is based on forward market prices. The PPA is subject to the construction of the GNTL. (See Item 1. Business – Regulated Operations – Transmission andDistribution – Great Northern Transmission Line.)The fifth PPA provides for Minnesota Power to purchase 50 MW of capacity from Manitoba Hydro at fixed prices. The PPA began in June 2017 and expires inMay 2020.Transmission . We continue to make investments in transmission opportunities that strengthen or enhance the transmission grid or take advantage of ourgeographical location between sources of renewable energy and end users. These include the GNTL, investments to enhance our own transmission facilities,investments in other transmission assets (individually or in combination with others), and our investment in ATC. See also Item 1. Business – RegulatedOperations.Energy Infrastructure and Related Services.ALLETE Clean Energy.ALLETE Clean Energy focuses on developing, acquiring, and operating clean and renewable energy projects. ALLETE Clean Energy currently owns and operates,in four states, approximately 535 MW of nameplate capacity wind energy generation that is contracted under PSAs of various durations. ALLETE Clean Energyalso engages in the development of wind energy facilities to operate under long-term PSAs or for sale to others upon completion.ALLETE Clean Energy believes the market for renewable energy in North America is robust, driven by several factors including environmental regulation, taxincentives, societal expectations and continual technology advances. State renewable portfolio standards, and state or federal regulations to limit GHG emissionsare examples of environmental regulation or public policy that we believe will drive renewable energy development.ALLETE Clean Energy’s strategy includes the safe, reliable, optimal and profitable operation of its existing facilities. This includes a strong safety culture, thecontinuous pursuit of operational efficiencies at existing facilities and cost controls. ALLETE Clean Energy generally acquires facilities in liquid power marketsand its strategy includes the exploration of PSA extensions upon expiration of existing contracts.ALLETE, Inc. 2017 Form 10-K53Outlook (Continued)ALLETE Clean Energy (Continued)ALLETE Clean Energy will pursue growth through acquisitions or project development for others. ALLETE Clean Energy is targeting acquisitions of existingfacilities up to 200 MW each, which have long-term PSAs in place for the facilities’ output. At this time, ALLETE Clean Energy expects acquisitions will beprimarily wind or solar facilities in North America. ALLETE Clean Energy is also targeting the development of new facilities up to 200 MW each, which will havelong-term PSAs in place for the output or may be sold upon completion.Federal production tax credit qualification is important to development project economics, and ALLETE Clean Energy invested in equipment in late 2016 and late2017 to meet production tax credit safe harbor provisions which provides an opportunity to seek development of up to approximately 1,500 MW of qualified windprojects through 2021. ALLETE Clean Energy will also invest approximately $80 million through 2020 to requalify up to 385 WTGs at its Storm Lake I, StormLake II and Lake Benton wind energy facilities for production tax credits. We anticipate annual production tax credits relating to these projects of approximately$5 million in 2018, $10 million in 2019, $15 million to $20 million annually in 2020 through 2027 and decreasing thereafter through 2030.On January 3, 2017, ALLETE Clean Energy announced that it will develop a wind energy facility of up to 50 MW after securing a 25-year PSA with Montana-Dakota Utilities, which includes an option to purchase the facility upon completion. We expect Montana-Dakota Utilities to exercise the option in the first quarterof 2018; construction and sale is expected to be completed in December 2018. Revenue is expected to be recognized upon completion; if the wind energy facility isnot completed and sold in 2018, revenue and related margins would be recognized in 2019. ALLETE Clean Energy constructed and sold a 107 MW wind energyfacility to Montana-Dakota Utilities in 2015. On March 16, 2017, ALLETE Clean Energy announced it will build, own and operate a separate 100 MW windenergy facility pursuant to a 20-year PSA with Northern States Power; construction is expected to begin in late 2018.ALLETE Clean Energy manages risk by having a diverse portfolio of assets, which includes PSA expiration, technology and geographic diversity. The currentportfolio of approximately 535 MW is subject to typical variations in seasonal wind with higher wind resources typically available in the winter months. Themajority of its planned maintenance leverages this seasonality and is performed during lower wind periods. The current mix of PSA expiration and geographiclocation for existing facilities is as follows:Wind Energy FacilityLocationCapacity MWPSA MWPSA ExpirationArmenia MountainPennsylvania100.5100%2024Chanarambie/VikingMinnesota97.5 PSA 1 12%2018PSA 2 88%2023CondonOregon50100%2022Lake BentonMinnesota104100%2028Storm Lake IIowa108100%2019Storm Lake IIIowa77 PSA 1 90%2019PSA 2 10%2032U.S. Water Services.U.S. Water Services provides integrated water management for industry by combining chemical, equipment, engineering and service for customized solutions toreduce water and energy usage and improve efficiency. U.S. Water Services is located in 49 states and Canada, and has an established base of approximately 4,900 customers. U.S. Water Services differentiates itself from the competition by developing synergies between established solutions in engineering, equipment andchemical water treatment, and helping customers achieve efficient and sustainable use of their water and energy systems. U.S. Water Services is a leading providerto the biofuels industry, and also serves the commercial and institutional markets, food and beverage, light manufacturing, power generation, and midstream oil andgas industries, among others. U.S. Water Services principally relies upon recurring revenues from a diverse mix of industrial customers. U.S. Water Services sellscertain products which are seasonal in nature, with higher demand typically realized in warmer months; generally, lower sales occur in the first quarter of eachyear.ALLETE, Inc. 2017 Form 10-K54Outlook (Continued)U.S. Water Services (Continued)Our strategy is to grow U.S. Water Services’ presence in North America by adding customers, products, markets and new geographies. We believe water scarcityand a growing emphasis on conservation will continue to drive significant growth in the industrial, commercial and governmental sectors leading to organicrevenue growth for U.S. Water Services. U.S. Water Services also expects to pursue periodic strategic tuck-in acquisitions with a purchase price in the $10 millionto $50 million range. Priority will be given to acquisitions which expand its geographic reach, add new technology, or deepen its capabilities to serve its expandingcustomer base.On September 1, 2017, U.S. Water Services acquired Tonka Water for total consideration of $19.2 million. Tonka Water is a supplier of municipal and industrialwater treatment systems that will expand U.S. Water Services’ geographic and customer markets.U.S. Water Services expects cash flow from operations of approximately $15 million in 2018 ($12 million in 2017).Corporate and Other.BNI Energy. In 2017 , BNI Energy sold a record 4.7 million tons of coal (3.8 million tons in 2016 ) and anticipates 2018 sales will be lower than 2017 primarilydue to an expected outage for one of its customers. BNI Energy operates under cost-plus fixed fee agreements extending through December 31, 2037.ALLETE Properties. ALLETE Properties represents our legacy Florida real estate investment. Market conditions can impact land sales and could result in ourinability to cover our cost basis, operating expenses or fixed carrying costs such as community development district assessments and property taxes. ALLETEProperties’ major projects in Florida are Town Center at Palm Coast and Palm Coast Park, with approximately 2,000 acres combined of land available for sale.(See Item 1. Business – Corporate and Other – ALLETE Properties.) In addition to these two projects, ALLETE Properties has approximately 800 acres of otherland available for sale.In recent years, market conditions for real estate in Florida have required us to review our land inventories for impairment. In 2015, the Company reevaluated itsstrategy related to the real estate assets of ALLETE Properties in response to market conditions and transaction activity. The revised strategy incorporated thepossibility of a bulk sale of its entire portfolio. Proceeds from a bulk sale would be strategically deployed to support growth in ALLETE Clean Energy and U.S.Water Services, collectively our Energy Infrastructure and Related Services businesses. ALLETE Properties also continues to pursue sales of individual parcelsover time. ALLETE Properties will continue to maintain key entitlements and infrastructure without making additional investments or acquisitions.Income TaxesALLETE’s aggregate federal and multi-state statutory tax rate is approximately 41 percent for 2017 . On an ongoing basis, ALLETE’s statutory tax rate will bereduced to approximately 28 percent as a result of the federal income tax rate change of the TCJA. ALLETE also has tax credits and other tax adjustments thatreduce the combined statutory rate to the effective tax rate. These tax credits and adjustments historically have included items such as investment tax credits,production tax credits, AFUDC‑Equity, depletion, as well as other items. The annual effective rate can also be impacted by such items as changes in income beforeincome taxes, state and federal tax law changes that become effective during the year, business combinations, tax planning initiatives and resolution of prior years’tax matters. We expect our effective tax rate to be approximately negative 10 percent for 2018 primarily due to a lower statutory tax rate resulting from the TCJA,and federal production tax credits as a result of wind energy generation. We also expect that our effective tax rate will be lower than the combined statutory rateover the next 12 years due to production tax credits attributable to our wind energy generation.We expect the federal income tax rate change of the TCJA to result in lower income tax expense on an ongoing basis for our Regulated Operations, ALLETEClean Energy and U.S. Water Services segments as well as our Corporate and Other businesses. The lower income tax expense for our Regulated Operationssegment is expected to be mostly offset by lower revenue as most of the benefit is expected to be passed back to customers through lower rates. We do not expect amaterial impact on the Company’s ability to utilize its federal and state NOL and tax credit carryforwards due to the TCJA.ALLETE, Inc. 2017 Form 10-K55Liquidity and Capital ResourcesLiquidity Position. ALLETE is well-positioned to meet its liquidity needs. As of December 31, 2017 , we had cash and cash equivalents of $98.9 million , $395.1million in available consolidated lines of credit and a debt-to-capital ratio of 42 percent.Capital Structure. ALLETE’s capital structure for each of the last three years is as follows:As of December 312017 %2016 %2015 %Millions ALLETE Equity$2,068.258$1,893.055$1,820.253Non-Controlling Interest————2.2—Long-Term Debt (Including Current Maturities)1,513.3421,569.1451,605.047Notes Payable————1.6— $3,581.5100$3,462.1100$3,429.0100Cash Flows. Selected information from ALLETE’s Consolidated Statement of Cash Flows is as follows:Year Ended December 31201720162015Millions Cash and Cash Equivalents at Beginning of Period$27.5$97.0$145.8Cash Flows from (used for) Operating Activities402.9332.0340.1Investing Activities(229.0)(276.2)(618.8)Financing Activities(102.5)(125.3)229.9Change in Cash and Cash Equivalents71.4(69.5)(48.8)Cash and Cash Equivalents at End of Period$98.9$27.5$97.0Operating Activities . Cash from operating activities was higher in 2017 compared to 2016 primarily due to a payment of $31.0 million made in 2016 as part of along-term PSA between Minnesota Power and Silver Bay Power, as well as higher recoveries of our cost recovery riders, net income and non-cash items in 2017,partially offset by an increase in customer receivables and higher payments on accounts payable in 2017.Cash from operating activities was lower in 2016 compared to 2015 primarily due to a payment of $31.0 million made as part of a long-term PSA betweenMinnesota Power and Silver Bay Power, cash contributions to our defined benefit pension plan and non-cash items, partially offset by higher net income, lowerfuel inventory and increased recoveries through our cost recovery riders.Investing Activities . Cash used for investing activities was lower in 2017 compared to 2016 primarily due to lower payments for capital expenditures in 2017,partially offset by the acquisition of Tonka Water and additional investments in ATC in 2017.Cash used for investing activities was lower in 2016 compared to 2015 primarily due to a decrease in cash used for the acquisitions of subsidiaries, as well as fewercapital expenditures in 2016. In 2015, we acquired U.S. Water Services, and ALLETE Clean Energy acquired the Chanarambie/Viking and Armenia Mountainwind energy facilities. (See Note 6. Acquisitions.)Financing Activities . Cash used for financing activities was lower in 2017 primarily due to higher proceeds received from the issuance of common stock of $86.0million compared to $30.9 million in 2016, partially offset by higher contingent consideration payments in 2017 and repayments of long-term debt of $189.6million in 2017, net of long-term debt issuances of $131.5 million in 2017. Additionally, in 2016 the Company paid $8.0 million to acquire the non-controllinginterest of the limited liability company that owns the Condon wind energy facility. (See Securities and Note 6. Acquisitions.)Cash used for financing activities decreased in 2016 compared to 2015 primarily due to lower proceeds from the issuance of long‑term debt and common stock.ALLETE, Inc. 2017 Form 10-K56Liquidity and Capital Resources (Continued)Working Capital . Additional working capital, if and when needed, generally is provided by consolidated bank lines of credit and the issuance of securities,including long-term debt, common stock and commercial paper. As of December 31, 2017 , we had consolidated bank lines of credit aggregating $407.0 million ($409.0 million as of December 31, 2016 ), the majority of which expire in October 2020. We had $11.9 million outstanding in standby letters of credit and nooutstanding draws under our lines of credit as of December 31, 2017 ( $11.1 million in standby letters of credit and no outstanding draws as of December 31, 2016). In addition, as of December 31, 2017 , we had 3.2 million original issue shares of our common stock available for issuance through Invest Direct and 2.9 millionoriginal issue shares of common stock available for issuance through a distribution agreement with Lampert Capital Markets, Inc. (See Securities. ) The amountand timing of future sales of our securities will depend upon market conditions and our specific needs.The remeasurement of deferred income tax assets and liabilities resulting from the TCJA for Minnesota Power and SWL&P were recorded as regulatory assets andliabilities. The net regulatory liabilities for Minnesota Power and SWL&P are expected to be passed back to customers over time primarily based upon thenormalization provisions of the U.S. Internal Revenue Code over the life of the related property, plant and equipment with the remainder passed back based uponthe determinations of regulatory authorities. The final amount and timing over which the benefits of the TCJA will be passed back to customers has not beendetermined, and therefore, the full cash flow impacts are still uncertain. (See Note 4. Regulatory Matters.)Securities . We entered into a distribution agreement with Lampert Capital Markets, Inc., in 2008, as amended most recently in August 2016, with respect to theissuance and sale of up to an aggregate of 13.6 million shares of our common stock, without par value, of which 2.9 million shares remain available for issuance asof December 31, 2017 . For the year ended December 31, 2017 , 1.0 million shares of common stock were issued under this agreement, resulting in net proceeds of$65.7 million ( 0.1 million shares for net proceeds of $8.0 million in 2016 ; 1.3 million shares for net proceeds of $69.9 million in 2015 ). The shares issued in 2017and 2016 were offered and sold pursuant to Registration Statement No. 333-212794, pursuant to which the remaining shares will continue to be offered for sale,from time to time. The shares issued in 2015 were offered and sold pursuant to Registration Statement No. 333-190335.During the year ended December 31, 2017 , we issued 0.3 million shares of common stock through Invest Direct, the Employee Stock Purchase Plan, and theRetirement Savings and Stock Ownership Plan, resulting in net proceeds of $20.3 million ( 0.4 million shares for net proceeds of $22.9 million in 2016 ; 0.4 millionshares for net proceeds of $25.9 million in 2015 ). These shares of common stock were registered under Registration Statement Nos. 333-211075, 333-188315,333-183051 and 333-162890.On June 1, 2017, ALLETE issued $80 million of its senior unsecured notes (the Notes) to certain institutional buyers in the private placement market. The Noteswere issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, to institutional accredited investors. TheNotes bear interest at 3.11 percent and mature on June 1, 2027. (See Note 10. Short-Term and Long-Term Debt.)On August 25, 2017, ALLETE entered into a $40 million term loan agreement (Term Loan). The Term Loan is an unsecured, single draw loan that is due onAugust 25, 2020, and may be prepaid at any time subject to a make-whole provision. The interest rate on the Term Loan is equal to LIBOR plus 1.025 percent .(See Note 10. Short-Term and Long-Term Debt.)On November 2, 2017, ALLETE entered into a bond purchase agreement providing for the issuance and sale of $60 million of its First Mortgage Bonds (theBonds) that bear interest at 4.07 percent . The Bonds will be issued on or about April 1, 2018, and will mature in April 2048. (See Note 10. Short-Term and Long-Term Debt.)Financial Covenants . See Note 10. Short-Term and Long-Term Debt for information regarding our financial covenants.Pension and Other Postretirement Benefit Plans. Management considers various factors when making funding decisions, such as regulatory requirements,actuarially determined minimum contribution requirements and contributions required to avoid benefit restrictions for the defined benefit pension plans. For theyear ended December 31, 2017 , we contributed $1.7 million in cash and 0.2 million shares of ALLETE common stock, which had an aggregate value of $13.5million when contributed, to the defined benefit pension plans. These shares of ALLETE common stock were contributed in reliance upon an exemption availablepursuant to Section 4(a)(2) of the Securities Act of 1933, as amended. On January 8, 2018, we contributed $15.0 million in cash to the defined benefit pensionplans. We do not expect to make any additional contributions to our defined benefit pension plans in 2018 , and we do not expect to make any contributions to ourother postretirement benefit plans in 2018 . (See Note 12. Common Stock and Earnings Per Share and Note 15. Pension and Other Postretirement Benefit Plans.)ALLETE, Inc. 2017 Form 10-K57Liquidity and Capital Resources (Continued)Off-Balance Sheet Arrangements . Off-balance sheet arrangements are discussed in Note 11. Commitments, Guarantees and Contingencies.Contractual Obligations and Commercial Commitments . ALLETE has contractual obligations and other commitments that will need to be funded in the future,in addition to its capital expenditure programs. The following table summarizes contractual obligations and other commercial commitments as of December 31,2017 : Payments Due by Period Less than1 to 34 to 5AfterContractual Obligations (a)Total1 YearYearsYears5 YearsMillions Long-Term Debt$2,255.4$126.1$313.6$284.8$1,530.9Pension (b)458.046.392.191.6228.0Other Postretirement Benefit Plans (b)97.29.219.119.249.7Operating Lease Obligations79.914.222.313.430.0PPA Obligations (c)2,283.1104.5222.1289.51,667.0Other Purchase Obligations56.540.53.51.411.1Total Contractual Obligations$5,230.1$340.8$672.7$699.9$3,516.7(a)Does not include $1.7 million of non-current unrecognized tax benefits due to uncertainty regarding the timing of future cash payments related to uncertain tax positions.(See Note 13. Income Tax Expense.)(b)Represents the estimated future benefit payments for our defined benefit pension and other postretirement plans through 2027.(c)Does not include the agreement with Manitoba Hydro expiring in 2022, as this contract is for surplus energy only; Oliver Wind I and Oliver Wind II, as Minnesota Poweronly pays for energy as it is delivered; and the agreement with Tenaska commencing in 2020 as it is subject to approval of the construction of a 525 MW to 550 MWcombined-cycle natural gas‑fired facility. (See Note 11. Commitments, Guarantees and Contingencies.)Long-Term Debt. Our long-term debt obligations, including long-term debt due within one year, represent the principal amount of bonds, notes and loans which arerecorded on the Consolidated Balance Sheet, plus interest. The table above assumes that the interest rates in effect at December 31, 2017 , remain constant throughthe remaining term. (See Note 10. Short-Term and Long‑Term Debt.)Pension and Other Postretirement Benefit Plans. Our pension and other postretirement benefit plan obligations represent our current estimate of future benefitpayments through 2027. Pension contributions will be dependent on several factors including realized asset performance, future discount rate and other actuarialassumptions, Internal Revenue Service and other regulatory requirements, and contributions required to avoid benefit restrictions for the pension plans. Funding forthe other postretirement benefit plans is impacted by realized asset performance, future discount rate and other actuarial assumptions, and utility regulatoryrequirements. These amounts are estimates and will change based on actual market performance, changes in interest rates and any changes in governmentalregulations. (See Note 15. Pension and Other Postretirement Benefit Plans.)PPA Obligations. PPA obligations represent our Square Butte, Manitoba Hydro, Minnkota Power and other PPA’s. (See Note 11. Commitments, Guarantees andContingencies.)Other Purchase Obligations. Other purchase obligations represents our minimum purchase commitments under coal and rail contracts, purchase obligations forcertain capital expenditure projects, and long-term service agreements for wind energy facilities. (See Note 11. Commitments, Guarantees and Contingencies.)ALLETE, Inc. 2017 Form 10-K58Liquidity and Capital Resources (Continued)Credit Ratings . Access to reasonably priced capital markets is dependent in part on credit and ratings. Our securities have been rated by Standard & Poor’s and byMoody’s. Rating agencies use both quantitative and qualitative measures in determining a company’s credit rating. These measures include business risk, liquidityrisk, competitive position, capital mix, financial condition, predictability of cash flows, management strength and future direction. Some of the quantitativemeasures can be analyzed through a few key financial ratios, while the qualitative ones are more subjective. Our current credit ratings are listed in the followingtable:Credit RatingsStandard & Poor’sMoody’sIssuer Credit RatingBBB+A3Commercial PaperA-2P-2First Mortgage Bonds(a)A1(a)Not rated by Standard & Poor’s.The disclosure of these credit ratings is not a recommendation to buy, sell or hold our securities. Ratings are subject to revision or withdrawal at any time by theassigning rating organization. Each rating should be evaluated independently of any other rating.On February 6, 2018, Standard & Poor’s revised its credit rating outlook on ALLETE to negative from stable, while affirming its issuer and commercial paperratings on ALLETE. Standard & Poor’s cited the potential effect of the TCJA on the Company’s cash flows and Standard & Poor’s assessment of the Company’sregulatory risk following Minnesota Power’s recent general rate case as its rationale for issuing the negative outlook.On February 8, 2018, Moody’s issued a report on ALLETE noting that Minnesota Power’s general rate case was credit negative. With respect to MinnesotaPower’s general rate case outcome, Moody’s noted a lower return on equity, disallowance of various expenses, including a decision to disallow recovery of theprepaid pension asset, and a ruling against Minnesota Power’s request to adopt an annual rate review mechanism. In addition, Moody’s noted the potential negativeimpact of the TCJA on certain financial metrics used by Moody’s.The Company believes it is well-positioned to meet its liquidity needs. As of December 31, 2017 , we had cash and cash equivalents of $98.9 million , $395.1million in available consolidated lines of credit and a debt-to-equity ratio of 42 percent. Our cash from operating activities for the year ended December 31, 2017was $402.9 million . In addition, as of December 31, 2017, we had 3.2 million original issue shares of our common stock available for issuance through InvestDirect and 2.9 million original issue shares of common stock available for issuance through a distribution agreement with Lampert Capital Markets, Inc.Common Stock Dividends . ALLETE is committed to providing a competitive dividend to its shareholders while at the same time funding its growth. TheCompany’s long-term objective is to maintain a dividend payout ratio similar to our peers and provide for future dividend increases. Our targeted payout range isbetween 60 percent and 65 percent. In 2017 , we paid out 63 percent ( 66 percent in 2016 ; 69 percent in 2015 ) of our per share earnings in dividends. On January23, 2018, our Board of Directors declared a dividend of $0.56 per share, which is payable on March 1, 2018, to shareholders of record at the close of business onFebruary 15, 2018.Capital RequirementsALLETE’s projected capital expenditures for the years 2018 through 2022 are presented in the following table. Actual capital expenditures may vary from theestimates due to changes in forecasted plant maintenance, regulatory decisions or approvals, future environmental requirements, base load growth, capital marketconditions or executions of new business strategies.ALLETE, Inc. 2017 Form 10-K59Capital Requirements (Continued)Capital Expenditures20182019202020212022TotalMillions Regulated Operations Base and Other$130$190$130$170$170$790 Transmission Cost Recovery (a)1108550——245Regulated Operations Capital Expenditures2402751801701701,035ALLETE Clean Energy65652555165U.S. Water Services555101035Corporate and Other (b)15153560170295Total Capital Expenditures$325$360$245$245$355$1,530(a)Estimated capital expenditures eligible for cost recovery outside of a general rate case. Our portion of transmission capital expenditures related to construction of theGNTL is estimated at approximately $245 million through 2020. (See Item 1. Business – Regulated Operations – Transmission and Distribution.)(b)Our portion of capital expenditures related to construction of a 525 MW to 550 MW combined-cycle natural gas-fired generating facility, which will be jointly owned byDairyland Power Cooperative and a subsidiary of ALLETE, is estimated at approximately $200 million through 2022, subject to regulatory approval. (See Item 7.Management’s Discussion and Analysis – Outlook – EnergyForward.)We are well positioned to meet our financing needs due to adequate operating cash flows, available additional working capital and access to capital markets. Wewill finance capital expenditures from a combination of internally generated funds, debt and equity issuance proceeds. We intend to maintain a capital structurewith capital ratios near current levels. (See Capital Structure. )Environmental and Other MattersOur businesses are subject to regulation of environmental matters by various federal, state and local authorities. A number of regulatory changes to the Clean AirAct, the Clean Water Act and various waste management requirements have recently been promulgated by both the EPA and state authorities. Minnesota Power’sfacilities are subject to additional requirements under many of these regulations. Minnesota Power is reshaping its generation portfolio, over time, to reduce itsreliance on coal, has installed cost-effective emission control technology, and advocates for sound science and policy during rulemaking implementation. (See Note11. Commitments, Guarantees and Contingencies.)Market RiskSecurities Investments.Available-for-Sale Securities. As of December 31, 2017 , our available-for-sale securities portfolio consisted primarily of securities held in other postretirementplans to fund employee benefits. (See Note 8. Investments.)ALLETE, Inc. 2017 Form 10-K60Market Risk (Continued)INTEREST RATE RISKWe are exposed to risks resulting from changes in interest rates as a result of our issuance of variable rate debt. We manage our interest rate risk by varying theissuance and maturity dates of our fixed rate debt, limiting the amount of variable rate debt, and continually monitoring the effects of market changes in interestrates. We may also enter into derivative financial instruments, such as interest rate swaps, to mitigate interest rate exposure. The following table presents the long-term debt obligations and the corresponding weighted average interest rate as of December 31, 2017 : Expected Maturity DateInterest Rate SensitiveFinancial Instruments20182019202020212022ThereafterTotalFair ValueLong-Term Debt Fixed Rate – Millions$63.4$56.2$89.0$97.8$88.0$1,034.5$1,428.9$1,543.2Average Interest Rate – %2.87.64.23.83.74.44.4 Variable Rate – Millions$1.2$1.4$54.0——$27.8$84.4$84.4Average Interest Rate – %5.45.42.1——0.71.8 Interest rates on variable rate long-term debt are reset on a periodic basis reflecting prevailing market conditions. Based on the variable rate debt outstanding as ofDecember 31, 2017 , an increase of 100 basis points in interest rates would impact the amount of pre-tax interest expense by $0.8 million. This amount wasdetermined by considering the impact of a hypothetical 100 basis point increase to the average variable interest rate on the variable rate debt outstanding as ofDecember 31, 2017 .COMMODITY PRICE RISKOur regulated utility operations incur costs for power and fuel (primarily coal and related transportation) in Minnesota, and power and natural gas purchased forresale in our regulated service territory in Wisconsin. Minnesota Power’s exposure to price risk for these commodities is significantly mitigated by the currentratemaking process and regulatory framework, which allows recovery of fuel costs in excess of those included in base rates or distribution of savings in fuel coststo ratepayers. SWL&P’s exposure to price risk for natural gas is significantly mitigated by the current ratemaking process and regulatory framework, which allowsthe commodity cost to be passed through to customers. We seek to prudently manage our customers’ exposure to price risk by entering into contracts of variousdurations and terms for the purchase of power and coal and related transportation costs (Minnesota Power) and natural gas (SWL&P).POWER MARKETINGMinnesota Power’s power marketing activities consist of: (1) purchasing energy in the wholesale market to serve its regulated service territory when energyrequirements exceed generation output; and (2) selling excess available energy and purchased power. From time to time, Minnesota Power may have excess energythat is temporarily not required by retail and municipal customers in our regulated service territory. Minnesota Power actively sells any excess energy to thewholesale market to optimize the value of its generating facilities.We are exposed to credit risk primarily through our power marketing activities. We use credit policies to manage credit risk, which includes utilizing an establishedcredit approval process and monitoring counterparty limits.Recently Adopted Accounting Standards.New accounting standards are discussed in Note 1. Operations and Significant Accounting Policies of this Form 10-K.Item 7A. Quantitative and Qualitative Disclosures about Market RiskSee Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Risk for information related to quantitative andqualitative disclosure about market risk.ALLETE, Inc. 2017 Form 10-K61Item 8. Financial Statements and Supplementary DataSee our Consolidated Financial Statements as of December 31, 2017 and 2016 , and for the years ended December 31, 2017 , 2016 and 2015 , and supplementarydata, which are indexed in Item 15(a).Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNot applicable.Item 9A. Controls and ProceduresConclusion Regarding the Effectiveness of Disclosure Controls and ProceduresAs of December 31, 2017 , evaluations were performed, under the supervision and with the participation of management, including our principal executive officerand principal financial officer, on the effectiveness of the design and operation of ALLETE’s disclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934 (Exchange Act). Based upon those evaluations, our principal executive officer and principal financial officerhave concluded that such disclosure controls and procedures are effective to provide assurance that information required to be disclosed in ALLETE’s reports filedor submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and suchinformation is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timelydecisions regarding required disclosure.Management’s Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule13a-15(f) or 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financialofficer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the Internal Control – Integrated Framework(framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework, our managementconcluded that our internal control over financial reporting was effective as of December 31, 2017 .The effectiveness of the Company’s internal control over financial reporting as of December 31, 2017 , has been audited by PricewaterhouseCoopers LLP, anindependent registered public accounting firm, as stated in their report which is included herein.Changes in Internal ControlsThere has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or isreasonably likely to materially affect, our internal control over financial reporting.Item 9B. Other InformationNot applicable.ALLETE, Inc. 2017 Form 10-K62Part IIIItem 10. Directors, Executive Officers and Corporate GovernanceUnless otherwise stated, the information required by this Item is incorporated by reference herein from our Proxy Statement for the 2018 Annual Meeting ofShareholders ( 2018 Proxy Statement) under the following headings:•Directors. The information regarding directors will be included in the “Election of Directors” section;•Audit Committee Financial Expert. The information regarding the Audit Committee financial expert will be included in the “Corporate Governance”section and the “Audit Committee Report” section;•Audit Committee Members. The identity of the Audit Committee members will be included in the “Corporate Governance” section and the “AuditCommittee Report” section;•Executive Officers. The information regarding executive officers is included in Part I of this Form 10-K; and•Section 16(a) Compliance. The information regarding Section 16(a) compliance will be included in the “Ownership of ALLETE Common Stock –Section 16(a) Beneficial Ownership Reporting Compliance” section.Our 2018 Proxy Statement will be filed with the SEC within 120 days after the end of our 2017 fiscal year.Code of Ethics. We have adopted a written Code of Ethics that applies to all of our employees, including our Chief Executive Officer, Chief Financial Officer andChief Accounting Officer. A copy of our Code of Ethics is available on our website at www.allete.com and print copies are available without charge upon requestto ALLETE, Inc., Attention: Secretary, 30 West Superior St., Duluth, Minnesota 55802. Any amendment to the Code of Ethics or any waiver of the Code of Ethicswill be disclosed on our website at www.allete.com promptly following the date of such amendment or waiver.Corporate Governance. The following documents are available on our website at www.allete.com and print copies are available upon request:•Corporate Governance Guidelines;•Audit Committee Charter;•Executive Compensation Committee Charter; and•Corporate Governance and Nominating Committee Charter.Any amendment to these documents will be disclosed on our website at www.allete.com promptly following the date of such amendment.Item 11. Executive CompensationThe information required for this Item is incorporated by reference herein from the “Compensation Discussion and Analysis,” the “Compensation of ExecutiveOfficers,” the “Compensation Committee Report” and the “Director Compensation” sections in our 2018 Proxy Statement.ALLETE, Inc. 2017 Form 10-K63Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required for this Item is incorporated by reference herein from the “Ownership of ALLETE Common Stock – Securities Owned by CertainBeneficial Owners” and the “Ownership of ALLETE Common Stock – Securities Owned by Directors and Management” sections in our 2018 Proxy Statement.Securities Authorized for Issuance Under Equity Compensation PlansThe following table sets forth the shares of ALLETE common stock available for issuance under the Company's equity compensation plans as of December 31,2017 :Plan CategoryNumber of Securities to beIssued Upon Exercise ofOutstanding Options,Warrants, and RightsWeighted-Average ExercisePrice of Outstanding Options,Warrants, and RightsNumber of SecuritiesRemaining Available forFuture Issuance Under EquityCompensation Plans (a) Equity Compensation Plans Approved by Security Holders——1,266,716Equity Compensation Plans Not Approved by SecurityHolders—N/A—Total——1,266,716(a)Excludes the number of securities shown in the first column as to be issued upon exercise of outstanding options, warrants, and rights. The amount shown is comprised of:(i) 1,005,861 shares available for issuance under the long-term incentive plan in the form of options, rights, restricted stock units, performance share awards, and othergrants as approved by the Executive Compensation Committee of the Company’s Board of Directors; (ii) 136,178 shares available for issuance under the Director StockPlan as payment for a portion of the annual retainer payable to non-employee Directors; and (iii) 124,677 shares available for issuance under the ALLETE and AffiliatedCompanies Employee Stock Purchase Plan.Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required for this Item is incorporated by reference herein from the “Corporate Governance” section in our 2018 Proxy Statement.We have adopted a Related Person Transaction Policy which is available on our website at www.allete.com. Print copies are available without charge, uponrequest. Any amendment to this policy will be disclosed on our website at www.allete.com promptly following the date of such amendment.Item 14. Principal Accounting Fees and ServicesThe information required for this Item is incorporated by reference herein from the “Audit Committee Report” section in our 2018 Proxy Statement.ALLETE, Inc. 2017 Form 10-K64Part IVItem 15. Exhibits and Financial Statement Schedules(a)Certain Documents Filed as Part of this Form 10-K. (1)Financial StatementsPage ALLETE Report of Independent Registered Public Accounting Firm73 Consolidated Balance Sheet as of December 31, 2017 and 201675 For the Years Ended December 31, 2017, 2016 and 2015 Consolidated Statement of Income76 Consolidated Statement of Comprehensive Income77 Consolidated Statement of Cash Flows78 Consolidated Statement of Equity79 Notes to Consolidated Financial Statements80(2)Financial Statement Schedules Schedule II – ALLETE Valuation and Qualifying Accounts and Reserves142 All other schedules have been omitted either because the information is not required to be reported by ALLETE or because the information is includedin the Consolidated Financial Statements or the notes.(3)Exhibits including those incorporated by reference. ALLETE, Inc. 2017 Form 10-K65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, dated as of September 20, 2004 (filed as Exhibit 3 to the September 21, 2004, Form 8-K, File No. 1-3548).*3(a)3—Amendment to Articles of Incorporation, dated as of May 12, 2009 (filed as Exhibit 3 to the June 30, 2009, Form 10-Q, File No. 1-3548).*3(a)4—Amendment to Articles of Incorporation, dated as of May 11, 2010 (filed as Exhibit 3(a) to the May 14, 2010, Form 8-K, File No. 1-3548).*3(a)5—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 May 11, 2010 (filed as Exhibit 3(b) to the May 14, 2010, 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 NewYork Mellon (formerly Irving Trust Company) and Andres Serrano (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: NumberDated as ofReference FileExhibit FirstMarch 1, 19492-78267(b) SecondJuly 1, 19512-90367(c) ThirdMarch 1, 19572-130752(c) FourthJanuary 1, 19682-277942(c) FifthApril 1, 19712-395372(c) SixthAugust 1, 19752-541162(c) SeventhSeptember 1, 19762-570142(c) EighthSeptember 1, 19772-596902(c) NinthApril 1, 19782-608662(c) TenthAugust 1, 19782-628522(d)2 EleventhDecember 1, 19822-566494(a)3 TwelfthApril 1, 198733-302244(a)3 ThirteenthMarch 1, 199233-474384(b) FourteenthJune 1, 199233-552404(b) FifteenthJuly 1, 199233-552404(c) SixteenthJuly 1, 199233-552404(d) SeventeenthFebruary 1, 199333-501434(b) EighteenthJuly 1, 199333-501434(c) NineteenthFebruary 1, 19971-3548 (1996 Form 10-K)4(a)3 TwentiethNovember 1, 19971-3548 (1997 Form 10-K)4(a)3 Twenty-firstOctober 1, 2000333-543304(c)3 Twenty-secondJuly 1, 20031-3548 (June 30, 2003, Form 10-Q)4 Twenty-thirdAugust 1, 20041-3548 (Sept. 30, 2004, Form 10-Q)4(a) Twenty-fourthMarch 1, 20051-3548 (March 31, 2005, Form 10-Q)4 Twenty-fifthDecember 1, 20051-3548 (March 31, 2006, Form 10-Q)4 Twenty-sixthOctober 1, 20061-3548 (2006 Form 10-K)4(a)3 Twenty-seventhFebruary 1, 20081-3548 (2007 Form 10-K)4(a)3 Twenty-eighthMay 1, 20081-3548 (June 30, 2008, Form 10-Q)4 Twenty-ninthNovember 1, 20081-3548 (2008 Form 10-K)4(a)3 ThirtiethJanuary 1, 20091-3548 (2008 Form 10-K)4(a)4 Thirty-firstFebruary 1, 20101-3548 (March 31, 2010, Form 10-Q)4 Thirty-secondAugust 1, 20101-3548 (Sept. 30, 2010, Form 10-Q)4 Thirty-thirdJuly 1, 20121-3548 (July 2, 2012, Form 8-K)4 Thirty-fourthApril 1, 20131-3548 (April 2, 2013, Form 8-K)4 Thirty-fifthMarch 1, 20141-3548 (March 31, 2014, Form 10-Q)4 Thirty-sixthJune 1, 20141-3548 (June 30, 2014, Form 10-Q)4 Thirty-seventhSeptember 1, 20141-3548 (Sept. 30, 2014, Form 10-Q)4 Thirty-eighthSeptember 1, 20151-3548 (Sept. 30, 2015, Form 10-Q)4(a)ALLETE, Inc. 2017 Form 10-K66Exhibit Number*4(b)1—Mortgage and Deed of Trust, dated as of March 1, 1943, between Superior Water, Light and Power Company and Chemical Bank & Trust Companyand Howard B. Smith, as Trustees, both succeeded by U.S. Bank National Association, as Trustee (filed as Exhibit 7(c), File No. 2-8668).*4(b)2—Supplemental Indentures to Superior Water, Light and Power Company’s Mortgage and Deed of Trust: NumberDated as ofReference FileExhibit FirstMarch 1, 19512-596902(d)(1) SecondMarch 1, 19622-277942(d)1 ThirdJuly 1, 19762-574782(e)1 FourthMarch 1, 19852-786414(b) FifthDecember 1, 19921-3548 (1992 Form 10-K)4(b)1 SixthMarch 24, 19941-3548 (1996 Form 10-K)4(b)1 SeventhNovember 1, 19941-3548 (1996 Form 10-K)4(b)2 EighthJanuary 1, 19971-3548 (1996 Form 10-K)4(b)3 NinthOctober 1, 20071-3548 (2007 Form 10-K)4(c)3 TenthOctober 1, 20071-3548 (2007 Form 10-K)4(c)4 EleventhDecember 1, 20081-3548 (2008 Form 10-K)4(c)3 TwelfthDecember 2, 20131-3548 (2013 Form 10-K)4(c)3*4(c)—Note Purchase Agreement, dated as of June 8, 2007, between ALLETE and Thrivent Financial for Lutherans and The Northwestern Mutual LifeInsurance Company (filed as Exhibit 10(a) to the June 30, 2007, Form 10-Q, File No. 1-3548).*4(d)—Term Loan Agreement dated as of August 25, 2015, among ALLETE, as Borrower, the Lenders party hereto, JPMorgan Chase Bank, N.A., asAdministrative Agent, and J.P. Morgan Securities LLC, as Sole Lead Arranger and Sole Book Runner (filed as Exhibit 4 to the August 28, 2015, Form8-K, File No. 1-3548).*4(e)—Note Purchase and Guarantee Agreement dated as of November 5, 2015, among Armenia Mountain Wind LLC, AMW I Holding, LLC and thepurchasers named therein (filed as Exhibit 4 to the November 12, 2015, Form 8-K, File No. 1-3548).*4(f)—Note Purchase Agreement, dated December 8, 2016, between ALLETE and Hartford Investment Management Company, Northwestern MutualInvestment Management Company, The Northwestern Mutual Life Insurance Company and Nationwide Life insurance Company (filed as Exhibit 4 tothe December 12, 2016, Form 8-K, File No. 1-3548).*4(g) Term Loan Agreement dated as of August 25, 2017, among ALLETE, as Borrower, the Lenders party hereto, JPMorgan Chase Bank, N.A., asAdministrative Agent, Bank of America, N.A., as Syndication Agent, and JPMorgan Chase Bank, N.A., as Sole Lead Arranger and Sole Book Runner(filed as Exhibit 4 to the September 30, 2017, Form 10-Q, File No. 1-3548).*10(a)—Power Purchase and Sale Agreement, dated as of May 29, 1998, between Minnesota Power, Inc. (now ALLETE) and Square Butte ElectricCooperative (filed as Exhibit 10 to the June 30, 1998, Form 10-Q, File No. 1-3548).*10(b)—Credit Agreement dated as of November 4, 2013 among ALLETE, as Borrower, the lenders party thereto, JPMorgan Chase Bank, N.A., asAdministrative Agent, and J.P. Morgan Securities LLC, as Sole Lead Arranger and Sole Book Runner (filed as Exhibit 10 to the November 4, 2013,Form 8-K, File No. 1-3548).*10(c)1—Financing Agreement between Collier County Industrial Development Authority and ALLETE dated as of July 1, 2006 (filed as Exhibit 10(b)1 to theJune 30, 2006, Form 10-Q, File No. 1-3548).*10(c)2—Amended and Restated Letter of Credit Agreement, dated as of June 3, 2011, among ALLETE, the participating banks and Wells Fargo Bank,National Association, as Administrative Agent and Issuing Bank (filed as Exhibit 10(b) to the June 30, 2011, Form 10-Q, File No. 1-3548).*10(c)3—First Amendment to Amended and Restated Letter of Credit Agreement, dated as of June 1, 2013, between ALLETE and Wells Fargo Bank, NationalAssociation, as Issuing Bank, Administrative Agent and Sole Participating Bank (filed as Exhibit 10(b) to the June 30, 2013, Form 10-Q, File No. 1-3548).*10(d)—Agreement dated December 16, 2005, among ALLETE, Wisconsin Public Service Corporation and WPS Investments, LLC (filed as Exhibit 10(g) tothe 2009 Form 10-K, File No. 1-3548).+*10(e)1 ALLETE Executive Annual Incentive Plan, as amended and restated, effective January 1, 2011 (filed as Exhibit 10(h)1 to the 2010 Form 10-K, FileNo. 1-3548).+*10(e)2—ALLETE Executive Annual Incentive Plan Form of Award Effective 2014 (filed as Exhibit 10(e)6 to the 2013 Form 10‑K, File No. 1-3548).+*10(e)3—ALLETE Executive Annual Incentive Plan Form of Award Effective 2015 (filed as Exhibit 10(e)6 to the 2014 Form 10‑K, File No. 1-3548).+*10(e)4—ALLETE Executive Annual Incentive Plan Form of Award Effective 2016 (filed as Exhibit 10(e)6 to the 2015 Form 10‑K, File No. 1-3548).+*10(e)5—ALLETE Executive Annual Incentive Plan Form of Award Effective 2017 (filed as Exhibit 10(e)6 to the 2016 Form 10-K, File No. 1-3548).+*10(e)6—ALLETE Executive Annual Incentive Plan Form of Award Superior Water, Light and Power Effective 2017 (filed as Exhibit 10(e)7 to the 2016 Form10-K, File No. 1-3548).ALLETE, Inc. 2017 Form 10-K67Exhibit Number+*10(f)1—ALLETE and Affiliated Companies Supplemental Executive Retirement Plan (SERP I), as amended and restated, effective January 1, 2009 (filed asExhibit 10(i)4 to the 2008 Form 10-K, File No. 1-3548).+*10(f)2—Amendment to the ALLETE and Affiliated Companies Supplemental Executive Retirement Plan (SERP I), effective January 1, 2011 (filed as Exhibit10(i)2 to the 2010 Form 10-K, File No. 1-3548).+*10(f)3—ALLETE and Affiliated Companies Supplemental Executive Retirement Plan II (SERP II), as amended and restated, effective January 1, 2015 (filed asExhibit 10(f)3 to the 2014 Form 10-K, File No. 1-3548).+*10(g)—ALLETE Deferred Compensation Trust Agreement, as amended and restated, effective December 15, 2012 (filed as Exhibit 10(j) to the 2012 Form10-K, File No. 1-3548).+*10(h)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(h)2—Amendment to the ALLETE Executive Long-Term Incentive Compensation Plan, effective January 1, 2011 (filed as Exhibit 10(m)2 to the 2010 Form10-K, File No. 1-3548).+*10(h)3—Form of ALLETE Executive Long-Term Incentive Compensation Plan Performance Share Grant Effective 2012 (filed as Exhibit 10(m)12 to the 2011Form 10-K, File No. 1-3548).+*10(h)4—Form of ALLETE Executive Long-Term Incentive Compensation Plan Restricted Stock Unit Grant Effective 2012 (filed as Exhibit 10(m)13 to the2011 Form 10-K, File No. 1-3548).+*10(h)5—Form of ALLETE Executive Long-Term Incentive Compensation Plan Performance Share Grant Effective 2013 (filed as Exhibit 10(k)14 to the 2012Form 10-K, File No. 1-3548).+*10(h)6—Form of ALLETE Executive Long-Term Incentive Compensation Plan Restricted Stock Unit Grant Effective 2013 (filed as Exhibit 10(k)15 to the2012 Form 10-K, File No. 1-3548).+*10(h)7—Form of ALLETE Executive Long-Term Incentive Compensation Plan Performance Share Grant Effective 2014 (filed as Exhibit 10(j)14 to the 2013Form 10-K, File No. 1-3548).+*10(h)8—Form of ALLETE Executive Long-Term Incentive Compensation Plan Restricted Stock Unit Grant Effective 2014 (filed as Exhibit 10(j)15 to the2013 Form 10-K, File No. 1-3548).+*10(h)9—Form of ALLETE Executive Long-Term Incentive Compensation Plan Performance Share Grant Effective 2015 (filed as Exhibit 10(j)16 to the 2014Form 10-K, File No. 1-3548).+*10(h)10—Form of ALLETE Executive Long-Term Incentive Compensation Plan Restricted Stock Unit Grant Effective 2015 (filed as Exhibit 10(j)17 to the2014 Form 10-K, File No. 1-3548).+*10(i)1—ALLETE Executive Long-Term Incentive Compensation Plan effective January 1, 2016 (filed November 6, 2015, as Exhibit 99 to Form S-8, File No.333-207846).+*10(i)2—Form of ALLETE Executive Long-Term Incentive Compensation Plan Restricted Stock Unit Grant Effective 2016 (filed as Exhibit 10(k)3 to the 2015Form 10-K, File No. 1-3548).+*10(i)3—Form of ALLETE Executive Long-Term Incentive Compensation Plan Performance Share Grant Effective 2016 (filed as Exhibit 10(k)2 to the 2015Form 10-K, File No. 1-3548).+*10(i)4—Form of ALLETE Executive Long-Term Incentive Compensation Plan Cash Award Effective 2017 (filed as Exhibit 10(i)4 to the 2016 Form 10-K,File No. 1-3548).+*10(i)5—Form of ALLETE Executive Long-Term Incentive Compensation Plan Restricted Stock Unit Grant Effective 2017 (filed as Exhibit 10(i)5 to the 2016Form 10-K, File No. 1-3548).+*10(i)6—Form of ALLETE Executive Long-Term Incentive Compensation Plan Performance Share Grant Effective 2017 (filed as Exhibit 10(i)6 to the 2016Form 10-K, File No. 1-3548).+10(i)7—Form of ALLETE Executive Long-Term Incentive Compensation Plan Restricted Stock Unit Grant Effective 2018.+10(i)8—Form of ALLETE Executive Long-Term Incentive Compensation Plan Performance Share Grant Effective 2018.+*10(j)1—Amended and Restated ALLETE Non-Employee Director Stock Plan, effective May 15, 2013 (filed as Exhibit 10(a) to the June 30, 2013, Form 10-Q,File No. 1-3548).+*10(k)1—ALLETE Non-Employee Director Compensation Summary effective January 1, 2015 (filed as Exhibit 10(l)5 to the 2014 Form 10-K, File No. 1-3548).+*10(k)2—ALLETE Non-Employee Director Compensation Summary effective January 1, 2017 (filed as Exhibit 10(k)3 to the 2016 Form 10-K, File No. 1-3548).+*10(l)1—Minnesota Power (now ALLETE) Non-Employee Director Compensation Deferral Plan Amended and Restated, effective January 1, 1990 (filed asExhibit 10(ac) to the 2002 Form 10-K, File No. 1-3548).+*10(l)2—October 2003 Amendment to the Minnesota Power (now ALLETE) Non-Employee Director Compensation Deferral Plan (filed as Exhibit 10(aa)2 tothe 2003 Form 10-K, File No. 1-3548).+*10(l)3—January 2005 Amendment to the ALLETE Non-Employee Director Compensation Deferral Plan (filed as Exhibit 10(c) to the March 31, 2005, Form10-Q, File No. 1-3548).+*10(l)4—October 2006 Amendment to the ALLETE Non-Employee Director Compensation Deferral Plan (filed as Exhibit 10(d) to the September 30, 2006,Form 10-Q, File No. 1-3548).+*10(l)5—July 2012 Amendment to the ALLETE Non-Employee Director Compensation Deferral Plan (filed as Exhibit 10(n)5 to the 2012 Form 10-K, File No.1-3548).ALLETE, Inc. 2017 Form 10-K68Exhibit Number+*10(m)1—ALLETE Non-Employee Director Compensation Deferral Plan II, effective May 1, 2009 (filed as Exhibit 10(a) to the June 30, 2009, Form 10-Q, FileNo. 1-3548).+*10(m)2—ALLETE Non-Employee Director Compensation Deferral Plan II, as amended and restated, effective July 24, 2012 (filed as Exhibit 10(o)2 to the 2012Form 10-K, File No. 1-3548).+*10(n)—ALLETE Non-Employee Director Compensation Trust Agreement, as amended and restated, effective December 15, 2012 (filed as Exhibit 10(p)2 tothe 2012 Form 10-K, File No. 1-3548).+*10(o)—ALLETE and Affiliated Companies Change in Control Severance Plan, as amended and restated, effective January 19, 2011 (filed as Exhibit 10(q) tothe 2010 Form 10-K, File No. 1-3548).12—Computation of Ratios of Earnings to Fixed Charges.21—Subsidiaries of the Registrant.23—Consent of Independent Registered Public Accounting Firm.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 2002.95—Mine Safety.99—ALLETE News Release dated February 15, 2018, announcing earnings for the year ended December 31, 2017. (This exhibit has beenfurnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemedincorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in suchfiling.)101.INS—XBRL Instance101.SCH—XBRL Schema101.CAL—XBRL Calculation101.DEF—XBRL Definition101.LAB—XBRL Label101.PRE—XBRL PresentationALLETE, Inc. 2017 Form 10-K69Exhibits (Continued)ALLETE or its subsidiaries are obligors under various long-term debt instruments including, but not limited to, the following:•$38,995,000 original principal amount, of City of Cohasset, Minnesota, Variable Rate Demand Revenue Refunding Bonds (ALLETE, formerly MinnesotaPower & Light Company, Project) Series 1997A ($13,500,000 remaining principal balance);•$27,800,000 of Collier County Industrial Development Authority, Industrial Development Variable Rate Demand Refunding Revenue Bonds Series 2006;•$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.Pursuant to Item 601(b)(4)(iii) of Regulation S-K, these long-term debt instruments are not filed as exhibits because the total amount of debt authorized under eachof 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.*Incorporated herein by reference as indicated.+Management contract or compensatory plan or arrangement pursuant to Item 15(b).Item 16. Form 10-K SummaryNone.ALLETE, Inc. 2017 Form 10-K70SignaturesPursuant 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 bythe undersigned, thereunto duly authorized. ALLETE, Inc. Dated:February 15, 2018By /s/ Alan R. Hodnik Alan R. Hodnik Chairman, President, Chief Executive OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.Signature Title Date /s/ Alan R. Hodnik Chairman, President, Chief Executive Officer and Director February 15, 2018Alan R. Hodnik (Principal Executive Officer) /s/ Robert J. Adams Senior Vice President and Chief Financial Officer February 15, 2018Robert J. Adams (Principal Financial Officer) /s/ Steven W. Morris Vice President, Controller and Chief Accounting Officer February 15, 2018Steven W. Morris (Principal Accounting Officer) ALLETE, Inc. 2017 Form 10-K71Signatures (Continued)Signature Title Date /s/ Kathryn W. Dindo Director February 15, 2018Kathryn W. Dindo /s/ Sidney W. Emery, Jr. Director February 15, 2018Sidney W. Emery, Jr. /s/ George G. Goldfarb Director February 15, 2018George G. Goldfarb /s/ James S. Haines, Jr. Director February 15, 2018James S. Haines, Jr. /s/ James J. Hoolihan Director February 15, 2018James J. Hoolihan /s/ Heidi E. Jimmerson Director February 15, 2018Heidi E. Jimmerson /s/ Madeleine W. Ludlow Director February 15, 2018Madeleine W. Ludlow /s/ Susan K. Nestegard Director February 15, 2018Susan K. Nestegard /s/ Douglas C. Neve Director February 15, 2018Douglas C. Neve /s/ Robert P. Powers Director February 15, 2018Robert P. Powers /s/ Leonard C. Rodman Director February 15, 2018Leonard C. Rodman ALLETE, Inc. 2017 Form 10-K72Report of Independent Registered Public Accounting FirmTo the Board of Directors and Shareholders of ALLETE, Inc.:Opinions on the Financial Statements and Internal Control over Financial ReportingWe have audited the accompanying consolidated balance sheets of ALLETE, Inc. and its subsidiaries as of December 31, 2017 and 2016, and the relatedconsolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2017, including therelated notes and schedule of valuation and qualifying accounts and reserves for each of the three years in the period ended December 31, 2017 appearing underItem 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting asof December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (COSO).In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017 in conformity withaccounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.Basis for OpinionsThe Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and forits assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting. Ourresponsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based onour audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to beindependent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities andExchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonableassurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internalcontrol over financial reporting was maintained in all material respects.Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financialstatements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidenceregarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significantestimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financialreporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing andevaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as weconsidered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactionsand dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. ALLETE, Inc. 2017 Form 10-K73Report of Independent Registered Public Accounting Firm (Continued)Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate./s/ PricewaterhouseCoopers LLPMinneapolis, MinnesotaFebruary 15, 2018We have served as the Company’s auditor since 1963. ALLETE, Inc. 2017 Form 10-K74CONSOLIDATED FINANCIAL STATEMENTSALLETE Consolidated Balance SheetAs of December 3120172016Millions Assets Current Assets Cash and Cash Equivalents$98.9$27.5Accounts Receivable (Less Allowance of $2.1 and $3.1)135.1122.5Inventories – Net95.9104.2Prepayments and Other37.640.3Total Current Assets367.5294.5Property, Plant and Equipment – Net3,822.43,741.2Regulatory Assets384.7330.1Investment in ATC118.7135.6Other Investments53.155.6Goodwill and Intangible Assets – Net225.9213.4Other Non-Current Assets107.7106.5Total Assets$5,080.0$4,876.9Liabilities and Shareholders’ Equity Liabilities Current Liabilities Accounts Payable$136.3$74.0Accrued Taxes50.046.5Accrued Interest17.617.6Long-Term Debt Due Within One Year64.1187.7Other83.273.7Total Current Liabilities351.2399.5Long-Term Debt1,439.21,370.4Deferred Income Taxes230.5554.6Regulatory Liabilities532.0125.8Defined Benefit Pension and Other Postretirement Benefit Plans191.8210.9Other Non-Current Liabilities267.1322.7Total Liabilities3,011.82,983.9Commitments, Guarantees and Contingencies (Note 11)Shareholders’ Equity Common Stock Without Par Value, 80.0 Shares Authorized, 51.1 and 49.6 Shares Issued and Outstanding1,401.41,295.3Accumulated Other Comprehensive Loss(22.6)(28.2)Retained Earnings689.4625.9Total Shareholders’ Equity2,068.21,893.0Total Liabilities and Shareholders’ Equity$5,080.0$4,876.9The accompanying notes are an integral part of these statements.ALLETE, Inc. 2017 Form 10-K75ALLETE Consolidated Statement of IncomeYear Ended December 31201720162015Millions Except Per Share Amounts Operating Revenue Utility$1,063.8$1,000.7$991.2Non-utility355.5339.0495.2Total Operating Revenue1,419.31,339.71,486.4Operating Expenses Fuel, Purchased Power and Gas – Utility396.9339.9336.0Transmission Services – Utility71.265.254.1Cost of Sales – Non-utility147.8137.7294.4Operating and Maintenance339.9334.1333.5Depreciation and Amortization177.5195.8170.0Taxes Other than Income Taxes56.953.851.4Other(0.7)(10.3)36.3Total Operating Expenses1,189.51,116.21,275.7Operating Income229.8223.5210.7Other Income (Expense) Interest Expense(67.8)(70.3)(64.9)Equity Earnings in ATC22.518.516.3Other2.43.94.7Total Other Expense(42.9)(47.9)(43.9)Income Before Non-Controlling Interest and Income Taxes186.9175.6166.8Income Tax Expense14.719.825.3Net Income172.2155.8141.5Less: Non-Controlling Interest in Subsidiaries—0.50.4Net Income Attributable to ALLETE$172.2$155.3$141.1Average Shares of Common Stock Basic50.849.348.3Diluted51.049.548.4Basic Earnings Per Share of Common Stock$3.39$3.15$2.92Diluted Earnings Per Share of Common Stock$3.38$3.14$2.92Dividends Per Share of Common Stock$2.14$2.08$2.02The accompanying notes are an integral part of these statements.ALLETE, Inc. 2017 Form 10-K76ALLETE Consolidated Statement of Comprehensive IncomeYear Ended December 31201720162015Millions Net Income$172.2$155.8$141.5Other Comprehensive Income (Loss) Unrealized Gain (Loss) on Securities Net of Income Tax Expense (Benefit) of $0.7, $(0.2) and $(0.3)0.9(0.2)(0.5)Unrealized Gain on Derivatives Net of Income Tax Expense of $–, $– and $0.1——0.1Defined Benefit Pension and Other Postretirement Benefit Plans Net of Income Tax Expense (Benefit) of $2.2, $(2.4) and $(2.2)4.7(3.5)(3.0)Total Other Comprehensive Income (Loss)5.6(3.7)(3.4)Total Comprehensive Income177.8152.1138.1Less: Non-Controlling Interest in Subsidiaries—0.50.4Total Comprehensive Income Attributable to ALLETE$177.8$151.6$137.7The accompanying notes are an integral part of these statements.ALLETE, Inc. 2017 Form 10-K77ALLETE Consolidated Statement of Cash FlowsYear Ended December 31201720162015Millions Operating Activities Net Income$172.2$155.8$141.5AFUDC – Equity(1.2)(2.1)(3.3)Income from Equity Investments – Net of Dividends(3.2)(5.7)(1.8)Impairment of Real Estate——36.3Impairment of Goodwill—3.3—Change in Fair Value of Contingent Consideration(0.7)(13.6)—Deferred Fuel Adjustment Clause Charge19.5——Loss (Gain) on Sales of Investments and Property, Plant and Equipment0.4(6.0)(0.2)Depreciation Expense171.9190.6165.9Amortization of PSAs(23.6)(22.3)(23.2)Amortization of Other Intangible Assets and Other Assets10.210.35.6Deferred Income Tax Expense14.419.425.1Share-Based and ESOP Compensation Expense6.65.111.6Defined Benefit Pension and Other Postretirement Benefit Expense10.14.615.4Bad Debt Expense0.84.11.6Provision for Interim Rate Refund32.3——Changes in Operating Assets and Liabilities Accounts Receivable(8.0)(4.7)1.1Inventories11.913.3(22.1)Prepayments and Other(5.3)(6.9)3.7Accounts Payable(7.5)6.5(19.3)Other Current Liabilities1.8(13.8)5.1Cash Contributions to Defined Benefit Pension Plans(1.7)(6.3)—Changes in Regulatory and Other Non-Current Assets33.7(10.7)0.6Changes in Regulatory and Other Non-Current Liabilities(31.7)11.1(3.5)Cash from Operating Activities402.9332.0340.1Investing Activities Proceeds from Sale of Available-for-sale Securities10.19.01.7Payments for Purchase of Available-for-sale Securities(8.6)(9.4)(2.3)Acquisitions of Subsidiaries – Net of Cash Acquired(18.5)(5.9)(333.3)Investment in ATC(7.8)(5.4)(1.6)Changes to Other Investments3.04.43.1Additions to Property, Plant and Equipment(208.5)(265.6)(286.8)Proceeds from Sale of Property, Plant and Equipment1.30.70.4Changes in Restricted Cash—(4.0)—Cash for Investing Activities(229.0)(276.2)(618.8)Financing Activities Proceeds from Issuance of Common Stock86.030.9161.2Proceeds from Issuance of Long-Term Debt131.54.8324.5Changes in Restricted Cash(0.4)7.08.5Changes in Notes Payable—(1.6)(2.1)Repayments of Long-Term Debt(189.6)(54.8)(160.2)Acquisition of Non-Controlling Interest—(8.0)—Acquisition-Related Contingent Consideration Payments(19.7)(0.9)—Dividends on Common Stock(108.7)(102.7)(97.9)Other Financing Activities(1.6)—(4.1)Cash from (for) Financing Activities(102.5)(125.3)229.9Change in Cash and Cash Equivalents71.4(69.5)(48.8)Cash and Cash Equivalents at Beginning of Period27.597.0145.8Cash and Cash Equivalents at End of Period$98.9$27.5$97.0The accompanying notes are an integral part of these statements.ALLETE, Inc. 2017 Form 10-K78ALLETE Consolidated Statement of Equity TotalEquityRetainedEarningsAccumulatedOtherComprehensiveLossUnearnedESOPSharesCommonStockNon-ControllingInterest inSubsidiariesMillions Balance as of December 31, 2014$1,611.2$530.1$(21.1)$(7.2)$1,107.6$1.8Comprehensive Income Net Income141.5141.1———0.4Other Comprehensive Income – Net of Tax Unrealized Loss on Securities(0.5)—(0.5)———Unrealized Gain on Derivatives0.1—0.1———Defined Benefit Pension and Other PostretirementPlans(3.0)—(3.0)———Total Comprehensive Income138.1 Common Stock Issued163.8———163.8—Dividends Declared(97.9)(97.9)————ESOP Shares Earned7.2——7.2——Balance as of December 31, 20151,822.4573.3(24.5)—1,271.42.2Comprehensive Income Net Income155.8155.3———0.5Other Comprehensive Income – Net of Tax Unrealized Loss on Securities(0.2)—(0.2)———Defined Benefit Pension and Other PostretirementPlans(3.5)—(3.5)———Total Comprehensive Income152.1 Common Stock Issued35.9———35.9—Common Stock Retired(8.0)———(8.0)—Dividends Declared(102.7)(102.7)————Acquisition of Non-Controlling Interest(6.7)———(4.0)(2.7)Balance as of December 31, 20161,893.0625.9(28.2)—1,295.3—Comprehensive Income Net Income172.2172.2————Other Comprehensive Income – Net of Tax Unrealized Gain on Securities0.9—0.9———Defined Benefit Pension and Other PostretirementPlans4.7—4.7———Total Comprehensive Income177.8 Common Stock Issued106.1———106.1—Dividends Declared(108.7)(108.7)————Balance as of December 31, 2017$2,068.2$689.4$(22.6)—$1,401.4—The accompanying notes are an integral part of these statements.ALLETE, Inc. 2017 Form 10-K79NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIESFinancial Statement Preparation. References in this report to “we,” “us,” and “our” are to ALLETE and its subsidiaries, collectively. We prepare our financialstatements in conformity with GAAP. These principles require management to make informed judgments, best estimates, and assumptions that affect the reportedamounts of assets, liabilities, revenue and expenses. Actual results could differ from those estimates.Subsequent Events. The Company performed an evaluation of subsequent events for potential recognition and disclosure through the time of the financialstatements issuance.Principles of Consolidation. Our Consolidated Financial Statements include the accounts of ALLETE and all of our majority‑owned subsidiary companies. Allmaterial intercompany balances and transactions have been eliminated in consolidation.Business Segments. We present three reportable segments: Regulated Operations, ALLETE Clean Energy and U.S. Water Services. Our segments weredetermined in accordance with the guidance on segment reporting. We measure performance of our operations through budgeting and monitoring of contributionsto consolidated net income by each business segment.Regulated Operations includes our regulated utilities, Minnesota Power and SWL&P, as well as our investment in ATC, a Wisconsin-based regulated utility thatowns and maintains electric transmission assets in portions of Wisconsin, Michigan, Minnesota and Illinois. Minnesota Power provides regulated utility electricservice in northeastern Minnesota to approximately 145,000 retail customers. Minnesota Power also has 16 non-affiliated municipal customers in Minnesota.SWL&P is a Wisconsin utility and a wholesale customer of Minnesota Power. SWL&P provides regulated electric, natural gas and water service in northwesternWisconsin to approximately 15,000 electric customers, 13,000 natural gas customers and 10,000 water customers. Our regulated utility operations include retailand wholesale activities under the jurisdiction of state and federal regulatory authorities .ALLETE Clean Energy focuses on developing, acquiring, and operating clean and renewable energy projects. ALLETE Clean Energy currently owns andoperates, in four states, approximately 535 MW of nameplate capacity wind energy generation that is contracted under PSAs of various durations. ALLETE CleanEnergy also engages in the development of wind energy facilities to operate under long-term PSAs or for sale to others upon completion.U.S. Water Services provides integrated water management for industry by combining chemical, equipment, engineering and service for customized solutions toreduce water and energy usage, and improve efficiency.Corporate and Other is comprised of BNI Energy, ALLETE Properties, other business development and corporate expenditures, unallocated interest expense, asmall amount of non-rate base generation, approximately 5,000 acres of land in Minnesota, and earnings on cash and investments.BNI Energy mines and sells lignite coal to two North Dakota mine-mouth generating units, one of which is Square Butte. In 2017 , Square Butte supplied 50percent ( 227.5 MW) of its output to Minnesota Power under long-term contracts. (See Note 11. Commitments, Guarantees and Contingencies.)ALLETE Properties represents our legacy Florida real estate investment. Our strategy related to the real estate assets of ALLETE Properties is to sell individualparcels over time, but incorporates the possibility of a bulk sale of our entire real estate portfolio. Proceeds from a bulk sale would be strategically deployed tosupport growth in ALLETE Clean Energy and U.S. Water Services, collectively our energy infrastructure and related services businesses. ALLETE Properties willcontinue to maintain key entitlements and infrastructure without making additional investments or acquisitions. (See Note 8. Investments.)Cash and Cash Equivalents. We consider all investments purchased with original maturities of three months or less to be cash equivalents.ALLETE, Inc. 2017 Form 10-K80NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)Supplemental Statement of Cash Flow Information.Consolidated Statement of Cash Flows Year Ended December 31201720162015Millions Cash Paid During the Period for Interest – Net of Amounts Capitalized$64.5$68.2$59.0Cash Paid During the Period for Income Taxes$0.4$0.5$0.4Remeasurement of Deferred Income Taxes Resulting from the TCJA Increase in Regulatory Assets$80.9——Decrease in Investment in ATC$(27.9)——Decrease in Deferred Income Taxes$(353.6)——Increase in Regulatory Liabilities$393.6——Noncash Investing and Financing Activities Increase (Decrease) in Accounts Payable for Capital Additions to Property, Plant and Equipment$67.2$(22.0)$(40.6)Capitalized Asset Retirement Costs$(15.6)$3.7$12.4Camp Ripley Solar Financing—$15.0—AFUDC–Equity$1.2$2.1$3.3ALLETE Common Stock Contributed to Pension Plans$13.5——Contingent Consideration——$35.7ALLETE Common Stock Received for Land Inventory—$8.0—Long-Term Finance Receivable for Land Inventory—$12.0—Accounts Receivable. Accounts receivable are reported on the Consolidated Balance Sheet net of an allowance for doubtful accounts. The allowance is based onour evaluation of the receivable portfolio under current conditions, overall portfolio quality, review of specific situations and such other factors that, in ourjudgment, deserve recognition in estimating losses.Accounts Receivable As of December 312017 2016Millions Trade Accounts Receivable Billed$112.6 $106.5Unbilled24.6 19.1Less: Allowance for Doubtful Accounts2.1 3.1Total Accounts Receivable$135.1 $122.5Concentration of Credit Risk. We are subject to concentration of credit risk primarily as a result of accounts receivable. Minnesota Power sells electricity to nineLarge Power Customers. Receivables from these customers totaled $13.8 million as of December 31, 2017 ( $9.5 million as of December 31, 2016 ). MinnesotaPower does not obtain collateral to support utility receivables, but monitors the credit standing of major customers. In addition, Minnesota Power, as permitted bythe MPUC, requires its taconite-producing Large Power Customers to pay weekly for electric usage based on monthly energy usage estimates, which allows us toclosely manage collection of amounts due. One of these customers accounted for 10 percent of consolidated operating revenue in 2017 ( 8 percent in 2016 and in2015 ).Long-Term Finance Receivables. Long-term finance receivables relating to our real estate operations are collateralized by property sold, accrue interest atmarket-based rates and are net of an allowance for doubtful accounts. We assess delinquent finance receivables by comparing the balance of such receivables to theestimated fair value of the collateralized property. If the fair value of the property is less than the finance receivable, we record a reserve for the difference. Weestimate fair value based on recent property tax assessed values or current appraisals.ALLETE, Inc. 2017 Form 10-K81NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)Available-for-Sale Securities. Available-for-sale securities are recorded at fair value with unrealized gains and losses included in accumulated othercomprehensive income (loss), net of tax. Unrealized losses that are other than temporary are recognized in earnings. We use the specific identification method asthe 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 byassessing such factors as share price trends and the impact of overall market conditions. (See New Accounting Pronouncements and Note 8. Investments.)Inventories – Net. Inventories are stated at the lower of cost or net realizable value. Inventories in our Regulated Operations and ALLETE Clean Energy segmentsare carried at an average cost or first-in, first-out basis. Inventories in our U.S. Water Services segment and Corporate and Other operations are carried at anaverage cost, first-in, first-out or specific identification basis.Inventories – Net As of December 312017 2016Millions Fuel (a)$34.8 $43.9Materials and Supplies46.5 48.7Raw Materials2.8 2.9Work in Progress4.2 1.0Finished Goods8.3 8.6Reserve for Obsolescence(0.7) (0.9)Total Inventories – Net$95.9 $104.2(a)Fuel consists primarily of coal inventory at Minnesota Power.Prepayments and Other Current Assets As of December 312017 2016Millions Deferred Fuel Adjustment Clause (a)— $18.6Restricted Cash (b)$2.6 2.2Other35.0 19.5Total Prepayments and Other Current Assets$37.6 $40.3(a)At a hearing on January 18, 2018, the MPUC disallowed recovery of Minnesota Power’s regulatory asset for deferred fuel adjustment clause costs resulting in a$19.5 million pre-tax charge to Fuel, Purchased Power and Gas – Utility in 2017.(b)Restricted Cash includes collateral deposits required under an ALLETE Clean Energy loan agreement and collateral deposits required for U.S. Water Services’ standbyletters of credit.Property, Plant and Equipment. Property, plant and equipment are recorded at original cost and are reported on the Consolidated Balance Sheet net ofaccumulated depreciation. Expenditures for additions, significant replacements, improvements and major plant overhauls are capitalized; maintenance and repaircosts are expensed as incurred. Gains or losses on property, plant and equipment in our U.S. Water Services segment and Corporate and Other operations arerecognized when they are retired or otherwise disposed. When property, plant and equipment in our Regulated Operations and ALLETE Clean Energy segmentsare retired or otherwise disposed, no gain or loss is recognized in accordance with the accounting standards for component depreciation except for certaincircumstances where the retirement is unforeseen or unexpected. Our Regulated Operations capitalize AFUDC, which includes both an interest and equitycomponent. AFUDC represents the cost of both debt and equity funds used to finance utility plant additions during construction periods. AFUDC amountscapitalized are included in rate base and are recovered from customers as the related property is depreciated. Upon MPUC approval of cost recovery, therecognition of AFUDC ceases. (See Note 2. Property, Plant and Equipment.)ALLETE, Inc. 2017 Form 10-K82NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)Property, Plant and Equipment (Continued)We believe that long-standing ratemaking practices approved by applicable state and federal regulatory commissions allow for the recovery of the remaining bookvalue of retired plant assets. In 2015, Minnesota Power retired Taconite Harbor Unit 3 and converted Laskin to operate on natural gas which were actions includedin Minnesota Power’s MPUC-approved 2013 IRP. In a July 2016 order, the MPUC approved Minnesota Power’s 2015 IRP with modifications. The 2015 IRPcontains steps in Minnesota Power’s EnergyForward plan including the economic idling of Taconite Harbor Units 1 and 2 in September 2016, and the ceasing ofcoal-fired operations at Taconite Harbor in 2020. (See Note 4. Regulatory Matters.) The MPUC order for the 2015 IRP also directed Minnesota Power to retireBoswell Units 1 and 2 no later than 2022. In October 2016, Minnesota Power announced that Boswell Units 1 and 2 will be retired in 2018. We do not expect torecord any impairment charge as a result of the retirement of Taconite Harbor Unit 3, the ceasing of coal-fired operations at Taconite Harbor Units 1 and 2, or theconversion of Laskin to operate on natural gas. In addition, we expect to be able to continue depreciating these assets for at least their established remaining usefullives; however, we are unable to predict the impact of regulatory outcomes resulting in changes to their established remaining useful lives.Impairment of Long-Lived Assets. We review our long-lived assets, which include the legacy real estate assets of ALLETE Properties, for indicators ofimpairment in accordance with the accounting standards for property, plant and equipment on a quarterly basis. Land inventory is accounted for as held for use andis recorded at cost, unless the carrying value is determined not to be recoverable in accordance with the accounting standards for property, plant and equipment, inwhich case the land inventory is written down to estimated fair value.In accordance with the accounting standards for property, plant and equipment, if indicators of impairment exist, we test our long‑lived assets for recoverability bycomparing the carrying amount of the asset to the undiscounted future net cash flows expected to be generated by the asset. Cash flows are assessed at the lowestlevel of identifiable cash flows. The undiscounted future net cash flows are impacted by trends and factors known to us at the time they are calculated and ourexpectations related to: management’s best estimate of future sales prices; holding period and timing of sales; method of disposition; and future expendituresnecessary to maintain the operations.Real Estate Assets. In recent years, market conditions for real estate in Florida have required us to review our land inventories for impairment. In 2015, theCompany reevaluated its strategy related to the real estate assets of ALLETE Properties in response to market conditions and transaction activity. The revisedstrategy incorporated the possibility of a bulk sale of its entire portfolio. Proceeds from a bulk sale would be strategically deployed to support growth in ALLETEClean Energy and U.S. Water Services, collectively our Energy Infrastructure and Related Services businesses. ALLETE Properties also continues to pursue salesof individual parcels over time. ALLETE Properties will continue to maintain key entitlements and infrastructure without making additional investments oracquisitions.In connection with implementing the revised strategy, management evaluated its impairment analysis for its real estate assets using updated assumptions todetermine estimated future net cash flows on an undiscounted basis. Estimated fair values were based upon current market data and pricing for individual parcels.Our impairment analysis incorporates a probability-weighted approach considering the alternative courses of sales noted above.Based on the results of the 2015 undiscounted cash flow analysis, the undiscounted future net cash flows were not adequate to recover the carrying value of the realestate assets leading to an adjustment of carrying value to estimated fair value. Estimated fair value was derived using Level 3 inputs, including current marketinterest in the property for a bulk sale of its entire portfolio, and discounted cash flow analysis of estimated selling price for sales over time. As a result, a non-cashimpairment charge of $36.3 million was recorded in 2015 to reduce the carrying value of the real estate to its estimated fair value.In 2017 and 2016, our qualitative assessments indicated that the cash flows were adequate to recover the carrying value of ALLETE Properties real estate assets.As a result, no impairment was recorded in 2017 or 2016.Derivatives. ALLETE is exposed to certain risks relating to its business operations that can be managed through the use of derivative instruments. ALLETE mayenter into derivative instruments to manage those risks including interest rate risk related to certain variable-rate borrowings.Accounting for Stock-Based Compensation. We apply the fair value recognition guidance for share-based payments. Under this guidance, we recognize stock-based compensation expense for all share-based payments granted, net of an estimated forfeiture rate. (See Note 16. Employee Stock and Incentive Plans.)ALLETE, Inc. 2017 Form 10-K83NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)Goodwill and Intangible Assets.Goodwill. Goodwill is the excess of the purchase price (consideration transferred) over the estimated fair value of net assets of acquired businesses. In accordancewith GAAP, goodwill is not amortized. Goodwill is assessed annually in the fourth quarter for impairment and whenever an event occurs or circumstances changethat would indicate the carrying amount may be impaired. Impairment testing for goodwill is done at the reporting unit level.As part of the 2016 annual impairment analysis, the Company recognized a non-cash impairment charge of $3.3 million for ALLETE Clean Energy’s goodwillprimarily related to the acquisition of Storm Lake II in 2014 . The charge, which is presented within Operating Expenses – Other in the Consolidated Statement ofIncome, eliminated all recognized goodwill for the ALLETE Clean Energy reporting unit.As of the date of our annual goodwill impairment testing in 2017 , the U.S. Water Services reporting unit had positive equity and the Company elected to bypassthe qualitative assessment of goodwill for impairment, proceeding directly to the two-step impairment test. In performing Step 1 of the impairment test, wecompared the fair value of the reporting unit to its carrying value including goodwill. If the carrying value including goodwill were to exceed the fair value of areporting unit, Step 2 of the impairment test would be performed. Step 2 of the impairment test requires the carrying value of goodwill to be reduced to its fairvalue, if lower, as of the test date.U.S. Water Services . For Step 1 of the impairment test, we estimated the reporting unit's fair value using standard valuation techniques, including techniqueswhich use estimates of projected future results and cash flows to be generated by the reporting unit. Such techniques generally include a terminal value that utilizesa growth rate on debt-free cash flows. These cash flow valuations involve a number of estimates that require broad assumptions and significant judgment bymanagement regarding future performance. Our annual impairment test in 2017 indicated that the estimated fair value of U.S. Water Services exceeded its carryingvalue, and therefore no impairment existed ( none in 2016 or in 2015 ). The fair value of the reporting unit was determined using a discounted cash flow model,using significant assumptions which included a discount rate of 10.75 percent , cash flow forecasts through 2022, annual revenue growth rates ranging from 7percent to 9 percent, excluding 13 percent of revenue growth in 2018 related to the year over year impact of the acquisition of Tonka Water, and a terminal growthrate of 4.0 percent. Forecasted annual revenue growth assumes an increase in market share and growth in the industry.Intangible Assets. Intangible assets include customer relationships, patents, non-compete agreements, land easements, trademarks and trade names. Intangibleassets with definite lives consist of customer relationships, which are amortized using an attrition model, and patents, non-compete agreements, land easements andcertain trade names, which are amortized on a straight-line basis with estimated remaining useful lives ranging from approximately 1 year to approximately 20 years. We review definite-lived intangible assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not berecoverable. Indefinite‑lived intangible assets consist of trademarks and certain trade names, which are tested for impairment annually in the fourth quarter andwhenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Impairment is calculated as the excess of theasset’s carrying amount over its fair value. Fair value is generally determined using a discounted cash flow analysis. Our annual impairment test in 2017 indicatedthat the estimated fair value of trademarks and trade names exceeded the asset carrying values. As a result, no impairment existed in 2017 ( none in 2016 or in 2015).ALLETE, Inc. 2017 Form 10-K84NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)Other Non-Current Assets As of December 312017 2016Millions Contract Payment (a)$27.5 $29.6Finance Receivable (b)11.0 11.5Restricted Cash (c)8.6 8.6Other60.6 56.8Total Other Non-Current Assets$107.7 $106.5(a)Contract Payment includes a payment made to Cliffs as part of a long-term PSA between Minnesota Power and Silver Bay Power. The contract payment is being amortizedover the term of the PSA. (See Note 11. Commitments, Guarantees and Contingencies.)(b)In 2016, ALLETE Properties sold its Ormond Crossings project and Lake Swamp wetland mitigation bank for consideration of approximately $21 million . Theconsideration included a down payment in the form of 0.1 million shares of ALLETE common stock with a value of $8.0 million . The remaining purchase price will be paidunder the terms of a finance receivable due over a five -year period which bears interest at market rates and is collateralized by the property sold.(c)Restricted Cash includes collateral deposits required under an ALLETE Clean Energy loan agreement and PSAs, and deposits from SWL&P customers in aid of futurecapital expenditures.Other Current Liabilities As of December 312017 2016Millions PSAs$24.5 $24.6Other58.7 49.1Total Other Current Liabilities$83.2 $73.7Other Non-Current Liabilities As of December 312017 2016Millions Asset Retirement Obligation$122.7 $136.6PSAs89.5 113.8Contingent Consideration (a)5.4 25.0Other49.5 47.3Total Other Non-Current Liabilities$267.1 $322.7(a)Contingent Consideration relates to the estimated fair value of the earnings-based payment resulting from the U.S. Water Services acquisition. (See Note 6. Acquisitionsand Note 9. Fair Value.)Environmental Liabilities. We review environmental matters on a quarterly basis. Accruals for environmental matters are recorded when it is probable that aliability has been incurred and the amount of the liability can be reasonably estimated based on current law and existing technologies. Accruals are adjusted asassessment and remediation efforts progress, or as additional technical or legal information becomes available. Accruals for environmental liabilities are includedin the Consolidated Balance Sheet at undiscounted amounts and exclude claims for recoveries from insurance or other third parties. Costs related to environmentalcontamination treatment and cleanup are expensed unless recoverable in rates from customers. (See Note 11. Commitments, Guarantees and Contingencies.)ALLETE, Inc. 2017 Form 10-K85NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)Revenue Recognition.Regulated Operations utility rates are under the jurisdiction of Minnesota, Wisconsin and federal regulatory authorities. Customers are billed on a cycle basis.Revenue is accrued for services provided but not yet billed. Regulated utility electric rates include adjustment clauses that: (1) bill or credit customers for fuel andpurchased energy costs above or below the base levels in rate schedules; (2) bill retail customers for the recovery of conservation improvement programexpenditures not collected in base rates; and (3) bill customers for the recovery of certain transmission, renewable, and environmental improvement expenditures.Previously, fuel and purchased power expense was deferred to match the period in which the revenue for fuel and purchased power expense was billed tocustomers with the deferred fuel costs recognized as a regulatory asset. At a hearing on January 18, 2018, the MPUC disallowed recovery of Minnesota Power’sregulatory asset for deferred fuel adjustment clause costs due to the anticipated adoption of a forward-looking fuel adjustment clause methodology resulting in a$19.5 million pre-tax charge to Fuel, Purchased Power and Gas – Utility in 2017. As a result of the MPUC hearing, fuel and purchased power costs above or belowthe base levels in rate schedules are no longer deferred.Revenue from cost recovery riders (transmission, renewable and environmental improvement) is accounted for in accordance with GAAP for alternative revenueprograms. These standards allow for recognizing revenue under an alternative revenue program if the program is established by an order from the utility’sregulatory authority, the order allows automatic adjustment of future rates, the amount of the revenue recognized is objectively determinable and probable ofrecovery, and the revenue will be collected within 24 months following the end of the annual period in which it is recognized. Revenue recognized using thealternative revenue program guidance is included in Operating Revenue – Utility on the Consolidated Statement of Income and Regulatory Assets on theConsolidated Balance Sheet until it is subsequently collected from customers.Minnesota Power participates in MISO. MISO transactions are accounted for on a net hourly basis in each of the day-ahead and real-time markets. MinnesotaPower records net sales in Operating Revenue – Utility and net purchases in Fuel, Purchased Power and Gas – Utility expense on the Consolidated Statement ofIncome.ALLETE Clean Energy recognizes revenue from the sale of energy from PSAs under various durations. Revenue is recognized when delivered to an agreed uponpoint or production is curtailed at the request of its customers at specified prices. As part of its acquisitions of wind energy facilities, ALLETE Clean Energy hasassumed various PSAs that were above or below estimated market prices at the time of acquisition and amortizes the resulting differences between contract pricesand estimated market prices to Operating Revenue – Non-utility on the Consolidated Statement of Income. In 2017 , we recognized $23.6 million of non-cashrevenue amortization relating to the difference between contract prices and estimated market prices as an increase in Operating Revenue – Non-utility ($22.3 million in 2016 ; $23.2 million in 2015 ). Revenue from the construction and sale of wind energy facilities to others will be recognized at a point in time, orover time, as performance obligations are satisfied based on the terms of each specific agreement.U.S. Water Services recognizes revenue from the sale of products when the earnings process is complete. This generally occurs when products are shipped to thecustomer in accordance with the contract or purchase order, ownership and risk of loss have passed to the customer, collectibility is reasonably assured, and pricingis fixed and determinable. Revenue from services is recognized as the services are performed.Corporate and OtherBNI Energy recognizes coal sales when delivered at the cost of production plus a specified profit per ton of coal delivered.ALLETE Properties records full profit recognition on sales of real estate upon closing, provided that cash collections are at least 20 percent of the contract priceand the other requirements under the guidance for sales of real estate are met. Certain contracts with customers allow us to receive participation revenue from landsales to third parties if various formula-based criteria are achieved.ALLETE, Inc. 2017 Form 10-K86NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)Operating Expenses – Other Year Ended December 31201720162015Millions Impairment of Real Estate (a)——$36.3Impairment of Goodwill (b)—$3.3—Change in Fair Value of Contingent Consideration (c)$(0.7)(13.6)—Total Operating Expenses – Other$(0.7)$(10.3)$36.3(a)See Impairment of Long-Lived Assets.(b)See Goodwill and Intangible Assets.(c)See Note 9. Fair Value.Unamortized Discount and Premium on Debt. Discount and premium on debt are deferred and amortized over the terms of the related debt instruments using amethod which approximates the effective interest method.Income Taxes. ALLETE and its subsidiaries file a consolidated federal income tax return as well as combined and separate state income tax returns. We accountfor income taxes using the liability method in accordance with GAAP for income taxes. Under the liability method, deferred income tax assets and liabilities areestablished 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 whichthe taxes become payable.Due to the effects of regulation on Minnesota Power and SWL&P, certain adjustments made to deferred income taxes are, in turn, recorded as regulatory assets orliabilities. Federal investment tax credits have been recorded as deferred credits and are being amortized to income tax expense over the service lives of the relatedproperty. In accordance with GAAP for uncertainty in income taxes, we are required to recognize in our financial statements the largest tax benefit of a tax positionthat is “more‑likely‑than‑not” to be sustained on audit, based solely on the technical merits of the position as of the reporting date. The term“more‑likely‑than‑not” means more than 50 percent likely. (See Note 13. Income Tax Expense.)Tax Cuts and Jobs Act of 2017 . On December 22, 2017, the TCJA was enacted into law. The TCJA has significantly changed the U.S. Internal Revenue Code(IRC) and the taxation of corporations. The more significant provisions that impact our Company include a reduction in the corporate federal income tax rate from35 percent to 21 percent , and provisions related to our regulated utilities which generally allow for the continued deductibility of interest expense, the eliminationof full expensing for property acquired after September 27, 2017, and the continuation of normalization requirements for accelerated tax depreciation taken byregulated utilities. The TCJA allows for full expensing for property and imposes an interest expense limitation on non‑regulated operations. The interest expenselimitation is not expected to have a material impact on the Company.Under ASC 740, the tax effects of changes in tax laws must be recognized in the period in which the law is enacted. ASC 740 requires deferred income tax assetsand liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. Thus, as of the date of enactment,the Company’s deferred income tax assets and liabilities were remeasured based upon the new tax rate. For our Regulated Operations segment, the change indeferred income taxes was recorded as regulatory assets, regulatory liabilities and a change to our investment in ATC. The benefits of the TCJA for MinnesotaPower and SWL&P are expected to be passed back to customers over time primarily based upon the normalization provisions of the IRC over the life of the relatedproperty, plant and equipment with the remainder passed back based upon the determinations of regulatory authorities. The decrease in our investment in ATC isexpected to be amortized into earnings over time. For our ALLETE Clean Energy and U.S. Water Services segments as well as our Corporate and Otherbusinesses, the change in deferred income taxes is recorded in income tax expense on the Consolidated Statement of Income.On December 22, 2017, the SEC staff issued guidance in Staff Accounting Bulletin 118 (SAB 118) which clarifies accounting for income taxes under ASC 740 ifinformation is not yet available or complete, and provides for up to a one year period in which to complete the required analyses and accounting (the measurementperiod). SAB 118 describes three scenarios associated with a company’s status of accounting for the TCJA: (1) a company is complete with its accounting forcertain effects, (2) a company is able to determine a reasonable estimate for certain effects and records that estimate as a provisional amount, or (3) a company isnot able to determine a reasonable estimate and therefore continues to apply ASC 740, based on the provisions of the tax laws that were in effect immediately priorto the TCJA being enacted.ALLETE, Inc. 2017 Form 10-K87NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)Income Taxes (Continued)The Company has made a provisional estimate for the measurement and accounting of the effects of the TCJA, which have been reflected in the ConsolidatedFinancial Statements as of December 31, 2017. The measurement and accounting of the effects of the TCJA resulted in a decrease to Income Tax Expense of $13.0million for the year ended December 31, 2017, as well as a decrease to Deferred Income Taxes of $353.6 million , a decrease to Investment in ATC of$27.9 million , an increase to Regulatory Assets of $80.9 million and an increase to Regulatory Liabilities of $393.6 million as of December 31, 2017. Theprovisional amounts incorporate assumptions made based upon the Company’s current interpretation of the TCJA, and may change as the Company receivesadditional clarification and implementation guidance. Any adjustments recorded to the provisional amounts in 2018 will be included in income from operations asan adjustment to income tax expense.As provided for under SAB 118, the Company has not estimated the impact for items for which it cannot predict, such as guidance that has not yet been provided,or for which federal or state regulatory treatment is still uncertain. The determination of the impact of the income tax effects of these types of items will occurwhen more information is available to the Company.Excise Taxes. We collect excise taxes from our customers levied by government entities. These taxes are stated separately on the billing to the customer andrecorded as a liability to be remitted to the government entity. We account for the collection and payment of these taxes on a net basis.Purchase Accounting. In accordance with the authoritative accounting guidance, the purchase price of an acquired business is generally allocated to the assetsacquired and liabilities assumed at their estimated fair values on the date of acquisition. Any unallocated purchase price amount is recognized as goodwill on theConsolidated Balance Sheet if it exceeds the estimated fair value and as a bargain purchase gain on the Consolidated Income Statement if it is below the estimatedfair value. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment, and the utilization of independent valuationexperts as well as the use of significant estimates and assumptions with respect to the timing and amounts of future cash inflows and outflows, discount rates,market prices and asset lives, among other items. The judgments made in the determination of the estimated fair value assigned to the assets acquired and liabilitiesassumed, as well as the estimated useful life of each asset and the duration of each liability, can materially impact the financial statements in periods afteracquisition, such as through depreciation and amortization expense. (See Note 6. Acquisitions.)New Accounting Pronouncements.Recently Adopted PronouncementsSimplifying the Measurement of Inventory. In 2015, the FASB issued an accounting standards update which requires entities that measure inventory using the first-in, first-out or average cost methods to measure inventory at the lower of cost or net realizable value. Net realizable value is defined as estimated selling price inthe ordinary course of business less reasonably predictable costs of completion, disposal and transportation. This accounting guidance was adopted in the firstquarter of 2017 and did not have a material impact on our Consolidated Financial Statements.Improvements to Employee Share-Based Payment Accounting. In March 2016, the FASB issued guidance to simplify the accounting for share-based paymenttransactions by requiring all excess tax benefits and deficiencies to be recognized in income tax expense or benefit in earnings, thus eliminating the requirement toclassify the excess tax benefit and deficiencies as additional paid-in capital. Under the new guidance, an entity makes an accounting policy election to eitherestimate the expected forfeiture awards or account for forfeitures as they occur. This accounting guidance was adopted in the first quarter of 2017. The adoption ofthis guidance is expected to result in a less than $1 million impact to income tax expense (benefit) annually.Clarifying the Definition of a Business. In January 2017, the FASB issued clarifying guidance on the definition of a business and provided additional guidance toassist with evaluating whether transactions are to be accounted for as an acquisition or disposal of a group of assets or a business. The clarifying guidance will alsoimpact other areas including the accounting for goodwill and consolidation. This accounting guidance was adopted in the first quarter of 2017 and did not have animpact on our Consolidated Financial Statements.ALLETE, Inc. 2017 Form 10-K88NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)New Accounting Pronouncements (Continued)Stock Compensation: Scope of Modification Accounting. In May 2017, the FASB issued additional clarifying guidance regarding circumstances where changes tothe terms or conditions of share-based payment awards require an entity to apply modification accounting under ASC 718. The guidance provides specificsituations that would be excluded from effects of a modification including if the fair value, vesting conditions, and classification are the same before and aftermodification. The amendments in this update will be applied prospectively to awards modified on or after adoption. This accounting guidance was adopted by theCompany in the second quarter of 2017 and did not have an impact on our Consolidated Financial Statements.Recently Issued PronouncementsSimplifying the Test for Goodwill Impairment . In January 2017, the FASB issued updated guidance which simplifies the measurement of goodwill impairment byremoving step two of the goodwill impairment test that requires the determination of the fair value of individual assets and liabilities of a reporting unit. Theupdated guidance requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value; however, the lossrecognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective for the Company beginning in the first quarterof 2020, with early adoption permitted on a prospective basis.Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. In March 2017, the FASB issued guidance to improve thepresentation of net periodic pension and postretirement benefit costs. Under the revised guidance of ASC 715, an entity shall present the service cost component ofthe net periodic benefit cost in the same income statement line as other employee compensation costs arising from services rendered during the period. Theguidance also allows only the service cost component of the periodic cost to be eligible for capitalization. The standard will be applied retrospectively for incomestatement presentation, and prospectively for capitalization of service cost components. We do not expect there to be a material impact on the ConsolidatedFinancial Statements with the adoption of the updated guidance which is effective for the Company beginning in the first quarter of 2018.Revenue from Contracts with Customers. In 2014, the FASB issued amended revenue recognition guidance that clarifies the principles for recognizing revenuefrom contracts with customers by providing a single comprehensive model to determine the measurement of revenue and timing of recognition. The guidancerequires an entity to recognize revenue in a manner that depicts the transfer of goods or services to customers in an amount that reflects the consideration to whichan entity expects to be entitled in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, anduncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required regarding customercontracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. As of December 31, 2017, theCompany has reviewed all of its revenue streams and contracts for its regulated, energy infrastructure and related services, and corporate and other businesses,completing the evaluations of the impact of this new guidance. Based on these evaluations, the Company has determined the new guidance does not materially alterthe amount or timing of revenue recognition from the current methodology nor does it have a material transition adjustment upon adoption. Additionally,management does not expect the recognition of any assets from the costs to obtain a contract. Management continues to draft and refine the additional disclosuresneeded to meet the requirements of the new standard following adoption. The Company will adopt and implement the new guidance on a modified retrospectivebasis which requires application of standards to all contracts with customers effective January 1, 2018, with the cumulative impact on contracts with performanceobligations not yet satisfied as of December 31, 2017, recognized as an adjustment to Retained Earnings on the Consolidated Balance Sheet.Leases. In February 2016, the FASB issued an accounting standard update which revises the existing guidance for leases. Under the revised guidance, lessees willbe required to recognize a “right-of-use” asset and a lease liability for all leases with a term greater than 12 months. The new standard also requires additionalquantitative and qualitative disclosures by lessees and lessors to enable users of the financial statements to assess the amount, timing and uncertainty of cash flowsarising from leases. The accounting for leases by lessors and the recognition, measurement, and presentation of expenses and cash flows from leases are notexpected to significantly change as a result of the new guidance. As of December 31, 2017, ALLETE expects to make $79.9 million in minimum lease paymentsdue in future years (undiscounted). The revised guidance is effective for the Company beginning in the first quarter of 2019 with early adoption permitted. We arecurrently evaluating the impact of the revised lease guidance on our Consolidated Financial Statements.ALLETE, Inc. 2017 Form 10-K89NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)New Accounting Pronouncements (Continued)Financial Instruments. In January 2016, the FASB issued an accounting standard update which requires entities to measure their investments at fair value andrecognize any changes in fair value in net income unless the investments qualify for the practicability exception. The practicability exception will be available forequity investments that do not have readily determinable fair values. The updated guidance is effective for the Company beginning in the first quarter of 2018 andwill result in a cumulative-effect adjustment to Retained Earnings on the Consolidated Balance Sheet in the fiscal year of adoption. We have performed apreliminary evaluation of the impact of this update, and based on that evaluation, we do not expect the adoption of the update to have a material impact on ourConsolidated Financial Statements.Classification of Certain Cash Receipts and Cash Payments. In August 2016, the FASB issued an accounting standard update which addresses the following eightspecific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero‑coupon debt instruments or other debt instruments with coupon interestrates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceedsfrom the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies);distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of thepredominance principle. This accounting guidance is effective for the Company beginning in the first quarter of 2018. We do not expect the adoption of the updateto have a material impact on our Consolidated Statement of Cash Flows.Statement of Cash Flows: Restricted Cash. In November 2016, the FASB issued an accounting standard update related to the presentation of restricted cash in theCompany’s Consolidated Statement of Cash Flows. The update requires that the Consolidated Statement of Cash Flows explain the change during the period incash, cash equivalents, and restricted cash. Restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Consolidated Statement of Cash Flows. This accounting guidance is effective for the Company beginning in the first quarter of2018 and will be applied retrospectively to all periods presented. The guidance will result in changes to the Company’s Consolidated Statement of Cash Flows suchthat restricted cash amounts will be included in the beginning-of-period and end‑of‑period cash and cash equivalents totals when adopted for our fiscal yearbeginning January 1, 2018. We do not expect the adoption of the update to have a material impact on our Consolidated Statement of Cash Flows.Revision of Prior Balance Sheet. During the first quarter of 2017, the Company identified an error related to the deferred income tax treatment associated with itsWholesale and Retail Contra AFUDC Regulatory Liability. The Company evaluated the materiality of the error and concluded that it was not material to anypreviously issued historical financial statements. The Company has revised its Consolidated Balance Sheet as of December 31, 2016, by decreasing RegulatoryAssets and Deferred Income Taxes by $29.5 million . The correction had no impact on our Consolidated Statement of Income.Reclassification of Prior Income Statement. Beginning with the second quarter of 2017, the Company enhanced its presentation of Operating Revenue andcertain Operating Expenses on the Consolidated Statement of Income by presenting the caption Operating Revenue separately as Operating Revenue – Utility andOperating Revenue – Non-utility. In conformity with the current presentation, we now present $1,007.7 million and $991.2 million of Operating Revenue asOperating Revenue – Utility for the years ended December 31, 2016 , and 2015 , respectively, as it is generated from our regulated utility operations. Non-utilityrevenue of $339.0 million and $495.2 million for the years ended December 31, 2016 , and 2015 respectively, is now presented as Operating Revenue – Non-utility. In addition, the captions Fuel and Purchased Power and Cost of Sales have been updated to Fuel, Purchased Power and Gas – Utility and Cost of Sales –Non-utility. As a result, we have reclassified $7.0 million relating to the cost of gas sales at SWL&P from the historic caption Cost of Sales to Fuel, PurchasedPower and Gas – Utility for the year ended December 31, 2016 , and $7.9 million for the year ended December 31, 2015 .ALLETE, Inc. 2017 Form 10-K90NOTE 2. PROPERTY, PLANT AND EQUIPMENTProperty, Plant and Equipment As of December 312017 2016Millions Regulated Operations Property, Plant and Equipment in Service$4,523.7 $4,437.0Construction Work in Progress121.6 84.2Accumulated Depreciation(1,520.5) (1,426.1)Regulated Operations – Net3,124.8 3,095.1ALLETE Clean Energy Property, Plant and Equipment in Service482.5 472.3Construction Work in Progress144.9 101.0Accumulated Depreciation(60.8) (41.0)ALLETE Clean Energy – Net566.6 532.3U.S. Water Services Property, Plant and Equipment in Service24.8 19.5Accumulated Depreciation(10.4) (6.9)U.S. Water Services – Net14.4 12.6Corporate and Other (a) Property, Plant and Equipment in Service204.7 179.8Construction Work in Progress5.0 2.8Accumulated Depreciation(93.1) (81.4)Corporate and Other – Net116.6 101.2Property, Plant and Equipment – Net$3,822.4 $3,741.2(a)Primarily includes BNI Energy and a small amount of non-rate base generation.Depreciation is computed using the straight-line method over the estimated useful lives of the various classes of assets.Estimated Useful Lives of Property, Plant and EquipmentRegulated Operations ALLETE Clean Energy (a)5 to 35 years Generation5 to 50 years U.S. Water Services3 to 39 years Transmission44 to 67 years Corporate and Other3 to 50 years Distribution18 to 65 years (a)ALLETE Clean Energy’s Property, Plant and Equipment consists primarily of WTGs with estimated useful lives ranging from 30 years to 35 years.Asset Retirement Obligations. We recognize, at fair value, obligations associated with the retirement of certain tangible, long‑lived assets that result from theacquisition, construction, development or normal operation of the asset. Asset retirement obligations (AROs) relate primarily to the decommissioning of our coal-fired and wind energy facilities, and land reclamation at BNI Energy. AROs are included in Other Non-Current Liabilities on the Consolidated Balance Sheet. Theassociated retirement costs are capitalized as part of the related long-lived asset and depreciated over the useful life of the asset. Removal costs associated withcertain distribution and transmission assets have not been recognized, as these facilities have indeterminate useful lives.Conditional asset retirement obligations have been identified for treated wood poles and remaining polychlorinated biphenyl and asbestos-containing assets;however, removal liabilities 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 authorities have allowed provisions for future plant removal costs indepreciation rates. These plant removal cost recoveries are classified either as AROs or as a regulatory liability for non-AROs. To the extent annual accruals forplant removal costs differ from accruals under approved depreciation rates, a regulatory asset has been established in accordance with GAAP for AROs. (See Note4. Regulatory Matters.)ALLETE, Inc. 2017 Form 10-K91NOTE 2. PROPERTY, PLANT AND EQUIPMENT (Continued)Asset Retirement Obligations Millions Obligation as of December 31, 2015 $131.4Accretion 8.0Liabilities Settled (6.5)Revisions in Estimated Cash Flows 3.7Obligation as of December 31, 2016 136.6Accretion 7.6Liabilities Settled (5.9)Revisions in Estimated Cash Flows (15.6)Obligation as of December 31, 2017 $122.7NOTE 3. JOINTLY-OWNED FACILITIES AND PROJECTSBoswell Unit 4. Minnesota Power owns 80 percent of the 585 MW Boswell Unit 4. While Minnesota Power operates the plant, certain decisions about theoperations of Boswell Unit 4 are subject to the oversight of a committee on which it and WPPI Energy, the owner of the remaining 20 percent , have equalrepresentation and voting rights. Each owner must provide its own financing and is obligated to its ownership share of operating costs. Minnesota Power’s share ofoperating expenses for Boswell Unit 4 is included in Operating Expenses on the Consolidated Statement of Income.CapX2020. Minnesota Power was a participant in the CapX2020 initiative which represented an effort to ensure electric transmission and distribution reliability inMinnesota and the surrounding region for the future. CapX2020, which consisted of electric cooperatives and municipal and investor-owned utilities, includingMinnesota’s largest transmission owners, assessed the transmission system and projected growth in customer demand for electricity through 2020. MinnesotaPower participated in three CapX2020 projects which were completed and placed in service in 2011, 2012 and 2015.Minnesota Power’s investments in jointly-owned facilities and projects and the related ownership percentages are as follows:Regulated Utility PlantPlant in ServiceAccumulatedDepreciationConstruction Work inProgress% OwnershipMillions As of December 31, 2017 Boswell Unit 4$668.2$222.8$8.280CapX2020 Projects101.08.4—9.3 - 14.7Total$769.2$231.2$8.2 As of December 31, 2016 Boswell Unit 4$668.1$211.2$8.180CapX2020 Projects101.25.9—9.3 - 14.7Total$769.3$217.1$8.1 NOTE 4. REGULATORY MATTERSElectric Rates. Entities within our Regulated Operations segment file for periodic rate revisions with the MPUC, PSCW or FERC. As authorized by the MPUC,Minnesota Power also recognizes revenue under cost recovery riders for transmission, renewable and environmental investments and expenditures. (SeeTransmission Cost Recovery Rider, Renewable Cost Recovery Rider and Environmental Improvement Rider .) Revenue from cost recovery riders was $96.9 millionin 2017 ( $97.1 million in 2016 ; $89.6 million in 2015 ).ALLETE, Inc. 2017 Form 10-K92NOTE 4. REGULATORY MATTERS (Continued)Electric Rates (Continued)2016 Minnesota General Rate Case. In November 2016, Minnesota Power filed a retail rate increase request with the MPUC seeking an average increase ofapproximately 9 percent for retail customers. The rate filing sought a return on equity of 10.25 percent and a 53.81 percent equity ratio. On an annualized basis, therequested final rate increase would have generated approximately $55 million in additional revenue. In December 2016, Minnesota Power filed a request to modifyits original interim rate proposal reducing its requested interim rate increase to $34.7 million from the original request of approximately $49 million due to achange in its electric sales forecast. In December 2016 orders, the MPUC accepted the November 2016 filing as complete and authorized an annual interim rateincrease of $34.7 million beginning January 1, 2017 .On February 23, 2017, Minnesota Power filed an additional request to further reduce its requested interim rate increase. In an order dated April 13, 2017, theMPUC approved Minnesota Power’s updated retail rate request resulting in a reduction in the annual interim rate increase to $32.2 million beginning May 1, 2017.As a result of working with intervenors and further developments as the rate review progressed, Minnesota Power’s final rate request was adjusted toapproximately $49 million on an annualized basis. At a hearing on January 18, 2018, the MPUC made determinations regarding Minnesota Power’s general ratecase including allowing a return on common equity of 9.25 percent and a 53.81 percent equity ratio. Upon commencement of final rates, we expect additionalrevenue of approximately $13 million on an annualized basis. Final rates are expected to commence in the fourth quarter of 2018; interim rates will be collectedthrough this period which will be fully offset by the recognition of a corresponding reserve. As a result of the MPUC’s decisions on January 18, 2018, MinnesotaPower has recorded a reserve for an interim rate refund of approximately $32 million as of December 31, 2017 . The MPUC also disallowed recovery of MinnesotaPower’s regulatory asset for deferred fuel adjustment clause costs due to the anticipated adoption of a forward-looking fuel adjustment clause methodologyresulting in a $19.5 million pre-tax charge to Fuel, Purchased Power and Gas – Utility in 2017. An order from the MPUC setting forth the effective date of finalrates is expected by March 12, 2018. Minnesota Power will review this order for potential reconsideration of certain issues at that time.As part of its decision in Minnesota Power’s 2016 general rate case, the MPUC extended the depreciable lives of Boswell Unit 3, Unit 4 and common facilities to2050 primarily to mitigate rate increases for our customers, and shortened the depreciable lives of Boswell Unit 1 and Unit 2 to 2022, resulting in a net decrease todepreciation expense of approximately $25 million pre-tax in 2017.Energy-Intensive Trade-Exposed Customer Rates. An EITE customer ratemaking law was enacted in 2015 which established that it is the energy policy ofMinnesota to have competitive rates for certain industries such as mining and forest products. In 2015, Minnesota Power filed a rate schedule petition with theMPUC for EITE customers and a corresponding rider for EITE cost recovery. In a March 2016 order, the MPUC dismissed the petition without prejudice. In June2016, Minnesota Power filed a revised EITE petition with the MPUC which included additional information on the net benefits analysis, limits on eligiblecustomers and term lengths for the EITE discount. The rate adjustments were intended to be revenue and cash flow neutral to Minnesota Power. The MPUCapproved a reduction in rates for EITE customers in a December 2016 order and subsequently approved cost recovery in an order dated April 20, 2017; collectionof the discount was subject to the MPUC’s review of Minnesota Power’s compliance filing implementing approval of a recovery mechanism, with the subsequentorder issued on October 13, 2017, that modified the order dated April 20, 2017. During 2017, Minnesota Power provided discounts of $8.6 million which wererecorded as a receivable. On September 29, 2017, Minnesota Power informed its EITE customers that it has suspended the EITE discount due to a concern that itwas not revenue and cash flow neutral to Minnesota Power based on an MPUC decision at a hearing on September 7, 2017, as well as the interim rate reductionand decisions in its 2016 general rate case. Based on the MPUC’s decisions at a hearing on January 18, 2018, as part of Minnesota Power’s 2016 general rate case,Minnesota Power reinstated the EITE discount effective January 1, 2018. Minnesota Power expects the discount to EITE customers to be approximately $15million annually based on EITE customer current operating levels. While interim rates are in effect for Minnesota Power’s 2016 general rate case, EITE discountswill offset interim rate refund reserves for non-EITE customers.FERC-Approved Wholesale Rates. Minnesota Power has 16 non-affiliated municipal customers in Minnesota. SWL&P is a Wisconsin utility and a wholesalecustomer of Minnesota Power. All wholesale contracts include a termination clause requiring a three -year notice to terminate.ALLETE, Inc. 2017 Form 10-K93NOTE 4. REGULATORY MATTERS (Continued)Electric Rates (Continued)Minnesota Power’s wholesale electric contract with the Nashwauk Public Utilities Commission is effective through at least December 31, 2032. No terminationnotice may be given for this contract prior to July 1, 2029. The wholesale electric service contracts with SWL&P and another municipal customer are effectivethrough at least February 28, 2021, and through June 30, 2019, respectively. Under the agreement with SWL&P, no termination notice has been given. The othermunicipal customer provided a contract termination notice in June 2016. Minnesota Power currently provides approximately 29 MW of average monthly demandto this customer. The rates included in these three contracts are set each July 1 based on a cost-based formula methodology, using estimated costs and a rate ofreturn that is equal to Minnesota Power’s authorized rate of return for Minnesota retail customers. The formula-based rate methodology also provides for a yearlytrue-up calculation for actual costs incurred.Minnesota Power’s wholesale electric contracts with 14 municipal customers are effective through at least December 31, 2024. No termination notices may begiven prior to three years before maturity. These contracts include fixed capacity charges through 2018; beginning in 2019, the capacity charge will be determinedusing a cost-based formula methodology with limits on the annual change from the previous year’s capacity charge. The base energy charge for each year of thecontract term will be set each January 1, subject to monthly adjustment, and will also be determined using a cost-based formula methodology.Transmission Cost Recovery Rider. Minnesota Power has an approved cost recovery rider in place for certain transmission investments and expenditures. In aFebruary 2016 order, the MPUC approved Minnesota Power’s updated customer billing rates which allows Minnesota Power to charge retail customers on acurrent basis for the costs of constructing certain transmission facilities plus a return on the capital invested. As a result of the MPUC approval of the certificate ofneed for the GNTL in 2015, the project is eligible for cost recovery under the existing transmission cost recovery rider. Minnesota Power is funding theconstruction of the GNTL with a subsidiary of Manitoba Hydro (see Great Northern Transmission Line ), and anticipates including its portion of the investmentsand expenditures for the GNTL in future transmission bill factor filings.Renewable Cost Recovery Rider. Minnesota Power has an approved cost recovery rider in place for investments and expenditures related to Bison, and therestoration and repair of Thomson. The cost recovery rider allows Minnesota Power to charge retail customers on a current basis for the costs of constructingcertain renewable investments plus a return on the capital invested. Updated customer billing rates for the renewable cost recovery rider were approved by theMPUC in an order dated November 8, 2017.In a November 2016 order, the MPUC directed Minnesota Power to attribute all North Dakota investment tax credits realized from Bison to Minnesota Powerregulated retail customers. As a result of the adverse regulatory outcome, Minnesota Power recorded a regulatory liability and a reduction in Operating Revenue ofapproximately $15 million in 2016. The North Dakota investment tax credits previously recognized as income tax credits in Corporate and Other were reversed in2016 resulting in an $8.8 million charge to net income in 2016. In December 2016, Minnesota Power submitted a request for reconsideration with the MPUC. In anorder dated February 14, 2017, the MPUC decided to reconsider its November 2016 order.In an order dated December 7, 2017, the MPUC modified its November 2016 order to allow Minnesota Power to account for North Dakota investment tax creditsbased on the long-standing regulatory precedents of stand-alone allocation methodology of accounting for income taxes. As a result of the favorable regulatoryoutcome, Minnesota Power recorded a reduction in its regulatory liability and an increase in Operating Revenue of approximately $14 million in 2017. The NorthDakota investment tax credits were reestablished as income tax credits in Corporate and Other, resulting in a $7.9 million increase to net income in 2017.The stand-alone method provides that income taxes (and credits) are calculated as if Minnesota Power was the only entity included in ALLETE’s consolidatedfederal and unitary state income tax returns. Minnesota Power has recorded a regulatory liability for North Dakota investment tax credits generated by itsjurisdictional activity and expected to be realized in the future. North Dakota investment tax credits attributable to ALLETE’s apportionment and income ofALLETE’s other subsidiaries are included in Corporate and Other operations.Minnesota Power also has approval for current cost recovery of investments and expenditures related to compliance with the Minnesota Solar Energy Standard.(See Minnesota Solar Energy Standard. ) Currently, there is no approved customer billing rate for solar costs.ALLETE, Inc. 2017 Form 10-K94NOTE 4. REGULATORY MATTERS (Continued)Electric Rates (Continued)Environmental Improvement Rider . Minnesota Power has an approved environmental improvement rider in place for investments and expenditures related to theimplementation of the Boswell Unit 4 mercury emissions reduction plan completed in 2015. Updated customer billing rates for the environmental improvementrider were approved by the MPUC in a December 2016 order; however, in an order dated March 22, 2017, the MPUC approved a request by Minnesota Power todelay implementation of the updated rates until resolution of its 2016 general rate case. (See 2016 Minnesota General Rate Case.)Fuel Adjustment Clause Reform Pilot . In an order dated December 19, 2017, the MPUC adopted a three-year pilot program to implement certain proceduralreforms to the Minnesota utilities’ automatic fuel adjustment clause (FAC) for fuel and purchased power. The order changes the method of accounting for allMinnesota electric utilities to a monthly budgeted, forwarded-looking FAC with an annual prudence review and true-up to actual allowed costs. The MPUC isseeking input from Minnesota electric utilities and other stakeholders on the implementation and transition accounting needed to adopt the change. The three-yearpilot program is expected to begin in 2019. At a hearing on January 18, 2018, the MPUC disallowed recovery of Minnesota Power’s regulatory asset for deferredfuel adjustment clause costs due to the anticipated adoption of the forward-looking fuel adjustment clause methodology in this proceeding resulting in a$19.5 million pre-tax charge to Fuel, Purchased Power and Gas – Utility in 2017.Tax Cuts and Jobs Act of 2017 . On December 29, 2017, the MPUC opened a docket to review the effects of the TCJA on electric and natural gas rates and servicesin Minnesota, including the legislation’s impact on tax rates and utilities’ deferred income tax assets and liabilities. On January 19, 2018, the MPUC issued a noticeof request for information and established comment periods with an initial filing required by March 2, 2018. On January 10, 2018, the PSCW also opened a docketto review the effects of this legislation and directed Wisconsin utilities to defer its impacts until further direction is provided by the PSCW. We have recorded theimpact of the remeasurement of deferred income tax assets and liabilities resulting from the federal income tax rate change of the TCJA for Minnesota Power andSWL&P as regulatory assets and liabilities as the benefits of the TCJA are expected to be passed back to our customers over time. (See Regulatory Assets andLiabilities .) The final amount and timing over which the benefits of the TCJA will be passed back to customers is expected to be determined in these dockets;however, we are unable to predict the outcome of these regulatory proceedings.2016 Wisconsin General Rate Case. SWL&P’s current retail rates are based on a 2017 PSCW retail rate order effective August 14, 2017, that allows for a 10.5percent return on common equity and a 55 percent equity ratio. SWL&P’s retail rates prior to August 14, 2017, were based on a 2012 PSCW retail rate order thatprovided for a 10.9 percent return on equity. The 2017 PSCW retail rate order authorizes SWL&P to collect on average a 2.9 percent increase in rates for retailcustomers ( 3.8 percent increase in electric rates; 4.8 percent decrease in natural gas rates; and 9.8 percent increase in water rates). On an annualized basis, SWL&Pexpects to collect additional revenue of $2.5 million .Integrated Resource Plan. In 2015, Minnesota Power filed its 2015 IRP with the MPUC which included an analysis of a variety of existing and future energyresource alternatives and a projection of customer cost impact by class. The 2015 IRP also contained steps in Minnesota Power’s EnergyForward strategic planincluding the economic idling of Taconite Harbor Units 1 and 2 which occurred in September 2016, the ceasing of coal-fired operations at Taconite Harbor in2020, and the addition of between 200 MW and 300 MW of natural gas-fired generation in the next decade. In a July 2016 order, the MPUC approved MinnesotaPower’s 2015 IRP with modifications. The order accepted Minnesota Power’s plans for Taconite Harbor, directed Minnesota Power to retire Boswell Units 1 and 2no later than 2022, required an analysis of generation and demand response alternatives to be filed with a natural gas resource proposal, and required MinnesotaPower to conduct request for proposals for additional wind, solar and demand response resource additions subject to further MPUC approvals. In October 2016,Minnesota Power announced Boswell Units 1 and 2 will be retired in 2018.On July 28, 2017, Minnesota Power submitted a resource package to the MPUC requesting approval of PPAs for the output of a 250 MW wind energy facility anda 10 MW solar energy facility as well as approval of a 250 MW natural gas energy PPA. These agreements will be subject to MPUC approval of the constructionof a 525 MW to 550 MW combined-cycle natural gas-fired generating facility which will be jointly owned by Dairyland Power Cooperative and a subsidiary ofALLETE. Minnesota Power would purchase approximately 50 percent of the facility's output starting in 2025. In an order dated September 19, 2017, the MPUCapproved Minnesota Power’s request to extend the next IRP filing deadline until October 1, 2019, and Minnesota Power’s request that approval for the natural gasenergy PPA be decided through an administrative law judge process. The administrative law judge is expected to provide a recommendation by July 2018, and theCompany anticipates a MPUC decision in the second half of 2018. The MPUC did not take any action regarding the wind and solar energy PPAs which will berefiled separately from the natural gas energy PPA.ALLETE, Inc. 2017 Form 10-K95NOTE 4. REGULATORY MATTERS (Continued)Great Northern Transmission Line . Minnesota Power and Manitoba Hydro have proposed construction of the GNTL, an approximately 220 -mile 500 -kVtransmission line between Manitoba and Minnesota’s Iron Range. In 2015, a certificate of need was approved by the MPUC. Based on this approval, MinnesotaPower’s portion of the investments and expenditures for the project are eligible for cost recovery under its existing transmission cost recovery rider and areanticipated to be included in future transmission cost recovery filings. ( See Transmission Cost Recovery Rider.) Also in 2015, the FERC approved our request torecover on construction work in progress related to the GNTL from Minnesota Power’s wholesale customers. In an April 2016 order, the MPUC approved the routepermit for the GNTL which largely follows Minnesota Power’s preferred route, including the international border crossing, and in November 2016, the U.S.Department of Energy issued a presidential permit to cross the U.S.-Canadian border, which was the final major regulatory approval needed before construction inthe U.S. could begin. Site clearing and pre-construction activities commenced in the first quarter of 2017 with construction expected to be completed in 2020. Totalproject cost in the U.S., including substation work, is estimated to be between $560 million and $710 million , of which Minnesota Power’s portion is expected tobe between $300 million and $350 million ; the difference will be recovered from a subsidiary of Manitoba Hydro as contributions in aid of construction. Totalproject costs of $152.4 million have been incurred through December 31, 2017 , of which $67.6 million has been recovered from a subsidiary of Manitoba Hydro.Manitoba Hydro must obtain regulatory and governmental approvals related to a new transmission line in Canada. In 2015, Manitoba Hydro submitted the finalpreferred route and EIS for the transmission line in Canada to the Manitoba Conservation and Water Stewardship for regulatory approval. In December 2016,Manitoba Hydro filed an application with the National Energy Board in Canada requesting authorization to construct and operate an international transmission line.Both provincial and federal approvals are pending. Construction of Manitoba Hydro’s hydroelectric generation facility commenced in 2014 and is anticipated to bein service by early 2021.Conservation Improvement Program. Minnesota requires electric utilities to spend a minimum of 1.5 percent of gross operating revenues from service providedin the state on energy CIPs each year and establish an annual energy-savings goal of 1.5 percent of annual retail energy sales. These investments are recoveredfrom certain retail customers through a combination of the conservation cost recovery charge included in retail base rates and a conservation program adjustment,which is adjusted annually through the CIP consolidated filing. The MPUC allows utilities to accumulate, in a deferred account for future cost recovery, all CIPexpenditures, any financial incentive earned for cost-effective program achievements and a carrying charge on the deferred account balance. Minnesota Powerrefers to its conservation programs collectively as the “Power of One”. On November 16, 2017, the Minnesota Department of Commerce approved MinnesotaPower’s modified CIP triennial filing for 2017 through 2019, which outlines Minnesota Power’s CIP spending and energy-saving goals for 2017 through 2019.Minnesota Power’s CIP investment goal was $10.3 million for 2017 ( $7.3 million for 2016 ; $7.1 million for 2015 ), with actual spending of $8.1 million in 2017 ($7.4 million in 2016 ; $6.6 million in 2015 ). The investment goals for 2018 and 2019 are $10.3 million and $10.5 million , respectively.On April 3, 2017, Minnesota Power submitted its 2016 CIP consolidated filing, which detailed Minnesota Power’s CIP program results and requested a CIPfinancial incentive of $5.5 million based upon MPUC procedures. In an order dated June 22, 2017, the MPUC approved Minnesota Power’s CIP consolidatedfiling, including the requested CIP financial incentive which was recorded as revenue and as a regulatory asset in 2017. The approved financial incentive will berecovered through customer billing rates in 2017 and 2018. In 2016 and 2015, the CIP financial incentives recognized were $7.5 million and $6.2 million ,respectively. CIP financial incentives are recognized in the period in which the MPUC approves the filing.MISO Return on Equity Complaints. In 2013, several customer groups located within the MISO service area filed complaints with the FERC requesting, amongother things, a reduction in the base return on equity used by MISO transmission owners, including ALLETE and ATC, to 9.15 percent . In 2015, a federaladministrative law judge ruled on the complaint proposing a reduction in the base return on equity to 10.32 percent , or 10.82 percent including an incentive adderfor participation in a regional transmission organization. In September 2016, the FERC issued an order affirming the administrative law judge’s recommendation.In 2015, an additional complaint was filed with the FERC seeking an order to further reduce the base return on equity to 8.67 percent. In June 2016, a federaladministrative law judge ruled on the additional complaint proposing a further reduction in the base return on equity to 9.70 percent , or 10.20 percent including anincentive adder for participation in a regional transmission organization, subject to approval or adjustment by the FERC. A final decision from the FERC on theadministrative law judge’s recommendation is pending, which is not expected to have a material impact on our Consolidated Financial Statements.ALLETE, Inc. 2017 Form 10-K96NOTE 4. REGULATORY MATTERS (Continued)Minnesota Solar Energy Standard. Minnesota law requires at least 1.5 percent of total retail electric sales, excluding sales to certain customers, to be generatedby solar energy by the end of 2020. At least 10 percent of the 1.5 percent mandate must be met by solar energy generated by or procured from solar photovoltaicdevices with a nameplate capacity of 40 kW or less and community solar garden subscriptions. In a 2016 order, the MPUC approved Camp Ripley, a 10 MW utilityscale solar project at the Camp Ripley Minnesota Army National Guard base and training facility near Little Falls, Minnesota, as eligible to meet the solar energystandard and for current cost recovery. Camp Ripley was completed in the fourth quarter of 2016. In a July 2016 order, the MPUC approved a community solargarden project in northeastern Minnesota, which is comprised of a 1 MW solar array owned and operated by a third party with the output purchased by MinnesotaPower and a 40 kW solar array that is owned and operated by Minnesota Power. Minnesota Power believes Camp Ripley and the community solar garden arrayswill meet approximately one‑third of the overall mandate. Additionally, in an order dated February 10, 2017, the MPUC approved Minnesota Power’s proposal toincrease the amount of solar rebates available for customer-sited solar installations and recover costs of the program through Minnesota Power’s renewable costrecovery rider. The proposal to incentivize customer‑sited solar installations and the community solar garden subscriptions is expected to meet a portion of therequired small scale solar mandate.Regulatory Assets and Liabilities. Our regulated utility operations are subject to accounting guidance for the effect of certain types of regulation. Regulatoryassets represent incurred costs that have been deferred as they are probable for recovery in customer rates. Regulatory liabilities represent obligations to makerefunds to customers and amounts collected in rates for which the related costs have not yet been incurred. The Company assesses quarterly whether regulatoryassets and liabilities meet the criteria for probability of future recovery or deferral. No regulatory assets or liabilities are currently earning a return. The recovery,refund or credit to rates for these regulatory assets and liabilities will occur over the periods either specified by the applicable regulatory authority or over thecorresponding period related to the asset or liability.ALLETE, Inc. 2017 Form 10-K97NOTE 4. REGULATORY MATTERS (Continued)Regulatory Assets and Liabilities As of December 3120172016Millions Current Regulatory Assets (a) Deferred Fuel Adjustment Clause—$18.6Non-Current Regulatory Assets Defined Benefit Pension and Other Postretirement Benefit Plans (b)$220.3226.1Income Taxes (c)(d)112.833.8Asset Retirement Obligations (e)29.626.0Manufactured Gas Plant (f)8.11.0PPACA Income Tax Deferral5.05.0Conservation Improvement Program (g)3.34.0Cost Recovery Riders (h)—30.5Other5.63.7Total Non-Current Regulatory Assets384.7330.1Total Regulatory Assets$384.7$348.7Non-Current Regulatory Liabilities Income Taxes (d)$411.2$19.1Wholesale and Retail Contra AFUDC (i)57.956.8Provision for Interim Rate Refund (j)23.7—Plant Removal Obligations20.319.1North Dakota Investment Tax Credits (k)14.128.2Cost Recovery Riders (h)2.2—Other2.62.6Total Non-Current Regulatory Liabilities$532.0$125.8(a)Current regulatory assets are presented within Prepayments and Other on the Consolidated Balance Sheet. At a hearing on January 18, 2018, the MPUC disallowedrecovery of Minnesota Power’s regulatory asset for deferred fuel adjustment clause costs resulting in a $19.5 million pre-tax charge to Fuel, Purchased Power and Gas –Utility in 2017. (See 2016 Minnesota General Rate Case.)(b)Defined benefit pension and other postretirement items included in our Regulated Operations, which are otherwise required to be recognized in accumulated othercomprehensive income as actuarial gains and losses as well as prior service costs and credits, are recognized as regulatory assets or regulatory liabilities on theConsolidated Balance Sheet. The asset or liability will decrease as the deferred items are amortized and recognized as components of net periodic benefit cost. (See Note15. Pension and Other Postretirement Benefit Plans.)(c)See Note 1. Operations and Significant Accounting Policies – Revision of Prior Balance Sheet.(d)These costs represent the difference between deferred income taxes recognized for financial reporting purposes and amounts previously billed to our customers. Theincrease in 2017 is primarily due to the remeasurement of deferred income tax assets and liabilities for our Regulated Operations resulting from the TCJA. The benefits ofthe TCJA for Minnesota Power and SWL&P are expected to be passed back to customers over time primarily based upon the normalization provisions of the U.S. InternalRevenue Code over the life of the related property, plant and equipment with the remainder passed back based upon the determinations of regulatory authorities. (See Note1. Operations and Significant Accounting Policies, and Tax Cuts and Jobs Act of 2017.) The balances not related to remeasurement will decrease over the remaining life ofthe related temporary differences and flow through current income taxes.(e)Asset retirement obligations will accrete and be amortized over the lives of the related property with asset retirement obligations.(f)The manufactured gas plant regulatory asset represents costs of remediation for a former manufactured gas plant site located in Superior, Wisconsin, and formerlyoperated by SWL&P. We expect recovery of these remediation costs to be allowed by the PSCW in rates over time.(g)The conservation improvement program regulatory asset represents CIP expenditures, any financial incentive earned for cost-effective program achievements and acarrying charge deferred for future cost recovery over the next year following MPUC approval.(h)The cost recovery rider regulatory assets and liabilities are revenues not yet collected from our customers and cash collections from our customers in excess of the revenuerecognized, respectively, primarily due to capital expenditures related to Bison, investment in CapX2020 projects, the Boswell Unit 4 environmental upgrade and theGNTL, and are recognized in accordance with the accounting standards for alternative revenue programs. The cost recovery rider regulatory assets and liabilities as ofDecember 31, 2017 , will be recovered or returned within the next two years.(i)Wholesale and Retail Contra AFUDC represents amortization to offset AFUDC Equity and Debt recorded during the construction period of our cost recovery rider projectsprior to placing the projects in service. The regulatory liability will decrease over the remaining depreciable life of the related asset.(j)This amount is expected to be refunded to Minnesota Power’s regulated retail customers in the first quarter of 2019 and includes $8.6 million of EITE discounts that will beoffset against interim rate refunds. (See 2016 Minnesota General Rate Case and Energy-Intensive Trade‑Exposed Customer Rates.)(k)North Dakota investment tax credits expected to be realized from Bison that will be credited to Minnesota Power’s regulated retail customers through future renewable costrecovery rider fillings as the tax credits are utilized.ALLETE, Inc. 2017 Form 10-K98NOTE 5. INVESTMENT IN ATCOur wholly-owned subsidiary, ALLETE Transmission Holdings, owns approximately 8 percent of ATC, a Wisconsin-based utility that owns and maintains electrictransmission assets in portions of Wisconsin, Michigan, Minnesota and Illinois. We account for our investment in ATC under the equity method of accounting. Asof December 31, 2017 , our equity investment in ATC was $118.7 million ( $135.6 million as of December 31, 2016 ). On January 31, 2018, we invested anadditional $1.6 million in ATC. In total, we expect to invest approximately $6 million throughout 2018 .ALLETE’s Investment in ATC Year Ended December 3120172016Millions Equity Investment Beginning Balance$135.6$124.5Cash Investments7.85.4Equity in ATC Earnings22.518.5Distributed ATC Earnings(19.3)(12.8)Remeasurement of Deferred Income Taxes (a)(27.9)—Equity Investment Ending Balance$118.7$135.6(a)Impact of the remeasurement of deferred income tax assets and liabilities resulting from the TCJA. (See Note 1. Operations and Significant Accounting Policies.)ATC Summarized Financial Data Balance Sheet Data As of December 3120172016Millions Current Assets$87.7$75.8Non-Current Assets4,598.94,312.9Total Assets$4,686.6$4,388.7Current Liabilities$767.2$495.1Long-Term Debt1,790.61,865.3Other Non-Current Liabilities240.3271.5Members’ Equity1,888.51,756.8Total Liabilities and Members’ Equity$4,686.6$4,388.7Income Statement Data Year Ended December 31201720162015Millions Revenue$721.6$650.8$615.8Operating Expense344.9322.5319.3Other Expense104.195.596.1Net Income$272.6$232.8$200.4ALLETE’s Equity in Net Income$22.5$18.5$16.3In September 2016, the FERC issued an order reducing ATC’s authorized return on equity to 10.32 percent , or 10.82 percent including an incentive adder forparticipation in a regional transmission organization. Prior to this order, ATC had been allowed a return on equity of 12.2 percent which had been impacted byreductions for estimated refunds related to complaints filed with the FERC by several customers located within the MISO service area.In June 2016, a federal administrative law judge ruled on an additional complaint proposing a further reduction in the base return on equity to 9.70 percent , or10.20 percent including an incentive adder for participation in a regional transmission organization, subject to approval or adjustment by the FERC. A finaldecision from the FERC on the administrative law judge’s recommendation is pending. (See Note 4. Regulatory Matters.)ALLETE, Inc. 2017 Form 10-K99NOTE 6. ACQUISITIONSThe following acquisitions are consistent with ALLETE’s stated strategy of investing in energy infrastructure and related services businesses to complement itsregulated businesses, balance exposure to business cycles and changing demand, and provide potential long-term earnings growth. The pro forma impact of thefollowing acquisitions was not significant , either individually or in the aggregate, to the results of the Company for the years ended December 31, 2017 , 2016 and2015 .2017 Activity.Tonka Water. On Septemb er 1, 2017, U.S. Water Services acquired 100 percent of Tonka Water . Total consideration for the transaction was $19.2 million ,including a working capital adjustment. Consideration of $19.0 million was p aid in cash on the acquisition date and a working capital adjustment of $0.2 millionwas pa id in the fourth quarter of 2017. Tonka Water is a supplier of municipal and industrial water treatment systems and will expand U.S. Water Services’geographic and customer markets.The acquisition was accounted for as a business combination and the purchase price was allocated based on the estimated fair values of the assets acquired and theliabilities assumed at the date of acquisition. The allocation of the purchase price is subject to judgment and the preliminary estimated fair value of the assetsacquired and the liabilities assumed may be adjusted when the valuation analysis is complete in subsequent periods. Preliminary estimates subject to adjustment insubsequent periods relate primarily to income tax liabilities; subsequent adjustments could impact the amount of goodwill recorded. Fair value measurements werevalued primarily using the discounted cash flow method and replacement cost basis.Millions Assets Acquired Accounts Receivable$5.1Other Current Assets5.1Trade Names (a)0.9Goodwill (a)(b)16.9Other Non-Current Assets0.2Total Assets Acquired$28.2Liabilities Assumed Current Liabilities$9.0Total Liabilities Assumed$9.0Net Identifiable Assets Acquired$19.2(a) Presented within Goodwill and Intangible Assets – Net on the Consolidated Balance Sheet. (See Note 7. Goodwill and Intangible Assets.)(b)Recognized goodwill is attributable to the assembled workforce and anticipated synergies. For tax purposes, the purchase price allocation resulted in $4.1 million ofdeductible goodwill.Acquisition-related costs were immaterial, expensed as incurred during 2017 and recorded in Operating and Maintenance on the Consolidated Statement ofIncome.2016 Activity.Acquisition of Non-Controlling Interest. In April 2016, ALLETE Clean Energy acquired the non-controlling interest in the limited liability company that owns itsCondon wind energy facility for $8.0 million . This transaction was accounted for as an equity transaction, and no gain or loss was recognized in net income orother comprehensive income. As a result of the acquisition, the Condon wind energy facility is now a wholly-owned subsidiary of ALLETE Clean Energy.WEST. In October 2016 , U.S. Water Services acquired 100 percent of Water & Energy Systems Technology of Nevada, Inc. (WEST). Total consideration for thetransaction was $6.7 million . Consideration of $5.9 million was paid in cash on the acquisition date, working capital adjustments of $0.2 million were paid in thefirst six months of 2017 and a $0.6 million payment is due in April 2018. WEST is an integrated water management company and was acquired to expand U.S.Water Services’ regional footprint in the Southwestern United States.ALLETE, Inc. 2017 Form 10-K100NOTE 6. ACQUISITIONS (Continued)2016 Activity (Continued)The acquisition was accounted for as a business combination and the purchase price was allocated based on the estimated fair values of the assets acquired and theliabilities assumed at the date of acquisition. The purchase price accounting, which was finalized in the second quarter of 2017, is shown in the following table.Fair value measurements were valued primarily using the discounted cash flow method and replacement cost basis.Millions Assets Acquired Cash and Cash Equivalents$0.1Other Current Assets1.0Customer Relationships (a)2.8Goodwill (a)(b)4.2Other Non-Current Assets0.1Total Assets Acquired$8.2Liabilities Assumed Current Liabilities$0.3Non-Current Liabilities1.2Total Liabilities Assumed$1.5Net Identifiable Assets Acquired$6.7(a)Presented within Goodwill and Intangible Assets – Net on the Consolidated Balance Sheet. (See Note 7. Goodwill and Intangible Assets.)(b)For tax purposes, the purchase price allocation resulted in no allocation to goodwill.Acquisition-related costs were immaterial , expensed as incurred during 2016 and recorded in Operating and Maintenance on the Consolidated Statement ofIncome.2015 Activity.U.S. Water Services. In 2015 , ALLETE acquired U.S. Water Services . Total consideration for the transaction was $202.3 million , which included payment of$166.6 million in cash and an estimated fair value of earnings-based contingent consideration of $35.7 million , as estimated at the date of acquisition, to be paidthrough 2019. The contingent consideration is presented within Other Non-Current Liabilities on the Consolidated Balance Sheet. The Consolidated Statement ofIncome reflects 100 percent of the results of operations for U.S. Water Services since the acquisition date as the Company has acquired 100 percent of U.S. WaterServices.The acquisition was accounted for as a business combination and the purchase price was allocated based on the estimated fair values of the assets acquired and theliabilities assumed at the date of acquisition. The purchase price accounting, which was finalized in 2015, is reflected in the following table. Fair valuemeasurements were valued primarily using the discounted cash flow method.ALLETE, Inc. 2017 Form 10-K101NOTE 6. ACQUISITIONS (Continued)2015 Activity (Continued)Millions Assets Acquired Cash and Cash Equivalents$0.9Accounts Receivable16.8Inventories (a)13.4Other Current Assets (b)5.3Property, Plant and Equipment10.6Intangible Assets (c)83.0Goodwill (d)122.9Other Non-Current Assets0.2Total Assets Acquired$253.1Liabilities Assumed Current Liabilities$19.2Non-Current Liabilities31.6Total Liabilities Assumed$50.8Net Identifiable Assets Acquired$202.3(a)Included in Inventories was $2.7 million of fair value adjustments relating to work in progress and finished goods inventories which were recognized as Cost of Sales withinone year from the acquisition date.(b)Included in Other Current Assets was $1.6 million relating to the fair value of sales backlog. Sales backlog was recognized as Cost of Sales within one year from theacquisition date. Also included in Other Current Assets was restricted cash of $2.1 million relating to cash pledged as collateral for standby letters of credit.(c)Intangible Assets include customer relationships, patents, non-compete agreements, and trademarks and trade names. (See Note 7. Goodwill and Intangible Assets.)(d)For tax purposes, the purchase price allocation resulted in $2.9 million of deductible goodwill.Acquisition-related costs of $3.0 million after-tax were expensed as incurred during 2015 and recorded in Operating and Maintenance on the ConsolidatedStatement of Income.Chanarambie/Viking. In 2015 , ALLETE Clean Energy acquired 100 percent of wind energy facilities in southern Minnesota ( Chanarambie/Viking ) from EDFRenewable Energy, Inc. for $48.0 million .The facilities have a combined 97.5 MW of generating capability. The wind energy facilities began commercial operations in 2003 and have PSAs in place for theirentire output, which expire in 2018 ( 12 MW) and 2023 ( 85.5 MW).The acquisition was accounted for as a business combination and the purchase price was allocated based on the estimated fair values of the assets acquired and theliabilities assumed at the date of acquisition. The purchase price accounting, which was finalized in 2015, is reflected in the following table. Fair valuemeasurements were valued primarily using the discounted cash flow method.ALLETE, Inc. 2017 Form 10-K102NOTE 6. ACQUISITIONS (Continued)2015 Activity (Continued)Millions Assets Acquired Current Assets$4.8Property, Plant and Equipment103.0Other Non-Current Assets (a)1.0Total Assets Acquired$108.8Liabilities Assumed Current Liabilities (b)$6.7PSAs49.0Non-Current Liabilities5.1Total Liabilities Assumed$60.8Net Identifiable Assets Acquired$48.0(a)Included in Other Non-Current Assets was $0.3 million of goodwill. For tax purposes, the purchase price allocation resulted in no allocation to goodwill.(b)Current Liabilities included $5.9 million related to the current portion of PSAs.Acquisition-related costs of $0.2 million after-tax were expensed as incurred during 2015 and recorded in Operating and Maintenance on the ConsolidatedStatement of Income.Armenia Mountain. In 2015 , ALLETE Clean Energy acquired 100 percent of a wind energy facility located near Troy, Pennsylvania ( Armenia Mountain ) fromThe AES Corporation and a minority shareholder for $111.1 million , plus the assumption of existing debt.The facility has 100.5 MW of generating capability, began commercial operations in 2009, and has PSAs in place for its entire output, which expire in 2024.The acquisition was accounted for as a business combination and the purchase price was allocated based on the estimated fair values of the assets acquired and theliabilities assumed at the date of acquisition. The purchase price accounting, which was finalized in 2015, is reflected in the following table. Fair valuemeasurements were valued primarily using the discounted cash flow method.Millions Assets Acquired Current Assets (a)$9.0Property, Plant and Equipment156.2Other Non-Current Assets (b)14.4Total Assets Acquired$179.6Liabilities Assumed Current Liabilities$2.9Long-Term Debt Due Within One Year5.9Long-Term Debt55.0Other Non-Current Liabilities4.7Total Liabilities Assumed$68.5Net Identifiable Assets Acquired$111.1(a)Included in Current Assets was $1.0 million related to the current portion of PSAs and $6.0 million of restricted cash related to collateral deposits required under its loanagreement.(b)Included in Other Non-Current Assets was $8.2 million related to the non-current portion of PSAs, $6.1 million of restricted cash related to collateral deposits requiredunder its loan agreements and an immaterial amount of goodwill. For tax purposes, the purchase price allocation resulted in no allocation to goodwill.ALLETE, Inc. 2017 Form 10-K103NOTE 6. ACQUISITIONS (Continued)2015 Activity (Continued)Acquisition-related costs of $1.6 million after-tax were expensed as incurred during 2015 and recorded in Operating and Maintenance on the ConsolidatedStatement of Income.A and W Technologies. In 2015 , U.S. Water Services acquired 100 percent of A and W Technologies, Inc. (AWT). Total consideration for the transaction was $9.3million , which included payment of $8.3 million in cash and a $1.0 million payment made in April 2017. AWT, similar to U.S. Water Services, is an integratedwater management company and was acquired to expand U.S. Water Services’ regional footprint in the Southeastern United States.The acquisition was accounted for as a business combination and the purchase price was allocated based on the estimated fair values of the assets acquired and theliabilities assumed at the date of acquisition. The purchase price accounting, which was finalized in 2015, is reflected in the following table. Fair valuemeasurements were valued primarily using the discounted cash flow method.Millions Assets Acquired Current Assets$1.0Property, Plant and Equipment0.1Intangible Assets (a)3.9Goodwill (b)4.4Total Assets Acquired$9.4Liabilities Assumed Current Liabilities$0.1Total Liabilities Assumed$0.1Net Identifiable Assets Acquired$9.3(a)Intangible Assets include customer relationships and non-compete agreements. (See Note 7. Goodwill and Intangible Assets.)(b)For tax purposes, the purchase price allocation resulted in $4.4 million of deductible goodwill.Acquisition-related costs were immaterial , expensed as incurred during 2015 and recorded in Operating and Maintenance on the Consolidated Statement ofIncome.ALLETE, Inc. 2017 Form 10-K104NOTE 7. GOODWILL AND INTANGIBLE ASSETSThe following table summarizes changes to goodwill by reportable segment: ALLETE CleanEnergy U.S. Water Services TotalMillions Balance as of December 31, 2015$3.3 $127.3 $130.6Acquired Goodwill (a)— 3.9 3.9Impairment Charge (b)(3.3) — (3.3)Balance as of December 31, 2016— 131.2 131.2Acquired Goodwill (a)— 16.9 16.9Other Adjustments (c)— 0.2 0.2Balance as of December 31, 2017— $148.3 $148.3(a)See Note 6. Acquisitions.(b)The facts and circumstances that led to an impairment of ALLETE Clean Energy’s goodwill primarily relate to lower estimated energy prices in periods not under PSAs.Impairment Charge is included in Operating Expenses – Other on the Consolidated Statement of Income. (See Note 1. Operations and Significant Accounting Policies.)ALLETE Clean Energy’s goodwill was primarily related to the acquisition of Storm Lake II in 2014.(c)Finalization of purchase price accounting for U.S. Water Services’ acquisition of WEST was completed in 2017 resulting in an adjustment to the goodwill recorded at thetime of the initial acquisition.The following table summarizes changes to intangible assets, net, for the year ended December 31, 2017 : December 31, 2016 Additions (a) Amortization December 31, 2017Millions Intangible Assets Definite-Lived Intangible Assets Customer Relationships$59.3 — $(4.6) $54.7Developed Technology and Other (b)6.3 $0.9 (0.9) 6.3Total Definite-Lived Intangible Assets65.6 0.9 (5.5) 61.0Indefinite-Lived Intangible Assets Trademarks and Trade Names16.6 — n/a 16.6Total Intangible Assets$82.2 $0.9 $(5.5) $77.6(a)Additions resulting from the September 1, 2017, acquisition of Tonka Water. (See Note 6. Acquisitions.)(b)Developed Technology and Other includes patents, non-compete agreements, land easements and trade names with finite lives.Customer relationships have a remaining useful life of approximately 20 years, and developed technology and other have remaining useful lives ranging fromapproximately 1 year to approximately 11 years (weighted average of approximately 7 years). The weighted average remaining useful life of all definite-livedintangible assets as of December 31, 2017 , is approximately 19 years.Amortization expense of intangible assets for the year ended December 31, 2017 , was $5.5 million ( $5.2 million in 2016 ; $4.0 million in 2015 ). Accumulatedamortization was $14.8 million and $9.3 million as of December 31, 2017 , and December 31, 2016 , respectively. Estimated amortization expense for definite-lived intangible assets is $5.3 million in 2018 , $5.0 million in 2019 , $4.7 million in 2020 , $4.6 million in 2021 , $4.3 million in 2022 and $37.1 million thereafter.ALLETE, Inc. 2017 Form 10-K105NOTE 8. INVESTMENTSInvestments. As of December 31, 2017 , the investment portfolio included the legacy real estate assets of ALLETE Properties, debt and equity securities consistingprimarily of securities held in other postretirement plans to fund employee benefits, the cash equivalents within these plans and other assets consisting primarily ofland in Minnesota.Other Investments As of December 3120172016Millions ALLETE Properties$26.4$31.7Available-for-sale Securities (a)19.118.8Cash Equivalents3.81.3Other3.83.8Total Other Investments$53.1$55.6(a)As of December 31, 2017 , the aggregate amount of available-for-sale corporate and governmental debt securities maturing in one year or less was $0.7 million , in oneyear to less than three years was $3.2 million , in three years to less than five years was $3.6 million , and in five or more years was $1.4 million .Land Inventory. Land inventory is accounted for as held for use and is recorded at cost, unless the carrying value is determined not to be recoverable in accordancewith the accounting standards for property, plant and equipment, in which case the land inventory is written down to estimated fair value. Land values are reviewedfor indicators of impairment on a quarterly basis and no impairment was recorded in 2017 ( none in 2016 ; $36.3 million in 2015 ). (See Note 1. Operations andSignificant Accounting Policies.)Available-for-Sale Securities. We account for our available-for-sale securities portfolio in accordance with the guidance for certain investments in debt andequity securities. Our available-for-sale securities portfolio consisted primarily of securities held in other postretirement plans to fund employee benefits.Gross realized and unrealized gains and losses on our available-for-sale securities were immaterial in 2017 , 2016 and 2015 .NOTE 9. FAIR VALUEFair 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 measurementdate (exit price). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and therisks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. We primarily applythe market approach for recurring fair value measurements and endeavor to utilize the best available information. Accordingly, we utilize valuation techniques thatmaximize the use of observable inputs and minimize the use of unobservable inputs. These inputs, which are used to measure fair value, are prioritized through thefair value hierarchy. 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 are as follows:Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reported date. Active markets are those in which transactions forthe asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. This category includes primarily equitysecurities.Level 2 — Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reported date. The types of assetsand liabilities included in Level 2 are typically either comparable to actively traded securities or contracts, such as treasury securities with pricing interpolated fromrecent trades of similar securities, or priced with models using highly observable inputs, such as commodity options priced using observable forward prices andvolatilities. This category includes deferred compensation and fixed income securities.Level 3 — Significant inputs that are generally less observable from objective sources. The types of assets and liabilities included in Level 3 are those with inputsrequiring significant management judgment or estimation, such as the complex and subjective models and forecasts used to determine the fair value. This categoryincludes the U.S. Water Services contingent consideration liability.ALLETE, Inc. 2017 Form 10-K106NOTE 9. FAIR VALUE (Continued)The following tables set forth by level within the fair value hierarchy, our assets and liabilities that were accounted for at fair value on a recurring basis as ofDecember 31, 2017 , and December 31, 2016 . Each asset and liability is classified based on the lowest level of input that is significant to the fair valuemeasurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of theseassets and liabilities and their placement within the fair value hierarchy levels. The estimated fair value of Cash and Cash Equivalents listed on the ConsolidatedBalance Sheet approximates the carrying amount and therefore is excluded from the recurring fair value measures in the following tables. Fair Value as of December 31, 2017Recurring Fair Value MeasuresLevel 1 Level 2 Level 3 TotalMillions Assets: Investments (a) Available-for-sale – Equity Securities$10.2 — — $10.2Available-for-sale – Corporate and Governmental Debt Securities— $8.9 — 8.9Cash Equivalents3.8 — — 3.8Total Fair Value of Assets$14.0 $8.9 — $22.9 Liabilities: (b) Deferred Compensation— $18.2 — $18.2U.S. Water Services Contingent Consideration— — $5.4 5.4Total Fair Value of Liabilities— $18.2 $5.4 $23.6Total Net Fair Value of Assets (Liabilities)$14.0 $(9.3) $(5.4) $(0.7)(a)Included in Other Investments on the Consolidated Balance Sheet.(b)Included in Other Non-Current Liabilities on the Consolidated Balance Sheet. Fair Value as of December 31, 2016Recurring Fair Value MeasuresLevel 1 Level 2 Level 3 TotalMillions Assets: Investments (a) Available-for-sale – Equity Securities$7.1 — — $7.1Available-for-sale – Corporate and Governmental Debt Securities— $11.7 — 11.7Cash Equivalents1.3 — — 1.3Total Fair Value of Assets$8.4 $11.7 — $20.1 Liabilities: (b) Deferred Compensation— $16.0 — $16.0U.S. Water Services Contingent Consideration— — $25.0 25.0Total Fair Value of Liabilities— $16.0 $25.0 $41.0Total Net Fair Value of Assets (Liabilities)$8.4 $(4.3) $(25.0) $(20.9)(a)Included in Other Investments on the Consolidated Balance Sheet.(b)Included in Other Non-Current Liabilities on the Consolidated Balance Sheet.ALLETE, Inc. 2017 Form 10-K107NOTE 9. FAIR VALUE (Continued)The following table provides a reconciliation of the beginning and ending balances of the U.S. Water Services Contingent Consideration measured at fair valueusing Level 3 measurements as of December 31, 2017 , and December 31, 2016 . The acquisition contingent consideration was recorded at the acquisition date atits estimated fair value. The acquisition date fair value was measured based on the consideration expected to be transferred, discounted to present value. Thediscount rate was determined at the time of measurement in accordance with generally accepted valuation methods. The fair value of the acquisition contingentconsideration is remeasured to arrive at estimated fair value each reporting period with the change in fair value recognized as income or expense in theConsolidated Statement of Income. Changes to the fair value of the acquisition contingent consideration can result from changes in discount rates, timing ofmilestones that trigger payments, and the timing and amount of earnings estimates. Using different valuation assumptions, including earnings projections ordiscount rates, may result in different fair value measurements and expense (or income) in future periods. Management analyzes the fair value of the contingentliability on a quarterly basis and makes adjustments as appropriate. The acquisition contingent consideration was measured at $5.4 million as ofDecember 31, 2017 .Recurring Fair Value Measures Activity in Level 3 Millions Balance as of December 31, 2015$36.6Accretion (a)2.8Payments(0.8)Changes in Cash Flow Projections (b)(13.6)Balance as of December 31, 2016$25.0Accretion (a)0.8Payments (c)(19.7)Changes in Cash Flow Projections (c)(0.7)Balance as of December 31, 2017$5.4(a)Included in Interest Expense on the Consolidated Statement of Income.(b)During the fourth quarter of 2016, management assessed earnings estimates used in calculating the fair value of the U.S. Water Services contingent consideration liabilityand determined an adjustment was necessary to the liability’s carrying amount based on its assessment. As a result, we recorded a reduction of $13.6 million to theliability’s carrying amount which resulted in an after-tax gain of the same amount presented within Operating Expenses – Other in the Consolidated Statement of Income.(c)Payments and changes in cash flow projections reflect the impact of a modification to the shareholder agreement in the first quarter of 2017 which provided participants aone-time election to sell shares at a determined price. Participants representing approximately half of the outstanding contingent consideration shares made the election,and were paid in the first half of 2017.The Company’s policy is to recognize transfers in and transfers out of Levels as of the actual date of the event or change in circumstances that caused the transfer.For the years ended December 31, 2017 and 2016 , there were no transfers in or out of Levels 1, 2 or 3.Fair Value of Financial Instruments. With the exception of the item listed in the following table, the estimated fair value of all financial instrumentsapproximates the carrying amount. The fair value for the item listed in the following table was based on quoted market prices for the same or similar instruments(Level 2).Financial InstrumentsCarrying Amount Fair ValueMillions Long-Term Debt, Including Long-Term Debt Due Within One Year December 31, 2017$1,513.3 $1,627.6December 31, 2016$1,569.1 $1,653.8Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis. Non-financial assets such as equity method investments, goodwill, intangible assets,and property, plant and equipment are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment isrecognized.ALLETE, Inc. 2017 Form 10-K108NOTE 9. FAIR VALUE (Continued)Equity Method Investment. Our wholly-owned subsidiary, ALLETE Transmission Holdings, owns approximately 8 percent of ATC. (See Note 5. Investment inATC.) The aggregate carrying amount of the investment was $118.7 million as of December 31, 2017 ( $135.6 million as of December 31, 2016 ). The Companyassesses our investment in ATC for impairment whenever events or changes in circumstances indicate that the carrying amount of our investment in ATC may notbe recoverable. For the years ended December 31, 2017 and 2016 , there were no indicators of impairment.Goodwill. The Company assesses the impairment of goodwill annually in the fourth quarter and whenever an event occurs or circumstances change that wouldindicate that the carrying amount may be impaired. The Company’s goodwill is a result of the U.S. Water Services acquisition in 2015 as well as U.S. WaterServices’ subsequent acquisitions. (See Note 6. Acquisitions.) The aggregate carrying amount of goodwill was $148.3 million as of December 31, 2017 , and$131.2 million as of December 31, 2016 .Impairment testing for goodwill is done at the reporting unit level. An impairment loss is recognized when the carrying amount of the reporting unit’s net assetsexceeds the estimated fair value of the reporting unit. The test for impairment requires us to make several estimates about fair value, most of which are based onprojected future cash flows. The Company calculates the excess of the reporting unit's fair value over its carrying amount, including goodwill, utilizing adiscounted cash flow analysis. Our annual impairment test for U.S. Water Services indicated that the estimated fair value of U.S. Water Services exceeded itscarrying value, and no impairment existed for the year ended December 31, 2017 ( none in 2016 and in 2015). As part of the 2016 annual impairment analysis, theCompany recognized a non-cash impairment charge of $3.3 million for ALLETE Clean Energy’s goodwill primarily related to the acquisition of Storm Lake II in2014 . The charge, which is presented within Operating Expenses – Other in the Consolidated Statement of Income, eliminated all goodwill for the ALLETE CleanEnergy reporting unit. (See Note 1. Operations and Significant Accounting Policies.)Intangible Assets. The Company assesses indefinite-lived intangible assets for impairment annually in the fourth quarter. The Company also assesses indefinite-lived and definite-lived intangible assets whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not berecoverable. Substantially all of the Company’s intangible assets are a result of the U.S. Water Services acquisition in 2015 as well as U.S. Water Services’subsequent acquisitions. The aggregate carrying amount of intangible assets was $77.6 million as of December 31, 2017 ( $82.2 million as of December 31, 2016 ).When events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable, the Company calculates the excess of anintangible asset's carrying amount over its undiscounted future cash flows. If the carrying amount is not recoverable, an impairment loss is recorded based on theamount by which the carrying amount exceeds the fair value. The inputs used in the fair value analysis fall within Level 3 of the fair value hierarchy due to the useof significant unobservable inputs to determine fair value. As of December 31, 2017 , there have been no events or changes in circumstance which would indicateimpairment of our intangible assets.Property, Plant and Equipment. The Company assesses the impairment of property, plant, and equipment whenever events or changes in circumstances indicatethat the carrying amount of property, plant, and equipment assets may not be recoverable. The impairment of ALLETE Clean Energy’s goodwill in 2016 ,primarily due to lower estimated energy prices in periods not under PSAs, caused management to review ALLETE Clean Energy’s WTGs for impairment. Basedon the results of the undiscounted cash flow analysis, the undiscounted future cash flows were adequate to recover the carrying value of the WTGs. In 2015 , theCompany implemented a revised strategy for its real estate assets and recorded a non-cash impairment charge of $36.3 million for ALLETE Properties, reducingthe carrying value of the real estate to its estimated fair value. (See Note 1. Operations and Significant Accounting Policies.) For the year ended December 31, 2017, there were no indicators of impairment.We believe that long-standing ratemaking practices approved by applicable state and federal regulatory commissions allow for the recovery of the remaining bookvalue of retired plant assets. In 2015, Minnesota Power retired Taconite Harbor Unit 3 and converted Laskin to operate on natural gas which were actions includedin Minnesota Power’s MPUC-approved 2013 IRP. In a July 2016 order, the MPUC approved Minnesota Power’s 2015 IRP with modifications. The 2015 IRPcontains steps in Minnesota Power’s EnergyForward plan including the economic idling of Taconite Harbor Units 1 and 2 in September 2016, and the ceasing ofcoal-fired operations at Taconite Harbor in 2020. (See Note 4. Regulatory Matters.) The MPUC order for the 2015 IRP also directed Minnesota Power to retireBoswell Units 1 and 2 no later than 2022. In October 2016, Minnesota Power announced that Boswell Units 1 and 2 will be retired in 2018. We do not expect torecord any impairment charge as a result of the retirement of Taconite Harbor Unit 3, the ceasing of coal-fired operations at Taconite Harbor Units 1 and 2, or theconversion of Laskin to operate on natural gas. In addition, we expect to be able to continue depreciating these assets for at least their established remaining usefullives; however, we are unable to predict the impact of regulatory outcomes resulting in changes to their established remaining useful lives.ALLETE, Inc. 2017 Form 10-K109NOTE 10. SHORT-TERM AND LONG-TERM DEBTShort-Term Debt. As of December 31, 2017 , total short-term debt outstanding was $64.1 million ( $187.7 million as of December 31, 2016 ), consisted of long-term debt due within one year and included $0.5 million of unamortized debt issuance costs.As of December 31, 2017 , we had consolidated bank lines of credit aggregating $407.0 million ( $409.0 million as of December 31, 2016 ), the majority of whichexpire in October 2020. We had $11.9 million outstanding in standby letters of credit and no outstanding draws under our lines of credit as of December 31, 2017 ($11.1 million in standby letters of credit and no outstanding draws as of December 31, 2016 ).Long-Term Debt. As of December 31, 2017 , total long-term debt outstanding was $1,439.2 million ( $1,370.4 million as of December 31, 2016 ) and included$9.5 million of unamortized debt issuance costs. The aggregate amount of long-term debt maturing in 2018 is $64.6 million ; $57.6 million in 2019 ; $143.0 millionin 2020 ; $97.8 million in 2021 ; $88.0 million in 2022 ; and $1,062.3 million thereafter. Substantially all of our regulated electric plant is subject to the lien of themortgages collateralizing outstanding first mortgage bonds. The mortgages contain non-financial covenants customary in utility mortgages, including restrictionson our ability to incur liens, dispose of assets, and merge with other entities.Minnesota Power is obligated to make financing payments for the Camp Ripley solar array totaling $1.4 million annually during the financing term, which expiresin 2027. Minnesota Power has the option at the end of the financing term to renew for a two ‑year term, or to purchase the solar array for approximately $4 million. Minnesota Power anticipates exercising the purchase option when the term expires.On June 1, 2017, ALLETE issued $80.0 million of its senior unsecured notes (the Notes) to certain institutional buyers in the private placement market. The Noteswere issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, to institutional accredited investors. TheNotes bear interest at 3.11 percent and mature on June 1, 2027. Interest on the Notes is payable semi-annually in June and December of each year, commencing onDecember 1, 2017. ALLETE has the option to prepay all or a portion of the Notes at its discretion, subject to a make-whole provision. The Notes are subject toadditional terms and conditions which are customary for these types of transactions. Proceeds from the sale of the Notes were used to redeem debt, fund corporategrowth opportunities and for general corporate purposes.On August 25, 2017, ALLETE entered into a $40.0 million term loan agreement (Term Loan). The Term Loan is an unsecured, single draw loan that is due onAugust 25, 2020, and may be prepaid at any time subject to a make-whole provision. Interest on the Term Loan is payable quarterly at a rate per annum equal toLIBOR plus 1.025 percent . Proceeds from the Term Loan were used for general corporate purposes.On November 2, 2017, ALLETE entered into a bond purchase agreement providing for the issuance and sale of $60.0 million of its First Mortgage Bonds (theBonds) that bear interest at 4.07 percent . The Bonds will be issued on or about April 1, 2018, and will mature in April 2048. Interest on the Bonds will be payablesemi-annually in April and October of each year, commencing on October 16, 2018. ALLETE has the option to prepay all or a portion of the Bonds at itsdiscretion, subject to a make-whole provision. The Bonds are subject to additional terms and conditions which are customary for these types of transactions. Thecompany intends to use the proceeds from the sale of the Bonds to fund utility capital expenditures and for general corporate purposes. The Bonds were sold inreliance on an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, to institutional accredited investors.ALLETE, Inc. 2017 Form 10-K110NOTE 10. SHORT-TERM AND LONG-TERM DEBT (Continued)Long-Term Debt (Continued)Long-Term Debt As of December 3120172016Millions First Mortgage Bonds 1.83% Series Due 2018$50.0$50.08.17% Series Due 201942.042.05.28% Series Due 202035.035.02.80% Series Due 202040.040.04.85% Series Due 202115.015.03.02% Series Due 202160.060.03.40% Series Due 202275.075.06.02% Series Due 202375.075.03.69% Series Due 202460.060.04.90% Series Due 202530.030.05.10% Series Due 202530.030.03.20% Series Due 202675.075.05.99% Series Due 202760.060.03.30% Series Due 202840.040.03.74% Series Due 202950.050.03.86% Series Due 203060.060.05.69% Series Due 203650.050.06.00% Series Due 204035.035.05.82% Series Due 204045.045.04.08% Series Due 204285.085.04.21% Series Due 204360.060.04.95% Series Due 204440.040.05.05% Series Due 204440.040.04.39% Series Due 204450.050.0Unsecured Term Loan Variable Rate Due 2017—125.0Senior Unsecured Notes 5.99% Due 2017—50.0Variable Demand Revenue Refunding Bonds Series 1997 A Due 202013.513.5Unsecured Term Loan Variable Rate Due 202040.0—Armenia Mountain Senior Secured Notes 3.26% Due 202465.974.6Industrial Development Variable Rate Demand Refunding Revenue Bonds Series 2006, Due 202527.827.8Senior Unsecured Notes 3.11% Due 202780.0—SWL&P First Mortgage Bonds 4.15% Series Due 202815.015.0Other Long-Term Debt, 3.11% – 5.37% Due 2018 – 203769.161.2Unamortized Debt Issuance Costs(10.0)(11.0)Total Long-Term Debt1,503.31,558.1Less: Due Within One Year64.1187.7Net Long-Term Debt$1,439.2$1,370.4ALLETE, Inc. 2017 Form 10-K111NOTE 10. SHORT-TERM AND LONG-TERM DEBT (Continued)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. Our compliance with financial covenants is not dependent on debt ratings. The most restrictive financialcovenant requires ALLETE to maintain a ratio of indebtedness to total capitalization (as the amounts are calculated in accordance with the respective long-termdebt arrangements) of less than or equal to 0.65 to 1.00 , measured quarterly. As of December 31, 2017 , our ratio was approximately 0.42 to 1.00 . Failure to meetthis covenant would give rise to an event of default if not cured after notice from the lender, in which event ALLETE may need to pursue alternative sources offunding. 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 financingarrangements to meet payment terms or to observe other covenants that would result in an acceleration of payments due. ALLETE has no significant restrictions onits ability to pay dividends from retained earnings or net income. As of December 31, 2017 , ALLETE was in compliance with its financial covenants.NOTE 11. COMMITMENTS, GUARANTEES AND CONTINGENCIES The following table details the estimated minimum payments for certain long-term commitments:As of December 31, 2017 Millions20182019202020212022ThereafterCoal, Rail and Shipping Contracts$29.0$1.8————Leasing Agreements$14.2$12.8$9.5$7.3$6.1$30.0Long-term Service Agreements (a)$11.0$0.9——$1.0$11.0PPAs (b)$104.5$107.1$115.0$144.8$144.7$1,667.0(a)Consists of long-term service agreements for wind energy facilities.(b)Does not include the agreement with Manitoba Hydro expiring in 2022, as this contract is for surplus energy only; Oliver Wind I and Oliver Wind II, as Minnesota Poweronly pays for energy as it is delivered; and the agreement with Tenaska commencing in 2020 as it is subject to approval of the construction of a 525 MW to 550 MWcombined-cycle natural gas-fired facility. (See Power Purchase Agreements.)Coal, Rail and Shipping Contracts. Minnesota Power has coal supply agreements providing for the purchase of a significant portion of its coal requirementsthrough December 2018 and a portion of its coal requirements through December 2021. Minnesota Power also has coal transportation agreements in place for thedelivery of a significant portion of its coal requirements through December 2018. The costs of fuel and related transportation costs for Minnesota Power’sgeneration are recoverable from Minnesota Power’s utility customers through the fuel adjustment clause.Leasing Agreements. BNI Energy is obligated to make lease payments for a dragline totaling $2.8 million annually during the lease term, which expires in 2027.BNI Energy has the option at the end of the lease term to renew the lease at fair market value, to purchase the dragline at fair market value, or to surrender thedragline and pay a $3.0 million termination fee. We also lease other properties and equipment under operating lease agreements with a majority of terms expiringthrough 2024. Total lease expense was $17.5 million in 2017 ( $17.1 million in 2016 ; $17.3 million in 2015 ).ALLETE, Inc. 2017 Form 10-K112NOTE 11. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)Power Purchase Agreements. Our long-term PPAs have been evaluated under the accounting guidance for variable interest entities. We have determined thateither we have no variable interest in the PPAs, or where we do have variable interests, we are not the primary beneficiary; therefore, consolidation is not required.These conclusions are based on the fact that we do not have both control over activities that are most significant to the entity and an obligation to absorb losses orreceive benefits from the entity’s performance. Our financial exposure relating to these PPAs is limited to our capacity and energy payments.Square Butte PPA. Minnesota Power has a PPA with Square Butte that extends through 2026 (Agreement). Minnesota Power is obligated to pay its pro rata shareof Square Butte’s costs based on its entitlement to the output of Square Butte’s 455 MW coal‑fired generating unit. Minnesota Power’s output entitlement underthe Agreement is 50 percent for the remainder of the Agreement, subject to the provisions of the Minnkota Power PSA described in the following table. MinnesotaPower’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’scosts consist primarily of debt service, operating and maintenance, depreciation and fuel expenses. As of December 31, 2017 , Square Butte had total debtoutstanding of $330.0 million . Annual debt service for Square Butte is expected to be approximately $49 million in each of the next five years, 2018 through 2022, of which Minnesota Power’s obligation is 50 percent. Fuel expenses are recoverable through Minnesota Power’s fuel adjustment clause and include the cost ofcoal purchased from BNI Energy under a long-term contract.Minnesota Power’s cost of power purchased from Square Butte during 2017 was $75.7 million ( $73.3 million in 2016 ; $77.8 million in 2015 ). This reflectsMinnesota Power’s pro rata share of total Square Butte costs based on the 50 percent output entitlement. Included in this amount was Minnesota Power’s pro ratashare of interest expense of $9.4 million in 2017 ( $9.6 million in 2016 ; $10.1 million in 2015 ). Minnesota Power’s payments to Square Butte are approved as apurchased power expense for ratemaking purposes by both the MPUC and the FERC.ALLETE, Inc. 2017 Form 10-K113NOTE 11. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)Power Purchase Agreements (Continued)Minnesota Power has also entered into the following agreements for the purchase or sale of capacity and energy as of December 31, 2017 :CounterpartyQuantityProductCommencementExpirationPricingPPAs Great River Energy PPA 150 MWCapacity / EnergyJune 2016May 2020(a)PPA 250 MWCapacityJune 2016May 2020FixedPPA 350 MWCapacityJune 2017May 2020FixedManitoba Hydro PPA 1(b)EnergyMay 2011April 2022Forward Market PricesPPA 250 MWCapacity / EnergyJune 2015May 2020(c)PPA 350 MWCapacityJune 2017May 2020FixedPPA 4 (d)250 MWCapacity / EnergyJune 2020May 2035(e)PPA 5 (d)133 MWEnergy(f)(f)Forward Market PricesMinnkota Power50 MWCapacity / EnergyJune 2016May 2020(g)Oliver Wind I(h)EnergyDecember 2006December 2031FixedOliver Wind II(h)EnergyDecember 2007December 2032FixedShell Energy50 MWEnergyJanuary 2017December 2019FixedTransAlta(i)EnergyJanuary 2017December 2019FixedTenaska (j)(j)Capacity / EnergyJune 2020June 2040FixedPSAs Basin PSA 1100 MWCapacity / EnergyMay 2010April 2020(k)PSA 2100 MWCapacityJune 2016May 2018FixedPSA 350 MWCapacityJune 2017May 2019FixedMinnkota Power(l)Capacity / EnergyJune 2014December 2026(l)Silver Bay Power(m)EnergyJanuary 2017December 2031(n)(a)The capacity price is fixed and the energy price is based on a formula that includes an annual fixed price component adjusted for changes in a natural gas index, as well asmarket prices.(b)The energy purchased consists primarily of surplus hydro energy on Manitoba Hydro's system and is delivered on a non-firm basis. Minnesota Power will purchase at leastone million MWh of energy over the contract term.(c)The capacity and energy prices are adjusted annually by the change in a governmental inflationary index.(d)Agreements are subject to the construction of additional transmission capacity between Manitoba and the U.S., along with construction of new hydroelectric generatingcapacity in Manitoba. (See Great Northern Transmission Line.)(e)The capacity price is adjusted annually until 2020 by the change in a governmental inflationary index. The energy price is based on a formula that includes an annual fixedcomponent adjusted for the change in a governmental inflationary index and a natural gas index, as well as market prices.(f)The contract term shall be the 20 -year period beginning on the in-service date for the GNTL. (See Great Northern Transmission Line.)(g)The agreement includes a fixed capacity charge and energy prices that escalate at a fixed rate annually over the term.(h)The PPAs provide for the purchase of all output from the 50 MW Oliver Wind I and 48 MW Oliver Wind II wind energy facilities.(i)The energy purchased under the 50 MW PPA is during off-peak hours and the 100 MW PPA is during on-peak hours.(j)The PPA provides for the purchase of all output from a 250 MW wind energy facility to be constructed in southwest Minnesota and is subject to approval of theconstruction of a 525 MW to 550 MW combined-cycle natural gas-fired facility. (See Note 4. Regulatory Matters.)(k)The capacity charge is based on a fixed monthly schedule with a minimum annual escalation provision. The energy charge is based on a fixed monthly schedule andprovides for annual escalation based on the cost of fuel. The agreement also allows Minnesota Power to recover a pro rata share of increased costs related to emissionsthat occur during the last five years of the contract.(l)Minnesota Power is selling a portion of its entitlement from Square Butte to Minnkota Power, resulting in Minnkota Power’s net entitlement increasing and MinnesotaPower’s net entitlement decreasing until Minnesota Power’s share is eliminated at the end of 2025 . Of Minnesota Power’s 50 percent output entitlement, it sold toMinnkota Power approximately 28 percent in 2017 ( 28 percent in 2016 and in 2015 ). (See Square Butte PPA.)(m)Silver Bay Power supplies approximately 90 MW of load to Northshore Mining, an affiliate of Silver Bay Power, which has been served predominately through self-generation by Silver Bay Power. In the years 2016 through 2019, Minnesota Power is supplying Silver Bay Power with at least 50 MW of energy and Silver Bay Power hasthe option to purchase additional energy. On December 31, 2019, Silver Bay Power will cease self-generation and Minnesota Power will supply the energy requirementsfor Silver Bay Power.(n)The energy pricing is fixed through 2019 with pricing in later years escalating at a fixed rate annually and adjusted for changes in a natural gas index.ALLETE, Inc. 2017 Form 10-K114NOTE 11. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)Transmission . We continue to make investments in transmission opportunities that strengthen or enhance the transmission grid or take advantage of ourgeographical location between sources of renewable energy and end users. These include the GNTL, investments to enhance our own transmission facilities,investments in other transmission assets (individually or in combination with others) and our investment in ATC.Great Northern Transmission Line. As a condition of the 250 MW long-term PPA entered into with Manitoba Hydro, construction of additional transmissioncapacity is required. As a result, Minnesota Power and Manitoba Hydro proposed construction of the GNTL, an approximately 220 -mile 500 -kV transmission linebetween Manitoba and Minnesota’s Iron Range in order to strengthen the electric grid, enhance regional reliability and promote a greater exchange of sustainableenergy.In 2015, a certificate of need was approved by the MPUC. Based on this approval, Minnesota Power’s portion of the investments and expenditures for the projectare eligible for cost recovery under its existing transmission cost recovery rider and are anticipated to be included in future transmission cost recovery filings. (SeeNote 4. Regulatory Matters.) Also in 2015, the FERC approved our request to recover on construction work in progress related to the GNTL from MinnesotaPower’s wholesale customers. In an April 2016 order, the MPUC approved the route permit for the GNTL which largely follows Minnesota Power’s preferredroute, including the international border crossing, and in November 2016, the U.S. Department of Energy issued a presidential permit to cross the U.S.-Canadianborder, which was the final major regulatory approval needed before construction in the U.S. could begin. Site clearing and pre-construction activities commencedin the first quarter of 2017 with construction expected to be completed in 2020. Total project cost in the U.S., including substation work, is estimated to be between$560 million and $710 million , of which Minnesota Power’s portion is expected to be between $300 million and $350 million ; the difference will be recoveredfrom a subsidiary of Manitoba Hydro as contributions in aid of construction. Total project costs of $152.4 million have been incurred through December 31, 2017 ,of which $67.6 million has been recovered from a subsidiary of Manitoba Hydro.Manitoba Hydro must obtain regulatory and governmental approvals related to a new transmission line in Canada. In 2015, Manitoba Hydro submitted the finalpreferred route and EIS for the transmission line in Canada to the Manitoba Conservation and Water Stewardship for regulatory approval. In December 2016,Manitoba Hydro filed an application with the National Energy Board in Canada requesting authorization to construct and operate an international transmission line.Both provincial and federal approvals are pending. Construction of Manitoba Hydro’s hydroelectric generation facility commenced in 2014 and is anticipated to bein service by early 2021.Environmental Matters.Our businesses are subject to regulation of environmental matters by various federal, state and local authorities. A number of regulatory changes to the Clean AirAct, the Clean Water Act and various waste management requirements have recently been promulgated by both the EPA and state authorities. Minnesota Power’sfacilities are subject to additional requirements under many of these regulations. Minnesota Power is reshaping its generation portfolio, over time, to reduce itsreliance on coal, has installed cost-effective emission control technology and advocates for sound science and policy during rulemaking implementation.We consider our businesses to be in substantial compliance with currently applicable environmental regulations and believe all necessary permits have beenobtained. We anticipate that with many state and federal environmental regulations finalized, or to be finalized in the near future, potential expenditures for futureenvironmental matters may be material and may require significant capital investments. Minnesota Power has evaluated various environmental compliancescenarios using possible outcomes of environmental regulations to project power supply trends and impacts on customers.We review environmental matters on a quarterly basis. Accruals for environmental matters are recorded when it is probable that a liability has been incurred andthe amount of the liability can be reasonably estimated based on current law and existing technologies. Accruals are adjusted as assessment and remediation effortsprogress, or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in the Consolidated Balance Sheet atundiscounted amounts and exclude claims for recoveries from insurance or other third parties. Costs related to environmental contamination treatment and cleanupare expensed unless recoverable in rates from customers.Air. The electric utility industry is regulated both at the federal and state level to address air emissions. Minnesota Power’s generating facilities mainly burn low-sulfur western sub-bituminous coal. All of Minnesota Power’s coal-fired generating facilities are equipped with pollution control equipment such as scrubbers,baghouses and low NO X technologies. Under currently applicable environmental regulations, these facilities are substantially compliant with emissionrequirements.ALLETE, Inc. 2017 Form 10-K115NOTE 11. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)Environmental Matters (Continued)New Source Review (NSR). In 2008, Minnesota Power received a Notice of Violation (NOV) from the EPA asserting violations of the NSR requirements of theClean Air Act at Boswell and Laskin Unit 2 between the years of 1981 and 2001. Minnesota Power received an additional NOV in 2011 alleging that two projectsundertaken at Rapids Energy Center in 2004 and 2005 should have been reviewed under the NSR requirements and that the Rapids Energy Center’s Title V permitwas violated. Minnesota Power reached a settlement with the EPA regarding these NOVs and entered into a Consent Decree which was approved by the U.S.District Court for the District of Minnesota in 2014. The Consent Decree provided for, among other requirements, more stringent emissions limits at all affectedunits, the option of refueling, retrofitting or retiring certain small coal units, and the addition of 200 MW of wind energy. Provisions of the Consent Decree requirethat, by no later than December 31, 2018, Boswell Units 1 and 2 must be retired, refueled, repowered, or emissions rerouted through existing emission controltechnology at Boswell. In October 2016, Minnesota Power announced that Boswell Units 1 and 2 will be retired in 2018 as part of its EnergyForward strategicplan. We believe that costs to retire Boswell Units 1 and 2 will be eligible for recovery in rates over time, subject to regulatory approval in a rate proceeding.Cross-State Air Pollution Rule (CSAPR). The CSAPR requires certain states in the eastern half of the U.S., including Minnesota, to reduce power plant emissionsthat contribute to ozone or fine particulate pollution in other states. The CSAPR does not require installation of controls; rather it requires facilities have sufficientallowances to cover their emissions on an annual basis. These allowances are allocated to facilities from each state’s annual budget, and can be bought and sold.Based on our review of the NO x and SO 2 allowances issued and pending issuance, we currently expect generation levels and emission rates will result in continuedcompliance with the CSAPR.Mercury and Air Toxics Standards (MATS) Rule. Under Section 112 of the Clean Air Act, the EPA is required to set emission standards for hazardous air pollutants(HAPs) for certain source categories. The final MATS rule addressed such emissions from coal-fired utility units greater than 25 MW and established categories ofHAPs, including mercury, trace metals other than mercury, and acid gases. The EPA established emission limits for these categories of HAPs and work practicestandards for the remaining categories. Construction on the project to implement the Boswell Unit 4 mercury emissions reduction plan to position the unit forMATS compliance was completed in 2015. Investments and compliance work previously completed at Boswell Unit 3, including emission reduction investmentscompleted in 2009, meet the requirements of the MATS rule. The conversion of Laskin Units 1 and 2 to operate on natural gas in 2015 positioned those units forMATS compliance.Minnesota Mercury Emissions Reduction Act/Rule. Minnesota Power was required to implement a mercury emissions reduction project for Boswell Unit 4 byDecember 31, 2018. The Boswell Unit 4 environmental upgrade discussed above (see Mercury and Air Toxics Standards (MATS) Rule ) fulfills the requirements ofthe Minnesota Mercury Emissions Reduction Act.National Ambient Air Quality Standards (NAAQS). The EPA is required to review the NAAQS every five years. If the EPA determines that a state’s air quality isnot in compliance with the NAAQS, the state is required to adopt plans describing how it will reduce emissions to attain the NAAQS. Four NAAQS have eitherrecently been revised or are currently proposed for revision, as described below.•Ozone NAAQS. All areas of Minnesota currently meet the new standard based on the most recent available ambient monitoring data; however, some areasin the metropolitan Twin Cities and southwest portion of the state are close to exceeding the standard. As a result, voluntary efforts to reduce ground-levelozone continue in the state. No additional costs for compliance are anticipated at this time.•Particulate Matter NAAQS. The EPA has designated the entire state of Minnesota as unclassifiable/attainment; however, Minnesota sources mayultimately be required to reduce their emissions to assist with attainment in neighboring states. In September 2016, environmental groups filed a lawsuitagainst the EPA in the U.S. District Court for the Northern District of California alleging the EPA had failed to fully implement the PM 2.5 standards incertain states, including Minnesota, by not enforcing states’ submittals of required infrastructure implementation plans for the 2012 PM 2.5 NAAQS. Theoutcome of this litigation is uncertain, and as such, any costs for complying with the final Particulate Matter NAAQS cannot be estimated at this time.•NO 2 NAAQS. Ambient monitoring data indicates that Minnesota is likely in compliance with the one-hour NAAQS standard for NO 2 . On July 16, 2017,the EPA proposed retaining the current one-hour and annual NO 2 NAAQS. Additional compliance costs for the one-hour NO 2 NAAQS are not expectedat this time. ALLETE, Inc. 2017 Form 10-K116NOTE 11. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)Environmental Matters (Continued)•SO 2 NAAQS. In 2015, the EPA finalized the SO 2 data requirements rule (DRR) for the 2010 one-hour NAAQS to assist the states in implementing thestandard. The MPCA initially informed Minnesota Power that compliant SO 2 modeling completed at Minnesota Power's Boswell and Taconite Harborfacilities would satisfy the DRR obligations and no further modeling would be required; however, the DRR also require facilities have federally-enforceable permit limits at which the one-hour SO 2 NAAQS compliance was modeled by January 13, 2017. Taconite Harbor was issued an amended airpermit in September 2016, containing the new modeling limits at that facility. The MPCA did not meet the January 13, 2017, deadline to amend theBoswell permit. The MPCA is in discussions with the EPA on alternate compliance pathways to use existing completed modeling at current limits. OnAugust 21, 2017, the EPA proposed retaining the current primary SO 2 one-hour NAAQS. Compliance costs for the one-hour SO 2 NAAQS are notexpected to be material.Climate Change. The scientific community generally accepts that emissions of GHG are linked to global climate change which creates physical and financial risks.Physical risks could include, but are not limited to: increased or decreased precipitation and water levels in lakes and rivers; increased temperatures; and changes inthe intensity and frequency of extreme weather events. These all have the potential to affect the Company’s business and operations. We are addressing climatechange by taking the following steps that also ensure reliable and environmentally compliant generation resources to meet our customers’ requirements:•Expanding our renewable power supply;•Providing energy conservation initiatives for our customers and engaging in other demand side management efforts;•Improving efficiency of our generating facilities;•Supporting research of technologies to reduce carbon emissions from generating facilities and carbon sequestration efforts; and•Evaluating and developing less carbon intensive future generating assets such as efficient and flexible natural gas‑fired generating facilities.EPA Regulation of GHG Emissions. In 2010, the EPA issued the Prevention of Significant Deterioration (PSD) and Title V Greenhouse Gas Tailoring Rule(Tailoring Rule). The Tailoring Rule establishes permitting thresholds required to address GHG emissions for new facilities, existing facilities that undergo majormodifications and other facilities characterized as major sources under the Clean Air Act’s Title V program. For our existing facilities, the rule does not requireamending our existing Title V operating permits to include GHG requirements, however, GHG requirements may be added to our existing Title V operatingpermits by the MPCA as these permits are renewed or amended.In 2014, the U.S. Supreme Court invalidated the aspect of the Tailoring Rule that established higher permitting thresholds for GHG than for other pollutants subjectto PSD; however, the court also upheld the EPA’s ability to require best available control technology (BACT) for GHG from sources already subject to regulationunder PSD. Minnesota Power’s coal-fired generating facilities are already subject to regulation under PSD, so we anticipate that ultimately PSD for GHG willapply to our facilities, but the timing of the promulgation of a replacement for the Tailoring Rule is uncertain. The PSD applies to existing facilities only when theyundertake a major modification that increases emissions.In October 2016, the EPA published a proposed rule in the Federal Register to revise its PSD and Title V regulatory provisions concerning GHG emissions. In thisproposed rule, the EPA proposes to amend its regulations to clarify that a source’s obligation to obtain a PSD or Title V permit is triggered only by non-GHGpollutants. If the PSD or Title V permitting requirements are triggered by non-GHG, NSR pollutants, then these programs will also apply to the source’s GHGemissions. The proposed rule, as currently written, is not expected to have a material impact on the Title V permitting for current operations.In 2014, the EPA announced a proposed rule under Section 111(d) of the Clean Air Act for existing power plants entitled “Carbon Pollution Emission Guidelinesfor Existing Stationary Sources: Electric Generating Units”, also referred to as the Clean Power Plan (CPP). The EPA issued the final CPP in 2015, together with aproposed federal implementation plan and a model rule for emissions trading. In February 2016, the U.S. Supreme Court issued an order staying the effectivenessof the rule until after the appellate court process is complete. In September 2016, the U.S. Court of Appeals for the District of Columbia heard oral arguments andis currently deliberating. If the CPP is upheld at the completion of the appellate process, all of the CPP regulatory deadlines are expected to be reset based on thelength of time that the appeals process takes. The EPA is precluded from enforcing the CPP while the U.S. Supreme Court stay is in force; however, the MPCA hasbeen holding a series of meetings on the CPP for educational and planning purposes in the interim. Minnesota Power has been actively involved in these MPCAmeetings, and is closely monitoring the appeals process.ALLETE, Inc. 2017 Form 10-K117NOTE 11. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)Environmental Matters (Continued)If upheld, the CPP would establish uniform CO 2 emission performance rates for existing fossil fuel-fired and natural gas-fired combined cycle generating units,setting state-specific goals for CO 2 emissions from the power sector. State goals were determined based on CPP source-specific performance emission rates andeach state’s mix of power plants. The EPA has filed a motion with the U.S. Court of Appeals for the District of Columbia Circuit to hold CPP-related litigation insuspension while the EPA is reviewing the rule. On October 10, 2017, the EPA issued a notice of proposed rulemaking, proposing to repeal the CPP. OnDecember 28, 2017, an Advanced Notice of Proposed Rulemaking (ANPRM) for a CPP replacement rule was published in the Federal Register.Minnesota Power is currently evaluating the CPP rescission and recently proposed ANPRM for a CPP replacement rule as it relates to the State of Minnesota aswell as its potential impact on the Company. Minnesota has already initiated several measures consistent with those called for under the CPP. Minnesota Power isimplementing its EnergyForward strategic plan that provides for significant emission reductions and diversifying its electricity generation mix to include morerenewable and natural gas energy. (See Note 4. Regulatory Matters.)We are unable to predict the GHG emission compliance costs we might incur; however, the costs could be material. Minnesota Power would seek recovery ofadditional costs through a rate proceeding.Water. The Clean Water Act requires National Pollutant Discharge Elimination System (NPDES) permits be obtained from the EPA (or, when delegated, fromindividual state pollution control agencies) for any wastewater discharged into navigable waters. We have obtained all necessary NPDES permits, includingNPDES storm water permits for applicable facilities, to conduct our operations.Clean Water Act - Aquatic Organisms. In 2014, EPA regulations under Section 316(b) of the Clean Water Act setting standards applicable to cooling water intakestructures for the protection of aquatic organisms became effective. The regulations require existing large power plants and manufacturing facilities that withdrawgreater than 25 percent of water from adjacent water bodies for cooling purposes and have a design intake flow of greater than 2 million gallons per day, to limitthe number of aquatic organisms that are impacted by the facility’s intake structure or cooling system. The Section 316(b) rule will be implemented throughNPDES permits issued to covered facilities. No NPDES permits for Minnesota Power facilities have been re-issued containing Section 316(b) requirements sincethe final rule became effective. Should the MPCA require significant modifications to Minnesota Power’s intake structures, a preliminary assessment indicates thatMinnesota Power could incur costs of compliance up to $15 million over the next five years. Minnesota Power would seek recovery of additional costs through arate proceeding.Steam Electric Power Generating Effluent Guidelines. In 2015, the EPA issued revised federal effluent limit guidelines (ELG) for steam electric power generatingstations under the Clean Water Act. It set effluent limits and prescribed BACT for several wastewater streams, including flue gas desulphurization (FGD) water,bottom ash transport water and coal combustion landfill leachate. On September 13, 2017, the EPA announced a two-year postponement of the ELG compliancedate of November 1, 2018, to November 1, 2020, while the agency reconsiders bottom ash transport water and FGD wastewater provisions.The final ELG rule’s potential impact on Minnesota Power operations is primarily at Boswell. Boswell currently discharges bottom ash contact water through itsNPDES permit, and also has a closed-loop FGD system that does not discharge, but may do so in the future. Under the existing ELG rule, bottom ash transportwater discharge must cease no later than December 31, 2023. Bottom ash contact water will either need to be re-used in a closed-loop process, routed to a FGDscrubber, or the bottom ash handling system will need to be converted to a dry process. If FGD wastewater is discharged in the future, it will require additionalwastewater treatment. The ELG rule provision regarding these two waste-streams are being reconsidered and may change prior to November 1, 2020. Efforts havebeen underway at Boswell for several years to reduce the amount of water discharged and evaluate potential re-use options in its plant processes.At this time, we cannot estimate what compliance costs we might incur related to these or other potential future water discharge regulations; however, the costscould be material, including costs associated with retrofits for bottom ash handling, pond dewatering, pond closure, and wastewater treatment and reuse. MinnesotaPower would seek recovery of additional costs through a rate proceeding.Solid and Hazardous Waste. The Resource Conservation and Recovery Act of 1976 regulates the management and disposal of solid and hazardous wastes. We arerequired to notify the EPA of hazardous waste activity and, consequently, routinely submit the necessary reports to the EPA.ALLETE, Inc. 2017 Form 10-K118NOTE 11. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)Environmental Matters (Continued)Coal Ash Management Facilities. Minnesota Power stores or disposes coal ash at four of its electric generating facilities by the following methods: storing ash inlined onsite impoundments (ash ponds), disposing of dry ash in a lined dry ash landfill which has been idled and has a temporary landfill cover in place, applyingash to land as an approved beneficial use and trucking ash to state permitted landfills.Coal Combustion Residuals from Electric Utilities (CCR). In 2015, the EPA published the final rule regulating CCR as nonhazardous waste under Subtitle D of theResource Conservation and Recovery Act (RCRA) in the Federal Register. The rule includes additional requirements for new landfill and impoundmentconstruction as well as closure activities related to certain existing impoundments. Costs of compliance for Boswell and Laskin are expected to occur primarilyover the next 10 years and be between approximately $65 million and $100 million . The EPA has indicated to Minnesota Power that the Taconite Harbor landfillis a CCR unit, based on the EPA’s interpretation of the CCR rule language. Minnesota Power has agreed to post the required CCR information for the TaconiteHarbor landfill on Minnesota Power’s website while the CCR issue is resolved. Minnesota Power continues to work on minimizing costs through evaluation ofbeneficial re-use and recycling of CCR and CCR-related waters. On September 13, 2017, the EPA announced its intention to formally reconsider the CCR ruleunder Subtitle D of the RCRA. Compliance costs, if any, for CCR at Taconite Harbor cannot be estimated at this time. Minnesota Power would seek recovery ofadditional costs through a rate proceeding.Other Environmental MattersManufactured Gas Plant Site. We are reviewing and addressing environmental conditions at a former manufactured gas plant site located in Superior, Wisconsin,and formerly operated by SWL&P. SWL&P has been working with the Wisconsin Department of Natural Resources (WDNR) in determining the extent andlocation of contamination at the site and surrounding properties. In December 2017, the WDNR authorized SWL&P to transition from site investigation into theremedial design process. As of December 31, 2017 , we have recorded a liability of approximately $8 million for remediation costs at this site, and a correspondingregulatory asset as we expect recovery of these remediation costs to be allowed by the PSCW. We expect to incur these costs over the next four years.Other MattersALLETE Clean Energy. ALLETE Clean Energy’s wind energy facilities have PSAs in place for their entire output and expire in various years between 2018 and2032. As of December 31, 2017 , ALLETE Clean Energy has $15.4 million outstanding in standby letters of credit.U.S. Water Services. As of December 31, 2017 , U.S. Water Services has $0.8 million outstanding in standby letters of credit.BNI Energy. As of December 31, 2017 , BNI Energy had surety bonds outstanding of $49.9 million and a letter of credit for an additional $0.6 million related tothe reclamation liability for closing costs associated with its mine and mine facilities. Although its coal supply agreements obligate the customers to provide for theclosing costs, additional assurance is required by federal and state regulations. BNI Energy’s total reclamation liability is currently estimated at $47.5 million . BNIEnergy does not believe it is likely that any of these outstanding surety bonds or the letter of credit will be drawn upon.ALLETE Properties. As of December 31, 2017 , ALLETE Properties had surety bonds outstanding and letters of credit to governmental entities totaling$8.6 million primarily related to development and maintenance obligations for various projects. The estimated cost of the remaining development work is$6.1 million . ALLETE Properties does not believe it is likely that any of these outstanding surety bonds or letters of credit will be drawn upon.ALLETE, Inc. 2017 Form 10-K119NOTE 11. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)Other Matters (Continued)Community Development District Obligations. In 2005, the Town Center District issued $26.4 million of tax-exempt, 6.0 percent capital improvement revenuebonds, and in 2006, the Palm Coast Park District issued $31.8 million of tax-exempt, 5.7 percent special assessment bonds. The capital improvement revenue bondsand the special assessment bonds are payable over 31 years (by May 1, 2036 and 2037, respectively) and are secured by special assessments on the benefited land.The bond proceeds were used to pay for the construction of a portion of the major infrastructure improvements in each district and to mitigate traffic andenvironmental impacts. The assessments were billed to the landowners beginning in 2006 for the Town Center District and 2007 for the Palm Coast Park District.To the extent that ALLETE Properties still owns land at the time of the assessment, it will incur the cost of our portion of these assessments, based upon itsownership of benefited property. As of December 31, 2017 , we owned 70 percent of the assessable land in the Town Center District ( 72 percent as ofDecember 31, 2016 ) and 33 percent of the assessable land in the Palm Coast Park District ( 92 percent as of December 31, 2016 ). As of December 31, 2017 ,ownership levels, our annual assessments related to capital improvement and special assessment bonds for the ALLETE Properties projects within these districtsare $1.4 million for Town Center at Palm Coast and $2.0 million for Palm Coast Park. As we sell property at these projects, the obligation to pay specialassessments will pass to the new landowners. In accordance with accounting guidance, these bonds are not reflected as debt on our Consolidated Balance Sheet.Legal Proceedings.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 othergovernmental audits, inspections, investigations and other proceedings that involve state and federal taxes, safety, and compliance with regulations, rate base andcost of service issues, among other things. We do not expect the outcome of these matters to have a material effect on our financial position, results of operations orcash flows.NOTE 12. COMMON STOCK AND EARNINGS PER SHARESummary of Common StockSharesEquity ThousandsMillionsBalance as of December 31, 201445,929$1,107.6Employee Stock Purchase Plan180.9Invest Direct38319.0Options and Stock Awards438.6Equity Issuance Program1,28969.9Forward Sale Agreement and Issuance1,41365.4Balance as of December 31, 201549,0751,271.4Employee Stock Purchase Plan160.9Invest Direct34420.0Options and Stock Awards653.7Contributions to RSOP603.3Equity Issuance Program1308.0Received for Sale of Land Inventory(130)(8.0)Acquisition of Non-Controlling Interest—(4.0)Balance as of December 31, 201649,5601,295.3Employee Stock Purchase Plan120.8Invest Direct25719.0Options and Stock Awards223.6Contributions to RSOP503.5Equity Issuance Program1,00065.7Contributions to Pension21613.5Balance as of December 31, 201751,117$1,401.4ALLETE, Inc. 2017 Form 10-K120NOTE 12. COMMON STOCK AND EARNINGS PER SHARE (Continued)Equity Issuance Program. We entered into a distribution agreement with Lampert Capital Markets, Inc., in 2008, as amended most recently in August 2016 , withrespect to the issuance and sale of up to an aggregate of 13.6 million shares of our common stock, without par value, of which 2.9 million shares remain availablefor issuance as of December 31, 2017 . For the year ended December 31, 2017 , 1.0 million shares of common stock were issued under this agreement, resulting innet proceeds of $65.7 million ( 0.1 million shares for net proceeds of $8.0 million in 2016 ; 1.3 million shares for net proceeds of $69.9 million in 2015 ). Theshares issued in 2017 and 2016 were offered and sold pursuant to Registration Statement No. 333-212794, pursuant to which the remaining shares will continue tobe offered for sale, from time to time. The shares issued in 2015 were offered and sold pursuant to Registration Statement No. 333-190335.Earnings Per Share. We compute basic earnings per share using the weighted average number of shares of common stock outstanding during each period. Thedifference between basic and diluted earnings per share, if any, arises from outstanding stock options, non-vested restricted stock units, performance share awardsgranted under our Executive Long-Term Incentive Compensation Plan and common shares under the forward sale agreement (described below). No options topurchase shares of common stock were excluded from the computation of diluted earnings per share in 2017 , 2016 and 2015 .Forward Sale Agreement and Issuance of Common Stock . In 2014, ALLETE entered into a confirmation of forward sale agreement (Agreement) with aforward counterparty in connection with a public offering of 2.8 million shares of ALLETE common stock.Pursuant to the Agreement, the forward counterparty (or its affiliate) borrowed 2.8 million shares of ALLETE common stock from third parties and sold them tothe underwriters. The forward sale price was $48.01 per share, subject to adjustment as provided in the Agreement. In 2014, ALLETE physically settled a portionof its obligations under the Agreement by delivering approximately 1.4 million shares of common stock in exchange for cash proceeds of $65.0 million , and inFebruary 2015, ALLETE physically settled the remaining portion of its obligation under the Agreement by delivering approximately 1.4 million shares of commonstock for cash proceeds of $65.4 million .Contributions to Pension. For the year ended December 31, 2017 , we contributed approximately 0.2 million shares of ALLETE common stock to our pensionplan, which had an aggregate value of $13.5 million when contributed ( none in 2016 and in 2015 ). These shares of ALLETE common stock were contributed inreliance upon an exemption available pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.Reconciliation of Basic and Diluted Earnings Per Share Dilutive Year Ended December 31BasicSecuritiesDilutedMillions Except Per Share Amounts 2017 Net Income Attributable to ALLETE$172.2 $172.2Average Common Shares50.80.251.0Earnings Per Share$3.39 $3.382016 Net Income Attributable to ALLETE$155.3 $155.3Average Common Shares49.30.249.5Earnings Per Share$3.15 $3.142015 Net Income Attributable to ALLETE$141.1 $141.1Average Common Shares48.30.148.4Earnings Per Share$2.92 $2.92ALLETE, Inc. 2017 Form 10-K121NOTE 13. INCOME TAX EXPENSEIncome Tax Expense Year Ended December 31201720162015Millions Current Income Tax Expense (a) Federal———State$0.3$0.4$0.2Total Current Income Tax Expense$0.3$0.4$0.2Deferred Income Tax Expense Federal$12.1$12.0$19.4Federal – Remeasurement of Deferred Income Taxes (b)(13.0)——State15.88.16.5Investment Tax Credit Amortization(0.5)(0.7)(0.8)Total Deferred Income Tax Expense$14.4$19.4$25.1Total Income Tax Expense$14.7$19.8$25.3(a)For the years ended December 31, 2017 , 2016 and 2015 , the federal and state current tax expense was minimal due to NOLs which resulted from the bonus depreciationprovisions of the Protecting Americans from Tax Hikes Act of 2015, the Tax Increase Prevention Act of 2014 and the American Taxpayer Relief Act of 2012. The federaland state NOLs will be carried forward to offset future taxable income.(b)Deferred income tax benefit from the remeasurement of deferred income tax assets and liabilities resulting from the TCJA. (See Note 1. Operations and SignificantAccounting Policies.)Reconciliation of Taxes from Federal Statutory Rate to Total Income Tax Expense Year Ended December 31201720162015Millions Income Before Non-Controlling Interest and Income Taxes$186.9$175.6$166.8Statutory Federal Income Tax Rate35%35%35%Income Taxes Computed at 35 percent Statutory Federal Rate$65.4$61.5$58.4Increase (Decrease) in Tax Due to: State Income Taxes – Net of Federal Income Tax Benefit10.55.64.4Regulatory Differences for Utility Plant—(0.1)(0.6)Production Tax Credits(45.1)(41.5)(37.0)Change in Fair Value of Contingent Consideration—(3.8)—Remeasurement of Deferred Income Taxes (a)(13.0)——Other(3.1)(1.9)0.1Total Income Tax Expense$14.7$19.8$25.3(a)Deferred income tax benefit from the remeasurement of deferred income tax assets and liabilities resulting from the TCJA. (See Note 1. Operations and SignificantAccounting Policies.)The effective tax rate was 7.9 percent for 2017 ( 11.3 percent for 2016 ; 15.2 percent for 2015 ). The 2017 effective tax rate was primarily impacted by productiontax credits and the remeasurement of deferred income tax assets and liabilities resulting from the TCJA. (See Note 1. Operations and Significant AccountingPolicies.) The 2016 and 2015 effective rates were primarily impacted by production tax credits.ALLETE, Inc. 2017 Form 10-K122NOTE 13. INCOME TAX EXPENSE (Continued)Deferred Income Tax Assets and Liabilities As of December 3120172016Millions Deferred Income Tax Assets Employee Benefits and Compensation$65.9$104.6Property Related104.3110.5NOL Carryforwards99.1185.6Tax Credit Carryforwards294.3227.4Power Sales Agreements35.059.3Regulatory Liabilities117.77.3Other33.346.9Gross Deferred Income Tax Assets749.6741.6Deferred Income Tax Asset Valuation Allowance(60.0)(43.0)Total Deferred Income Tax Assets$689.6$698.6Deferred Income Tax Liabilities Property Related$758.3$1,039.6Regulatory Asset for Benefit Obligations61.491.9Unamortized Investment Tax Credits32.833.3Partnership Basis Differences34.950.9Regulatory Assets32.025.6Other0.711.9Total Deferred Income Tax Liabilities$920.1$1,253.2Net Deferred Income Taxes (a)$230.5$554.6(a)Recorded as a net long-term Deferred Income Tax liability on the Consolidated Balance Sheet. Additionally, see Note 1. Operations and Significant Accounting Policies –Revision of Prior Balance Sheet.NOL and Tax Credit Carryforwards As of December 3120172016Millions Federal NOL Carryforwards (a)$375.2$485.3Federal Tax Credit Carryforwards$209.2$163.7State NOL Carryforwards (a)$289.9$294.4State Tax Credit Carryforwards (b)$25.6$21.0(a)Pre-tax amounts.(b)Net of a $59.5 million valuation allowance as of December 31, 2017 ( $42.7 million as of December 31, 2016 ).The federal NOL and tax credit carryforward periods expire between 2030 and 2037. We expect to fully utilize the federal NOL and federal tax creditcarryforwards; therefore, no federal valuation allowance has been recognized as of December 31, 2017 . The state NOL and tax credit carryforward periods expirebetween 2024 and 2045. We have established a valuation allowance against certain state NOL and tax credits that we do not expect to utilize before theirexpiration. We do not expect a material impact on the Company’s ability to utilize its federal and state NOL and tax credit carryforwards due to the TCJA.ALLETE, Inc. 2017 Form 10-K123NOTE 13. INCOME TAX EXPENSE (Continued)Gross Unrecognized Income Tax Benefits201720162015Millions Balance at January 1$2.0$2.4$2.0Additions for Tax Positions Related to the Current Year0.10.10.5Additions for Tax Positions Related to Prior Years0.10.20.7Reductions for Tax Positions Related to Prior Years(0.1)(0.3)(0.7)Lapse of Statute(0.4)(0.4)(0.1)Balance as of December 31$1.7$2.0$2.4Unrecognized tax benefits are the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured pursuantto the “more-likely-than-not” criteria. The unrecognized tax benefit balance includes permanent tax positions which, if recognized would affect the annual effectiveincome tax rate. In addition, the unrecognized tax benefit balance includes temporary tax positions for which the ultimate deductibility is highly certain but forwhich there is uncertainty about the timing of such deductibility. A change in the period of deductibility would not affect the effective tax rate but would acceleratethe payment of cash to the taxing authority to an earlier period. The gross unrecognized tax benefits as of December 31, 2017 , included $0.8 million of netunrecognized tax benefits which, if recognized, would affect the annual effective income tax rate.As of December 31, 2017 , we had no accrued interest ( none as of December 31, 2016 , and 2015 ) related to unrecognized tax benefits included on theConsolidated Balance Sheet due to our NOL carryforwards. We classify interest related to unrecognized tax benefits as interest expense and tax-related penalties inoperating expenses on the Consolidated Statement of Income. Interest expense related to unrecognized tax benefits on the Consolidated Statement of Income wasimmaterial in 2017 ( immaterial in 2016 , and in 2015 ). There were no penalties recognized in 2017 , 2016 or 2015 . The unrecognized tax benefit amounts havebeen presented as reductions to the tax benefits associated with NOL and tax credit carryforwards on the Consolidated Balance Sheet.No material changes to unrecognized tax benefits are expected during the next 12 months.ALLETE and its subsidiaries file a consolidated federal income tax return as well as combined and separate state income tax returns in various jurisdictions.ALLETE has no open federal or state audits, and is no longer subject to federal examination for years before 2013 or state examination for years before 2012.NOTE 14. RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)Changes in Accumulated Other Comprehensive Loss. Comprehensive income (loss) is the change in shareholders’ equity during a period from transactions andevents from non-owner sources, including net income. The amounts recorded to accumulated other comprehensive loss include unrealized gains and losses onavailable-for-sale securities, defined benefit pension and other postretirement items, consisting of deferred actuarial gains or losses and prior service costs orcredits, and gains and losses on derivatives accounted for as cash flow hedges.ALLETE, Inc. 2017 Form 10-K124NOTE 14. RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Continued)Changes in accumulated other comprehensive loss, net of tax, for the years ended December 31, 2017 , 2016 and 2015 , were as follows: Unrealized Gain (Loss) onAvailable-for-saleSecuritiesDefined BenefitPension, OtherPostretirementItems (a)Gain(Loss) onCash FlowHedgeTotalMillions Balance as of December 31, 2014$(0.3)$(20.7)$(0.1)$(21.1)Other Comprehensive Income (Loss) Before Reclassifications(0.4)(4.3)0.1(4.6)Amounts Reclassified From Accumulated Other ComprehensiveLoss(0.1)1.3—1.2Net Other Comprehensive Income (Loss)(0.5)(3.0)0.1(3.4)Balance as of December 31, 2015(0.8)(23.7)—(24.5)Other Comprehensive Income (Loss) Before Reclassifications—(4.1)—(4.1)Amounts Reclassified From Accumulated Other ComprehensiveLoss(0.2)0.6—0.4Net Other Comprehensive Income (Loss)(0.2)(3.5)—(3.7)Balance as of December 31, 2016(1.0)(27.2)—(28.2)Other Comprehensive Income (Loss) Before Reclassifications1.13.9—5.0Amounts Reclassified From Accumulated Other ComprehensiveLoss(0.2)0.8—0.6Net Other Comprehensive Income (Loss)0.94.7—5.6Balance as of December 31, 2017$(0.1)$(22.5)—$(22.6)(a)Defined benefit pension and other postretirement items excluded from our Regulated Operations are recognized in accumulated other comprehensive loss and aresubsequently reclassified out of accumulated other comprehensive loss as components of net periodic pension and other postretirement benefit expense. (See Note 15.Pension and Other Postretirement Benefit Plans.)NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANSWe have noncontributory union, non-union and combined retiree defined benefit pension plans covering eligible employees. The combined retiree defined benefitpension plan was created in 2016, to include all union and non-union retirees from the existing plans as of January 1, 2016. The plans provide defined benefitsbased on years of service and final average pay. We contributed $1.7 million in cash to the plans in 2017 ( $6.3 million in 2016 ; none in 2015 ). We alsocontributed approximately 0.2 million shares of ALLETE common stock to the plans in 2017 , which had an aggregate value of $13.5 million when contributed (none in 2016; none in 2015). We also have a defined contribution RSOP covering substantially all employees. The 2017 plan year employer contributions, whichare made through the employee stock ownership plan portion of the RSOP, totaled $11.0 million ( $9.2 million for the 2016 plan year; $9.0 million for the 2015plan year). (See Note 12. Common Stock and Earnings Per Share and Note 16. Employee Stock and Incentive Plans.)The non-union defined benefit pension plan does not allow further crediting of service to the plan and is closed to new participants. The Minnesota Power uniondefined benefit pension plan is also closed to new participants.ALLETE, Inc. 2017 Form 10-K125NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)We have postretirement health care and life insurance plans covering eligible employees. In 2010, our postretirement health plan was amended to close the plan toemployees hired after January 31, 2011. The full eligibility requirement was also amended in 2010, to require employees to be at least age 55 with 10 years ofparticipation in the plan. In 2014, our postretirement life plan was amended to close the plan to non-union employees retiring after December 31, 2015. Thepostretirement health and life plans are contributory with participant contributions adjusted annually. Postretirement health and life benefits are funded through acombination of Voluntary Employee Benefit Association trusts (VEBAs), established under section 501(c)(9) of the Internal Revenue Code, and irrevocablegrantor trusts. In 2017 , no contributions were made to the VEBAs ( none in 2016 ; none in 2015 ) and no contributions were made to the grantor trusts ( none in2016 ; none in 2015 ).Management considers various factors when making funding decisions such as regulatory requirements, actuarially determined minimum contributionrequirements and contributions required to avoid benefit restrictions for the pension plans. Contributions are based on estimates and assumptions which are subjectto change. On January 8, 2018 , we contributed $15.0 million in cash to the defined benefit pension plans. We do not expect to make any additional contributions tothe defined benefit pension plans in 2018 , and we do not expect to make any contributions to the defined benefit postretirement health and life plans in 2018 .Accounting for defined benefit pension and other postretirement benefit plans requires that employers recognize on a prospective basis the funded status of theirdefined benefit pension and other postretirement plans on their balance sheet and recognize as a component of other comprehensive income, net of tax, the gains orlosses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost.The defined benefit pension and postretirement health and life benefit expense (credit) recognized annually by our regulated utilities are expected to be recovered(refunded) through rates filed with our regulatory jurisdictions. As a result, these amounts that are required to otherwise be recognized in accumulated othercomprehensive income have been recognized as a long-term regulatory asset (regulatory liability) on the Consolidated Balance Sheet, in accordance with theaccounting standards for the effect of certain types of regulation applicable to our Regulated Operations. The defined benefit pension and postretirement health andlife benefit expense (credits) associated with our other operations are recognized in accumulated other comprehensive income.Pension Obligation and Funded StatusAs of December 3120172016Millions Accumulated Benefit Obligation$745.4$698.8Change in Benefit Obligation Obligation, Beginning of Year$743.3$709.8Service Cost10.28.1Interest Cost32.533.2Actuarial Loss44.812.4Benefits Paid(51.0)(44.5)Participant Contributions13.424.3Obligation, End of Year$793.2$743.3Change in Plan Assets Fair Value, Beginning of Year$557.5$521.3Actual Return on Plan Assets91.648.8Employer Contribution (a)30.131.9Benefits Paid(51.0)(44.5)Fair Value, End of Year$628.2$557.5Funded Status, End of Year$(165.0)$(185.8) Net Pension Amounts Recognized in Consolidated Balance Sheet Consist of: Current Liabilities$(1.4)$(1.4)Non-Current Liabilities$(163.6)$(184.4)(a)Includes Participant Contributions noted above.ALLETE, Inc. 2017 Form 10-K126NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)The pension costs that are reported as a component within the Consolidated Balance Sheet, reflected in long-term regulatory assets or liabilities and accumulatedother comprehensive income, consist of a net loss of $236.2 million as of December 31, 2017 (net loss of $250.4 million as of December 31, 2016 ).Reconciliation of Net Pension Amounts Recognized in Consolidated Balance SheetAs of December 3120172016Millions Net Loss$(236.2)$(250.4)Accumulated Contributions in Excess of Net Periodic Benefit Cost (Prepaid Pension Asset)71.264.6Total Net Pension Amounts Recognized in Consolidated Balance Sheet$(165.0)$(185.8)Components of Net Periodic Pension CostYear Ended December 31201720162015Millions Service Cost$10.2$8.1$10.1Interest Cost32.533.229.9Expected Return on Plan Assets(42.4)(43.6)(40.7)Amortization of Loss9.99.517.9Amortization of Prior Service Cost——0.2Net Pension Cost$10.2$7.2$17.4Other Changes in Pension Plan Assets and Benefit Obligations Recognized inOther Comprehensive Income and Regulatory Assets or LiabilitiesYear Ended December 3120172016Millions Net (Gain) Loss$(4.3)$7.2Amortization of Loss(9.9)(9.5)Total Recognized in Other Comprehensive Income and Regulatory Assets or Liabilities$(14.2)$(2.3)Information for Pension Plans with an Accumulated Benefit Obligation in Excess of Plan AssetsAs of December 3120172016Millions Projected Benefit Obligation$793.2$743.3Accumulated Benefit Obligation$745.4$698.8Fair Value of Plan Assets$628.2$557.5ALLETE, Inc. 2017 Form 10-K127NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)Postretirement Health and Life Obligation and Funded StatusAs of December 3120172016Millions Change in Benefit Obligation Obligation, Beginning of Year$173.4$160.2Service Cost4.43.9Interest Cost7.77.4Actuarial Loss15.511.9Benefits Paid(12.2)(13.1)Participant Contributions3.13.1Plan Amendments(1.8)—Obligation, End of Year$190.1$173.4Change in Plan Assets Fair Value, Beginning of Year$154.3$153.4Actual Return on Plan Assets24.59.6Employer Contribution1.31.3Participant Contributions3.13.1Benefits Paid(12.2)(13.1)Fair Value, End of Year$171.0$154.3Funded Status, End of Year$(19.1)$(19.1) Net Postretirement Health and Life Amounts Recognized in Consolidated Balance Sheet Consist of: Non-Current Assets$3.0$1.4Current Liabilities$(1.1)$(1.1)Non-Current Liabilities$(21.0)$(19.4)According to the accounting standards for retirement benefits, only assets in the VEBAs are treated as plan assets in the preceding table for the purpose ofdetermining funded status. In addition to the postretirement health and life assets reported in the previous table, we had $19.2 million in irrevocable grantor trustsincluded in Other Investments on the Consolidated Balance Sheet as of December 31, 2017 ( $17.6 million as of December 31, 2016 ).The postretirement health and life costs that are reported as a component within the Consolidated Balance Sheet, reflected in regulatory long-term assets orliabilities and accumulated other comprehensive income, consist of the following:Unrecognized Postretirement Health and Life CostsAs of December 3120172016Millions Net Loss$21.1$19.8Prior Service Credit(4.6)(4.7)Total Unrecognized Postretirement Health and Life Cost$16.5$15.1Reconciliation of Net Postretirement Health and Life Amounts Recognized in Consolidated Balance SheetAs of December 3120172016Millions Net Loss (a)$(21.1)$(19.8)Prior Service Credit4.64.7Accumulated Net Periodic Benefit Cost in Excess of Contributions (a)(2.6)(4.0)Total Net Postretirement Health and Life Amounts Recognized in Consolidated Balance Sheet$(19.1)$(19.1)(a)Excludes gains, losses and contributions associated with irrevocable grantor trusts.ALLETE, Inc. 2017 Form 10-K128NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)Components of Net Periodic Postretirement Health and Life CostYear Ended December 31201720162015Millions Service Cost$4.4$3.9$4.3Interest Cost7.77.47.2Expected Return on Plan Assets(10.5)(11.2)(10.9)Amortization of Loss0.30.20.4Amortization of Prior Service Credit(2.0)(2.9)(3.0)Net Postretirement Health and Life Credit$(0.1)$(2.6)$(2.0)Other Changes in Postretirement Benefit Plan Assets and Benefit ObligationsRecognized in Other Comprehensive Income and Regulatory Assets or LiabilitiesYear Ended December 3120172016Millions Net Loss$1.6$13.5Prior Service Credit Arising During the Period(1.8)—Amortization of Prior Service Credit2.02.9Amortization of Loss(0.3)(0.2)Total Recognized in Other Comprehensive Income and Regulatory Assets or Liabilities$1.5$16.2Estimated Future Benefit Payments PensionPostretirementHealth and LifeMillions 2018$46.3$9.22019$46.2$9.52020$45.9$9.62021$45.8$9.62022$45.8$9.6Years 2023 – 2027$228.0$49.7The pension and postretirement health and life costs recorded in regulatory long-term assets or liabilities and accumulated other comprehensive income expected tobe recognized as a component of net pension and postretirement benefit costs for the year ending December 31, 2018 , are as follows: PensionPostretirementHealth and LifeMillions Net Loss$12.0$0.7Prior Service Credit—(1.8)Total Pension and Postretirement Health and Life Cost (Credit)$12.0$(1.1)ALLETE, Inc. 2017 Form 10-K129NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)Assumptions Used to Determine Benefit ObligationAs of December 3120172016Discount Rate Pension3.81 - 3.96%4.53%Postretirement Health and Life3.86%4.57%Rate of Compensation Increase3.70 - 4.10%3.70 - 4.30%Health Care Trend Rates Trend Rate5.00 - 6.73%5.00 - 7.00%Ultimate Trend Rate4.50%4.50%Year Ultimate Trend Rate Effective20382038Assumptions Used to Determine Net Periodic Benefit CostsYear Ended December 31201720162015Discount Rate4.53 - 4.57%4.72 - 4.73%4.30 - 4.33%Expected Long-Term Return on Plan Assets Pension7.50%8.00%8.00%Postretirement Health and Life6.00 - 7.50%6.40 - 8.00%6.40 - 8.00%Rate of Compensation Increase3.70 - 4.30%3.70 - 4.30%3.70 - 4.30%In establishing the expected long-term rate of return on plan assets, we determine the long-term historical performance of each asset class, adjust these for currenteconomic conditions, and utilizing the target allocation of our plan assets, forecast the expected long-term rate of return.The discount rate is computed using a bond matching study which utilizes a portfolio of high quality bonds that produce cash flows similar to the projected costs ofour pension and other postretirement plans.The Company utilizes actuarial assumptions about mortality to calculate the pension and postretirement health and life benefit obligations. The mortalityassumptions used to calculate our pension and other postretirement benefit obligations as of December 31, 2017 , considered a modified RP-2014 mortality tableand mortality projection scale.Sensitivity of a One Percent Change in Health Care Trend Rates One PercentIncreaseOne PercentDecreaseMillions Effect on Total of Postretirement Health and Life Service and Interest Cost$1.9($1.5)Effect on Postretirement Health and Life Obligation$23.4($19.3)Actual Plan Asset AllocationsPensionPostretirementHealth and Life (a) 2017201620172016Equity Securities53%49%64%60%Debt Securities38%39%31%34%Private Equity5%7%5%6%Real Estate4%5%—— 100%100%100%100%(a)Includes VEBAs and irrevocable grantor trusts.There were no shares of ALLETE common stock included in pension plan equity securities as of December 31, 2017 ( no shares as of December 31, 2016 ).ALLETE, Inc. 2017 Form 10-K130NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)The defined benefit pension plans have adopted a dynamic asset allocation strategy (glide path) that increases the invested allocation to fixed income assets as thefunding level of the plan increases to better match the sensitivity of the plan’s assets and liabilities to changes in interest rates. This is expected to reduce thevolatility of reported pension plan expenses. The postretirement health and life plans’ assets are diversified to achieve strong returns within managed risk. Equitysecurities are diversified among domestic companies with large, mid and small market capitalizations, as well as investments in international companies. Themajority of debt securities are made up of investment grade bonds.Following are the current targeted allocations as of December 31, 2017 :Plan Asset Target Allocations PensionPostretirementHealth and Life (a)Equity Securities56%60%Debt Securities35%37%Real Estate9%3% 100%100%(a)Includes VEBAs and irrevocable grantor trusts.Fair ValueFair 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 measurementdate (exit price). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and therisks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. We primarily applythe market approach for recurring fair value measurements and endeavor to utilize the best available information. Accordingly, we utilize valuation techniques thatmaximize the use of observable inputs and minimize the use of unobservable inputs. These inputs, which are used to measure fair value, are prioritized through thefair value hierarchy. 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 are as follows:Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reported date. Active markets are those in which transactions forthe asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. This category includes various U.S. equitysecurities, public mutual funds, and futures. These instruments are valued using the closing price from the applicable exchange or whose value is quoted andreadily traded daily.Level 2 — Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reported date. The types of assetsand liabilities included in Level 2 are typically either comparable to actively traded securities or contracts, such as treasury securities with pricing interpolated fromrecent trades of similar securities, or priced with models using highly observable inputs. This category includes various bonds and non-public funds whoseunderlying investments may be Level 1 or Level 2 securities.Level 3 — Significant inputs that are generally less observable from objective sources. The types of assets and liabilities included in Level 3 are those with inputsrequiring significant management judgment or estimation, such as the complex and subjective models and forecasts used to determine the fair value. This categoryincludes private equity funds and real estate valued through external appraisal processes. Valuation methodologies incorporate pricing models, discounted cashflow models, and similar techniques which utilize capitalization rates, discount rates, cash flows and other factors.ALLETE, Inc. 2017 Form 10-K131NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)Fair Value (Continued)Pension Fair Value Fair Value as of December 31, 2017Recurring Fair Value MeasuresLevel 1Level 2Level 3TotalMillions Assets: Equity Securities: U.S. Large-cap (a)—$108.6—$108.6U.S. Mid-cap Growth (a)—51.9—51.9U.S. Small-cap (a)—51.5—51.5International—122.3—122.3Debt Securities: Fixed Income—222.8—222.8Cash and Cash Equivalents$12.4——12.4Private Equity Funds——$33.233.2Real Estate——25.525.5Total Fair Value of Assets$12.4$557.1$58.7$628.2(a)The underlying investments consist of actively-managed funds managed to achieve the returns of certain U.S. equity securities large‑cap, mid-cap and small-cap indexes.Recurring Fair Value Measures Activity in Level 3Private Equity Funds Real EstateMillions Balance as of December 31, 2016$40.6$25.6Actual Return on Plan Assets7.11.7Purchases, Sales, and Settlements – Net(14.5)(1.8)Balance as of December 31, 2017$33.2$25.5ALLETE, Inc. 2017 Form 10-K132NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)Fair Value (Continued) Fair Value as of December 31, 2016Recurring Fair Value MeasuresLevel 1Level 2Level 3TotalMillions Assets: Equity Securities: U.S. Large-cap (a)$94.6——$94.6U.S. Mid-cap Growth (a)—$44.8—44.8U.S. Small-cap (a)—45.0—45.0International46.742.3—89.0Debt Securities: Fixed Income—200.1—200.1Cash and Cash Equivalents17.8——17.8Private Equity Funds——$40.640.6Real Estate——25.625.6Total Fair Value of Assets$159.1$332.2$66.2$557.5(a)The underlying investments classified under U.S. Equity Securities consist of money market funds (Level 1), mutual funds (Level 1) and actively-managed funds (Level 2),which are combined with futures, and settle daily, to achieve the returns of the U.S. Equity Securities Mid-cap Growth and Small-cap funds. Our exposure with respect tothese investments includes both the futures and the underlying investments. Recurring Fair Value Measures Activity in Level 3 Private Equity Funds Real EstateMillions Balance as of December 31, 2015 $43.3$28.9Actual Return on Plan Assets 5.02.3Purchases, Sales, and Settlements – Net (7.7)(5.6)Balance as of December 31, 2016 $40.6$25.6Postretirement Health and Life Fair Value Fair Value as of December 31, 2017Recurring Fair Value MeasuresLevel 1Level 2Level 3TotalMillions Assets: Equity Securities: (a) U.S. Large-cap$32.1——$32.1U.S. Mid-cap Growth24.3——24.3U.S. Small-cap15.5——15.5International35.8——35.8Debt Securities: Mutual Funds49.8——49.8Fixed Income—$4.5—4.5Cash and Cash Equivalents0.8——0.8Private Equity Funds——$8.28.2Total Fair Value of Assets$158.3$4.5$8.2$171.0(a)The underlying investments consist of mutual funds (Level 1). ALLETE, Inc. 2017 Form 10-K133NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)Fair Value (Continued)Recurring Fair Value Measures Activity in Level 3Private Equity FundsMillions Balance as of December 31, 2016$9.5Actual Return on Plan Assets2.6Purchases, Sales, and Settlements – Net(3.9)Balance as of December 31, 2017$8.2 Fair Value as of December 31, 2016Recurring Fair Value MeasuresLevel 1Level 2Level 3TotalMillions Assets: Equity Securities: (a) U.S. Large-cap$27.9——$27.9U.S. Mid-cap Growth20.7——20.7U.S. Small-cap14.0——14.0International27.9——27.9Debt Securities: Mutual Funds48.6——48.6Fixed Income—$4.6—4.6Cash and Cash Equivalents1.1——1.1Private Equity Funds——$9.59.5Total Fair Value of Assets$140.2$4.6$9.5$154.3(a)The underlying investments consist of mutual funds (Level 1). Recurring Fair Value Measures Activity in Level 3Private Equity FundsMillions Balance as of December 31, 2015$12.0Actual Return on Plan Assets1.4Purchases, Sales, and Settlements – Net(3.9)Balance as of December 31, 2016$9.5Accounting and disclosure requirements for the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Act) provide guidance for employersthat sponsor postretirement health care plans that provide prescription drug benefits. We provide a fully insured postretirement health benefit, including aprescription drug benefit, which qualifies us for a federal subsidy under the Act. The federal subsidy is reflected in the premiums charged to us by the insurancecompany.ALLETE, Inc. 2017 Form 10-K134NOTE 16. EMPLOYEE STOCK AND INCENTIVE PLANSEmployee Stock Ownership Plan. We sponsor an ESOP within the RSOP. Eligible employees may contribute to the RSOP plan as of their date of hire. In 1990,the ESOP issued a $75.0 million note to use as consideration for 2.8 million shares (1.9 million shares adjusted for stock splits) of our common stock. The notematured in December 2015. The ESOP shares were initially pledged as collateral for the debt. As the debt was repaid, shares were released from collateral andallocated to participants based on the proportion of debt service paid in the year. As shares were released from collateral, we reported compensation expense equalto the current market price of the shares less dividends on allocated shares. The dividends received by the ESOP are distributed to participants. Dividends onallocated ESOP shares are recorded as a reduction of retained earnings. Future ESOP employer allocations will be funded with contributions paid in either cash orthe issuance of ALLETE common stock at the Company’s discretion. ESOP compensation expense was $11.0 million in 2017 ( $9.2 million in 2016 ; $9.0 millionin 2015 ).According to the accounting standards for stock compensation, unallocated shares of ALLETE common stock held and purchased by the ESOP were treated asunearned ESOP shares and not considered outstanding for earnings per share computations. ESOP shares are included in earnings per share computations after theyare allocated to participants.As of December 31201720162015Millions ESOP Shares Allocated1.41.61.8Unallocated———Total1.41.61.8Fair Value of Unallocated Shares———Stock-Based Compensation. Stock Incentive Plan. Under our Executive Long-Term Incentive Compensation Plan (Executive Plan), share-based awards may beissued to key employees through a broad range of methods, including non-qualified and incentive stock options, performance shares, performance units, restrictedstock, restricted stock units, stock appreciation rights and other awards. There are 1.0 million shares of ALLETE common stock reserved for issuance under theExecutive Plan, of which 0.8 million of these shares remain available for issuance as of December 31, 2017 .The following types of share-based awards were outstanding in 2017, 2016 or 2015:Non-Qualified Stock Options . These options allow for the purchase of shares of common stock at a price equal to the market value of our common stock at thedate of grant. Options become exercisable beginning one year after the grant date, with one-third vesting each year over three years. Options may be exercisedup 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 theoptions can be exercised is three years. Employees have up to three months to exercise vested options upon voluntary termination or involuntary terminationwithout cause. All options are canceled upon termination for cause. All options vest immediately upon retirement, death, disability or a change of control, asdefined 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 vestingperiod if the employee is eligible for retirement. Stock options have not been granted since 2008 and none were outstanding as of December 31, 2017 .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. Expectedvolatility is estimated based on the historic volatility of our stock and the stock of our peer group companies. We utilize historical option exercise andemployee pre-vesting termination data to estimate the option life. The dividend growth rate is based upon historical growth rates in our dividends.ALLETE, Inc. 2017 Form 10-K135NOTE 16. EMPLOYEE STOCK AND INCENTIVE PLANS (Continued)Stock-Based Compensation (Continued)Performance Shares. Under the performance share awards plan, the number of shares earned is contingent upon attaining specific market goals over a three -year performance period. Market goals are measured by total shareholder return relative to a group of peer companies. 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 marketgoals achieved. In the case of termination of employment for any reason other than qualified retirement, death, or disability, no award will be earned. If thereis 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 targetperformance. The fair value of these awards is determined by the probability of meeting the total shareholder return goals. Compensation cost is recognizedover the three -year performance period based on our estimate of the number of shares which will be earned by the award recipients.Restricted Stock Units. Under the restricted stock units plan, shares for participants eligible for retirement vest monthly over a three -year period. Forparticipants not eligible for retirement, shares vest at the end of the three -year period. In the case of qualified retirement, death or disability, a pro rata portionof the award will be earned. In the case of termination of employment for any reason other than qualified retirement, death or disability, no award will beearned. If there is a change in control, a pro rata portion of the award will be earned. The fair value of these awards is equal to the grant date fair value.Compensation cost is recognized over the three -year vesting period based on our estimate of the number of shares which will be earned by the awardrecipients.Employee Stock Purchase Plan (ESPP). Under our ESPP, eligible employees may purchase ALLETE common stock at a 5 percent discount from the marketprice. Because the discount is not greater than 5 percent , we are not required to apply fair value accounting to these awards.RSOP . The RSOP is a contributory defined contribution plan subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended,and qualifies as an employee stock ownership plan and profit sharing plan. The RSOP provides eligible employees an opportunity to save for retirement.The following share-based compensation expense amounts were recognized in our Consolidated Statement of Income for the periods presented.Share-Based Compensation ExpenseYear Ended December 31201720162015Millions Performance Shares$2.1$1.8$1.8Restricted Stock Units1.00.80.8Total Share-Based Compensation Expense$3.1$2.6$2.6Income Tax Benefit$0.9$1.1$1.1There were no capitalized share-based compensation costs during the years ended December 31, 2017 , 2016 or 2015 .As of December 31, 2017 , the total unrecognized compensation cost for the performance share awards and restricted stock units not yet recognized in ourConsolidated Statement of Income was $2.4 million and $1.0 million , respectively. These amounts are expected to be recognized over a weighted-average periodof 1.7 years .ALLETE, Inc. 2017 Form 10-K136NOTE 16. EMPLOYEE STOCK AND INCENTIVE PLANS (Continued)Stock-Based Compensation (Continued)Non-Qualified Stock Options. The following table presents information regarding our outstanding stock options. 201720162015 Number ofOptionsWeighted-AverageExercisePriceNumber ofOptionsWeighted-AverageExercisePriceNumber ofOptionsWeighted-AverageExercisePriceOutstanding as of January 14,357$40.2939,654$44.3966,279$44.39Exercised(4,357)$40.29(35,297)$44.89(24,456)$44.52Forfeited————(2,169)$42.93Outstanding as of December 31——4,357$40.2939,654$44.39Exercisable as of December 31——4,357$40.2939,654$44.39Cash received from non-qualified stock options exercised was $0.3 million in 2017 . The intrinsic value of a stock award is the amount by which the fair value ofthe underlying stock exceeds the exercise price of the award. The total intrinsic value of options exercised was $0.1 million during 2017 ( $0.5 million in 2016 ;$0.2 million in 2015 ).Performance Shares. The following table presents information regarding our non-vested performance shares. 201720162015 Number ofSharesWeighted-AverageGrant DateFair ValueNumber ofSharesWeighted-AverageGrant DateFair ValueNumber ofSharesWeighted-AverageGrant DateFair ValueNon-vested as of January 1127,580$52.56119,540$52.72119,635$48.26Granted (a)50,729$62.9057,189$52.4343,583$58.95Unearned Grant Award(40,801)$46.27(42,126)$52.70(36,670)$45.41Forfeited(9,610)$58.29(7,023)$53.45(7,008)$53.49Non-vested as of December 31127,898$58.23127,580$52.56119,540$52.72(a) Shares granted include accrued dividends .There were 35,894 performance shares granted in January 2018 for the three -year performance period ending in 2020 . The ultimate issuance is contingent uponthe attainment of certain goals of ALLETE during the performance periods. The grant date fair value of the performance shares granted was $2.9 million . Therewere 58,293 performance shares awarded in February 2018 . The grant date fair value of the shares awarded was $3.5 million .ALLETE, Inc. 2017 Form 10-K137NOTE 16. EMPLOYEE STOCK AND INCENTIVE PLANS (Continued)Stock-Based Compensation (Continued)Restricted Stock Units. The following table presents information regarding our available restricted stock units. 201720162015 Number ofSharesWeighted-AverageGrant DateFair ValueNumber ofSharesWeighted-AverageGrant DateFair ValueNumber ofSharesWeighted-AverageGrant DateFair ValueAvailable as of January 154,728$51.7957,694$49.8653,888$44.47Granted (a)21,241$62.2020,351$50.2526,702$54.81Awarded(17,281)$49.72(19,661)$44.33(19,464)$41.44Forfeited(3,440)$56.00(3,656)$52.87(3,432)$51.52Available as of December 3155,248$56.1854,728$51.7957,694$49.86(a) Shares granted include accrued dividends.There were 14,569 restricted stock units granted in January 2018 for the vesting period ending in 2020 . The grant date fair value of the restricted stock unitsgranted was $1.1 million . There were 12,766 restricted stock units awarded in February 2018 . The grant date fair value of the shares awarded was $0.7 million .NOTE 17. BUSINESS SEGMENTSWe present three reportable segments: Regulated Operations, ALLETE Clean Energy, and U.S. Water Services. We measure performance of our operationsthrough budgeting and monitoring of contributions to consolidated net income by each business segment.Regulated Operations includes three operating segments which consist of our regulated utilities, Minnesota Power and SWL&P, as well as our investment in ATC.ALLETE Clean Energy is our business focused on developing, acquiring and operating clean and renewable energy projects. U.S. Water Services is our integratedwater management company. The ALLETE Clean Energy and U.S. Water Services reportable segments comprise our Energy Infrastructure and Related Servicesbusinesses. We also present Corporate and Other which includes two operating segments, BNI Energy, our coal mining operations in North Dakota, and ALLETEProperties, our legacy Florida real estate investment, along with other business development and corporate expenditures, unallocated interest expense, a smallamount of non-rate base generation, approximately 5,000 acres of land in Minnesota, and earnings on cash and investments.ALLETE, Inc. 2017 Form 10-K138NOTE 17. BUSINESS SEGMENTS (Continued)Year Ended December 31201720162015Millions Operating Revenue Regulated Operations$1,063.8$1,000.7$991.2 Energy Infrastructure and Related Services ALLETE Clean Energy (a)80.580.5262.1U.S. Water Services151.8137.5119.8 Corporate and Other123.2121.0113.3Total Operating Revenue$1,419.3$1,339.7$1,486.4Net Income (Loss) Attributable to ALLETE (b)(c) Regulated Operations$128.4$135.5$131.6 Energy Infrastructure and Related Services ALLETE Clean Energy41.513.429.9U.S. Water Services10.71.50.9 Corporate and Other(8.4)4.9(21.3)Total Net Income Attributable to ALLETE$172.2$155.3$141.1Depreciation and Amortization Regulated Operations$132.6$154.3$135.1 Energy Infrastructure and Related Services ALLETE Clean Energy23.422.318.7U.S. Water Services9.88.97.3 Corporate and Other11.710.38.9Total Depreciation and Amortization$177.5$195.8$170.0Operating Expenses – Other (d) ALLETE Clean Energy—$3.3—Corporate and Other$(0.7)(13.6)$36.3Total Operating Expenses – Other$(0.7)$(10.3)$36.3Interest Expense (c) Regulated Operations$57.0$52.1$53.9 Energy Infrastructure and Related Services ALLETE Clean Energy4.25.83.3U.S. Water Services1.61.71.4 Corporate and Other10.314.58.6 Eliminations(5.3)(3.8)(2.3)Total Interest Expense$67.8$70.3$64.9Equity Earnings in ATC Regulated Operations$22.5$18.5$16.3(a)Includes the construction and sale of a wind energy facility by ALLETE Clean Energy to Montana-Dakota Utilities for $197.7 million in 2015.(b)Net income in 2017 included a favorable impact of $13.0 million after-tax due to the remeasurement of deferred income tax assets and liabilities resulting from the TCJA,which consisted of a $23.6 million after-tax benefit for ALLETE Clean Energy, a $9.2 million after-tax benefit for U.S. Water Services and a $19.8 million after-tax expensefor Corporate and Other. The TCJA did not have an impact on net income for our Regulated Operations as the remeasurement of deferred income tax assets and liabilitiesprimarily resulted in the recording of regulatory assets and liabilities. (See Note 1. Operations and Significant Accounting Policies, and Note 4. Regulatory Matters.)(c)Includes interest expense resulting from intercompany loan agreements and allocated to certain subsidiaries. The amounts are eliminated in consolidation. (d)See Note 1. Operations and Significant Accounting Policies.ALLETE, Inc. 2017 Form 10-K139NOTE 17. BUSINESS SEGMENTS (Continued)Year Ended December 31201720162015Millions Income Tax Expense (Benefit) (a) Regulated Operations (b)$27.2$5.9$24.4 Energy Infrastructure and Related Services ALLETE Clean Energy(14.2)8.121.0U.S. Water Services(7.8)1.40.9 Corporate and Other (b)9.54.4(21.0)Total Income Tax Expense$14.7$19.8$25.3(a)Income tax expense in 2017 included an income tax benefit of $13.0 million due to the remeasurement of deferred income tax assets and liabilities resulting from the TCJA,which consisted of income tax benefits of $23.6 million for ALLETE Clean Energy and $9.2 million for U.S. Water Services as well as additional income tax expense of$19.8 million for Corporate and Other. The TCJA did not have an impact on income tax expense for our Regulated Operations as the remeasurement of deferred income taxassets and liabilities primarily resulted in the recording of regulatory assets and liabilities. (See Note 1. Operations and Significant Accounting Policies, and Note 4.Regulatory Matters.)(b)In 2017, Regulated Operations includes $14.0 million of income tax expense related to North Dakota investment tax credits transferred to Corporate and Other and higherpre-tax income for the favorable impact for the regulatory outcome of the MPUC’s modification of its November 2016 order on the allocation of North Dakota investmenttax credits. There was no impact to net income for Regulated Operations. Corporate and Other recorded an offsetting income tax benefit of $7.9 million in 2017. In 2016,Regulated Operations includes $15.0 million of income tax benefit for North Dakota investment tax credits transferred from Corporate and Other and lower pre-tax incomerelated to the adverse impact for the regulatory outcome of the November 2016 MPUC order. There was no impact to net income for Regulated Operations. Corporate andOther recorded an offsetting income tax expense of $8.8 million in 2016. (See Note 4. Regulatory Matters.)As of December 3120172016Millions Assets Regulated Operations (a)$3,886.6$3,823.9 Energy Infrastructure and Related Services ALLETE Clean Energy600.5566.0U.S. Water Services292.4264.1 Corporate and Other300.5222.9Total Assets (a)$5,080.0$4,876.9Capital Expenditures Regulated Operations$177.1$121.8 Energy Infrastructure and Related Services ALLETE Clean Energy56.1106.9U.S. Water Services4.43.7 Corporate and Other28.915.4Total Capital Expenditures$266.5$247.8(a)See Note 1. Operations and Significant Accounting Policies – Revision of Prior Balance Sheet.ALLETE, Inc. 2017 Form 10-K140NOTE 18. 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 EndedMar. 31Jun. 30Sept. 30Dec. 31Millions Except Earnings Per Share 2017 Operating Revenue$365.6$353.3$362.5$337.9Operating Income$72.6$55.0$69.0$33.2Net Income Attributable to ALLETE$49.0$36.9$44.9$41.4Earnings Per Share of Common Stock Basic$0.97$0.73$0.88$0.81Diluted$0.97$0.72$0.88$0.812016 Operating Revenue$333.8$314.8$349.6$341.5Operating Income$66.8$42.2$53.4$61.1Net Income Attributable to ALLETE$45.9$24.8$40.3$44.3Earnings Per Share of Common Stock Basic$0.93$0.50$0.82$0.89Diluted$0.93$0.50$0.81$0.892015 Operating Revenue$320.0$323.3$462.5$380.6Operating Income$56.4$39.5$85.2$29.6Net Income Attributable to ALLETE$39.9$22.5$60.4$18.3Earnings Per Share of Common Stock Basic$0.85$0.46$1.24$0.37Diluted$0.85$0.46$1.23$0.37ALLETE, Inc. 2017 Form 10-K141Schedule IIALLETEValuation and Qualifying Accounts and Reserves Balance atBeginning ofPeriodAdditionsDeductionsfromReserves (a)Balance atEnd ofPeriod Charged toIncomeOtherChargesMillions Reserve Deducted from Related Assets Reserve For Uncollectible Accounts 2015 Trade Accounts Receivable$1.1$1.6—$1.7$1.0Finance Receivables – Long-Term$0.6———$0.62016 Trade Accounts Receivable$1.0$4.1—$2.0$3.1Finance Receivables – Long-Term$0.6——$0.6—2017 Trade Accounts Receivable$3.1$0.8—$1.8$2.1Finance Receivables – Long-Term—————Deferred Asset Valuation Allowance 2015 Deferred Tax Assets$22.1$9.5——$31.62016 Deferred Tax Assets$31.6$11.4——$43.02017 Deferred Tax Assets$43.0$17.0——$60.0(a)Includes uncollectible accounts written-off.ALLETE, Inc. 2017 Form 10-K142Exhibit 10(i)7ALLETEEXECUTIVE LONG-TERM INCENTIVE COMPENSATION PLANRESTRICTED STOCK UNIT GRANT[Effective 2018][Eligible Executive Employees]Name In accordance with the terms of ALLETE’s Executive Long-Term Incentive Compensation Plan, as amended (the "Plan"), and asdetermined by and through the Executive Compensation Committee of ALLETE’s Board of Directors, ALLETE hereby grants toyou (the "Participant") Restricted Stock Units (“RSU’s”) as set forth below, payable in the form of ALLETE Common Stock, subjectto the terms and conditions set forth in this Grant, including Annex A hereto, and all documents incorporated herein by reference:Number of Restricted Stock Units: Date of Grant: Vesting Period: This Grant is made in accordance with the Plan.Further terms and conditions of the Grant are set forth in Annex A hereto, which is an integral part of this Grant.Any term, provision or condition applicable to the Restricted Stock Units set forth in the Plan and not set forth herein is herebyincorporated by reference. To the extent any provision hereof is inconsistent with a Plan provision, the Plan provision will govern.YOU SHOULD CAREFULLY READ AND REVIEW THE TERMS AND CONDITIONS SET FORTH IN THIS GRANT,INCLUDING ANNEX A HERETO, WHICH CONTAINS IMPORTANT INFORMATION, INCLUDING MANDATORYCLAIMS AND ARBITRATION PROCEDURES. You will be deemed to have accepted this Grant on the Date of Grant, and all its associated terms and conditions, including themandatory claims and arbitration procedures set forth in Annex A, unless you notify the Company of your non-acceptance of theGrant by contacting the Manager–Compensation and Benefits, in writing within sixty (60) days of the Date of Grant.IN WITNESS WHEREOF, ALLETE has caused this Grant to be executed by its Chairman, President and Chief Executive Officer asof the date and year first above written.ALLETE By: Chairman, President & CEO Attachment: Annex A1ANNEX ATOALLETEEXECUTIVE LONG-TERM INCENTIVE COMPENSATION PLANRESTRICTED STOCK UNIT GRANTThe grant of restricted stock units (each, a “RSU”) under the ALLETE Executive Long-Term Incentive Compensation Plan(the “Plan”), evidenced by the Grant to which this is annexed, is subject to the following additional terms and conditions:1. Form and Timing of Payment. Subject to the provisions hereof, each RSU will be paid in the form of one share of ALLETEcommon stock (each, a “Share”), plus accrued Dividend Equivalents. Shares will be deposited into your ALLETE Invest Direct planaccount. Except as otherwise provided in sections 3 and 4, below, payment will be made during the period ending sixty days after theend of the vesting period; provided, however, the Participant will not be permitted, directly or indirectly, to designate the taxableyear of the distribution. Payment will be subject to withholding Shares equal in value to the minimum amount of tax required to bewithheld by law.2. Dividend Equivalents . You will receive Dividend Equivalents in connection with the RSUs granted. Dividend Equivalents willbe calculated and credited to you at the time the underlying RSUs are paid. Dividend Equivalents will be in the form of additionalRSUs, which will be added to the number of RSUs subject to the grant, and will equal the number of Shares (including fractionalShares) that could have been purchased on applicable dividend payment dates, based on the closing ALLETE common stock price asreported in the consolidated transaction reporting system on that date, with cash dividends that would have been paid on theunderlying RSUs, if such RSUs were Shares. Dividend Equivalents will only become payable if and to the extent the underlyingRSUs vest and become payable.3. Payment Upon Retirement, Death or Disability; Forfeiture Upon Other Termination of Employment, Default on CertainAgreements or Unsatisfactory Job Performance .3.1 Subject to Section 3.4 below, if during the vesting period you (i) Retire, (ii) die while employed by a RelatedCompany, or (iii) become Disabled, a portion of the unvested RSUs subject to the Grant will vest and be paid to you (or yourbeneficiary or estate) during the period ending sixty days after such event; provided, however, you will not be permitted,directly or indirectly, to designate the taxable year of the distribution. Except as otherwise provided in Section 4, paymentpursuant to this Section 3.1 will be prorated, after giving effect to accumulated Dividend Equivalents, based on the number ofwhole calendar months within the vesting period that had elapsed as of the date of Retirement, death or Disability in relationto the number of calendar months in the vesting period. For purposes of this calculation, you will be credited with a wholemonth if you were employed on the 15 th of the month.3.2 Except as otherwise provided in Section 4, if during the vesting period or prior to payment of all RSUs you have aSeparation from Service for any reason other than those specified in Section 3.1 above, all unvested or unpaid RSUs subjectto the Grant (and related Dividend Equivalents) will be forfeited on the date of such Separation from Service.13.3 If during the vesting period or prior to payment of all RSUs you are demoted, you default on any written agreementwith a Related Company related to a restrictive employment covenant (such as confidentiality, non-disclosure, non-competition, non-solicitation, or the like), or if ALLETE determines, in its sole discretion, that your job performance isunsatisfactory, ALLETE may cancel or amend your grant relating to any unpaid RSUs, resulting in the forfeiture of someportion or all of your unpaid RSUs (and related Dividend Equivalents).3.4 Notwithstanding anything herein to the contrary, if you become entitled to a payment of the RSUs by reason of yourRetirement and if you are a Specified Employee on the date of such Retirement, payment shall not be made until the earlierof: (i) the expiration of the six-month period beginning on the date of your Retirement, or (ii) the date of your death. Thepayment to which a Specified Employee would otherwise be entitled during this six-month period shall be paid, together withDividend Equivalents that have accrued during this six-month delay, during the seventh month following the date of theParticipant’s Retirement, or, if earlier, the date of the Participant’s death.4. Change in Control . Upon a Change in Control, unless the Committee provides otherwise prior to the Change in Control,outstanding unvested RSUs shall be prorated (as described below) and such prorated RSUs shall immediately vest and be payable toyou during the period ending sixty days after the Change in Control. The RSUs will not be subject to proration and immediately vest,however, if and to the extent that the Grant is, in connection with the Change in Control, fully assumed by the successor corporationor parent thereof; in such case, the RSUs shall be prorated and immediately vest upon your termination of employment by thesuccessor corporation for reasons other than cause within 18 months following the Change in Control and be payable to theParticipant during the period ending sixty days after the termination of employment. Any payment on account of or in connectionwith a Change in Control will be prorated, after giving effect to the accumulation of Dividend Equivalents, based on the number ofwhole calendar months within the three-year vesting period that had elapsed as of the date of the Change in Control or termination ofemployment, as applicable, in relation to the number of calendar months in the three-year vesting period. For purposes of thiscalculation, you will be credited with a whole month if you were employed on the 15 th of the month. In no event will you bepermitted, directly or indirectly, to designate the taxable year of the distribution on account of or in connection with a Change inControl.5. Compensation Recovery Policy . The Grant is subject to the terms of any compensation recovery policy or policies establishedby ALLETE as may be amended from time to time (“Compensation Recovery Policy”). ALLETE hereby incorporates into the Grantthe terms of the Compensation Recovery Policy.26. Section 409A Compliance. This Grant is intended to comply with Section 409A or an exemption thereunder, and, accordingly,to the maximum extent permitted, the Plan and the Grant shall be interpreted and administered in compliance therewith.Notwithstanding any other provision of the Grant, payments provided pursuant to the Grant may only be made upon an event and ina manner that complies with Section 409A or an applicable exemption. Any payments pursuant to the Grant that may be excludedfrom Section 409A as a short-term deferral shall be excluded from Section 409A to the maximum extent possible. To the extent thatany provision of the Grant would cause a conflict with the requirements of Section 409A or would cause the administration of theGrant to fail to satisfy Section 409A, such provision shall be deemed null and void to the extent permitted by applicable law.Nothing herein shall be construed as a guarantee of any particular tax treatment. ALLETE makes no representation that the Grantcomplies with Section 409A and in no event shall ALLETE be liable for the payment of any taxes and penalties that you may incurunder Section 409A.7. Claims Procedure and Arbitration . The Grant is subject to the following claims procedures:7.1 Mandatory Claims Procedures. If you or any person acting on your behalf (the “Claimant”) has any claim ordispute related in any way to the Grant or to the Plan, the Claimant must follow these claims procedures. All claims must bebrought no later than one year following the date on which the claim first arose and any claim not submitted within such timelimit will be waived.7.2 Claim Submission . Any claim must be made in writing to the Claims Administrator. The ClaimsAdministrator, or its delegate, shall notify the Claimant of the resolution of the Claim within 90 days after receipt of theclaim; provided, however, if the Claims Administrator determines that an extension is necessary, the 90-day period shall beextended to up to 180 days upon notice to that effect to the Claimant.7.3 Notice of Denial . If a claim is wholly or partially denied, the denial notice shall contain (i) the reason orreasons for denial of the claim, and (ii) references to the pertinent Plan provisions upon which the denial is based. Unless theclaim is submitted for arbitration as provided below and in the Plan, the Claims Administrator’s decision or action shall befinal, conclusive and binding on all persons having any interest in the Plan.7.4 Arbitration . If, after exhausting the procedures set forth above, a Claimant wishes to pursue legal action, anyaction by the Claimant with respect to a claim, must be resolved by arbitration in the manner described herein.a)Time Limits . A Claimant seeking arbitration of any determination by the Claims Administrator must, withinsix (6) months of the date of the Claims Administrator’s final decision, file a demand for arbitration with theAmerican Arbitration Association submitting the Claim to resolution by arbitration. A Claimant waives anyclaim not filed timely in accordance with this Section.b)Rules Applicable to Arbitration . The arbitration process shall be conducted in accordance with theCommercial Law Rules of the American Arbitration Association.c)Venue . The arbitration shall be conducted in Minneapolis, Minnesota.3d)Binding Effect . The decision of the arbitrator with respect to the claim will be final and binding upon theCompany and the Claimant. BY PARTICIPATING IN THE PLAN, AND ACCEPTING THE GRANT,YOU, ON BEHALF OF YOURSELF AND ANY PERSON WITH A CLAIM RELATING TO YOURGRANT, AGREE TO WAIVE ANY RIGHT TO SUE IN COURT OR TO PURSUE ANY OTHER LEGALRIGHT OR REMEDY THAT MIGHT OTHERWISE BE AVAILABLE IN CONNECTION WITH THERESOLUTION OF THE CLAIM.e)Enforceability . Judgment upon any award entered by an arbitrator may be entered in any court havingjurisdiction over the parties.f)Waiver of Class, Collective, and Representative Actions . Any claim shall be heard without consolidation ofsuch claims with any other person or entity. To the fullest extent permitted by law, whether in court or inarbitration, by participating in the Plan, you waive any right to commence, be a party to in any way, or be anactual or putative class member of any class, collective, or representative action arising out of or relating toany claim, and you agree that any claim may only be initiated or maintained and decided on an individualbasis. g)Standard of Review . Any decision of an arbitrator on a claim shall be limited to determining whether theClaims Administrator’s decision or action was arbitrary or capricious or was unlawful. The arbitrator shalladhere to and apply the deferential standard of review set out in Conkright v. Frommert , 130 S. Ct. 1640(2010), Metropolitan Life Insurance Co. v. Glenn , 554 U.S. 105 (2008), and Firestone Tire and RubberCompany v. Bruch, 489 U.S. 101 (1989), and shall accord due deference to the determinations, interpretations,and construction of the Plan document by the Claim’s Administrator.h)General Procedures .i.Arbitration Rules . The arbitration hearing will be conducted under the AAA Commercial ArbitrationRules (as amended or revised from time to time by AAA) (hereinafter the “AAA Rules”), before oneAAA arbitrator who is from the Large, Complex Case Panel and who has experience with mattersinvolving executive compensation and equity compensation plans. The AAA Rules and the terms andprocedures set forth here may conflict on certain issues. To the extent that the procedures set forth hereconflict with the AAA Rules, the procedures set forth here shall control and be applied by thearbitrator. Notwithstanding the amount of the claim, the Procedures for Large, Complex CommercialDisputes shall not apply.ii.Substantive Law . The arbitrator shall apply the substantive law (and the laws of remedies, if applicable),of Minnesota or federal law, or both, depending upon the claim. Except to the extent required byapplicable law, the Claimant shall keep any arbitration decision or award strictly confidential and notdisclose to anyone other than his or her spouse, attorney, or tax advisor.4iii.Authority . The arbitrator shall have jurisdiction to hear and rule on prehearing disputes and is authorizedto hold prehearing conferences by telephone or in person as the arbitrator deems necessary. Thearbitrator will have the authority to hear a motion to dismiss and/or a motion for summary judgment byany party and in doing so shall apply the standards governing such motions under the Federal Rules ofCivil Procedure.iv.Pre-Hearing Procedures . Each party may take the deposition of not more than one individual and theexpert witness, if any, designated by another party. Each party will have the right to subpoenawitnesses in accordance with the Federal Arbitration Act, Title 9 of the United States Code. Additionaldiscovery may be had only if the arbitrator so orders, upon a showing of substantial need.v.Fees and Costs . Administrative arbitration fees and arbitrator compensation shall be borne equally by theparties, and each party shall be responsible for its own attorney’s fees, if any; provided, however, thatthe Committee will authorize payment by the Company of all administrative arbitration fees, arbitratorcompensation and attorney’s fees if the Committee concludes that a Claimant has substantiallyprevailed on his or her claims. Unless prohibited by statute, the arbitrator shall assess attorney’s feesagainst a party upon a showing that such party’s claim, defense or position is frivolous, orunreasonable, or factually groundless. If either party pursues a claim by any means other than those setforth in this Article, the responding party shall be entitled to dismissal of such action, and the recoveryof all costs and attorney’s fees and losses related to such action, unless prohibited by statute.(i)Interstate Commerce and the Federal Arbitration Act . The Company is involved in transactions involvinginterstate commerce, and the employee’s employment with the Company involves such commerce.Therefore, the Federal Arbitration Act, Title 9 of the United States Code, will govern the interpretation,enforcement, and all judicial proceedings regarding the arbitration procedures in this Section.8. Ratification of Actions. By receiving the Grant or other benefit under the Plan, you and each person claiming under or throughyou shall be conclusively deemed to have indicated your acceptance and ratification of, and consent to, any action taken under thePlan or the Grant by ALLETE, the Board, or the Committee.9. No Impact on Other Benefits . The Grant or payment on account thereof shall not be taken into account in determining anybenefits under any severance, retirement, welfare, insurance or other benefit plan of ALLETE or any affiliate except to the extentotherwise expressly provided in writing in such other plan or an agreement thereunder.10. Notices. Any notice hereunder to ALLETE shall be addressed to ALLETE, 30 West Superior Street, Duluth, Minnesota55802, Attention: Manager - Compensation and Benefits, Human Resources, and any notice hereunder to you shall be directed toyour address as indicated by ALLETE’s records, subject to the right of either party to designate at any time hereafter in writing someother address.511. Governing Law and Severability. To the extent not preempted by the Federal law, the Grant will be governed by and construedin accordance with the laws of the State of Minnesota, without regard to its conflicts of law provisions. In the event any provision ofthe Grant shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Grant,and the Grant shall be construed and enforced as if the illegal or invalid provision had not been included.12. Definitions. Capitalized terms not otherwise defined herein shall have the meanings given them in the Plan. The followingdefinitions apply to the Grant and this Annex A:12.1 “ Claims Administrator” means ALLETE’s Chief Executive Officer, unless the claimant is (or is acting on behalfof) an ALLETE executive officer (within the meaning of Exchange Act Rule 3b-7), in which case the Claims Administratoris the Executive Compensation Committee of the Board of Directors. 12.2 “ Change in Control ” means the earliest of:(i)the date any one Person, or more than one Person acting as a group (as the term “group” is used in TreasuryRegulations section 1.409A-3(i)(5)(v)(B)), acquires ownership of stock of the Company that, together withstock previously held by the acquirer, constitutes more than fifty (50%) percent of the total fair market value ortotal voting power of Company stock. If any one Person, or more than one Person acting as a group, isconsidered to own more than fifty (50%) percent of the total fair market value or total voting power of Companystock, the acquisition of additional stock by the same Person or Persons acting as a group does not cause aChange in Control. An increase in the percentage of stock owned by any one Person, or Persons acting as agroup, as a result of a transaction in which Company acquires its stock in exchange for property, is treated as anacquisition of stock;(ii)the date any one Person, or more than one Person acting as a group (as the term “group” is used in TreasuryRegulations section 1.409A-3(i)(5)(v)(B)), acquires (or has acquired during the twelve (12) month periodending on the date of the most recent acquisition by that Person or Persons) ownership of Company stockpossessing at least thirty (30%) percent of the total voting power of Company stock;(iii)the date a majority of the members of the Company’s board of directors is replaced during any twelve (12)month period by directors whose appointment or election is not endorsed by a majority of the members of theboard of directors prior to the date of appointment or election; or(iv)the date any one Person, or more than one Person acting as a group (as the term “group” is used in TreasuryRegulations section 1.409A-3(i)(5)(v)(B)), acquires (or has acquired during the twelve (12) month periodending on the date of the most recent acquisition by that Person or Persons) assets from the Company that havea total gross fair market value equal to at least forty (40%) percent of the total gross fair market value of all theCompany’s assets immediately prior to the acquisition or acquisitions. For this purpose, “gross fair marketvalue” means the value of the corporation’s assets, or the value of the assets being disposed of, without regard toany liabilities associated with these assets.6In determining whether a Change in Control occurs, the attribution rules of Code section 318 apply to determine stockownership. The stock underlying a vested option is treated as owned by the individual who holds the vested option, and thestock underlying an unvested option is not treated as owned by the individual who holds the unvested option. The term“Person” used in this definition means any individual, corporation (including any non-profit corporation), general, limited orlimited liability partnership, limited liability company, joint venture, estate, trust, firm, association, organization or other entityor any governmental or quasi-governmental authority, organization, agency or body.12.3 “ Code ” means the Internal Revenue Code of 1986, as it may be amended from time to time12.4 “ Disability ” or “ Disabled ” means a physical or mental condition in which the Participant is:(i)unable to engage in any substantial gainful activity by reason of any medically determinable physical or mentalimpairment that can be expected to result in death or can be expected to last for a continuous period of not lessthan twelve (12) months;(ii)by reason of any medically determinable physical or mental impairment which can be expected to result indeath or can be expected to last for a continuous period of not less than twelve (12) months, receiving incomereplacement benefits for a period of not less than three (3) months under the Employer’s accident and healthplan;(iii)determined to be totally disabled by the Social Security Administration; or(iv)disabled pursuant to an Employer-sponsored disability insurance arrangement provided that the definition ofdisability applied under such disability insurance program complies with the foregoing definition of Disability.12.5 “ Related Company ” means the ALLETE, Inc. and all persons with whom the ALLETE, Inc. would be considered asingle employer under Code section 414(b) (employees of controlled group of corporations), and all persons with whom suchperson would be considered a single employer under Code section 414(c) (employees of partnerships, proprietorships, etc.,under common control); provided that in applying Code sections 1563(a)(1), (2), and (3) for purposes of determining acontrolled group of corporations under Code section 414(b), the language “at least 50 percent” is used instead of “at least 80percent” each place it appears in Code sections 1563(a)(1), (2), and (3), and in applying Treasury Regulations section1.414(c)-2 for purposes of determining trades or businesses (whether or not incorporated) that are under common control forpurposes of Code section 414(c), “at least 50 percent” is used instead of “at least 80 percent” each place it appears inTreasury Regulations section 1.414(c)-2.12.6 “ Retirement ” or “ Retires ” means Separation from Service, for reasons other than death or Disability, on or afterattaining normal retirement age or early retirement age as defined in the most applicable qualified retirement plan sponsoredby the Related Company that employed the Participant immediately preceding the Separation from Service, without regard towhether the Participant is a participant in such plan, or if the employer Related Company does not sponsor such retirementplan, on or after attaining Normal Retirement Age or Early Retirement Age as defined in the ALLETE and AffiliatedCompanies Retirement Plan A, without regard to whether the Participant is a participant under the ALLETE and AffiliatedCompanies Retirement Plan A.712.7 “ Section 409A ” means Section 409A of the Code and Treasury Regulations section 1.409A-1 et seq., as they bothmay be amended from time to time, or other guidance issued by the Treasury Department and Internal Revenue Servicethereunder.12.8 “ Separation from Service ” means that the Participant terminates employment within the meaning of TreasuryRegulations section 1.409A-1(h) and other applicable guidance with all Related Companies. Whether a termination ofemployment has occurred is determined under the facts and circumstances, and a termination of employment shall occur if allRelated Companies and the Participant reasonably anticipate that no further services shall be performed after a certain date orthat the level of bona fide services the Participant shall perform after such date (as an employee or an independent contractor)shall permanently decrease to no more than 20 percent of the average level of bona fide services performed (whether as anemployee or an independent contractor) over the immediately preceding 36-month period (or the full period of services to theRelated Companies if the Participant has been providing services to the Related Companies less than 36 months). AParticipant shall not be considered to separate from service during a bona fide leave of absence for less than six (6) months orlonger if the Participant retains a right to reemployment with any Related Company by contract or statute. With respect todisability leave, a Participant shall not be considered to separate from service for 29 months unless the Participant otherwiseterminates employment or is terminated by all Related Companies.12.9 “ Specified Employee ” means an Participant who is subject to the six-month delay rule described in Code section409A(2)(B)(i), determined in accordance with guidelines adopted by the Board from time to time as permitted by Section409A of the Code and Treasury Regulations section 1.409A-1 et seq., as they both may be amended from time to time, andother guidance issued by the Treasury Department and Internal Revenue Service thereunder.8Exhibit 10(i)8ALLETEEXECUTIVE LONG-TERM INCENTIVE COMPENSATION PLANPERFORMANCE SHARE GRANT[Effective 2018][Eligible Executive Employees]NameIn accordance with the terms of ALLETE’s Executive Long-Term Incentive Compensation Plan, as amended (the "Plan"), and asdetermined by and through the Executive Compensation Committee of ALLETE’s Board of Directors, ALLETE hereby grants toyou (the "Participant") Performance Shares, as set forth below, subject to the terms and conditions set forth in this Grant, includingAnnex A and Annex B hereto and all documents incorporated herein by reference:Number of Performance Shares Granted: Date of Grant: Performance Period: Performance Goals:See Annex BThis Grant is made in accordance with the Plan.Further terms and conditions of the Grant are set forth in Annex A hereto and Performance Goals are set forth in Annex B hereto,both of which are integral parts of this Grant.Any term, provision or condition applicable to the Performance Shares set forth in the Plan and not set forth herein is herebyincorporated by reference. To the extent any provision hereof is inconsistent with a Plan provision, the Plan provision will govern.YOU SHOULD CAREFULLY READ AND REVIEW THE TERMS AND CONDITIONS SET FORTH IN THIS GRANT,INCLUDING ANNEX A HERETO , WHICH CONTAINS IMPORTANT INFORMATION, INCLUDING MANDATORYCLAIMS AND ARBITRATION PROCEDURES.You will be deemed to have accepted this Grant on the Date of Grant and all its associated terms and conditions, including themandatory claims and arbitration procedures set forth in Annex A, unless you notify the Company of your non-acceptance of theGrant by contacting the Manager–Compensation and Benefits, in writing within sixty (60) days of the Date of Grant.IN WITNESS WHEREOF, ALLETE has caused this Grant to be executed by its Chairman, President and Chief Executive Officer asof the date and year first above written.ALLETEBy: Chairman, President & CEOAttachments: Annex A and Annex BANNEX ATOALLETEEXECUTIVE LONG-TERM INCENTIVE COMPENSATION PLANPERFORMANCE SHARE GRANT The Performance Share Grant to which this is annexed is subject to the following additional terms and conditions:1. Dividend Equivalents. You will receive Dividend Equivalents with respect to Performance Shares that are earned andpayable. Dividend Equivalents are calculated and credited to you after the Performance Period has ended. The Dividend Equivalentswill be in the form of additional Performance Shares, which will be added to the number of Performance Shares earned, and willequal the number of Shares (including fractional Shares) that could have been purchased on applicable dividend payment dates,based on the closing ALLETE common stock price as reported in the consolidated transaction reporting system on that date, withcash dividends that would have been paid on underlying Performance Shares, if such Performance Shares were Shares. DividendEquivalents will only become payable if and to the extent the underlying Performance Shares are earned and become payable.2. Satisfaction of Goals. Performance Shares remain unearned unless and until Performance Goals are achieved. After thePerformance Period has ended, the Executive Compensation Committee (the “Committee”) will determine the extent to which thePerformance Goals have been met. You will not earn any Performance Shares if the threshold performance level has not been met.Subject to the provisions of Section 4 below and to provisions in the Plan for change in control, Performance Shares will be earnedas follows: If the threshold level has been met, you will have earned 50% of the Performance Shares (as increased by the DividendEquivalents). If the target level has been met, you will have earned 100% of the Performance Shares (as increased by the DividendEquivalents). If the superior level has been met, you will have earned 200% of the Performance Shares (as increased by the DividendEquivalents). Straight line interpolation will be used to determine earned awards based on achievement of goals between thethreshold, target and superior levels.3. Payment. Subject to the provisions of Section 4 below and to provisions in the Plan for Change in Control, PerformanceShares (as increased by the Dividend Equivalents) shall be paid in full after the Committee has determined the extent to whichPerformance Goals have been met and within two and one half months after the end of the Performance Period. Payment shall bemade, after withholding Performance Shares in an amount equal in value to the minimum amount of tax required to be withheld bylaw, by depositing ALLETE common stock into your Invest Direct account. Performance Share awards shall not vest until paid.4. Payment Upon Death, Retirement or Disability; Forfeiture of Unvested Performance Shares Upon Demotion,Unsatisfactory Job Performance, Default on Certain Agreements or Other Separation from Service.14.1 If during a Performance Period you (i) Retire, (ii) die while employed by a Related Company, or (iii) becomeDisabled, you (or your beneficiary or estate) will receive a payment of any Performance Shares (as increased by the DividendEquivalents) after the end of the Performance Period in accordance with Section 3 above. The payment shall be proratedbased upon the number of whole calendar months within the Performance Period which had elapsed as of the date of death,Retirement or Disability in relation to the number of calendar months in the full Performance Period. A whole month iscounted in the calculation if you were in the position as of the 15 th of the month.4.2 If after the end of a Performance Period, but before any or all Performance Shares have been paid, you Retire,die or become Disabled, you (or your beneficiary or estate) will be entitled to full payout of all earned Performance Shares(as increased by the Dividend Equivalents) in accordance with Section 3 above.4.3 If, prior to payment of all Performance Shares, you are demoted, you default on any written agreement with aRelated Company related to a restrictive employment covenant (such as confidentiality, non-disclosure, non-competition,non-solicitation, or the like) or ALLETE determines, in its sole discretion, that your job performance is unsatisfactory,ALLETE reserves the right to cancel or amend your grant relating to any unpaid Performance Shares, with the result thatsome portion or all of your unpaid Performance Shares (and related Dividend Equivalents) will be forfeited.4.4 If you have a Separation from Service for any reason other than those specified in subsection 4.1 above, allPerformance Shares (and related Dividend Equivalents), to the extent not yet paid, shall be forfeited on the date of suchSeparation from Service, except as otherwise provided by the Committee.5. Compensation Recovery Policy . The Grant is subject to the terms of any compensation recovery policy or policiesestablished by ALLETE as may be amended from time to time (“Compensation Recovery Policy”). ALLETE hereby incorporatesinto the Grant the terms of the Compensation Recovery Policy.6. Section 409A Compliance. This Grant is intended to comply with Section 409A of the Code (“Section 409A”) or anexemption thereunder, and, accordingly, to the maximum extent permitted, the Plan and the Grant shall be interpreted andadministered in compliance therewith. Notwithstanding any other provision of the Grant, payments provided pursuant to the Grantmay only be made upon an event and in a manner that complies with Section 409A or an applicable exemption. Any paymentspursuant to the Grant that may be excluded from Section 409A as a short-term deferral shall be excluded from Section 409A to themaximum extent possible. To the extent that any provision of the Grant would cause a conflict with the requirements of Section409A or would cause the administration of the Grant to fail to satisfy Section 409A, such provision shall be deemed null and void tothe extent permitted by applicable law. Nothing herein shall be construed as a guarantee of any particular tax treatment. ALLETEmakes no representation that the Grant complies with Section 409A and in no event shall ALLETE be liable for the payment of anytaxes and penalties that you may incur under Section 409A.7. Claims Procedure and Arbitration . The Grant is subject to the following claims procedures:27.1 Mandatory Claims Procedures. If you or any person acting on your behalf (the “Claimant”) has any claim ordispute related in any way to the Grant or to the Plan, the Claimant must follow these claims procedures. All claims must bebrought no later than one year following the date on which the claim first arose and any claim not submitted within such timelimit will be waived.7.2 Claim Submission . Any claim must be made in writing to the Claims Administrator. The ClaimsAdministrator, or its delegate, shall notify the Claimant of the resolution of the claim within 90 days after receipt of theclaim; provided, however, if the Claims Administrator determines that an extension is necessary, the 90-day period shall beextended to up to 180 days upon notice to that effect to the Claimant.7.3 Notice of Denial . If a claim is wholly or partially denied, the denial notice shall contain (i) the reason orreasons for denial of the claim, and (ii) references to the pertinent Plan provisions upon which the denial is based. Unless theclaim is submitted for arbitration as provided below and in the Plan, the Claims Administrator’s decision or action shall befinal, conclusive and binding on all persons having any interest in the Plan.7.4 Arbitration . If, after exhausting the procedures set forth above, a Claimant wishes to pursue legal action, anyaction by the Claimant with respect to a claim, must be resolved by arbitration in the manner described herein.a)Time Limits . A Claimant seeking arbitration of any determination by the Claims Administrator must, withinsix (6) months of the date of the Claims Administrator’s final decision, file a demand for arbitration with theAmerican Arbitration Association submitting the claim to resolution by arbitration. A Claimant waives anyclaim not filed timely in accordance with this Section.b)Rules Applicable to Arbitration . The arbitration process shall be conducted in accordance with theCommercial Law Rules of the American Arbitration Association.c)Venue . The arbitration shall be conducted in Minneapolis, Minnesota.d)Binding Effect . The decision of the arbitrator with respect to the claim will be final and binding upon theCompany and the Claimant. BY PARTICIPATING IN THE PLAN, AND ACCEPTING THE GRANT,YOU, ON BEHALF OF YOURSELF AND ANY PERSON WITH A CLAIM RELATING TO YOURGRANT, AGREE TO WAIVE ANY RIGHT TO SUE IN COURT OR TO PURSUE ANY OTHER LEGALRIGHT OR REMEDY THAT MIGHT OTHERWISE BE AVAILABLE IN CONNECTION WITH THERESOLUTION OF THE CLAIM.e)Enforceability . Judgment upon any award entered by an arbitrator may be entered in any court havingjurisdiction over the parties.3f)Waiver of Class, Collective, and Representative Actions . Any claim shall be heard without consolidation ofsuch claims with any other person or entity. To the fullest extent permitted by law, whether in court or inarbitration, by participating in the Plan, you waive any right to commence, be a party to in any way, or be anactual or putative class member of any class, collective, or representative action arising out of or relating toany claim, and you agree that any claim may only be initiated or maintained and decided on an individualbasis. g)Standard of Review . Any decision of an arbitrator on a claim shall be limited to determining whether theClaims Administrator’s decision or action was arbitrary or capricious or was unlawful. The arbitrator shalladhere to and apply the deferential standard of review set out in Conkright v. Frommert , 130 S. Ct. 1640(2010), Metropolitan Life Insurance Co. v. Glenn , 554 U.S. 105 (2008), and Firestone Tire and RubberCompany v. Bruch, 489 U.S. 101 (1989), and shall accord due deference to the determinations, interpretations,and construction of the Plan document by the Claims Administrator.h)General Procedures .i.Arbitration Rules . The arbitration hearing will be conducted under the AAA Commercial ArbitrationRules (as amended or revised from time to time by AAA) (hereinafter the “AAA Rules”), before oneAAA arbitrator who is from the Large, Complex Case Panel and who has experience with mattersinvolving executive compensation and equity compensation plans. The AAA Rules and the terms andprocedures set forth here may conflict on certain issues. To the extent that the procedures set forth hereconflict with the AAA Rules, the procedures set forth here shall control and be applied by thearbitrator. Notwithstanding the amount of the claim, the Procedures for Large, Complex CommercialDisputes shall not apply.ii.Substantive Law . The arbitrator shall apply the substantive law (and the laws of remedies, if applicable),of Minnesota or federal law, or both, depending upon the claim. Except to the extent required byapplicable law, the Claimant shall keep any arbitration decision or award strictly confidential and notdisclose to anyone other than his or her spouse, attorney, or tax advisor.iii.Authority . The arbitrator shall have jurisdiction to hear and rule on prehearing disputes and is authorizedto hold prehearing conferences by telephone or in person as the arbitrator deems necessary. Thearbitrator will have the authority to hear a motion to dismiss and/or a motion for summary judgment byany party and in doing so shall apply the standards governing such motions under the Federal Rules ofCivil Procedure.iv.Pre-Hearing Procedures . Each party may take the deposition of not more than one individual and theexpert witness, if any, designated by another party. Each party will have the right to subpoenawitnesses in accordance with the Federal Arbitration Act, Title 9 of the United States Code. Additionaldiscovery may be had only if the arbitrator so orders, upon a showing of substantial need.4v.Fees and Costs . Administrative arbitration fees and arbitrator compensation shall be borne equally by theparties, and each party shall be responsible for its own attorney’s fees, if any; provided, however, thatthe Committee will authorize payment by the Company of all administrative arbitration fees, arbitratorcompensation and attorney’s fees if the Committee concludes that a Claimant has substantiallyprevailed on his or her claims. Unless prohibited by statute, the arbitrator shall assess attorney’s feesagainst a party upon a showing that such party’s claim, defense or position is frivolous, orunreasonable, or factually groundless. If either party pursues a claim by any means other than those setforth in this Article, the responding party shall be entitled to dismissal of such action, and the recoveryof all costs and attorney’s fees and losses related to such action, unless prohibited by statute.i)Interstate Commerce and the Federal Arbitration Act . The Company is involved in transactions involvinginterstate commerce, and the employee’s employment with the Company involves such commerce. Therefore,the Federal Arbitration Act, Title 9 of the United States Code, will govern the interpretation, enforcement, andall judicial proceedings regarding the arbitration procedures in this Section.8. Ratification of Actions. By receiving the Grant or other benefit under the Plan, you and each person claiming under orthrough you shall be conclusively deemed to have indicated your acceptance and ratification of, and consent to, any action takenunder the Plan or the Grant by ALLETE, the Board or the Committee.9. No Impact on Other Benefits . The Grant or payment on account thereof shall not be taken into account in determiningany benefits under any severance, retirement, welfare, insurance or other benefit plan of ALLETE or any affiliate except to theextent otherwise expressly provided in writing in such other plan or an agreement thereunder.10. Notices. Any notice hereunder to ALLETE shall be addressed to ALLETE, 30 West Superior Street, Duluth,Minnesota 55802, Attention: Manager - Compensation and Benefits, Human Resources, and any notice hereunder to you shall bedirected to your address as indicated by ALLETE’s records, subject to the right of either party to designate at any time hereafter inwriting some other address.11. Governing Law and Severability. To the extent not preempted by the Federal law, the Grant will be governed by andconstrued in accordance with the laws of the State of Minnesota, without regard to its conflicts of law provisions. In the event anyprovision of the Grant shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts ofthe Grant, and the Grant shall be construed and enforced as if the illegal or invalid provision had not been included.12. Definitions. Capitalized terms not otherwise defined herein shall have the meanings given them in the Plan. Thefollowing definitions apply to the Grant and this Annex A:12.1 “ Claims Administrator” means ALLETE’s Chief Executive Officer, unless the claimant is (or is acting onbehalf of) an ALLETE executive officer (within the meaning of Exchange Act Rule 3b-7), in which case the ClaimsAdministrator is the Executive Compensation Committee of the Board of Directors.512.2 “ Code ” means the Internal Revenue Code of 1986, as it may be amended from time to time.12.3 “ Disability ” or “ Disabled ” means a physical or mental condition in which the Participant is:(a)unable to engage in any substantial gainful activity by reason of any medically determinable physical ormental impairment that can be expected to result in death or can be expected to last for a continuous periodof not less than twelve (12) months;(b)by reason of any medically determinable physical or mental impairment which can be expected to result indeath or can be expected to last for a continuous period of not less than twelve (12) months, receivingincome replacement benefits for a period of not less than three (3) months under the Employer’s accidentand health plan;(c)determined to be totally disabled by the Social Security Administration; or(d)disabled pursuant to an Employer-sponsored disability insurance arrangement provided that the definitionof disability applied under such disability insurance program complies with the foregoing definition ofDisability.12.4 “ Related Company ” means ALLETE, Inc. and all persons with whom the ALLETE, Inc. would beconsidered a single employer under Code section 414(b) (employees of controlled group of corporations), and all personswith whom such person would be considered a single employer under Code section 414(c) (employees of partnerships,proprietorships, etc., under common control); provided that in applying Code sections 1563(a)(1), (2), and (3) for purposes ofdetermining a controlled group of corporations under Code section 414(b), the language “at least 50 percent” is used insteadof “at least 80 percent” each place it appears in Code sections 1563(a)(1), (2), and (3), and in applying Treasury Regulationssection 1.414(c)-2 for purposes of determining trades or businesses (whether or not incorporated) that are under commoncontrol for purposes of Code section 414(c), “at least 50 percent” is used instead of “at least 80 percent” each place it appearsin Treasury Regulations section 1.414(c)-2.12.5 “ Retirement ” or “ Retires ” means Separation from Service, for reasons other than death or Disability, on orafter attaining normal retirement age or early retirement age as defined in the most applicable qualified retirement plansponsored by the Related Company that employed the Participant immediately preceding the Separation from Service,without regard to whether the Participant is a participant in such plan, or if the employer Related Company does not sponsorsuch retirement plan, on or after attaining Normal Retirement Age or Early Retirement Age as defined in the ALLETE andAffiliated Companies Retirement Plan A, without regard to whether the Participant is a participant under the ALLETE andAffiliated Companies Retirement Plan A.612.6 “ Separation from Service ” means that the Participant terminates employment within the meaning ofTreasury Regulations section 1.409A-1(h) and other applicable guidance with all Related Companies. Whether a terminationof employment has occurred is determined under the facts and circumstances, and a termination of employment shall occur ifall Related Companies and the Participant reasonably anticipate that no further services shall be performed after a certain dateor that the level of bona fide services the Participant shall perform after such date (as an employee or an independentcontractor) shall permanently decrease to no more than 20 percent of the average level of bona fide services performed(whether as an employee or an independent contractor) over the immediately preceding 36-month period (or the full period ofservices to the Related Companies if the Participant has been providing services to the Related Companies less than 36months). A Participant shall not be considered to separate from service during a bona fide leave of absence for less than six(6) months or longer if the Participant retains a right to reemployment with any Related Company by contract or statute. Withrespect to disability leave, a Participant shall not be considered to separate from service for 29 months unless the Participantotherwise terminates employment or is terminated by all Related Companies.7ANNEX BTOALLETEExecutive Long Term Incentive Compensation PlanPerformance Share GrantEffective 2018[Eligible Executive Employees]Financial Measure :Total Shareholder Return (TSR) computed over the three-year performance period January 1, 2018 to December 31, 2020.Performance Share Award:If ALLETE’s TSR ranking is at the 85th percentile or higher among the peer group (superior performance), 200% of thePerformance Share Grant will be earned. If ALLETE’s TSR ranking is at the 50 th percentile among the peer group (targetperformance), 100% of the Performance Share Grant will be earned. If ALLETE’s TSR ranking is at the 30 th percentile (thresholdperformance), 50% of the Performance Share Grant will be earned. If TSR ranking is below threshold, no Performance Shares willbe earned. Straight-line interpolation will be used to determine earned awards based on the TSR ranking between threshold, targetand superior.Peer Group:The integrated utility companies comprising Edison Electric Institute (EEI) Stock Index as of December 31, 2020 that have been inthe EEI Stock Index for at least three years as of December 31, 2020 will constitute the peer group used to determine actual payoutresults. The table below lists the EEI Stock Index as of December 31, 2017:Alliant Energy CorporationEntergy CorporationPG&E CorporationAmeren CorporationEversource EnergyPinnacle West Capital CorporationAmerican Electric Power CompanyExelon CorporationPNM Resources, Inc.Avangrid, Inc.FirstEnergy CorporationPortland General Electric CompanyAvista CorporationGreat Plains Energy IncorporatedPPL CorporationBlack Hills CorporationHawaiian Electric Industries, Inc.Public Service Enterprise Group, Inc.CenterPoint Energy, Inc.IDACORP, Inc.SCANA CorporationCMS Energy CorporationMDU Resources Group, Inc.Sempra EnergyConsolidated Edison, Inc.MGE Energy, Inc.Southern CompanyDominion Resources, Inc.NextEra Energy, IncUnitil CorporationDTE Energy CompanyNiSource, Inc.Vectren CorporationDuke Energy CorporationNorthWestern CorporationWEC Energy Group, IncEdison InternationalOGE Energy Corp.Westar Energy, Inc.El Paso Electric CompanyOtter Tail CorporationXcel Energy, Inc.Any Company that is no longer included in the EEI Stock Index as of December 31, 2020 due to corporate restructuring during theperformance period (e.g., mergers, acquisitions, divestitures, spin-offs, etc.) will be excluded from the results calculation entirely. Ifa corporate restructuring during the performance period results in a company remaining in the EEI Stock Index following thetransaction (and thus not being excluded from the results calculation entirely), from the point of the transaction forward, the resultscalculation will track only the entity that remains in the EEI Stock Index and ignore other entities, regardless of whether such otherentities are publicly traded.Exhibit 12ALLETEComputation of Ratios of Earnings to Fixed Charges (Unaudited)Year Ended December 3120172016201520142013Millions Earnings as Defined Pretax Income Before Non-Controlling Interest$186.9$175.6$166.8$162.2$133.3 Add:Fixed Charges68.773.071.962.556.7 Less:Undistributed Income from Less than 50 percent Owned Equity Investment3.35.71.82.64.1 Earnings as Defined$252.3$242.9$236.9$222.1$185.9 Fixed Charges Interest on Long-Term Debt$60.6$64.7$64.7$55.6$50.9 Other Interest Charges2.32.61.42.01.2 Interest Component of All Rentals (a)5.85.75.84.94.6 Total Fixed Charges$68.7$73.0$71.9$62.5$56.7Ratio of Earnings to Fixed Charges3.673.333.293.553.28(a)Represents interest portion of rents estimated at 33 1/3 percent.Exhibit 21SUBSIDIARIES OF THE REGISTRANTAs of December 31, 2017Name of Organization (a)State or CountryALLETE, Inc. (d/b/a ALLETE; Minnesota Power; Minnesota Power, Inc.;MinnesotaMinnesota Power & Light Company) ALLETE Automotive Services, LLCMinnesotaALLETE Enterprises, Inc.MinnesotaALLETE Clean Energy, Inc.MinnesotaACE Wind LLCDelawareACE Mid-West Holdings, LLCDelawareMWW Holdings, LLCDelawareLake Benton Power Associates LLCDelawareLake Benton Holdings LLCDelawareLake Benton Power Partners L.L.C.DelawareStorm Lake Power Partners I LLCDelawareStorm Lake II Power Associates LLCDelawareStorm Lake II Holdings LLCDelawareStorm Lake Power Partners II LLCDelawareNew Salem Holdings, LLCDelawareGlen Ullin Energy Center, LLCDelawareNorthern Wind Energy, LLCDelawareChanarambie Power Partners, LLCDelawareViking Wind Holdings, LLCDelawareACE West Holdings, LLCDelawareCondon Wind Power, LLCDelawareArmenia Holdings, LLCDelawareAMW I Holding, LLCDelawareArmenia Mountain Wind, LLCDelawareArmenia Mountain Wind II, LLCDelawareThunder Spirit Wind, LLCDelawareACE O&M, LLCDelawareALLETE Power Systems, Inc.MinnesotaALLETE Renewable Resources, Inc.North DakotaALLETE Transmission Holdings, Inc.WisconsinBNI Energy, Inc.North DakotaBNI Coal, Ltd.North DakotaGlobal Water Services Holding Company, Inc.DelawareU.S Water Services, Inc.MinnesotaU.S. Water Services – Canada, Inc.CanadaMP Affiliate Resources, Inc.MinnesotaRainy River Energy CorporationMinnesotaSouth Shore Energy, LLCWisconsinUpper Minnesota Properties, Inc.MinnesotaUpper Minnesota Properties - Development, Inc.MinnesotaALLETE Properties, LLC (d/b/a ALLETE Properties)MinnesotaALLETE Commercial, LLCFloridaLehigh Acquisition, LLCDelawareFlorida Landmark Communities, LLCFloridaLehigh CorporationFloridaMardem, LLCFloridaPalm Coast Holdings, Inc.FloridaPort Orange Holdings, LLCFloridaInterlachen Lakes Estates, LLCFlorida(a)Certain insignificant subsidiaries are omitted.Exhibit 21Name of Organization (a)State or CountryPalm Coast Land, LLCFloridaALLETE Water Services, Inc.MinnesotaFlorida Water Services CorporationFloridaEnergy Replacement Property, LLCMinnesotaEnergy Land, IncorporatedWisconsinLakeview Financial Corporation IMinnesotaLakeview Financial Corporation IIMinnesotaMP Investments, Inc.DelawareRendField Land Company, Inc.MinnesotaSuperior Water, Light and Power CompanyWisconsin(a)Certain insignificant subsidiaries are omitted.Exhibit 23CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-212794, 333-211075) and Form S-8 (Nos. 333-162890,333-183051, 333-190336, 333-207846) of ALLETE, Inc. of our report dated February 15, 2018, relating to the financial statements, financial statement scheduleand the effectiveness of internal control over financial reporting, which appears in this Form 10‑K./s/ PricewaterhouseCoopers LLPMinneapolis, MinnesotaFebruary 15, 2018Exhibit 31(a)Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002I, Alan R. Hodnik, certify that:1.I have reviewed this annual report on Form 10-K for the fiscal year ended December 31, 2017 , of ALLETE, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant andhave: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularlyduring the period in which this report is being prepared; b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles; c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’sauditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; and b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. Date:February 15, 2018/s/ Alan R. Hodnik Alan R. Hodnik President and Chief Executive OfficerExhibit 31(b)Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002I, Robert J. Adams, certify that:1.I have reviewed this annual report on Form 10-K for the fiscal year ended December 31, 2017 , of ALLETE, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant andhave: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularlyduring the period in which this report is being prepared; b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles; c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’sauditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; and b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.Date:February 15, 2018/s/ Robert J. Adams Robert J. Adams Senior Vice President and Chief Financial OfficerExhibit 32Section 1350 Certification of Periodic ReportBy the Chief Executive Officer and Chief Financial OfficerPursuant to Section 906 of the Sarbanes-Oxley Act of 2002Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, each of the undersigned officers of ALLETE, Inc. (ALLETE), does herebycertify that:1.The Annual Report on Form 10-K of ALLETE for the fiscal year ended December 31, 2017 , (Report) fully complies with the requirements of Section 13(a) ofthe Securities Exchange Act of 1934 (15 U.S.C. 78m); and2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of ALLETE. Date:February 15, 2018/s/ Alan R. Hodnik Alan R. Hodnik President and Chief Executive OfficerDate:February 15, 2018/s/ Robert J. Adams Robert J. Adams Senior Vice President and Chief Financial OfficerThis certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability pursuant to thatsection. Such certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of1934, except to the extent that ALLETE specifically incorporates it by reference.A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature thatappears in typed form within the electronic version of this written statement required by Section 906, has been provided to ALLETE and will be retained byALLETE and furnished to the Securities and Exchange Commission or its staff upon request.Exhibit 95Mine Safety Disclosure Mine or OperatingName/MSHAIdentificationNumberSection 104S&SCitations(#)Section104(b)Orders (#)Section104(d)Citationsand Orders(#)Section110(b)(2)Violations (#)Section107(a)Orders (#)Total DollarValue ofMSHAAssessmentsProposed ($)TotalNumber ofMining-RelatedFatalities(#)ReceivedNotice ofPattern ofViolationUnderSection104(e)(yes/no)ReceivedNotice ofPotential toHave PatternUnderSection104(e)(yes/no)LegalActionsPending asof Last Dayof Period(#)LegalActionsInitiatedDuringPeriod (#)Legal ActionsResolvedDuring Period(#) Center Mine /3200218—————$484—NoNo———For the quarter ended December 31, 2017 , BNI Energy, owner of Center Mine, received three citations under Section 104(a) of the Mine Safety Act, none ofwhich were significant and substantial (S&S) citations; eighteen citations were received for the year ended December 31, 2017 , one of which was a S&S citation.The total proposed penalties on BNI with respect to the three citations were $484. For the year ended December 31, 2017 , BNI Energy paid $2,871 in penalties forcitations closed during the period. For the year ended December 31, 2017 , there were no citations, orders, violations or notices received under Sections 104(b),104(d), 107(a), 104(e) or 110(b)(2) of the Mine Safety Act and there were no fatalities. Exhibit 99For Release:February 15, 2018Investor Contact:Vince Meyer 218-723-3952 vmeyer@allete.com NEWS ALLETE, Inc. reports 2017 earnings of $3.38 per share; initiates 2018 earnings guidance; expectssignificant growth from non-regulated businessesDULUTH, Minn. - ALLETE, Inc. (NYSE: ALE) today reported 2017 earnings of $3.38 per share on net income of $172.2 million and operating revenue of $1.42billion. Results from 2016 were $3.14 per share on net income of $155.3 million and operating revenue of $1.34 billion.“I am pleased with our financial performance and accomplishments in 2017 as we continued to execute on our multi-faceted strategy for growth while returningmore than $100 million to shareholders in the form of dividends; our businesses are well positioned as we move into 2018 and beyond,” said ALLETE Chairman,President and CEO Al Hodnik, “We believe our unique mix of businesses will continue to deliver a strong value proposition to shareholders as supported by ourrecent announcement to increase our long-term average annual earnings growth target to 5 percent to 7 percent from 5 percent previously, and increase ourdividend by approximately 5 percent over 2017.”Results in 2017 were positively impacted by $13.0 million after-tax, or $0.25 per share, for the remeasurement of ALLETE’s deferred income tax assets andliabilities resulting from the Tax Cuts and Jobs Act (TCJA) that was enacted on December 22, 2017. While immediate and future net tax benefits for the regulatedbusinesses are expected to return to our utility customers over time, the immediate net tax benefits attributable to ALLETE Clean Energy and U.S. Water Servicespositively affected 2017 results and are expected to benefit future after-tax earnings. Results for 2017 also reflect a benefit of $7.9 million after-tax, or $0.16 pershare, for the Minnesota Public Utilities Commission’s (MPUC) modification of its November 2016 order on the allocation of North Dakota investment tax creditsin a MPUC order dated December 7, 2017. These benefits were partially offset by a non-cash $11.4 million after-tax charge, or $0.22 per share, for the MPUC’sdecision in Minnesota Power’s rate case in January 2018, disallowing recovery of Minnesota Power’s regulatory asset for deferred fuel adjustment clause costs dueto the anticipated adoption of a forward-looking fuel adjustment clause methodology.Net income for 2016 was impacted by an after-tax gain of $13.6 million, or $0.28 per share, related to the change in fair value of the contingent considerationliability, offset by the adverse impact of $8.8 million after-tax, or $0.18 per share, for the November 2016 MPUC order on the allocation of North Dakotainvestment tax credits, a $3.3 million after-tax, or $0.07 per share, goodwill impairment charge related to ALLETE Clean Energy, and $0.9 million after-taxexpense, or $0.02 per share, related to the repayment of long-term debt at ALLETE Clean Energy.ALLETE’s Regulated Operations segment, which includes Minnesota Power, Superior Water, Light and Power, and the Company’s investment in the AmericanTransmission Co. (ATC), recorded net income of $128.4 million, a decrease of $7.1 million compared to 2016. Net income at Minnesota Power decreased $9.8million after-tax reflecting the previously mentioned non-cash $11.4 million after-tax charge for the MPUC’s decision disallowing recovery of Minnesota Power’sregulatory asset for deferred fuel adjustment clause costs. In addition, net income decreased due to lower sales to other power suppliers as a result of higherindustrial sales coupled with lower market prices, higher interest and taxes other than income taxes, and lower kWh sales to residential, commercial and municipalcustomers due to milder temperatures in 2017. These decreases were partially offset by lower depreciation expense of $14.6 million after-tax resulting from theMPUC’s decision to modify the depreciable lives at Boswell Energy Center, and higher industrial kWh sales. Interim retail rate refund reserves fully offset theinterim retail rates recognized during 2017 due to the regulatory outcome of the MPUC’s decision in Minnesota Power’s 2016 general rate case in January 2018.Our equity earnings in ATC increased $2.6 million after-tax in 2017, primarily due to additional investments in ATC and period-over-period changes in ATC’sestimate of a refund liability related to the MISO return on equity complaints.ALLETE’s Energy Infrastructure and Related Services businesses, which include ALLETE Clean Energy and U.S. Water Services, recorded net income of $41.5million and $10.7 million, respectively.Earnings at ALLETE Clean Energy in 2017 included a favorable impact of $23.6 million after-tax for the remeasurement of deferred income tax assets andliabilities resulting from the TCJA, increased production tax credits due to the requalification of certain wind turbine generators for production tax credits at itsStorm Lake I, Storm Lake II and Lake Benton wind energy facilities, lower operating and maintenance expenses, and lower interest expense. Results for 2016 atALLETE Clean Energy included a $3.3 million after-tax goodwill impairment charge and a $0.9 million after-tax expense related to the repayment of long-termdebt.Earnings at U.S. Water Services in 2017 increased $9.2 million reflecting a favorable impact of $9.2 million after-tax for the remeasurement of deferred income taxassets and liabilities resulting from the TCJA, and higher operating revenue, partially offset by increased operating expenses as a result of investments for futuregrowth in waste treatment and water safety applications. 2017 earnings also reflected a net loss of $0.8 million primarily for transaction fees and amortizationexpense of a recent acquisition. Cash flow from operations remained strong for the year at approximately $12 million.Our Corporate and Other businesses, which include BNI Energy and ALLETE Properties, recorded a net loss of $8.4 million for the year, compared to net incomeof $4.9 million in 2016. The net loss in 2017 included additional income tax expense of $19.8 million after-tax for the remeasurement of deferred income tax assetsand liabilities resulting from the TCJA. The net loss in 2017 also included the previously mentioned favorable impact of $7.9 million after-tax for the MPUC’smodification of its November 2016 order on the allocation of North Dakota investment tax credits, lower accretion expense relating to the contingent considerationliability, and lower interest expense. Net income in 2016 included the after-tax gain of $13.6 million related to the change in fair value of the U.S. Water Servicescontingent consideration liability, partially offset by the adverse impact of $8.8 million after-tax for the regulatory outcome of the November 2016 MPUC order.Earnings were diluted by $0.11 per share in 2017, due to additional shares of common stock outstanding as of December 31, 2017.The Company expects 2018 earnings per share to be within a range of $3.20 to $3.50 with earnings from our Energy Infrastructure and Related Services businessesexpected to increase further in 2019 and become a more meaningful contributor to ALLETE’s earnings in the coming years. Details of the Company’s 2018earnings guidance were also filed as part of today’s Form 8-K filing.ALLETE will host a conference call and webcast at 10 a.m. Eastern Time this morning to discuss details of its financial performance and earnings guidance.Interested parties may listen live by calling (877) 303-5852, or by accessing the webcast at www.allete.com. A replay of the call will be available through February19, 2018 by calling (855) 859-2056, pass code 9977768. The webcast will be accessible for one year at www.allete.com .ALLETE is an energy company headquartered in Duluth, Minn. In addition to its electric utilities, Minnesota Power and Superior Water, Light and Power ofWisconsin, ALLETE owns ALLETE Clean Energy, based in Duluth, BNI Energy in Bismarck, N.D., U.S. Water Services headquartered in St. Michael, Minn., andhas an eight percent equity interest in the American Transmission Co. More information about ALLETE is available at www.allete.com . ALE-CORPThe statements contained in this release and statements that ALLETE may make orally in connection with this release that are not historical facts, are forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements. These forward-looking statements involve risks anduncertainties and investors are directed to the risks discussed in documents filed by ALLETE with the Securities and Exchange Commission.ALLETE's press releases and other communications may include certain non-Generally Accepted Accounting Principles (GAAP) financial measures. A "non-GAAP financial measure" is defined as a numerical measure of a company's financial performance, financial position or cash flows that excludes (or includes)amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP in the company'sfinancial statements.Non-GAAP financial measures utilized by the Company may include presentations of earnings (loss) per share and earnings before interest, taxes, depreciationand amortization. ALLETE's management believes that these non-GAAP financial measures provide useful information to investors by removing the effect ofvariances in GAAP reported results of operations that are not indicative of changes in the fundamental earnings power of the Company's operations. Managementbelieves that the presentation of the non-GAAP financial measures is appropriate and enables investors and analysts to more accurately compare the company'songoing financial performance over the periods presented.ALLETE, Inc.Consolidated Statement of IncomeFor the Periods Ended December 31, 2017 and 2016 Quarter EndedYear to Date 2017201620172016Millions Except Per Share Amounts Operating Revenue Utility$239.7$260.2$1,063.8$1,000.7Non-utility98.281.3355.5339.0Total Operating Revenue337.9341.51,419.31,339.7Operating Expenses Fuel, Purchased Power and Gas – Utility113.789.3396.9339.9Transmission Services – Utility18.115.771.265.2Cost of Sales – Non-utility41.729.2147.8137.7Operating and Maintenance91.793.2339.9334.1Depreciation and Amortization26.050.1177.5195.8Taxes Other than Income Taxes14.213.256.953.8Other(0.7)(10.3)(0.7)(10.3)Total Operating Expenses304.7280.41,189.51,116.2Operating Income33.261.1229.8223.5Other Income (Expense) Interest Expense(17.3)(17.3)(67.8)(70.3)Equity Earnings in ATC5.23.522.518.5Other0.41.12.43.9Total Other Expense(11.7)(12.7)(42.9)(47.9)Income Before Non-Controlling Interest and Income Taxes21.548.4186.9175.6Income Tax Expense (Benefit)(19.9)4.114.719.8Net Income41.444.3172.2155.8Less: Non-Controlling Interest in Subsidiaries———0.5Net Income Attributable to ALLETE$41.4$44.3$172.2$155.3Average Shares of Common Stock Basic51.149.550.849.3Diluted51.349.751.049.5Basic Earnings Per Share of Common Stock$0.81$0.89$3.39$3.15Diluted Earnings Per Share of Common Stock$0.81$0.89$3.38$3.14Dividends Per Share of Common Stock$0.535$0.52$2.14$2.08Consolidated Balance SheetMillions Dec. 31,Dec. 31, Dec. 31,Dec. 31, 20172016 20172016Assets Liabilities and Equity Cash and Cash Equivalents$98.9$27.5 Current Liabilities$351.2$399.5Other Current Assets268.6267.0 Long-Term Debt1,439.21,370.4Property, Plant and Equipment – Net3,822.43,741.2 Deferred Income Taxes230.5554.6Regulatory Assets384.7330.1 Regulatory Liabilities532.0125.8Investment in ATC118.7135.6 Defined Benefit Pension & Other Postretirement BenefitPlans191.8210.9Other Investments53.155.6 Other Non-Current Liabilities267.1322.7Goodwill and Intangibles – Net225.9213.4 Equity2,068.21,893.0Other Non-Current Assets107.7106.5 Total Assets$5,080.0$4,876.9 Total Liabilities and Equity$5,080.0$4,876.9 Quarter EndedYear to DateALLETE, Inc.December 31,December 31,Income (Loss)2017201620172016Millions Regulated Operations$18.3$25.5$128.4$135.5 Energy Infrastructure and Related Services ALLETE Clean Energy30.43.741.513.4U.S. Water Services9.1(0.5)10.71.5 Corporate and Other(16.4)15.6(8.4)4.9Net Income Attributable to ALLETE$41.4$44.3$172.2$155.3Diluted Earnings Per Share$0.81$0.89$3.38$3.14Statistical Data Corporate Common Stock High$81.24$66.92$81.24$66.92Low$72.96$56.48$61.64$48.26Close$74.36$64.19$74.36$64.19Book Value$40.46$38.17$40.46$38.17Kilowatt-hours Sold Millions Regulated Utility Retail and Municipal Residential3052861,0961,102Commercial3593521,4201,442Municipal208205799816Industrial1,8901,7167,3276,456Total Retail and Municipal2,7622,55910,6429,816Other Power Suppliers1,0178604,0394,316Total Regulated Utility3,7793,41914,68114,132Regulated Utility Revenue Millions Regulated Operations Retail and Municipal Residential$33.5$30.6$119.9$115.8Commercial35.633.6139.5133.7Municipal12.817.257.967.6Industrial123.7110.0486.5412.5Reserve for Interim Rate Refunds(31.6)—(31.6)—Total Retail and Municipal174.0191.4772.2729.6Other Power Suppliers37.841.9161.8175.1Other27.926.9129.896.0Total Regulated Utility Revenue$239.7$260.2$1,063.8$1,000.7This 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 deemedincorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.

Continue reading text version or see original annual report in PDF format above