|   | R | Annual      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of      1934 |
|--------|---|------------------------------------------------------------------------------------------------|

|   | £ | Transition      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of      1934 |
|--------|--------|----------------------------------------------------------------------------------------------------|

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

| Title      of Each Class             |   | Name      of Each Stock Exchangeon      Which Registered |
|--------------------------------------|--------|----------------------------------------------------------|
| Common      Stock, without par value |   | New      York Stock Exchange                             |

| Large      Accelerated Filer R | Accelerated      Filer £ | Non-Accelerated      Filer £ | Smaller      Reporting Company £ |
|--------------------------------|-------------------------------|-----------------------------------|--------------------------------------------|

----

| Definitions                                                                           | 3                                                                                                                                |
|---------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------|
|                                                                                  |                                                                                                                             |
| Safe Harbor Statement Under the      Private Securities Litigation Reform Act of 1995 | 5                                                                                                                                |
|                                                                                  |                                                                                                                             |
| Part      I                                                                           |                                                                                                                             |
| Item      1.                                                                          | Business                                                                                                                         | 6 |
|                                                                                  | Energy      – Regulated Utility                                                                                            | 6 |
|                                                                                  |                                                                                                                             | Electric      Sales / Customers | 6 |
|                                                                                  |                                                                                                                             | Power      Supply | 10 |
|                                                                                  |                                                                                                                             | Transmission      & Distribution | 11 |
|                                                                                  |                                                                                                                             | Properties | 11 |
|                                                                                  |                                                                                                                             | Regulatory      Matters | 12 |
|                                                                                  |                                                                                                                             | Minnesota      Legislation | 14 |
|                                                                                  |                                                                                                                             | Competition | 15 |
|                                                                                  |                                                                                                                             | Franchises | 15 |
|                                                                                  | Energy      – Nonregulated Energy Operations                                                                               | 15 |
|                                                                                  | Energy      – Investment in ATC                                                                                            | 16 |
|                                                                                  | Real      Estate                                                                                                                 | 16 |
|                                                                                  |                                                                                                                             | Seller      Financing | 17 |
|                                                                                  |                                                                                                                             | Regulation | 18 |
|                                                                                  |                                                                                                                             | Competition | 18 |
|                                                                                  | Other                                                                                                                            | 18 |
|                                                                                  | Environmental      Matters                                                                                                       | 18 |
|                                                                                  | Employees                                                                                                                        | 20 |
|                                                                                  | Executive      Officers of the Registrant                                                                                        | 21 |
| Item      1A.                                                                         | Risk      Factors                                                                                                                | 22 |
| Item      1B.                                                                         | Unresolved      Staff Comments                                                                                                   | 26 |
| Item      2.                                                                          | Properties                                                                                                                       | 26 |
| Item      3.                                                                          | Legal      Proceedings                                                                                                           | 26 |
| Item      4.                                                                          | Submission      of Matters to a Vote of Security Holders                                                                         | 26 |
|                                                                                  |                                                                                                                             |   |
| Part      II                                                                          |                                                                                                                             |
| Item      5.                                                                          | Market      for Registrant’s Common Equity, Related Stockholder Matters      andIssuer      Purchases of Equity Securities | 26 |
| Item      6.                                                                          | Selected      Financial Data                                                                                                     | 27 |
| Item      7.                                                                          | Management’s      Discussion and Analysis of Financial Condition and Results of      Operations                            | 28 |
|                                                                                  | Overview                                                                                                                         | 28 |
|                                                                                  | 2007      Compared to 2006                                                                                                       | 30 |
|                                                                                  | 2006      Compared to 2005                                                                                                       | 32 |
|                                                                                  | Critical      Accounting Estimates                                                                                               | 34 |
|                                                                                  | Outlook                                                                                                                          | 36 |
|                                                                                  | Liquidity      and Capital Resources                                                                                             | 44 |
|                                                                                  | Capital      Requirements                                                                                                        | 48 |
|                                                                                  | Environmental      and Other Matters                                                                                             | 48 |
|                                                                                  | Market      Risk                                                                                                                 | 48 |
|                                                                                  | New      Accounting Standards                                                                                                    | 49 |
| Item      7A.                                                                         | Quantitative      and Qualitative Disclosures about Market Risk                                                                  | 50 |
| Item      8.                                                                          | Financial      Statements and Supplementary Data                                                                                 | 50 |
| Item      9.                                                                          | Changes      in and Disagreements with Accountants on Accounting and Financial      Disclosure                                   | 50 |
| Item      9A.                                                                         | Controls      and Procedures                                                                                                     | 50 |
| Item      9B.                                                                         | Other      Information                                                                                                           | 51 |
|                                                                                  |                                                                                                                             |
| Part      III                                                                         |                                                                                                                             |
| Item      10.                                                                         | Directors,      Executive Officers and Corporate Governance                                                                      | 52 |
| Item      11.                                                                         | Executive      Compensation                                                                                                      | 52 |
| Item      12.                                                                         | Security      Ownership of Certain Beneficial Owners and Management and Related      Stockholder Matters                         | 52 |
| Item      13.                                                                         | Certain      Relationships and Related Transactions, and Director      Independence                                              | 52 |
| Item      14.                                                                         | Principal      Accountant Fees and Services                                                                                      | 52 |
|                                                                                  |                                                                                                                             |
| Part      IV                                                                          |                                                                                                                             |   |
| Item      15.                                                                         | Exhibits      and Financial Statement Schedules                                                                                  | 53 |
|                                                                                  |                                                                                                                             |
| Signatures                                                                            | 57                                                                                                                               |
|                                                                                  |                                                                                                                             |
| Consolidated Financial      Statements                                                | 59                                                                                                                               |

----

| Abbreviation      or Acronym          | Term                                                                                                                                                                         |
|---------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| AICPA                                 | American      Institute of Certified Public Accountants                                                                                                                      |
| ALLETE                                | ALLETE,      Inc.                                                                                                                                                            |
| ALLETE      Properties                | ALLETE      Properties, LLC and its subsidiaries                                                                                                                             |
| AFUDC                                 | Allowance      for Funds Used During Construction - the cost of both the debt and equity      funds used to finance utility plant additions during construction      periods |
| AREA                                  | Arrowhead      Regional Emission Abatement                                                                                                                                   |
| ATC                                   | American      Transmission Company LLC                                                                                                                                       |
| Blandin      Paper                    | UPM,      Blandin Paper Mill                                                                                                                                                 |
| BNI      Coal                         | BNI      Coal, Ltd.                                                                                                                                                          |
| Boswell                               | Boswell      Energy Center                                                                                                                                                   |
| Company                               | ALLETE,      Inc. and its subsidiaries                                                                                                                                       |
| Constellation      Energy Commodities | Constellation      Energy Commodities Group, Inc.                                                                                                                            |
| DOC                                   | Minnesota      Department of Commerce                                                                                                                                        |
| DRI                                   | Development      of Regional Impact                                                                                                                                          |
| EITF                                  | Emerging      Issues Task Force                                                                                                                                              |
| Enventis      Telecom                 | Enventis      Telecom, Inc.                                                                                                                                                  |
| EPA                                   | Environmental      Protection Agency                                                                                                                                         |
| ESA                                   | Electric      Service Agreement                                                                                                                                              |
| ESOP                                  | Employee      Stock Ownership Plan                                                                                                                                           |
| FASB                                  | Financial      Accounting Standards Board                                                                                                                                    |
| FERC                                  | Federal      Energy Regulatory Commission                                                                                                                                    |
| Florida      Landmark                 | Florida      Landmark Communities, Inc.                                                                                                                                      |
| Florida      Water                    | Florida      Water Services Corporation                                                                                                                                      |
| Form      8-K                         | ALLETE      Current Report on Form 8-K                                                                                                                                       |
| Form      10-K                        | ALLETE      Annual Report on Form 10-K                                                                                                                                       |
| Form      10-Q                        | ALLETE      Quarterly Report on Form 10-Q                                                                                                                                    |
| FPL      Energy                       | FPL      Energy, LLC                                                                                                                                                         |
| FPSC                                  | Florida      Public Service Commission                                                                                                                                       |
| FSP                                   | Financial      Accounting Standards Board Staff Position                                                                                                                     |
| GAAP                                  | Accounting      Principles Generally Accepted in the United States                                                                                                           |
| Heating      Degree Days              | Measure      of the extent to which the average daily temperature is below 65 degrees      Fahrenheit, increasing demand for heating                                         |
| Invest      Direct                    | ALLETE’s      Direct Stock Purchase and Dividend Reinvestment Plan                                                                                                     |
| IPO                                   | Initial      Public Offering                                                                                                                                                 |
| kV                                    | Kilovolt(s)                                                                                                                                                                  |
| Laskin                                | Laskin      Energy Center                                                                                                                                                    |
| Manitoba      Hydro                   | Manitoba      Hydro Board                                                                                                                                                    |
| MBtu                                  | Million      British thermal units                                                                                                                                           |
| Mesabi      Nugget                    | Mesabi      Nugget Delaware, LLC                                                                                                                                             |
| Minnesota      Power                  | An      operating division of ALLETE, Inc.                                                                                                                                   |
| Minnkota      Power                   | Minnkota      Power Cooperative, Inc.                                                                                                                                        |
| MISO                                  | Midwest      Independent Transmission System Operator, Inc.                                                                                                                  |
| Moody’s                         | Moody’s      Investors Service, Inc.                                                                                                                                   |
| MPCA                                  | Minnesota      Pollution Control Agency                                                                                                                                      |
| MPUC                                  | Minnesota      Public Utilities Commission                                                                                                                                   |

----

| Abbreviation      or Acronym     | Term                                                                                                         |
|----------------------------------|--------------------------------------------------------------------------------------------------------------|
| MW      / MWh                    | Megawatt(s)      / Megawatthour(s)                                                                           |
| Non-residential                  | Retail      commercial, non-retail commercial, office, industrial, warehouse, storage      and institutional |
| NOX                              | Nitrogen      Oxide                                                                                          |
| Northwest      Airlines          | Northwest      Airlines, Inc.                                                                                |
| Note      ___                    | Note      ___ to the consolidated financial statements in this Form    10-K                                  |
| NPDES                            | National      Pollutant Discharge Elimination System                                                         |
| NYSE                             | New      York Stock Exchange                                                                                 |
| OAG                              | Office      of the Attorney General                                                                          |
| Oliver      Wind I               | Oliver      Wind I Energy Center                                                                             |
| Oliver      Wind II              | Oliver      Wind II Energy Center                                                                            |
| Palm      Coast Park             | Palm      Coast Park development project in Florida                                                          |
| Palm      Coast Park District    | Palm      Coast Park Community Development District                                                          |
| PolyMet      Mining              | PolyMet      Mining, Inc.                                                                                    |
| PSCW                             | Public      Service Commission of Wisconsin                                                                  |
| PUHCA      1935                  | Public      Utility Holding Company Act of 1935                                                              |
| PUHCA      2005                  | Public      Utility Holding Company Act of 2005                                                              |
| Rainy      River Energy          | Rainy      River Energy Corporation                                                                          |
| SEC                              | Securities      and Exchange Commission                                                                      |
| SFAS                             | Statement      of Financial Accounting Standards No.                                                         |
| SO2                              | Sulfur      Dioxide                                                                                          |
| Square      Butte                | Square      Butte Electric Cooperative                                                                       |
| Standard      & Poor’s | Standard      & Poor’s Ratings Services, a division of The McGraw-Hill Companies,      Inc.        |
| SWL&P                        | Superior      Water, Light and Power Company                                                                 |
| Taconite      Harbor             | Taconite      Harbor Energy Center                                                                           |
| Town      Center                 | Town      Center at Palm Coast development project in Florida                                                |
| Town      Center District        | Town      Center at Palm Coast Community Development District                                                |
| WDNR                             | Wisconsin      Department of Natural Resources                                                               |

----

| · | our      ability to successfully implement our strategic  objectives;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | our      ability to manage expansion and integrate acquisitions;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| · | prevailing      governmental policies, regulatory actions, and legislation including those      of the United States Congress, state legislatures, the FERC, the MPUC, the      PSCW, and various local and county regulators, and city administrators,      allowed rates of return, financings, industry and rate structure,      acquisition and disposal of assets and facilities, real estate      development, operation and construction of plant facilities, recovery of      purchased power, capital investments and other expenses, present or      prospective wholesale and retail competition (including but not limited to      transmission costs), zoning and permitting of land held for resale and      environmental matters; |
| · | the      potential impacts of climate change on our Regulated Utility      operations;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| · | effects      of restructuring initiatives in the electric industry;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| · | economic      and geographic factors, including political and economic      risks;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| · | changes      in and compliance with laws and policies;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| · | weather      conditions;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| · | natural      disasters and pandemic diseases;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| · | war      and acts of terrorism;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| · | wholesale      power market conditions;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| · | population      growth rates and demographic patterns;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| · | effects      of competition, including competition for retail and wholesale      customers;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| · | changes      in the real estate market;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| · | pricing      and transportation of commodities;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| · | changes      in tax rates or policies or in rates of inflation;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| · | unanticipated      project delays or changes in project costs;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| · | availability      and management of construction      materials and skilled construction labor for capital    projects;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| · | unanticipated      changes in operating expenses, capital and land      development expenditures;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| · | global      and domestic economic conditions;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| · | our      ability to access capital markets and  bank financing;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| · | changes      in interest rates and the performance of the financial      markets;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| · | our      ability to replace a mature workforce and retain qualified, skilled and      experienced personnel; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| · | the      outcome of legal and administrative proceedings (whether civil or      criminal) and settlements that affect the business and profitability of      ALLETE.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

----

| Item      1. | Business |
|--------------|----------|

|   | · | Regulated Utility      includes retail and wholesale rate regulated electric, natural gas and      water services in northeastern Minnesota and northwestern      Wisconsin under the jurisdiction of state and federal regulatory      authorities. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Nonregulated Energy      Operations includes our coal mining activities in North Dakota,      approximately 50 MW of nonregulated generation and Minnesota land      sales. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Investment in ATC      includes our equity ownership interest inATC. |
|--------|--------|----------------------------------------------------------------------|

| Year      Ended December 31                          | 2007   | 2006   | 2005   |
|------------------------------------------------------|--------|--------|--------|
|                                                 |   |   |   |
| Consolidated      Operating Revenue – Millions | $841.7 | $767.1 | $737.4 |
|                                                 |   |   |   |
| Percentage      of Consolidated Operating Revenue    |   |   |   |
| Regulated      Utility                               | 86     | 83     | 78     |
| Nonregulated      Energy Operations                  | 8      | 9      | 16     |
| Real      Estate                                     | 6      | 8      | 6      |
|                                                 | 100%   | 100%   | 100%   |

| Regulated Utility Electric SalesYear Ended December 31 | 2007   | %      | 2006   | %      | 2005   | %      |
|--------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Millions      of Kilowatthours                                                       |   |   |   |   |   |   |
|                                                                                 |   |   |   |   |   |   |
| Retail      and Municipals                                                           |   |   |   |   |   |   |
| Residential                                                                          | 1,141  | 9      | 1,100  | 9      | 1,102  | 10     |
| Commercial                                                                           | 1,373  | 11     | 1,335  | 10     | 1,327  | 11     |
| Industrial                                                                           | 7,054  | 55     | 7,206  | 56     | 7,130  | 61     |
| Municipals      and Other                                                            | 1,092  | 8      | 990    | 8      | 956    | 8      |
|                                                                                 | 10,660 | 83     | 10,631 | 83     | 10,515 | 90     |
| Other      Power Suppliers (a)                                                       | 2,157  | 17     | 2,153  | 17     | 1,142  | 10     |
|                                                                                 | 12,817 | 100    | 12,784 | 100    | 11,657 | 100    |

| (a) | Effective      January 1, 2006, Taconite Harbor was redirected from Nonregulated Energy      Operations to RegulatedUtility. |
|-----|------------------------------------------------------------------------------------------------------------------------------|

----

| Industrial      Customer Electric SalesYear      Ended December 31 | 2007   | %      | 2006   | %      | 2005   | %      |
|--------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Millions      of Kilowatthours                                |   |   |   |   |   |   |
| Taconite      Producers                                            | 4,408  | 62     | 4,517  | 63     | 4,558  | 64     |
| Paper,      Pulp and Wood Products                                 | 1,613  | 23     | 1,689  | 23     | 1,623  | 23     |
| Pipelines                                                          | 562    | 8      | 550    | 8      | 480    | 7      |
| Other      Industrial                                              | 471    | 7      | 450    | 6      | 469    | 6      |
|                                                               |   |   | 7,054  | 100    | 7,206  | 100    | 7,130 | 100 |

----

| Minimum      Revenue and Demand Under ContractAs      of February 1, 2008 | Minimum      AnnualDemand      Revenue (a,b) | MonthlyMegawatts |
|---------------------------------------------------------------------------|----------------------------------------------|------------------|
|                                                                      |                                         |             |
| 2008                                                                      | $64.1      million                           | 401              |
| 2009                                                                      | $27.5      million                           | 154              |
| 2010                                                                      | $25.5      million                           | 148              |
| 2011                                                                      | $25.3      million                           | 148              |
| 2012                                                                      | $15.6      million                           | 88               |

| (a) | Based      on past experience, we believe revenue from our Large Power Customers will      be substantially in excess of the minimum contract amounts. For example,      in our 2006 Form 10-K we stated that 2007 minimum annual revenue demand      from these Large Power Customers would be $62.5 million. Actual 2007      demand revenue from these Large Power Customers was      $118.7 million. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (b) | Although      several contracts have a feature that allows demand to go to zero after a      two-year advance notice of a permanent closure, this minimum revenue      summary does not reflect this occurrence happening in the forecasted      period because we believe it isunlikely. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Customer                                                  | Industry            | Location                                                  | Ownership                                                                                         | EarliestTermination      Date |
|-----------------------------------------------------------|---------------------|-----------------------------------------------------------|---------------------------------------------------------------------------------------------------|-------------------------------|
| Hibbing      Taconite Co. (a)                             | Taconite            | Hibbing,      MN                                          | 62.3%      Mittal Steel USA Inc.23%      Cleveland-Cliffs Inc14.7%      United States Steel (USS) | February      29, 2012        |
| ArcelorMittal      USA – Minorca Mine               | Taconite            | Virginia,      MN                                         | ArcelorMittal      USA Inc.                                                                       | December      31, 2013        |
| United      States Steel Corporation(USS)      Minntac    | Taconite            | Mt.      Iron, MN                                         | USS                                                                                               | October      31, 2014         |
| USS      Keewatin Taconite                                | Taconite            | Keewatin,      MN                                         | USS                                                                                               | October      31, 2014         |
| United      Taconite LLC (a)                              | Taconite            | Eveleth,      MN                                          | 70%      Cleveland-Cliffs Inc30%      Laiwu Steel Group                                           | February      29, 2012        |
| UPM,      Blandin Paper Mill (a)                          | Paper               | Grand      Rapids, MN                                     | UPM-Kymmene      Corporation                                                                      | February      29, 2012        |
| Boise      White Paper, LLC (b)                      | Paper               | International      Falls, MN                              | Madison Dearborn Partnership                                                            | February      28, 2009        |
| Sappi      Cloquet LLC (a)                                | Paper               | Cloquet,      MN                                          | Sappi      Limited                                                                                | February      29, 2012        |
| NewPage      Corporation – Duluth Mills             | Paper      and Pulp | Duluth,      MN                                           | NewPage      Corporation                                                                          | August      31, 2013          |
| USG      Interiors, Inc. (b)                              | Manufacturer        | Cloquet,      MN                                          | USG      Corporation                                                                              | February      28, 2009        |
| Enbridge      Energy Company,Limited      Partnership (b) | Pipeline            | Deer      River, MNFloodwood,      MN                     | Enbridge      Energy Company,Limited      Partnership                                             | February      28, 2009        |
| Minnesota      Pipeline Company (b)                       | Pipeline            | Staples,      MNLittle      Falls, MNPark      Rapids, MN | 60%      Koch Pipeline Co. L.P.40%      Marathon AshlandPetroleum      LLC                        | February      28, 2009        |

| (a) | The      contract will terminate four years from the date of written notice from      either Minnesota Power or the customer. No notice of contract cancellation      has been given by either party. Thus, the earliest date of cancellation is      February 29, 2012. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (b) | The      contract will terminate one year from the date of written notice from      either Minnesota Power or the customer. No notice of contract cancellation      has been given by either party. Thus, the earliest date of cancellation is      February 28, 2009. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Regulated      UtilityPower      Supply              | UnitNo.           | YearInstalled   | Net      WinterCapability | For the Year EndedDecember 31,      2007Electric Requirements |
|------------------------------------------------------|-------------------|-----------------|---------------------------|----------------------------------------------------------------------------------------|
|                                                 |              |            | MW                        | MWh                                                                                    | % |
| Coal-Fired                                           |              |            |                      |                                                                                   |   |
| Boswell      Energy Center                           | 1                 | 1958            | 69                        |                                                                                   |   |
| in      Cohasset, MN                                 | 2                 | 1960            | 69                        |                                                                                   |   |
|                                                 | 3                 | 1973            | 350                       |                                                                                   |   |
|                                                 | 4                 | 1980            | 429                       |                                                                                   |   |
|                                                 |              |            | 917                       | 6,005,520                                                                              | 45.7% |
| Laskin      Energy Center                            | 1                 | 1953            | 55                        |                                                                                   |   |
| in      Hoyt Lakes, MN                               | 2                 | 1953            | 54                        |                                                                                   |   |
|                                                 |              |            | 109                       | 591,499                                                                                | 4.5 |
| Taconite      Harbor Energy Center                   | 1,      2 & 3 | 1957,      1957 |                      |                                                                                   |   |
| in      Taconite Harbor, MN                          |              | 1967            | 220                       | 1,491,457                                                                              | 11.4 |
| Total      Coal                                      |              |            | 1,246                     | 8,088,476                                                                              | 61.6 |
| Purchased      Steam                                 |              |            |                      |                                                                                   |   |
| Hibbard      Energy Center in Duluth, MN             | 3      & 4    | 1949,      1951 | 47                        | 53,354                                                                                 | 0.4 |
| Hydro                                                |              |            |                      |                                                                                   |   |
| Group      consisting of ten stations in MN          | Various           |            | 115                       | 428,153                                                                                | 3.3 |
| Total      Company Generation                        |              |            | 1,408                     | 8,569,983                                                                              | 65.3 |
| Long      Term Purchased Power                       |              |            |                      |                                                                                   |   |
| Square      Butte burns lignite coal near Center, ND |              |            | 273                       | 1,533,186                                                                              | 11.7 |
| Wind      – Oliver County, ND (a)              |              |            | 20                        | 203,675                                                                                | 1.5 |
| Total      Long Term Purchased Power                 |              |            | 293                       | 1,736,861                                                                              | 13.2 |
|                                                 |              |            |                      |                                                                                   |   |
| Other      Purchased Power – Net (b)      |              |            | –                   | 2,819,715                                                                              | 21.5 |
| Total      Purchased Power                           |              |            | 293                       | 4,556,576                                                                              | 34.7 |
| Total                                                |              |            | 1,701                     | 13,126,559                                                                             | 100.0% |

| (a) | The      nameplate capacity of Oliver Wind I Energy Center is 50-MWs and 48-MWs for      the Oliver Wind II Energy Center. The capacity reflected in the table is      actual accredited capacity of the facility. Accredited capacity is the      amount of net generating capability associated with the facility for which      capacity credit may be obtained under applicable Mid-Continent Area Power      Pool (MAPP) rules. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (b) | Includes      short term market purchases in the MISO market and from other power      suppliers. |
|-----|---------------------------------------------------------------------------------------------------|

----

| Coal      Delivered to Minnesota PowerYear      Ended December 31 | 2007   | 2006   | 2005   |
|-------------------------------------------------------------------|--------|--------|--------|
| Average      Price per Ton                                        | $21.78 | $20.19 | $19.76 |
| Average      Price per MBtu                                       | $1.20  | $1.10  | $1.08  |

----

|   | · | rulemaking      for long-term transmission rights; |
|--------|--------|----------------------------------------------------|

|   | · | dockets      pertaining to the development and certification of electric reliability      organizations, including delegated authority to regional entities for      proposing and enforcing reliabilitystandards; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | rules      specifying the form of applications for federal construction permits to be      issued in the exercise of federal backstop siting authority for      transmission projects; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | rulemaking      requiring unregulated transmitting utilities to provide open access to      their transmission systems; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------|

|   | · | various      rulemakings regarding the consideration of merger applications under the      revised Federal Power Act Section203; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------|

|   | · | a      U.S. Department of Energy study/report on the benefits of economic      dispatch and a report on recommendations of regional joint boards that      considered economic dispatch; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | rulemaking      to facilitate transmission market transparency;  and |
|--------|--------|----------------------------------------------------------------------|

|   | · | the      energy market manipulationrulemaking. |
|--------|--------|------------------------------------------------|

----

|   | · | "As-needed"      peaking and intermediate generationfacilities; |
|--------|--------|-----------------------------------------------------------------|

|   | · | Expiration      of wholesale contracts presently inplace; |
|--------|--------|-----------------------------------------------------------|

|   | · | Short-term      market purchases; |
|--------|--------|-----------------------------------|

|   | · | Improved      efficiency of existing generation and power delivery assets;      and |
|--------|--------|-------------------------------------------------------------------------------------|

|   | · | Expanded      conservation and demand-side management  initiatives. |
|--------|--------|---------------------------------------------------------------------|

----

----

| Nonregulated      Power Supply | UnitNo.        | YearInstalled   | YearAcquired | NetCapability |
|--------------------------------|----------------|-----------------|--------------|---------------|
|                           |           |            |         | MW            |
| Steam                          |           |            |         |          |
| Wood-Fired      (a)            |           |            |         |          |
| Cloquet      Energy Center     | 5              | 2001            | 2001         | 22            |
| in      Cloquet, MN            |           |            |         |          |
| Rapids      Energy Center (b)  | 6      & 7 | 1969,      1980 | 2000         | 29            |
| in      Grand Rapids, MN       |           |            |         |          |
| Hydro                          |           |            |         |          |
| Conventional      Run-of-River |           |            |         |          |
| Rapids      Energy Center (b)  | 4      & 5 | 1917            | 2000         | 1             |
| in      Grand Rapids, MN       |           |            |         |          |

| (a) | Supplemented      by coal. |
|-----|----------------------------|

| (b) | The      net generation is primarily dedicated to the needs of one      customer. |
|-----|-----------------------------------------------------------------------------------|

----

----

----

----

| (1) | make      emissions reductions (See AREA and Boswell Unit 3 Emission Reduction Plans      for discussion of current emission reduction  initiatives); |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | purchase SO2 and      NOX      allowances through the EPA’s cap-and-trade system (See CAIR Phase I      NOX      Allowance Purchases below); and/or |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | use      a combination of both (1) and (2). |
|-----|---------------------------------------------|

----

----

| Executive Officers                                                                 | Initial Effective Date |
|------------------------------------------------------------------------------------|------------------------|
|                                                                               |                   |
| Donald J. Shippar, Age      58                                                     |                   |
| Chairman,      President and Chief Executive Officer                               | January      1, 2006   |
| President      and Chief Executive Officer                                         | January      21, 2004  |
| Executive      Vice President – ALLETE and President – Minnesota Power | May      13, 2003      |
| President      and Chief Operating Officer – Minnesota Power                 | January      1, 2002   |
|                                                                               |                   |
| Deborah A. Amberg, Age      42                                                     |                   |
| Senior      Vice President, General Counsel and Secretary                          | January      1, 2006   |
| Vice      President, General Counsel and Secretary                                 | March      8, 2004     |
|                                                                               |                   |
| Steven Q. DeVinck, Age      48                                                     |                   |
| Controller                                                                         | July      12, 2006     |
|                                                                               |                   |
| Laura A. Holquist, Age      46                                                     |                   |
| President      – ALLETE Properties, LLC                                      | September      6, 2001 |
|                                                                               |                   |
| Mark A. Schober, Age      52                                                       |                   |
| Senior      Vice President and Chief Financial Officer                             | July      1, 2006      |
| Senior      Vice President and Controller                                          | February      1, 2004  |
| Vice      President and Controller                                                 | April      18, 2001    |
|                                                                               |                   |
| Donald W. Stellmaker,      Age 50                                                  |                   |
| Treasurer                                                                          | July      24, 2004     |
|                                                                               |                   |
| Claudia Scott Welty, Age      55                                                   |                   |
| Senior      Vice President and Chief Administrative Officer                        | February      1, 2004  |

|   | Ms. Amberg was a Senior      Attorney. |
|--------|----------------------------------------|

|   | Mr. DeVinck was      Director of Nonutility Business Development, and Assistant Controller. |
|--------|---------------------------------------------------------------------------------------------|

|   | Mr. Stellmaker was      Director of Financial Planning. |
|--------|---------------------------------------------------------|

|   | Ms. Welty was Vice      President Strategy and TechnologyDevelopment. |
|--------|-----------------------------------------------------------------------|

----

----

----

|   | · | severe      or unexpected weather conditions; |
|--------|--------|-----------------------------------------------|

|   | · | 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 Minnesota Power’s generating facilities or those of our      competitors; |
|--------|--------|-------------------------------------------------------------------------------------------------|

|   | · | changes      in production and storage levels of natural gas, lignite, coal, crude oil      and refined products; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------|

|   | · | natural      disasters, wars, sabotage, terrorist acts or other catastrophic events;      and |
|--------|--------|-----------------------------------------------------------------------------------------------|

|   | · | federal,      state, local and foreign energy, environmental, or other regulation and      legislation. |
|--------|--------|---------------------------------------------------------------------------------------------------------|

----

----

| Item      1B. | Unresolved      Staff Comments |
|---------------|--------------------------------|

| Item      2. | Properties |
|--------------|------------|

| Item      3. | Legal      Proceedings |
|--------------|------------------------|

| Item      4. | Submission      of Matters to a Vote of SecurityHolders |
|--------------|---------------------------------------------------------|

| Item      5. | Market      for Registrant’s Common Equity, Related Stockholder Matters and Issuer      Purchases of Equity Securities |
|--------------|------------------------------------------------------------------------------------------------------------------------------|

|                       | 2007             | 2006      |
|----------------------------|------------------|-----------|
|                       | Price      Range | Dividends | Price      Range | Dividends |
| Quarter                    | High             | Low       | Declared | High | Low | Declared |
|                       |             |      |   |   |   |   |
| First                      | $49.69           | $44.93    | $0.4100 | $47.81 | $42.99 | $0.3625 |
| Second                     | 51.30            | 45.39     | 0.4100 | 48.55 | 44.34 | 0.3625 |
| Third                      | 50.05            | 38.60     | 0.4100 | 49.30 | 43.26 | 0.3625 |
| Fourth                     | 46.48            | 38.17     | 0.4100 | 47.84 | 42.55 | 0.3625 |
| Annual      Total          |             |      | $1.640 |   |   | $1.450 |
| Dividend      Payout Ratio |             |      | 53% |   |   | 53% |

----

|                                                                              | 2007     |   | 2006     |   | 2005     |   | 2004     |                        | 2003     |      |
|-----------------------------------------------------------------------------------|----------|--------|----------|--------|----------|--------|----------|-----------------------------|----------|-----------|
|                                                                              |     |   |     |   |     |   |     |                        |     |      |
| Operating      Revenue                                                            | $841.7   |   | $767.1   |   | $737.4   |   | $704.1   |                        | $659.6   |      |
| Operating      Expenses                                                           | 708.0    |   | 626.4    |   | 692.3    | (d)    | 603.2    |                        | 561.9    |      |
| Income      from Continuing Operations Before Change in Accounting      Principle | 87.6     |   | 77.3     |   | 17.6     | (d)    | 38.5     |                        | 29.2     |      |
| Income      (Loss) from Discontinued Operations – Net of Tax                | –  |   | (0.9)    |   | (4.3)    |   | 73.7     |                        | 207.2    |  (f) |
| Change      in Accounting Principle – Net of Tax                            | –  |   | –  |   | –  |   | (7.8)    |     (b) | –  |      |
| Net      Income                                                                   | 87.6     |   | 76.4     |   | 13.3     |   | 104.4    |                        | 236.4    |      |
| Common      Stock Dividends                                                       | 44.3     |   | 40.7     |   | 34.4     |   | 79.7     |                        | 93.2     |      |
| Earnings      Retained in (Distributed from) Business                             | $43.3    |   | $35.7    |   | $(21.1)  |   | $24.7    |                        | $143.2   |      |
| Shares      Outstanding – Millions                                          |     |   |     |   |     |   |     |                        |     |      |
| Year-End                                                                          | 30.8     |   | 30.4     |   | 30.1     |   | 29.7     |                        | 29.1     |      |
| Average (c)                                                                       |     |   |     |   |     |   |     |                        |     |      |
| Basic                                                                             | 28.3     |   | 27.8     |   | 27.3     |   | 28.3     |                        | 27.6     |      |
| Diluted                                                                           | 28.4     |   | 27.9     |   | 27.4     |   | 28.4     |                        | 27.8     |      |
| Diluted      Earnings (Loss) Per Share                                            |     |   |     |   |     |   |     |                        |     |      |
| Continuing      Operations                                                        | $3.08    |   | $2.77    |   | $0.64    | (d)    | $1.35    |     (e) | $1.05    |      |
| Discontinued      Operations                                                      | –  |   | (0.03)   |   | (0.16)   |   | 2.59     |                        | 7.47     | (f)       |
| Change      in Accounting Principle                                               | –  |   | –  |   | –  |   | (0.27)   |                        | –  |      |
|                                                                              | $3.08    |   | $2.74    |   | $0.48    |   | $3.67    |                        | $8.52    |      |
| Total      Assets                                                                 | $1,644.2 |   | $1,533.4 | (a)    | $1,398.8 |   | $1,431.4 |                        | $3,101.3 |      |
| Long-Term      Debt                                                               | 410.9    |   | 359.8    |   | 387.8    |   | 389.4    |                        | 513.9    |      |
| Return      on Common Equity                                                      | 12.4%    |   | 12.1%    |   | 2.2%     | (d)    | 8.3%     |                        | 17.7%    |      |
| Common      Equity Ratio                                                          | 63.7%    |   | 63.1%    |   | 60.7%    |   | 61.7%    |                        | 64.4%    |      |
| Dividends      Declared per Common Share                                          | $1.6400  |   | $1.4500  |   | $1.2450  |   | $2.8425  |                        | $3.3900  |      |
| Dividend      Payout Ratio                                                        | 53%      |   | 53%      |   | 259%     | (d)    | 77%      |                        | 40%      |      |
| Book      Value Per Share at Year-End                                             | $24.11   |   | $21.90   |   | $20.03   |   | $21.23   |                        | $50.18   |      |
| Capital      Expenditures by Segment                                              |     |   |     |   |     |   |     |                        |     |      |
| Regulated      Utility Operations                                                 | $220.6   |   | $107.5   |   | $46.5    |   | $41.7    |                        | $42.2    |      |
| Non      Regulated Utility                                                        | 3.3      |   | 1.9      |   | 12.1     |   | 15.7     |                        | 26.5     |      |
| Real      Estate      (h)                                                         | –  |   | –  |   | –  |   | –  |                        | –  |      |
| Other                                                                             | –  |   | –  |   | –  |   | 0.4      |                        | –  |      |
| Discontinued      Operations                                                      | –  |   | –  |   | 4.5      |   | 21.4     |                        | 67.6     |      |
| Total      Capital Expenditures                                                   | $223.9   |   | $109.4   |   | $63.1    |   | $79.2    |                        | $136.3   |      |
| Current      Cost Recovery (g)                                                    | $145     |   | $27      |   | –  |   | –  |                        | –  |      |

| (a) | Included      $86.1 million of assets and $107.6 million of liabilities reflecting the      adoption of SFAS 158 “Employers’ Accounting for Defined Benefit Pension      and Other Postretirement Plans.” (See Notes 2 and  16.) |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (b) | Reflected      the cumulative effect on prior years (to December 2003) of changing to the      equity method of accounting for investments in limited liability companies      included in our emerging technology portfolio. (See Note    6.) |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (c) | Excludes      unallocated ESOP shares. |
|-----|----------------------------------------|

| (d) | Impacted      by a $50.4 million, or $1.84 per share, charge related to the assignment      of the Kendall County power purchase agreement (See Note 10.), a $2.5      million, or $0.09 per share, deferred tax benefit due to comprehensive      state tax planning initiatives, and a $3.7 million, or $0.13 per      share, current tax benefit due to a positive resolution of income tax      audit issues. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (e) | Included      a $10.9 million, or $0.38 per share, after-tax debt prepayment cost      incurred as part of ALLETE’s financial restructuring in preparation for      the spin-off of the Automotive Services business and an $11.5 million, or      $0.41 per share, gain on the sale of ADESA shares related to the Company’s      ESOP (see Note 16). |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (f) | Included      a $71.6 million, or $2.59 per share, gain on the sale of the Water      Services businesses. |
|-----|------------------------------------------------------------------------------------------------------------|

| (g) | Estimated      current capital expenditures recoverable outside of a rate      case. |
|-----|--------------------------------------------------------------------------------------|

| (h) | Excludes      capitalized improvements on our development projects, which are included      in inventory. (See Note 6.) |
|-----|-------------------------------------------------------------------------------------------------------------------------|

----

|   | · | Regulated Utility      includes retail and wholesale rate regulated electric, natural gas and      water services in northeastern Minnesota and northwestern      Wisconsin under the jurisdiction of state and federal regulatory      authorities. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Nonregulated Energy      Operations includes our coal mining activities in North Dakota,      approximately 50 MW of nonregulated generation and Minnesota land      sales. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Investment in ATC      includes our equity ownership interest inATC. |
|--------|--------|----------------------------------------------------------------------|

|   | · | increased      electric sales to residential, commercial and municipal      customers; |
|--------|--------|----------------------------------------------------------------------------------------|

|   | · | continued      strong demand from our industrialcustomers; |
|--------|--------|------------------------------------------------------------|

|   | · | rate      increases, effective January 1, 2007, at  SWL&P; |
|--------|--------|----------------------------------------------------------------|

|   | · | commencement      of current cost recovery on AREA project environmental capital      expenditures; |
|--------|--------|-----------------------------------------------------------------------------------------------------|

|   | · | higher      AFUDC related to increased capitalexpenditures; |
|--------|--------|-------------------------------------------------------------|

|   | · | increased      operations and maintenance expense, relating to outages and salary and      wage increases; and |
|--------|--------|----------------------------------------------------------------------------------------------------------------|

|   | · | a      lower effective tax rate. |
|--------|--------|----------------------------------|

----

| Kilowatthours      Sold             | 2007   | 2006   | 2005   |
|-------------------------------------|--------|--------|--------|
| Millions                            |   |   |   |
|                                |   |   |   |
| Regulated      Utility              |   |   |   |
| Retail      and Municipals          |   |   |   |
| Residential                         | 1,141  | 1,100  | 1,102  |
| Commercial                          | 1,373  | 1,335  | 1,327  |
| Industrial                          | 7,054  | 7,206  | 7,130  |
| Municipals                          | 1,008  | 911    | 877    |
| Other                               | 84     | 79     | 79     |
| Total      Retail and Municipals    | 10,660 | 10,631 | 10,515 |
| Other      Power Suppliers          | 2,157  | 2,153  | 1,142  |
| Total      Regulated Utility        | 12,817 | 12,784 | 11,657 |
| Nonregulated      Energy Operations | 249    | 240    | 1,521  |
| Total      Kilowatthours Sold       | 13,066 | 13,024 | 13,178 |

| Real      Estate                         | 2007     | 2006    | 2005     |
|------------------------------------------|----------|---------|----------|
| Revenue      and Sales Activity (a) | Quantity | Amount  | Quantity | Amount | Quantity | Amount |
| Dollars      in Millions                 |     |    |     |   |   |   |
|                                     |     |    |     |   |   |   |
| Revenue      from Land Sales             |     |    |     |   |   |   |
| Town      Center Sales                   |     |    |     |   |   |   |
| Non-residential      Sq. Ft.             | 540,059  | $15.0   | 401,971  | $10.8 | 643,000 | $15.2 |
| Residential      Units                   | 130      | 1.6     | 773      | 12.9 | – | – |
| Palm      Coast Park                     |     |    |     |   |   |   |
| Non-residential      Sq. Ft.             | 40,000   | 2.0     | –  | – | – | – |
| Residential      Unit                    | 606      | 13.2    | 200      | 3.0 | – | – |
| Other      Land Sales                    |     |    |     |   |   |   |
| Acres (b)                           | 483      | 10.6    | 732      | 24.4 | 1,102 | 38.1 |
| Lots                                     | –  | – | –  | – | 7 | 0.4 |
| Contract      Sales Price (c)            |     | 42.4    |     | 51.1 |   | 53.7 |
| Revenue      Recognized from             |     |    |     |   |   |   |
| Previously      Deferred Sales           |     | 3.1     |     | 9.7 |   | – |
| Deferred      Revenue                    |     | (1.2)   |     | (3.8) |   | (10.0) |
| Adjustments      (d)                     |     | – |     | (0.9) |   | (1.7) |
| Revenue      from Land Sales             |     | 44.3    |     | 56.1 |   | 42.0 |
| Other      Revenue                       |     | 6.2     |     | 6.5 |   | 5.5 |
|                                     |     | $50.5   |     | $62.6 |   | $47.5 |

| (a) | Quantity      amounts are approximate until finalbuild-out. |
|-----|-------------------------------------------------------------|

| (b) | Acreage      amounts are shown on a gross basis, including wetlands and minority      interest. |
|-----|-------------------------------------------------------------------------------------------------|

| (c) | Reflected      total contract sales price on closed land transactions. Land sales are      recorded using a percentage-of-completion method. (See Critical Accounting      Estimates and Note 2.) |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (d) | Contributed      development dollars, which are credited to cost of real estate      sold. |
|-----|--------------------------------------------------------------------------------------------|

----

|   | · | scheduled      outage at Boswell Unit 3; |
|--------|--------|------------------------------------------|

|   | · | scheduled      outages at Laskin Unit 1 and Taconite Harbor Unit 2 relating to AREA Plan      environmental upgrades; and |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------|

|   | · | unscheduled      outages at Boswell Unit 4. |
|--------|--------|---------------------------------------------|

----

----

----

----

----

----

|   | · | New      FERC-approved wholesale rates effective March 1,  2008; |
|--------|--------|------------------------------------------------------------------|

|   | · | Minnesota      Power’s intention to file a retail rate case with the MPUC in mid-2008,      with interim rates in effect 60 dayslater; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Minnesota      Power’s expectation that electricity sales to industrial customers will      continue at the current high levels during2008; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | increased      revenue from current cost recovery riders related to the Company’s      investments in environmental and renewable energy    initiatives; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | increased      operation and maintenance expenses, including labor and benefit      costs; |
|--------|--------|--------------------------------------------------------------------------------------------|

|   | · | increased      financing costs associated with the 2008 capital expenditure      program; |
|--------|--------|-------------------------------------------------------------------------------------------|

|   | · | anticipation      of approximately $316 million in capital expenditures in 2008, about half      of which will be invested in environmental and renewable energy      initiatives; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the      expectation of ALLETE investing an additional $5 to $7 million in ATC in      2008; |
|--------|--------|----------------------------------------------------------------------------------------------|

|   | · | a      continuation of the difficult market conditions;  and |
|--------|--------|--------------------------------------------------------------|

|   | · | an      expectation that net income in 2008 will be less than in    2007. |
|--------|--------|---------------------------------------------------------------------------|

----

|   | · | "As-needed"      peaking and intermediate generationfacilities; |
|--------|--------|-----------------------------------------------------------------|

|   | · | Expiration      of wholesale contracts presently inplace; |
|--------|--------|-----------------------------------------------------------|

|   | · | Short-term      market purchases; |
|--------|--------|-----------------------------------|

|   | · | Improved      efficiency of existing generation and power delivery assets;      and |
|--------|--------|-------------------------------------------------------------------------------------|

|   | · | Expanded      conservation and demand-side management  initiatives. |
|--------|--------|---------------------------------------------------------------------|

|   | · | We      will consider only carbon minimizing resources to supply power to our      customers. We will not consider a new coal resource without a carbon      emission solution. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | We      will aggressively pursue Minnesota’s Renewable Energy Standard by adding      significant renewable resources to our portfolio of generation facilities      and power supply agreements. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | We      will continue to improve the efficiency of coal-based generation      facilities. |
|--------|--------|-------------------------------------------------------------------------------------------|

|   | · | We      plan to implement aggressive demand side conservation    efforts. |
|--------|--------|---------------------------------------------------------------------------|

|   | · | We      will continue to support research of technologies to reduce carbon      emissions from generation facilities and support carbon sequestration      efforts. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | We      plan to achieve overall carbon emission reductions while maintaining      competitively priced electric service to our  customers. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

----

| Summary      of Development ProjectsFor      the Year EndedDecember      31, 2007 | Ownership | TotalAcres      (a) | ResidentialUnits      (b) | Non-residentialSq.      Ft. (b, c) |
|-----------------------------------------------------------------------------------|-----------|---------------------|---------------------------|-----------------------------------------|
|                                                                              |      |                |                      |                                    |
| Town      Center                                                                  | 80%       |                |                      |                                    |
| At      December 31, 2006                                                         |      | 1,356               | 2,222                     | 2,705,310                               |
| Property      Sold                                                                |      | (99)                | (130)                     | (540,059)                               |
| Change      in Estimate (a)                                                       |      | (266)               | 197                       | 62,949                                  |
|                                                                              |      | 991                 | 2,289                     | 2,228,200                               |
|                                                                              |      |                |                      |                                    |
| Palm      Coast Park                                                              | 100%      |                |                      |                                    |
| At      December 31, 2006                                                         |      | 4,337               | 3,760                     | 3,156,800                               |
| Property      Sold                                                                |      | (888)               | (606)                     | (40,000)                                |
| Change      in Estimate (a)                                                       |      | (13)                | –                   | –                                 |
|                                                                              |      | 3,436               | 3,154                     | 3,116,800                               |
|                                                                              |      |                |                      |                                    |
| Ormond      Crossings                                                             | 100%      |                |                      |                                    |
| At      December 31, 2006                                                         |      | 5,960               | (d)                       | (d)                                     |
| Change      in Estimate (a)                                                       |      | 8                   |                      |                                    |
|                                                                              |      | 5,968               |                      |                                    |
|                                                                              |      | 10,395              | 5,443                     | 5,345,000                               |

| (a) | Acreage      amounts are approximate and shown on a gross basis, including wetlands and      minority interest. |
|-----|-----------------------------------------------------------------------------------------------------------------|

| (b) | Estimated      and includes minority interest. Density at build out may differ from these      estimates. |
|-----|-----------------------------------------------------------------------------------------------------------|

| (c) | Depending      on the project, non-residential includes retail commercial, non-retail      commercial, office, industrial, warehouse, storage and      institutional. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (d) | A development order approved      by the City of Ormond Beach includes up to 3,700 residential units and 5      million square feet of non-residential space. We estimate the first two      phases of Ormond Crossings will include 2,500-3,200 residential units      and 2.5-3.5 million square feet of various types of non-residential      space. Density of the residential and      non-residential components of the project will be determined based upon      market and traffic mitigation cost considerations.      Approximately      2,000 acres will be devoted to a regionally significant wetlands      mitigation bank. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Summary      of Other Land InventoriesFor      the Year EndedDecember      31, 2007 | Ownership | Total   | Mixed      Use | Residential   | Non-residential | Agricultural |
|-------------------------------------------------------------------------------------|-----------|---------|----------------|---------------|-----------------|--------------|
| Acres      (a)                                                                      |      |    |           |          |            |         |
|                                                                                |      |    |           |          |            |         |
| Palm      Coast Holdings                                                            | 80%       |    |           |          |            |         |
| At      December 31, 2006                                                           |      | 2,136   | 1,404          | 346           | 247             | 139          |
| Property      Sold                                                                  |      | (111)   | (78)           | –       | (14)            | (19)         |
| Change      in Estimate (a)                                                         |      | (1,160) | (964)          | (239)         | 96              | (53)         |
|                                                                                |      | 865     | 362            | 107           | 329             | 67           |
|                                                                                |      |    |           |          |            |         |
| Lehigh                                                                              | 80%       |    |           |          |            |         |
| At      December 31, 2006                                                           |      | 223     | –        | 140           | 74              | 9            |
| Change      in Estimate (a)                                                         |      | 6       | –        | –       | –         | 6            |
|                                                                                |      | 229     | –        | 140           | 74              | 15           |
|                                                                                |      |    |           |          |            |         |
| Cape      Coral                                                                     | 100%      |    |           |          |            |         |
| At      December 31, 2006                                                           |      | 30      | –        | 1             | 29              | –      |
| Property      Sold                                                                  |      | (8)     | –        | –       | (8)             | –      |
|                                                                                |      | 22      | –        | 1             | 21              | –      |
|                                                                                |      |    |           |          |            |         |
| Other      (b)                                                                      | 100%      |    |           |          |            |         |
| At      December 31, 2006                                                           |      | 934     | –        |  – | –         | 934          |
| Property      Sold                                                                  |      | (364)   | –        | –       | –         | (364)        |
| Change      in Estimate      (a)                                                    |      | (113)   | –        | –       | –         | (113)        |
|                                                                                |      | 457     |  –  |  – | –         | 457          |
|                                                                                |      | 1,573   | 362            | 248           | 424             | 539          |

| (a) | Acreage      amounts are approximate and shown on a gross basis, including wetlands      and minority interest. |
|-----|----------------------------------------------------------------------------------------------------------------------|

| (b) | Includes      land located in Palm Coast, Florida not included in development      projects. |
|-----|----------------------------------------------------------------------------------------------|

----

| Real      Estate                             |              |             |
|----------------------------------------------|-------------------|------------------|
| Pending      Contracts (a,      b)           |              | Contract         |
| At      December 31, 2007                    | Quantity      (c) | Sales      Price |
| Dollars      in Millions                     |              |             |
| Town      Center                             |              |             |
| Non-residential      Sq. Ft.                 | 304,000           | $9.6             |
| Residential      Units                       | 490               | 9.3              |
| Palm      Coast Park                         |              |             |
| Non-residential      Sq. Ft.                 | –           | –          |
| Residential      Units                       | 1,263             | 31.9             |
| Other      Land                              |              |             |
| Acres                                        | 123               | 4.4              |
| Total      Pending Land Sales Under Contract |              | $55.2            |

| (a) | For      the year ended December 31, 2007, we had contract cancellations totaling      $22.1 million. |
|-----|-------------------------------------------------------------------------------------------------------|

| (b) | Pending      contracts are contracts for which the due diligence period has ended, and      the contract deposit is non-refundable subject to performance by the      seller. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (c) | Acreage      amounts are approximate and shown on a gross basis, including wetlands      and minority interest. Non-residential square feet and residential      units are estimated and include minority interest. The actual property      densities at build-out may differ from these  estimates. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

|                                        | Payments      Due by Period |
|---------------------------------------------|-----------------------------|
| Contractual      Obligations                |                        | Less      than | 1      to 3 | 4      to 5 | After |
| As      of December 31, 2007                | Total                       | 1      Year | Years | Years | 5      Years |
| Millions                                    |                        |   |   |   |   |
| Long-Term      Debt (a)                     | $760.2                      | $33.7 | $79.6 | $47.7 | $599.2 |
| Operating      Lease Obligations            | 86.4                        | 8.1 | 23.0 | 12.4 | 42.9 |
| FIN      48 – Uncertain Tax Positions | 4.5                         | 2.0 | 2.5 | – | – |
| Unconditional      Purchase Obligations     | 407.7                       | 114.2 | 64.7 | 28.8 | 200.0 |
|                                        | $1,258.8                    | $158.0 | $169.8 | $88.9 | $842.1 |

| Credit      Ratings                                                         | Standard      & Poor’s | Moody’s |
|-----------------------------------------------------------------------------|----------------------------------|---------------|
|                                                                        |                             |          |
| Issuer      Credit Rating                                                   | BBB+                             | Baa2          |
| Commercial      Paper                                                       | A-2                              | P-2           |
| Senior      Secured                                                         |                             |          |
| First      Mortgage Bonds                                                   | A–                         | Baa1          |
| Pollution      Control Bonds                                                | A–                         | Baa1          |
| Unsecured      Debt                                                         |                             |          |
| Collier      County Industrial Development Revenue Bonds – Fixed Rate | BBB                              | –       |

----

| Capital      Expenditures (a)               | 2008                                | 2009          | 2010   | 2011   | 2012   | Total   |
|---------------------------------------------|-------------------------------------|---------------|--------|--------|--------|---------|
| Regulated      Utility Operations           |                                |          |   |   |   |    |
|                                        | Base      and Other                 | $121          | $136   | $173   | $158   | $151    | $739 |
|                                        | Current      Cost Recovery (b) |          |   |   |   |    |   |
|                                        |                                | Environmental | 130    | 68     | 12     | – | 23 | 233 |
|                                        |                                | Renewable     | 54     | 158    | 97     | 108     | 64 | 481 |
|                                        |                                | Transmission  | 11     | 17     | 15     | 20      | 15 | 78 |
|                                        | Total      Current Cost Recovery    | 195           | 243    | 124    | 128    | 102     | 792 |
| Regulated      Utility Capital Expenditures | 316                                 | 379           | 297    | 286    | 253    | 1,531   |
| Other      (c)                              |                                | 7             | 1      | 5      | 4      | 4       | 21 |
| Total      Capital Expenditures             | $323                                | $380          | $302   | $290   | $257   | $1,552  |

|   | (a) | Actual      and expected results will vary with time, regulatory requirements and      company direction. |
|--------|-----|-----------------------------------------------------------------------------------------------------------|

|   | (b) | Estimated      current capital expenditures recoverable outside of a rate      case. |
|--------|-----|--------------------------------------------------------------------------------------|

|   | (c) | Excludes      capitalized improvements on our real estate development projects, which      are included in inventory. (See Note6.) |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------|

----

|                                     | Principal      Cash Flow by Expected Maturity Date |
|------------------------------------------|----------------------------------------------------|
| Interest      Rate Sensitive             |                                               |   |   |   |   |   |   | Fair |
| Financial      Instruments               | 2008                                               | 2009 | 2010 | 2011 | 2012 | Thereafter | Total | Value |
| Dollars      in Millions                 |                                               |   |   |   |   |   |   |   |
|                                     |                                               |   |   |   |   |   |   |   |
| Long-Term      Debt                      |                                               |   |   |   |   |   |   |   |
| Fixed      Rate                          | $7.5                                               | $2.5 | $1.4 | $1.4 | $1.4 | $330.9 | $345.1 | $333.2 |
| Average      Interest Rate – %     | 7.1                                                | 5.6 | 6.3 | 6.3 | 6.3 | 5.5 | 5.6 |   |
|                                     |                                               |   |   |   |   |   |   |   |
| Variable      Rate                       | $4.3                                               | $8.2 | $3.6 | – | $1.7 | $59.8 | $77.6 | $77.7 |
| Average      Interest Rate – % (a) | 7.3                                                | 3.5 | 3.5 | – | 3.9 | 3.5 | 3.7 |   |

| (a) | Assumes      rate in effect at December 31, 2007, remains constant through remaining      term. |
|-----|-------------------------------------------------------------------------------------------------|

----

| Item      7A. | Quantitative      and Qualitative Disclosures about MarketRisk |
|---------------|----------------------------------------------------------------|

| Item      8. | Financial      Statements and Supplementary Data |
|--------------|--------------------------------------------------|

| Item      9A. | Controls      and Procedures |
|---------------|------------------------------|

----

| Item      9B. | Other      Information |
|---------------|------------------------|

----

| Item      10. | Directors,      Executive Officers and CorporateGovernance |
|---------------|------------------------------------------------------------|

|   | · | Directors. The      information regarding directors will be included in the “Election of      Directors” section; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------|

|   | · | Audit Committee Financial      Expert. The information regarding the Audit Committee financial      expert will be included in the “Audit Committee Report”      section; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Audit Committee Members.      The identity of the Audit Committee members is included in the “Audit      Committee Report” section; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Executive Officers. The      information regarding executive officers is included in Part I of this      Form 10-K; and |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------|

|   | · | Section 16(a)      Compliance. The information regarding Section 16(a) compliance will      be included in the “Section 16(a) Beneficial Ownership Reporting      Compliance” section. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Corporate      Governance Guidelines; |
|--------|--------|---------------------------------------|

|   | · | Audit      Committee Charter; |
|--------|--------|-------------------------------|

|   | · | Executive      Compensation Committee Charter; and |
|--------|--------|----------------------------------------------------|

|   | · | Corporate      Governance and Nominating CommitteeCharter. |
|--------|--------|------------------------------------------------------------|

| Item      11. | Executive      Compensation |
|---------------|-----------------------------|

| Item      12. | Security      Ownership of Certain Beneficial Owners and Management and Related      Stockholder Matters |
|---------------|----------------------------------------------------------------------------------------------------------|

| Item      13. | Certain      Relationships and Related Transactions, and Director      Independence |
|---------------|-------------------------------------------------------------------------------------|

| Item      14. | Principal      Accountant Fees and Services |
|---------------|---------------------------------------------|

----

| (a)    | Certain      Documents Filed as Part of this Form 10-K.                                                                                                                                                                    |                                                                                                                                                                                                                                                |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1)    | Financial      Statements                                                                                                                                                                                                  | Page                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                       | ALLETE                                                                                                                                                                                                                                              |   |
|   |                                                                                                                                                                                                                       | Report      of Independent Registered Public Accounting      Firm………………………………………………….........                                     | 58 |
|   |                                                                                                                                                                                                                       | Consolidated      Balance Sheet at December 31, 2007 and      2006……………………………………………..........                                                 | 59 |
|   |                                                                                                                                                                                                                       | For      the Three Years Ended December 31, 2007                                                                                                                                                                                                    |   |
|   |                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                | Consolidated      Statement of Income………………………………………………………………………………. | 60 |
|   |                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                | Consolidated      Statement of Cash Flows…………………………………………………………………………. | 61 |
|   |                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                | Consolidated      Statement of Shareholders’ Equity………………………………………………………………. | 62 |
|   |                                                                                                                                                                                                                       | Notes      to Consolidated Financial      Statements……………………………………………………………………….. | 63 |
| (2)    | Financial      Statement Schedules                                                                                                                                                                                         |                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                       | Schedule      II – ALLETE Valuation and Qualifying Accounts and      Reserves……………………………………….                                                       | 95 |
|   | All      other schedules have been omitted either because the information is not      required to be reported by ALLETE or because the information is included      in the consolidated financial statements or the notes. |
| (3)    | Exhibits      including those incorporated by reference.                                                                                                                                                                   |                                                                                                                                                                                                                                                |

|   | *3(a)1 | -      | Articles      of Incorporation, amended and restated as of May 8, 2001 (filed as Exhibit      3(b) to the March 31, 2001, Form 10-Q, File No.1-3548).                                                                                                                                                       |
|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | *3(a)2 | -      | Amendment      to Articles of Incorporation, effective 12:00 p.m. Eastern Time on      September 20, 2004 (filed as Exhibit 3 to the September 21, 2004,      Form 8-K, File No. 1-3548).                                                                                                              |
|   | *3(a)3 | -      | Amendment      to Certificate of Assumed Name, filed with the Minnesota Secretary of      State on May 8, 2001 (filed as Exhibit 3(a) to the March 31, 2001, Form      10-Q, File No. 1-3548).                                                                                                              |
|   | *3(b)  | -      | Bylaws,      as amended effective August 24, 2004 (filed as Exhibit 3 to the August 25,      2004, Form 8-K, File No. 1-3548).                                                                                                                                                                              |
|   | *4(a)1 | -      | Mortgage      and Deed of Trust, dated as of September 1, 1945, between Minnesota Power      & Light Company (now ALLETE) and The Bank of New York (formerly Irving      Trust Company) and Douglas J. MacInnes (successor to Richard H. West),      Trustees (filed as Exhibit 7(c), File No. 2-5865). |
|   | *4(a)2 | -      | Supplemental      Indentures to ALLETE’s Mortgage and Deed of Trust:                                                                                                                                                                                                                                  |
|   |   |   | Number                                                                                                                                                                                                                                                                                                      | Dated      as of | Reference      File | Exhibit |
|   |   |   | First                                                                                                                                                                                                                                                                                                       | March      1, 1949 | 2-7826 | 7(b) |
|   |   |   | Second                                                                                                                                                                                                                                                                                                      | July      1, 1951 | 2-9036 | 7(c) |
|   |   |   | Third                                                                                                                                                                                                                                                                                                       | March      1, 1957 | 2-13075 | 2(c) |
|   |   |   | Fourth                                                                                                                                                                                                                                                                                                      | January      1, 1968 | 2-27794 | 2(c) |
|   |   |   | Fifth                                                                                                                                                                                                                                                                                                       | April      1, 1971 | 2-39537 | 2(c) |
|   |   |   | Sixth                                                                                                                                                                                                                                                                                                       | August      1, 1975 | 2-54116 | 2(c) |
|   |   |   | Seventh                                                                                                                                                                                                                                                                                                     | September      1, 1976 | 2-57014 | 2(c) |
|   |   |   | Eighth                                                                                                                                                                                                                                                                                                      | September      1, 1977 | 2-59690 | 2(c) |
|   |   |   | Ninth                                                                                                                                                                                                                                                                                                       | April      1, 1978 | 2-60866 | 2(c) |
|   |   |   | Tenth                                                                                                                                                                                                                                                                                                       | August      1, 1978 | 2-62852 | 2(d)2 |
|   |   |   | Eleventh                                                                                                                                                                                                                                                                                                    | December      1, 1982 | 2-56649 | 4(a)3 |
|   |   |   | Twelfth                                                                                                                                                                                                                                                                                                     | April      1, 1987 | 33-30224 | 4(a)3 |
|   |   |   | Thirteenth                                                                                                                                                                                                                                                                                                  | March      1, 1992 | 33-47438 | 4(b) |
|   |   |   | Fourteenth                                                                                                                                                                                                                                                                                                  | June      1, 1992 | 33-55240 | 4(b) |
|   |   |   | Fifteenth                                                                                                                                                                                                                                                                                                   | July      1, 1992 | 33-55240 | 4(c) |
|   |   |   | Sixteenth                                                                                                                                                                                                                                                                                                   | July      1, 1992 | 33-55240 | 4(d) |
|   |   |   | Seventeenth                                                                                                                                                                                                                                                                                                 | February      1, 1993 | 33-50143 | 4(b) |
|   |   |   | Eighteenth                                                                                                                                                                                                                                                                                                  | July      1, 1993 | 33-50143 | 4(c) |
|   |   |   | Nineteenth                                                                                                                                                                                                                                                                                                  | February      1, 1997 | 1-3548      (1996 Form 10-K) | 4(a)3 |
|   |   |   | Twentieth                                                                                                                                                                                                                                                                                                   | November      1, 1997 | 1-3548      (1997 Form 10-K) | 4(a)3 |
|   |   |   | Twenty-first                                                                                                                                                                                                                                                                                                | October      1, 2000 | 333-54330 | 4(c)3 |
|   |   |   | Twenty-second                                                                                                                                                                                                                                                                                               | July      1, 2003 | 1-3548      (June 30, 2003 Form 10-Q) | 4 |
|   |   |   | Twenty-third                                                                                                                                                                                                                                                                                                | August      1, 2004 | 1-3548      (Sept. 30, 2004 Form 10-Q) | 4(a) |
|   |   |   | Twenty-fourth                                                                                                                                                                                                                                                                                               | March      1, 2005 | 1-3548      (March 31, 2005 Form 10-Q) | 4 |
|   |   |   | Twenty-fifth                                                                                                                                                                                                                                                                                                | December      1, 2005 | 1-3548      (March 31, 2006 Form 10-Q) | 4 |
|   |   |   | Twenty-sixth                                                                                                                                                                                                                                                                                                | October      1, 2006 | 1-3548      (2006 Form 10-K) | 4 |

----

|   | 4(a)3    | -      | Twenty-Seventh      Supplemental Indenture, dated as of February 1, 2008, between ALLETE and      The Bank of New York and Douglas J. MacInnes, as  Trustees.                                                                                                                                                                    |
|--------|----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | *4(b)1   | -      | Indenture      of Trust, dated as of August 1, 2004, between the City of Cohasset,      Minnesota and U.S. Bank National Association, as Trustee relating to $111      Million Collateralized Pollution Control Refunding Revenue Bonds (filed as      Exhibit 4(b) to the September 30, 2004, Form 10-Q, File No.      1-3548). |
|   | *4(b)2   | -      | Loan      Agreement, dated as of August 1, 2004, between the City of Cohasset,      Minnesota and ALLETE relating to $111 Million Collateralized Pollution      Control Refunding Revenue Bonds (filed as Exhibit 4(c) to the September      30, 2004, Form 10-Q, File No. 1-3548).                                              |
|   | *4(c)1   | -      | Mortgage      and Deed of Trust, dated as of March 1, 1943, between Superior Water,      Light and Power Company and Chemical Bank & Trust Company and Howard      B. Smith, as Trustees, both succeeded by U.S. Bank Trust N.A., as Trustee      (filed as Exhibit 7(c), File No. 2-8668).                                  |
|   | *4(c)2   | -      | Supplemental      Indentures to Superior Water, Light and Power Company’s Mortgage and Deed      of Trust:                                                                                                                                                                                                                 |
|   |     |   | Number                                                                                                                                                                                                                                                                                                                           | Dated      as of | Reference      File | Exhibit |
|   |     |   | First                                                                                                                                                                                                                                                                                                                            | March      1, 1951 | 2-59690 | 2(d)(1) |
|   |     |   | Second                                                                                                                                                                                                                                                                                                                           | March      1, 1962 | 2-27794 | 2(d)1 |
|   |     |   | Third                                                                                                                                                                                                                                                                                                                            | July      1, 1976 | 2-57478 | 2(e)1 |
|   |     |   | Fourth                                                                                                                                                                                                                                                                                                                           | March      1, 1985 | 2-78641 | 4(b) |
|   |     |   | Fifth                                                                                                                                                                                                                                                                                                                            | December      1, 1992 | 1-3548      (1992 Form 10-K) | 4(b)1 |
|   |     |   | Sixth                                                                                                                                                                                                                                                                                                                            | March      24, 1994 | 1-3548      (1996 Form 10-K) | 4(b)1 |
|   |     |   | Seventh                                                                                                                                                                                                                                                                                                                          | November      1, 1994 | 1-3548      (1996 Form 10-K) | 4(b)2 |
|   |     |   | Eighth                                                                                                                                                                                                                                                                                                                           | January      1, 1997 | 1-3548      (1996 Form 10-K) | 4(b)3 |
|   | 4(c)3    | -      | Ninth      Supplemental Indenture, dated as of October 1, 2007, between Superior      Water, Light and Power Company and U.S. Bank National Association, as      Trustees.                                                                                                                                                       |
|   | 4(c)4    | -      | Tenth      Supplemental Indenture, dated as of October 1, 2007, between Superior      Water, Light and Power Company and U.S. Bank National Association, as      Trustees.                                                                                                                                                       |
|   | *4(d)    | -      | Amended      and Restated Rights Agreement, dated as of July 12, 2006, between ALLETE      and the Corporate Secretary of ALLETE, as Rights Agent (filed as Exhibit 4      to the July 14, 2006, Form 8-K, File No. 1-3548).                                                                                                     |
|   | *10(a)   | -      | Power      Purchase and Sale Agreement, dated as of May 29, 1998, between Minnesota      Power, Inc. (now ALLETE) and Square Butte Electric Cooperative (filed as      Exhibit 10 to the June 30, 1998, Form 10-Q, File No.    1-3548).                                                                                          |
|   | *10(c)   | -      | Master      Agreement (without Appendices and Exhibits), dated December 28, 2004, by      and between Rainy River Energy Corporation and Constellation Energy      Commodities Group, Inc. (filed as Exhibit 10(c) to the 2004 Form 10-K,      File No. 1-3548).                                                                 |
|   | *10(d)1  | -      | Fourth      Amended and Restated Committed Facility Letter (without Exhibits), dated      January 11, 2006, by and among ALLETE and LaSalle Bank National      Association, as Agent (filed as Exhibit 10 to the January 17, 2006, Form      8-K, File No. 1-3548).                                                              |
|   | *10(d)2  | -      | First      Amendment to Fourth Amended and Restated Committed Facility Letter dated      June 19, 2006, by and among ALLETE and LaSalle Bank National Association,      as Agent (filed as Exhibit 10(a) to the June 30, 2006, Form 10-Q,      File No. 1-3548).                                                            |
|   | 10(d)3   | -      | Second      Amendment to Fourth Amended and Restated Committed Facility Letter dated      December 14, 2006, by and among ALLETE and LaSalle Bank National      Association, as Agent.                                                                                                                                           |
|   | *10(e)1  | -      | Financing      Agreement between Collier County Industrial Development Authority and      ALLETE dated as of July 1, 2006 (filed as Exhibit 10(b)1 to the      June 30, 2006, Form 10-Q, File No. 1-3548).                                                                                                                  |
|   | *10(e)2  | -      | Letter      of Credit Agreement, dated as of July 5, 2006, among ALLETE, the      Participating Banks and Wells Fargo Bank, National Association, as      Administrative Agent and Issuing Bank (filed as Exhibit 10(b)2 to the      June 30, 2006, Form 10-Q, File No. 1-3548).                                            |
|   | *10(g)   | -      | Agreement      (without Exhibit) dated December 16, 2005, among ALLETE, Wisconsin Public      Service Corporation and WPS Investments, LLC (filed as Exhibit 10 to the      December 21, 2005 Form 8-K, File No. 1-3548).                                                                                                        |
|   | +*10(h)1 | -      | Minnesota      Power (now ALLETE) Executive Annual Incentive Plan, as amended, effective      January 1, 1999 with amendments through January 2003 (filed as Exhibit 10      to the September 30, 2003, Form 10-Q, File No.    1-3548).                                                                                     |
|   | +*10(h)2 | -      | November      2003 Amendment to the ALLETE Executive Annual Incentive Plan (filed as      Exhibit 10(t)2 to the 2003 Form 10-K, File No. 1-3548).                                                                                                                                                                                |
|   | +*10(h)3 | -      | July      2004 Amendment to the ALLETE Executive Annual Incentive Plan (filed as      Exhibit 10(a) to the June 30, 2004, Form 10-Q, File No.      1-3548).                                                                                                                                                                      |

----

|   | +10(h)4  | - | January      2007 Amendment to the ALLETE Executive Annual Incentive    Plan.                                                                                                                                                         |   |
|--------|----------|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | +*10(h)5 | - | Form      of ALLETE Executive Annual Incentive Plan 2006 Award – President of ALLETE      Properties (filed as Exhibit 10(b) to the January 30, 2006, Form 8-K,      File No. 1-3548).                                     |   |
|   | +*10(h)6 | - | Form      of ALLETE Executive Annual Incentive Plan 2006 Award (filed as Exhibit 10      to the February 17, 2006, Form 8-K, File No. 1-3548).                                                                                   |   |
|   | +10(h)7  | - | Form      of ALLETE Executive Annual Incentive Plan Awards Effective      2007.                                                                                                                                                       |   |
|   | +*10(i)1 | - | ALLETE      and Affiliated Companies Supplemental Executive Retirement Plan, as      amended and restated, effective January 1, 2004 (filed as Exhibit 10(u) to      the 2003 Form 10-K, File No. 1-3548).                            |   |
|   | +*10(i)2 | - | January      2005 Amendment to the ALLETE and Affiliated Companies Supplemental      Executive Retirement Plan (filed as Exhibit 10(b) to the March 31, 2005,      Form 10-Q, File No. 1-3548).                                       |   |
|   | +*10(i)3 | - | August      2006 Amendments to the ALLETE and Affiliated Companies Supplemental      Executive Retirement Plan (filed as Exhibit 10(a) to the September 30,      2006, Form 10-Q, File No. 1-3548).                                   |   |
|   | +10(i)4  | - | December      2006 Amendments to the ALLETE and Affiliated Companies Supplemental      Executive Retirement Plan.                                                                                                                     |   |
|   | +*10(j)1 | - | Minnesota      Power and Affiliated Companies Executive Investment Plan I, as amended and      restated, effective November 1, 1988 (filed as Exhibit 10(c) to the 1988      Form 10-K, File No. 1-3548).                             |   |
|   | +*10(j)2 | - | Amendments      through December 2003 to the Minnesota Power and Affiliated Companies      Executive Investment Plan I (filed as Exhibit 10(v)2 to the 2003 Form      10-K, File No. 1-3548).                                         |   |
|   | +*10(j)3 | - | July      2004 Amendment to the Minnesota Power and Affiliated Companies Executive      Investment Plan I (filed as Exhibit 10(b) to the June 30, 2004, Form 10-Q,      File No. 1-3548).                                             |   |
|   | +*10(j)4 | - | August      2006 Amendment to the Minnesota Power and Affiliated Companies Executive      Investment Plan I (filed as Exhibit 10(b) to the September 30, 2006,      Form 10-Q, File No. 1-3548).                                 |   |
|   | +*10(k)1 | - | Minnesota      Power and Affiliated Companies Executive Investment Plan II, as amended      and restated, effective November 1, 1988 (filed as Exhibit 10(d) to the      1988 Form 10-K, File No. 1-3548).                            |   |
|   | +*10(k)2 | - | Amendments      through December 2003 to the Minnesota Power and Affiliated Companies      Executive Investment Plan II (filed as Exhibit 10(w)2 to the 2003 Form      10-K, File No. 1-3548).                                        |   |
|   | +*10(k)3 | - | July      2004 Amendment to the Minnesota Power and Affiliated Companies Executive      Investment Plan II (filed as Exhibit 10(c) to the June 30, 2004, Form      10-Q, File No. 1-3548).                                            |   |
|   | +*10(k)4 | - | August      2006 Amendment to the Minnesota Power and Affiliated Companies Executive      Investment Plan II (filed as Exhibit 10(c) to the September 30, 2006,      Form 10-Q, File No. 1-3548).                                |   |
|   | +*10(l)  | - | Deferred      Compensation Trust Agreement, as amended and restated, effective January      1, 1989 (filed as Exhibit 10(f) to the 1988 Form 10-K, File No.      1-3548).                                                             |   |
|   | +*10(m)1 | - | ALLETE      Executive Long-Term Incentive Compensation Plan as amended and restated      effective January 1, 2006 (filed as Exhibit 10 to the May 16,      2005, Form 8-K, File No. 1-3548).                               |   |
|   | +*10(m)2 | - | Form      of ALLETE Executive Long-Term Incentive Compensation Plan 2006      Nonqualified Stock Option Grant (filed as Exhibit 10(a)1 to the January      30, 2006, Form 8-K, File No. 1-3548).                                      |   |
|   | +*10(m)3 | - | Form      of ALLETE Executive Long-Term Incentive Compensation Plan 2006 Performance      Share Grant (filed as Exhibit 10(a)2 to the January 30, 2006, Form 8-K,      File No. 1-3548).                                              |   |
|   | +*10(m)4 | - | Form      of ALLETE Executive Long-Term Incentive Compensation Plan 2006 Long-Term      Cash Incentive Award – President of ALLETE Properties (filed as Exhibit      10(a)3 to the January 30, 2006, Form 8-K, File No.1-3548). |   |
|   | +*10(m)5 | - | Form      of ALLETE Executive Long-Term Incentive Compensation Plan 2006 Stock Grant      – President of ALLETE Properties (filed as Exhibit 10(a)4 to the January      30, 2006, Form 8-K, File No. 1-3548).                   |   |
|   | +10(m)6  | - | Form      of ALLETE Executive Long-Term Incentive Compensation Plan Nonqualified      Stock Option Grant Effective 2007.                                                                                                              |   |
|   | +10(m)7  | - | Form      of ALLETE Executive Long-Term Incentive Compensation Plan Performance      Share Grant Effective 2007.                                                                                                                      |   |
|   | +10(m)8  | - | Form      of ALLETE Executive Long-Term Incentive Compensation Plan Long-Term Cash      Incentive Award Effective 2007.                                                                                                               |   |
|   | +10(m)9  | - | Form      of ALLETE Executive Long-Term Incentive Compensation Plan Stock Grant      Effective 2007.                                                                                                                                  |   |
|   | +10(m)10 | - | Form      of ALLETE Executive Long-Term Incentive Compensation Plan Performance      Share Grant Effective 2008.                                                                                                                      |   |
|   | +*10(n)1 | - | Minnesota      Power (now ALLETE) Director Stock Plan, effective January 1, 1995 (filed      as Exhibit 10 to the March 31, 1995 Form 10-Q, File No.      1-3548).                                                                    |   |

----

|   | +*10(n)2 | - | Amendments      through December 2003 to the Minnesota Power (now ALLETE) Director Stock      Plan (filed as Exhibit 10(z)2 to the 2003 Form 10-K, File No.      1-3548).                                                                                                                                                                                                                                                                                                     |   |
|--------|----------|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | +*10(n)3 | - | July      2004 Amendment to the ALLETE Director Stock Plan (filed as Exhibit 10(e)      to the June 30, 2004, Form 10-Q, File No. 1-3548).                                                                                                                                                                                                                                                                                                                                    |   |
|   | +10(n)4  | - | January      2007 Amendment to the ALLETE Director Stock Plan.                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|   | +*10(n)5 | - | ALLETE      Director Compensation Summary Effective May 1, 2005 (filed as Exhibit 10      to the June 30, 2005, Form 10-Q, File No. 1-3548).                                                                                                                                                                                                                                                                                                                             |   |
|   | +10(n)6  | - | ALLETE      Non-Management Director Compensation Summary Effective February 15,      2007.                                                                                                                                                                                                                                                                                                                                                                                    |   |
|   | +*10(o)1 | - | Minnesota      Power (now ALLETE) Director Compensation Deferral Plan Amended and      Restated, effective January 1, 1990 (filed as Exhibit 10(ac) to the 2002      Form 10-K, File No. 1-3548).                                                                                                                                                                                                                                                                             |   |
|   | +*10(o)2 | - | October      2003 Amendment to the Minnesota Power (now ALLETE) Director Compensation      Deferral Plan (filed as Exhibit 10(aa)2 to the 2003 Form 10-K, File No.      1-3548).                                                                                                                                                                                                                                                                                              |   |
|   | +*10(o)3 | - | January      2005 Amendment to the ALLETE Director Compensation Deferral Plan (filed as      Exhibit 10(c) to the March 31, 2005, Form 10-Q, File No.      1-3548).                                                                                                                                                                                                                                                                                                           |   |
|   | +*10(o)4 | - | August      2006 Amendment to the ALLETE Director Compensation Deferral Plan (filed as      Exhibit 10(d) to the September 30, 2006, Form 10-Q, File No.      1-3548).                                                                                                                                                                                                                                                                                                        |   |
|   | +*10(p)  | - | ALLETE      Director Compensation Trust Agreement, effective October 11, 2004 (filed      as Exhibit 10(a) to the September 30, 2004, Form 10-Q, File No.      1-3548).                                                                                                                                                                                                                                                                                                       |   |
|   | +10(q)   | - | ALLETE      Change of Control Severance Pay Plan Effective February 13,      2008.                                                                                                                                                                                                                                                                                                                                                                                            |   |
|   | 12       | - | Computation      of Ratios of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                                                                                                                                      |   |
|   | 21       | - | Subsidiaries      of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|   | 23(a)    | - | Consent      of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|   | 23(b)    | - | Consent      of General Counsel.                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
|   | 31(a)    | - | Rule      13a-14(a)/15d-14(a) Certification by the Chief Executive Officer Pursuant      to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                    |   |
|   | 31(b)    | - | Rule      13a-14(a)/15d-14(a) Certification by the Chief Financial Officer Pursuant      to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                    |   |
|   | 32       | - | Section      1350 Certification of Annual Report by the Chief Executive Officer and      Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act      of 2002.                                                                                                                                                                                                                                                                                              |   |
|   | 99       | - | ALLETE      News Release dated February 15, 2008, announcing earnings for the year      ended December 31, 2007.      (This exhibit has been furnished and shall not be deemed “filed” for      purposes of Section 18 of the Securities Exchange Act of 1934, nor      shall it be deemed incorporated by reference in any filing under the      Securities Act of 1933, except as shall be expressly set forth by specific      reference in such filing.) |   |

| * | Incorporated      herein by reference as indicated.                                                                                                       |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| + | Management      contract or compensatory plan or arrangement required to be filed as an      exhibit to this report pursuant to Item 15(c) of Form  10-K. |

----

|                          | ALLETE,      Inc.                                   |
|-------------------------------|-----------------------------------------------------|
|                          |
|                          |
| Dated:      February 15, 2008 | By                                                  | /s/      Donald J. Shippar |
|                          | Donald      J. Shippar                              |
|                          | Chairman,      President and Chief ExecutiveOfficer |

| Signature                    |   | Title                                                  |   | Date                   |
|------------------------------|--------|--------------------------------------------------------|--------|------------------------|
|                         |   |                                                   |   |                   |
|                         |   |                                                   |   |                   |
| /s/      Donald J. Shippar   |   | Chairman,      President, Chief Executive Officer      |   | February      15, 2008 |
| Donald      J. Shippar       |   | and      Director(Principal      Executive Officer)    |   |                   |
|                         |   |                                                   |   |                   |
| /s/      Mark A. Schober     |   | Senior      Vice President and Chief Financial Officer |   | February      15, 2008 |
| Mark      A. Schober         |   | (Principal      Financial Officer)                     |   |                   |
|                         |   |                                                   |   |                   |
| /s/      Steven Q. DeVinck   |   | Controller                                             |   | February      15, 2008 |
| Steven      Q. DeVinck       |   | (Principal      Accounting Officer)                    |   |                   |
|                         |   |                                                   |   |                   |
| /s/      Kathleen A. Brekken |   | Director                                               |   | February      15, 2008 |
| Kathleen      A. Brekken     |   |                                                   |   |                   |
|                         |   |                                                   |   |                   |
| /s/      Heidi J. Eddins     |   | Director                                               |   | February      15, 2008 |
| Heidi      J. Eddins         |   |                                                   |   |                   |
|                         |   |                                                   |   |                   |
| /s/      Sidney W. Emery, Jr |   | Director                                               |   | February      15, 2008 |
| Sidney      W. Emery, Jr     |   |                                                   |   |                   |
|                         |   |                                                   |   |                   |
| /s/      James J. Hoolihan   |   | Director                                               |   | February      15, 2008 |
| James      J. Hoolihan       |   |                                                   |   |                   |
|                         |   |                                                   |   |                   |
| /s/      Madeleine W. Ludlow |   | Director                                               |   | February      15, 2008 |
| Madeleine      W. Ludlow     |   |                                                   |   |                   |
|                         |   |                                                   |   |                   |
| /s/      George L. Mayer     |   | Director                                               |   | February      15, 2008 |
| George      L. Mayer         |   |                                                   |   |                   |
|                         |   |                                                   |   |                   |
| /s/      Douglas C. Neve     |   | Director                                               |   | February      15, 2008 |
| Douglas      C. Neve         |   |                                                   |   |                   |
|                         |   |                                                   |   |                   |
| /s/      Roger D. Peirce     |   | Director                                               |   | February      15, 2008 |
| Roger      D. Peirce         |   |                                                   |   |                   |
|                         |   |                                                   |   |                   |
| /s/      Jack I. Rajala      |   | Director                                               |   | February      15, 2008 |
| Jack      I. Rajala          |   |                                                   |   |                   |
|                         |   |                                                   |   |                   |
| /s/      Bruce W. Stender    |   | Director                                               |   | February      15, 2008 |
| Bruce      W. Stender        |   |                                                   |   |                   |

----

----

| December      31                                            | 2007     | 2006     |
|-------------------------------------------------------------|----------|----------|
| Millions                                                    |     |     |
|                                                        |     |     |
| Assets                                                      |     |     |
| Current      Assets                                         |     |     |
| Cash      and Cash Equivalents                              | $23.3    | $44.8    |
| Short-Term      Investments                                 | 23.1     | 104.5    |
| Accounts      Receivable (Less Allowance of $1.0 and $1.1)  | 79.5     | 70.9     |
| Inventories                                                 | 49.5     | 43.4     |
| Prepayments      and Other                                  | 39.1     | 23.8     |
| Deferred      Income Taxes                                  | –  | 0.3      |
| Total      Current Assets                                   | 214.5    | 287.7    |
| Property,      Plant and Equipment – Net              | 1,104.5  | 921.6    |
| Investments                                                 | 213.8    | 189.1    |
| Other      Assets                                           | 111.4    | 135.0    |
| Total      Assets                                           | $1,644.2 | $1,533.4 |
|                                                        |     |     |
| Liabilities      and Shareholders’ Equity             |     |     |
| Liabilities                                                 |     |     |
| Current      Liabilities                                    |     |     |
| Accounts      Payable                                       | $72.7    | $53.5    |
| Accrued      Taxes                                          | 14.8     | 23.3     |
| Accrued      Interest                                       | 7.8      | 8.6      |
| Long-Term      Debt Due Within One Year                     | 11.8     | 29.7     |
| Deferred      Profit on Sales of Real Estate                | 2.7      | 4.1      |
| Other                                                       | 27.3     | 24.3     |
| Total      Current Liabilities                              | 137.1    | 143.5    |
| Long-Term      Debt                                         | 410.9    | 359.8    |
| Deferred      Income Taxes                                  | 144.2    | 130.8    |
| Other      Liabilities                                      | 200.1    | 226.1    |
| Minority      Interest                                      | 9.3      | 7.4      |
| Total      Liabilities                                      | 901.6    | 867.6    |
|                                                        |     |     |
| Commitments      and Contingencies                          |     |     |
|                                                        |     |     |
| Shareholders’      Equity                             |     |     |
| Common      Stock Without Par Value, 43.3 Shares Authorized |     |     |
| 30.8      and 30.4 Shares Outstanding                       | 461.2    | 438.7    |
| Unearned      ESOP Shares                                   | (64.5)   | (71.9)   |
| Accumulated      Other Comprehensive Loss                   | (4.5)    | (8.8)    |
| Retained      Earnings                                      | 350.4    | 307.8    |
| Total      Shareholders’ Equity                       | 742.6    | 665.8    |
| Total      Liabilities and Shareholders’ Equity       | $1,644.2 | $1,533.4 |

----

| For      the Year Ended December 31                       | 2007    | 2006    | 2005    |
|-----------------------------------------------------------|---------|---------|---------|
| Millions      Except Per Share Amounts                    |    |    |    |
|                                                      |    |    |    |
| Operating      Revenue                                    | $841.7  | $767.1  | $737.4  |
| Operating      Expenses                                   |    |    |    |
| Fuel      and Purchased Power                             | 347.6   | 281.7   | 273.1   |
| Operating      and Maintenance                            | 311.9   | 296.0   | 293.5   |
| Kendall      County Charge                                | – | – | 77.9    |
| Depreciation                                              | 48.5    | 48.7    | 47.8    |
| Total      Operating Expenses                             | 708.0   | 626.4   | 692.3   |
| Operating      Income from Continuing Operations          | 133.7   | 140.7   | 45.1    |
| Other      Income (Expense)                               |    |    |    |
| Interest      Expense                                     | (24.6)  | (27.4)  | (26.4)  |
| Equity      Earnings in ATC                               | 12.6    | 3.0     | – |
| Other                                                     | 15.5    | 11.9    | 1.1     |
| Total      Other Income (Expense)                         | 3.5     | (12.5)  | (25.3)  |
| Income      from Continuing Operations Before Minority    |    |    |    |
| Interest      and Income Taxes                            | 137.2   | 128.2   | 19.8    |
| Income      Tax Expense (Benefit)                         | 47.7    | 46.3    | (0.5)   |
| Minority      Interest                                    | 1.9     | 4.6     | 2.7     |
| Income      from Continuing Operations                    | 87.6    | 77.3    | 17.6    |
| Loss      from Discontinued Operations – Net of Tax | – | (0.9)   | (4.3)   |
| Net      Income                                           | $87.6   | $76.4   | $13.3   |
|                                                      |    |    |    |
| Average      Shares of Common Stock                       |    |    |    |
| Basic                                                     | 28.3    | 27.8    | 27.3    |
| Diluted                                                   | 28.4    | 27.9    | 27.4    |
|                                                      |    |    |    |
| Basic      Earnings (Loss) Per Share of Common Stock      |    |    |    |
| Continuing      Operations                                | $3.09   | $2.78   | $0.65   |
| Discontinued      Operations                              | – | (0.03)  | (0.16)  |
|                                                      | $3.09   | $2.75   | $0.49   |
| Diluted      Earnings (Loss) Per Share of Common Stock    |    |    |    |
| Continuing      Operations                                | $3.08   | $2.77   | $0.64   |
| Discontinued      Operations                              | – | (0.03)  | (0.16)  |
|                                                      | $3.08   | $2.74   | $0.48   |
|                                                      |    |    |    |
| Dividends      Per Share of Common Stock                  | $1.640  | $1.450  | $1.245  |

----

| For      the Year Ended December 31                                       | 2007    | 2006    | 2005    |
|---------------------------------------------------------------------------|---------|---------|---------|
| Millions                                                                  |    |    |    |
|                                                                      |    |    |    |
| Operating      Activities                                                 |    |    |    |
| Net      Income                                                           | $87.6   | $76.4   | $13.3   |
| Loss      from Discontinued Operations                                    | – | 0.9     | 4.3     |
| AFUDC      - Equity                                                       | (3.8)   | – | – |
| Income      from Equity Investments, Net of Dividends                     | (2.7)   | (1.8)   | – |
| Gain      on Sale of Assets                                               | (2.2)   | – | – |
| Loss      on Impairment of Investments                                    | 0.3     | – | 5.1     |
| Depreciation                                                              | 48.5    | 48.7    | 47.8    |
| Deferred      Income Taxes (Benefit)                                      | 14.0    | 27.8    | (34.2)  |
| Minority      Interest                                                    | 1.9     | 4.6     | 2.7     |
| Stock      Compensation Expense                                           | 2.0     | 1.8     | 1.5     |
| Bad      Debt Expense                                                     | 1.0     | 0.7     | 1.1     |
| Changes      in Operating Assets and Liabilities                          |    |    |    |
| Accounts      Receivable                                                  | (6.6)   | 7.5     | (1.4)   |
| Inventories                                                               | (6.1)   | (10.3)  | (1.3)   |
| Prepayments      and Other                                                | (11.7)  | (2.3)   | (2.5)   |
| Accounts      Payable                                                     | 9.4     | 5.1     | 4.9     |
| Other      Current Liabilities                                            | (10.0)  | 0.2     | 5.8     |
| Other      Assets                                                         | 0.8     | (4.3)   | 8.2     |
| Other      Liabilities                                                    | 0.7     | 1.0     | (4.1)   |
| Net      Operating Activities from (for) Discontinued Operations          | – | (13.5)  | 2.3     |
| Cash      from Operating Activities                                       | 123.1   | 142.5   | 53.5    |
| Investing      Activities                                                 |    |    |    |
| Proceeds      from Sale of Available-For-Sale Securities                  | 449.7   | 608.8   | 376.0   |
| Payments      for Purchase of Available-For-Sale Securities               | (368.3) | (596.4) | (343.7) |
| Changes      to Investments                                               | (19.6)  | (52.0)  | (1.1)   |
| Additions      to Property, Plant and Equipment                           | (210.2) | (102.3) | (58.6)  |
| Proceeds      from Sale of Assets                                         | 1.5     | – | – |
| Other                                                                     | (7.2)   | (15.0)  | 0.6     |
| Net      Investing Activities from Discontinued Operations                | – | 2.2     | 30.7    |
| Cash      from (for) Investing Activities                                 | (154.1) | (154.7) | 3.9     |
| Financing      Activities                                                 |    |    |    |
| Issuance      of Common Stock                                             | 20.6    | 15.8    | 21.0    |
| Issuance      of Long-Term Debt                                           | 123.9   | 77.8    | 35.0    |
| Reductions      of Long-Term Debt                                         | (90.7)  | (78.9)  | (35.7)  |
| Dividends      on Common Stock and Distributions to Minority Shareholders | (44.3)  | (43.9)  | (36.7)  |
| Net      Increase (Decrease) in Book Overdrafts                           | – | (3.4)   | 3.4     |
| Net      Financing Activities for Discontinued Operations                 | – | – | (0.9)   |
| Cash      from (for) Financing Activities                                 | 9.5     | (32.6)  | (13.9)  |
| Change      in Cash and Cash Equivalents                                  | (21.5)  | (44.8)  | 43.5    |
| Cash      and Cash Equivalents at Beginning of Period                     | 44.8    | 89.6    | 46.1    |
| Cash      and Cash Equivalents at End of Period                           | $23.3   | $44.8   | $89.6   |

----

|                                                           |                |     | Accumulated        |     |   |
|----------------------------------------------------------------|---------------------|----------|--------------------|----------|--------|
|                                                           | Total               |     | Other              | Unearned |   |
|                                                           | Shareholders’ | Retained | Comprehensive      | ESOP     | Common |
|                                                           | Equity              | Earnings | Income      (Loss) | Shares   | Stock  |
| Millions                                                       |                |     |               |     |   |
| Balance      at December 31, 2004                              | $630.5              | $293.2   | $(11.4)            | $(51.4)  | $400.1 |
|                                                           |                |     |               |     |   |
| Comprehensive      Income                                      |                |     |               |     |   |
| Net      Income                                                | 13.3                | 13.3     |               |     |   |
| Other      Comprehensive Income – Net of Tax             |                |     |               |     |   |
| Unrealized      Gains on Securities – Net                | 0.6                 |     | 0.6                |     |   |
| Additional      Pension Liability                              | (2.0)               |     | (2.0)              |     |   |
| Total      Comprehensive Income                                | 11.9                |     |               |     |   |
| Common      Stock Issued – Net                           | 21.0                |     |               |     | 21.0   |
| Dividends      Declared                                        | (34.4)              | (34.4)   |               |     |   |
| Purchase      of ALLETE Shares by ESOP                         | (30.3)              |     |               | (30.3)   |   |
| ESOP      Shares Earned                                        | 4.1                 |     |               | 4.1      |   |
| Balance      at December 31, 2005                              | 602.8               | 272.1    | (12.8)             | (77.6)   | 421.1  |
|                                                           |                |     |               |     |   |
| Comprehensive      Income                                      |                |     |               |     |   |
| Net      Income                                                | 76.4                | 76.4     |               |     |   |
| Other      Comprehensive Income – Net of Tax             |                |     |               |     |   |
| Unrealized      Gains on Securities – Net                | 1.9                 |     | 1.9                |     |   |
| Additional      Pension Liability                              | 6.4                 |     | 6.4                |     |   |
| Total      Comprehensive Income                                | 84.7                |     |               |     |   |
| Adjustment      to initially apply SFAS 158 – Net of Tax | (4.3)               |     | (4.3)              |     |   |
| Common      Stock Issued – Net                           | 17.6                |     |               |     | 17.6   |
| Dividends      Declared                                        | (40.7)              | (40.7)   |               |     |   |
| ESOP      Shares Earned                                        | 5.7                 |     |               | 5.7      |   |
| Balance      at December 31, 2006                              | 665.8               | 307.8    | (8.8)              | (71.9)   | 438.7  |
|                                                           |                |     |               |     |   |
| Comprehensive      Income                                      |                |     |               |     |   |
| Net      Income                                                | 87.6                | 87.6     |               |     |   |
| Other      Comprehensive Income – Net of Tax             |                |     |               |     |   |
| Unrealized      Gains on Securities – Net                | 1.1                 |     | 1.1                |     |   |
| Defined      Benefit Pension and Other Postretirement Plans    | 3.2                 |     | 3.2                |     |   |
| Total      Comprehensive Income                                | 91.9                |     |               |     |   |
| Adjustment      to initially apply FIN 48                      | (0.7)               | (0.7)    |               |     |   |
| Common      Stock Issued – Net                           | 22.5                |     |               |     | 22.5   |
| Dividends      Declared                                        | (44.3)              | (44.3)   |               |     |   |
| ESOP      Shares Earned                                        | 7.4                 |     |               | 7.4      |   |
| Balance      at December 31, 2007                              | $742.6              | $350.4   | $(4.5)             | $(64.5)  | $461.2 |

----

| Note      1. | Business      Segments |
|--------------|------------------------|

|                                                                                       | Energy       |         |
|--------------------------------------------------------------------------------------------|--------------|--------------|
|                                                                                       |         | Nonregulated |   |   |
|                                                                                       | Regulated    | Energy       | Investment | Real |   |
|                                                                                       | Consolidated | Utility      | Operations | In      ATC | Estate | Other |
| Millions                                                                                   |         |         |   |   |   |   |
|                                                                                       |         |         |   |   |   |   |
| 2007                                                                                       |         |         |   |   |   |   |
|                                                                                       |         |         |   |   |   |   |
| Operating      Revenue                                                                     | $841.7       | $723.8       | $67.0 | – | $50.5 | $0.4 |
| Fuel      and Purchased Power                                                              | 347.6        | 347.6        | – | – | – | – |
| Operating      and Maintenance                                                             | 311.9        | 229.3        | 61.2 | – | 20.1 | 1.3 |
| Depreciation      Expense                                                                  | 48.5         | 43.8         | 4.5 | – | 0.1 | 0.1 |
|                                                                                       |         |         |   |   |   |   |
| Operating      Income (Loss) from Continuing Operations                                    | 133.7        | 103.1        | 1.3 | – | 30.3 | (1.0) |
| Interest      Expense                                                                      | (24.6)       | (21.0)       | (2.0) | – | (0.5) | (1.1) |
| Equity      Earnings in ATC                                                                | 12.6         | –      | – | $12.6 | – | – |
| Other      Income                                                                          | 15.5         | 4.1          | 3.9 | – | 1.4 | 6.1 |
|                                                                                       |         |         |   |   |   |   |
| Income      from Continuing Operations Before Minority Interest and Income      Taxes | 137.2        | 86.2         | 3.2 | 12.6 | 31.2 | 4.0 |
| Income      Tax Expense (Benefit)                                                          | 47.7         | 31.3         | (0.3) | 5.1 | 11.6 | – |
| Minority      Interest                                                                     | 1.9          | –      | – | – | 1.9 | – |
|  Income      from Continuing Operations                                               | 87.6         | $54.9        | $3.5 | $7.5 | $17.7 | $4.0 |
|  Loss      from Discontinued Operations – Net of Tax                            | –      |         |   |   |   |   |
|                                                                                       |         |         |   |   |   |   |
| Net      Income                                                                            | $87.6        |         |   |   |   |   |
|                                                                                       |         |         |   |   |   |   |
| Total      Assets                                                                          | $1,644.2     | $1,330.9     | $84.2 | $65.7 | $91.3 | $72.1 |
| Capital      Additions                                                                     | $223.9       | $220.6       | $3.3 | – | – | – |

----

|                                                                                         |              | Energy    |         |        |
|----------------------------------------------------------------------------------------------|-------------------|-----------|--------------|-------------|
|                                                                                         |              |      | Nonregulated |        |   |   |
|                                                                                         |              | Regulated | Energy       | Investment  | Real |   |
|                                                                                         | Consolidated      | Utility   | Operations   | in ATC | Estate | Other |
| Millions                                                                                     |              |      |         |        |   |   |
|                                                                                         |              |      |         |        |   |   |
| 2006                                                                                         |              |      |         |        |   |   |
| Operating      Revenue                                                                       | $767.1            | $639.2    | $65.0        | –     | $62.6 | $0.3 |
| Fuel      and Purchased Power                                                                | 281.7             | 281.7     | –      | –     | – | – |
| Operating      and Maintenance                                                               | 296.0             | 217.9     | 57.1         | –     | 19.5 | 1.5 |
| Depreciation      Expense                                                                    | 48.7              | 44.2      | 4.3          | –     | 0.1 | 0.1 |
|                                                                                         |              |      |         |        |   |   |
| Operating      Income (Loss) from ContinuingOperations                                       | 140.7             | 95.4      | 3.6          | –     | 43.0 | (1.3) |
| Interest      Expense                                                                        | (27.4)            | (20.2)    | (3.3)        | –     | – | (3.9) |
| Equity      Earnings in ATC                                                                  | 3.0               | –   | –      | $3.0        | – | – |
| Other      Income                                                                            | 11.9              | 0.9       | 2.2          | –     | 1.3 | 7.5 |
|                                                                                         |              |      |         |        |   |   |
| Income      from Continuing Operations Before Minority Interest and Income      Taxes        | 128.2             | 76.1      | 2.5          | 3.0         | 44.3 | 2.3 |
| Income      Tax Expense (Benefit)                                                            | 46.3              | 29.3      | (1.2)        | 1.1         | 16.9 | 0.2 |
| Minority      Interest                                                                       | 4.6               | –   | –      | –     | 4.6 | – |
| Income      from Continuing Operations                                                       | 77.3              | $46.8     | $3.7         | $1.9        | $22.8 | $2.1 |
| Loss      from Discontinued Operations – Net of Tax                                    | (0.9)             |      |         |        |   |   |
|                                                                                         |              |      |         |        |   |   |
| Net      Income                                                                              | $76.4             |      |         |        |   |   |
|                                                                                         |              |      |         |        |   |   |
| Total      Assets                                                                            | $1,533.4          | $1,143.3  | $81.3        | $53.7       | $89.8 | $165.3 |
| Capital      Additions                                                                       | $109.4            | $107.5    | $1.9         | –     | – | – |
|                                                                                         |
|                                                                                         |
|                                                                                         |
| 2005                                                                                         |              |      |         |        |   |   |
| Operating      Revenue                                                                       | $737.4            | $575.6    | $113.9       | –     | $47.5 | $0.4 |
| Fuel      and Purchased Power                                                                | 273.1             | 243.7     | 29.4         | –     | – | – |
| Operating      and Maintenance                                                               | 293.5             | 202.9     | 71.2         | –     | 16.6 | 2.8 |
| Kendall      County Charge                                                                   | 77.9              | –   | 77.9         | –     | – | – |
| Depreciation      Expense                                                                    | 47.8              | 39.4      | 8.1          | –     | 0.1 | 0.2 |
|                                                                                         |              |      |         |        |   |   |
| Operating      Income (Loss) from ContinuingOperations                                       | 45.1              | 89.6      | (72.7)       | –     | 30.8 | (2.6) |
| Interest      Expense                                                                        | (26.4)            | (17.4)    | (6.6)        | –     | (0.1) | (2.3) |
| Other      Income (Expense)                                                                  | 1.1               | 0.7       | 1.7          | –     | 1.1 | (2.4) |
| Income      (Loss) from Continuing Operations Before Minority Interest and Income      Taxes | 19.8              | 72.9      | (77.6)       | –     | 31.8 | (7.3) |
| Income      Tax Expense (Benefit)                                                            | (0.5)             | 27.2      | (29.1)       | –     | 11.6 | (10.2) |
| Minority      Interest                                                                       | 2.7               | –   | –      | –     | 2.7 | – |
| Income      (Loss) from Continuing Operations                                                | 17.6              | $45.7     | $(48.5)      | –     | $17.5 |  $2.9 |
| Loss      from Discontinued Operations – Net of Tax                                    | (4.3)             |      |         |        |   |   |
|                                                                                         |              |      |         |        |   |   |
| Net      Income                                                                              | $13.3             |      |         |        |   |   |
|                                                                                         |              |      |         |        |   |   |
| Total      Assets                                                                            | $1,398.8      (a) | $909.5    | $185.2       | –     | $73.7 | $227.8 |
| Capital      Additions                                                                       | $63.1      (a)    | $46.5     | $12.1        | –     | – | – |

| (a) | Discontinued      Operations represented $2.6 million of total assets in 2005 and $4.5      million of capital additions in2005. |
|-----|----------------------------------------------------------------------------------------------------------------------------------|

----

----

----

| Accounts      Receivable                        |   |
|-------------------------------------------------|--------|
| December      31                                | 2007   | 2006 |
| Millions                                        |   |   |
|                                            |   |   |
| Trade      Accounts Receivable                  |   |   |
| Billed                                          | $63.9  | $58.5 |
| Unbilled                                        | 16.6   | 13.5 |
| Less: Allowance      for Doubtful Accounts | 1.0    | 1.1 |
| Total      Accounts Receivable – Net      | $79.5  | $70.9 |

| Inventories                 |   |
|-----------------------------|--------|
| December      31            | 2007   | 2006 |
| Millions                    |   |   |
|                        |   |   |
| Fuel                        | $22.1  | $18.9 |
| Materials      and Supplies | 27.4   | 24.5 |
| Total      Inventories      | $49.5  | $43.4 |

| Consolidated      Statement of Cash Flows                                       |   |
|---------------------------------------------------------------------------------|--------|
| Supplemental      Disclosure                                                    |   |
| For      the Year Ended December 31                                             | 2007   | 2006 | 2005 |
| Millions                                                                        |   |   |   |
|                                                                            |   |   |   |
| Cash      Paid During the Period for                                            |   |   |   |
| Interest      – Net of Amounts Capitalized                                | $26.3  | $25.3 | $24.6 |
| Income      Taxes                                                               | $34.2  | $32.4 (a) | $27.1 |
|                                                                            |   |   |   |
| Noncash      Investing Activities                                               |   |   |   |
| Accounts      Payable for Capital Additions to Property, Plant and    Equipment | $9.8   | $7.1 | – |
| AFUDC      - Equity                                                             | $3.8   | – | – |

| (a) | Net      of a $24.3 million cash refund. |
|-----|------------------------------------------|

----

| Prepayments      and Other Current Assets       |   |   |
|-------------------------------------------------|--------|--------|
| December      31                                | 2007   | 2006   |
| Millions                                        |   |   |
| Deferred      Fuel Adjustment Clause            | $26.5  | $15.1  |
| Other                                           | 12.6   | 8.7    |
| Total      Prepayments and Other Current Assets | $39.1  | $23.8  |

| Other      Assets                                                                                 |   |   |
|---------------------------------------------------------------------------------------------------|--------|--------|
| December      31                                                                                  | 2007   | 2006   |
| Millions                                                                                          |   |   |
| Deferred      Regulatory Charges (See Note 5)                                                     |   |   |
| Future      Benefit Obligations Under Defined Benefit Pension and Other Postretirement      Plans | $53.7  | $86.1  |
| Other      Deferred Regulatory Charges                                                            | 22.9   | 17.5   |
| Total      Deferred Regulatory Charges                                                            | 76.6   | 103.6  |
| Other                                                                                             | 34.8   | 31.4   |
| Total      Other Assets                                                                           | $111.4 | $135.0 |
|                                                                                              |   |   |
| Other      Liabilities                                                                            |   |   |
| December      31                                                                                  | 2007   | 2006   |
| Millions                                                                                          |   |   |
| Future      Benefit Obligation Under Defined Benefit Pension and Other Postretirement      Plans  | $71.6  | $108.2 |
| Deferred      Regulatory Credits (See Note 5)                                                     | 31.3   | 33.8   |
| Asset      Retirement Obligation (See Note 3)                                                     | 36.5   | 27.2   |
| Other                                                                                             | 60.7   | 56.9   |
| Total      Other Liabilities                                                                      | $200.1 | $226.1 |

----

----

| Property,      Plant and Equipment                    |     |     |
|-------------------------------------------------------|----------|----------|
| December      31                                      | 2007     | 2006     |
| Millions                                              |     |     |
| Regulated      Utility                                | $1,683.0 | $1,575.8 |
| Construction      Work in Progress                    | 165.8    | 71.4     |
| Accumulated      Depreciation                         | (796.8)  | (781.3)  |
| Regulated      Utility Plant – Net              | 1,052.0  | 865.9    |
| Nonregulated      Energy Operations                   | 89.9     | 88.5     |
| Construction      Work in Progress                    | 2.5      | 2.6      |
| Accumulated      Depreciation                         | (43.2)   | (40.1)   |
| Nonregulated      Energy Operations Plant – Net | 49.2     | 51.0     |
| Other      Plant – Net                          | 3.3      | 4.7      |
| Property,      Plant and Equipment – Net        | $1,104.5 | $921.6   |

| Estimated      Useful Lives of Property, Plant and Equipment |
|--------------------------------------------------------------|
|                                                         |   |   |   |   |
| Regulated      Utility –                               | Generation | 4      to 29 years | Nonregulated      Energy Operations | 4      to 40 years |
|                                                         | Transmission | 40      to 60 years | Other      Plant | 5      to 25 years |
|                                                         | Distribution | 30      to 70 years |   |   |

| Asset      Retirement Obligation             |   |
|----------------------------------------------|--------|
| Millions                                     |   |
| Obligation      at December 31, 2005         | $25.3  |
| Accretion      Expense                       | 1.8    |
| Additional      Liabilities Incurred in 2006 | 0.1    |
| Obligation      at December 31, 2006         | 27.2   |
| Accretion      Expense                       | 2.1    |
| Additional      Liabilities Incurred in 2007 | 7.2    |
| Obligation      at December 31, 2007         | $36.5  |

| Note      4. | Jointly-Owned      Electric Facility |
|--------------|--------------------------------------|

----

| Note      5. | Regulatory      Matters |
|--------------|-------------------------|

| Deferred      Regulatory Charges and Credits                                 |   |    |
|------------------------------------------------------------------------------|--------|---------|
| December      31                                                             | 2007   | 2006    |
| Millions                                                                     |   |    |
|                                                                         |   |    |
| Deferred      Charges                                                        |   |    |
| Income      Taxes                                                            | $11.3  | $11.6   |
| Premium      on Reacquired Debt                                              | 2.3    | 2.8     |
| Future      Benefit Obligations Under                                        |   |    |
| Defined      Benefit Pension and Other Postretirement Plans (See Note    15) | 53.7   | 86.1    |
| Deferred      MISO Costs                                                     | 3.7    | – |
| Asset      Retirement Obligation                                             | 3.6    | 2.3     |
| Other                                                                        | 2.0    | 0.8     |
|                                                                         | 76.6   | 103.6   |
| Deferred      Credits – Income Taxes                                   | 31.3   | 33.8    |
| Net      Deferred Regulatory Assets                                          | $45.3  | $69.8   |

| Note      6. | Investments |
|--------------|-------------|

| Available-For-Sale      Securities |
|------------------------------------|
| Millions                           |   |   |   |
|                               |   | Gross      Unrealized |   |
| At December 31           | Cost | Gain | (Loss) | Fair      Value |
|                               |   |   |   |   |
| 2007                               | $45.3 | $8.4 | $(0.1) | $53.6 |
| 2006                               | $123.2 | $7.0 | $(0.1) | $130.1 |
| 2005                               | $135.2 | $4.4 | $(0.1) | $139.5 |

|             |     |                | Net              |
|------------------|----------|---------------------|------------------|
|             |     |                | Unrealized       |
|             |     |                | Gain      (Loss) |
|             |     |                | in      Other    |
| Year      Ended  | Sales    | Gross      Realized | Comprehensive    |
| December      31 | Proceeds | Gain                | (Loss)           | Income |
|             |     |                |             |   |
| 2007             | $81.4    | –             | –          | $1.4 |
| 2006             | $12.4    | –             | –          | $2.5 |
| 2005             | $32.3    | –             | –          | $1.3 |

----

| Investments                                                 |    |   |
|-------------------------------------------------------------|---------|--------|
| December      31                                            | 2007    | 2006   |
| Millions                                                    |    |   |
| Real      Estate Assets                                     | $91.3   | $89.8  |
| Debt      and Equity Securities                             | 48.9    | 36.4   |
| Investment      in ATC                                      | 65.7    | 53.7   |
| Emerging      Technology Portfolio                          | 7.9     | 9.2    |
| Total      Investments                                      | $213.8  | $189.1 |
|                                                        |    |   |
|                                                        |    |   |
| Real      Estate Assets                                     | 2007    | 2006   |
| Millions                                                    |    |   |
| Land      Held for Sale Beginning Balance                   | $58.0   | $48.0  |
| Additions      during period: Capitalized Improvements | 12.8    | 18.8   |
|       Purchases               | – | 1.4    |
| Deductions      during period: Cost of Real Estate Sold     | (8.2)   | (10.2) |
| Land      Held for Sale Ending Balance                      | 62.6    | 58.0   |
| Long-Term      Finance Receivables                          | 15.3    | 18.3   |
| Other (a)                                                   | 13.4    | 13.5   |
| Total      Real Estate Assets                               | $91.3   | $89.8  |

| (a) | Consisted      primarily of a shopping center. |
|-----|------------------------------------------------|

| ALLETE’s      Interest in ATC                 |   |
|-----------------------------------------------------|--------|
| For      the Year Ended December 31, 2007           |   |
| Millions                                            |   |
| Equity      Investment Balance at December 31, 2006 | $53.7  |
| 2007      Cash Investments                          | 8.7    |
| Equity      in ATC Earnings                         | 12.6   |
| Distributed      ATC Earnings                       | (9.3)  |
| Equity      Investment Balance at December 31, 2007 | $65.7  |

----

| Financial      Instruments                     |                 |            |
|------------------------------------------------|----------------------|-----------------|
| December      31                               | Carrying      Amount | Fair      Value |
| Millions                                       |                 |            |
| Long-Term      Debt, Including Current Portion |                 |            |
| 2007                                           | $422.7               | $410.9          |
| 2006                                           | $389.5               | $387.6          |

| Note      7. | Short-Term      and Long-Term Debt |
|--------------|------------------------------------|

----

| Note      7. | Short-Term      and Long-Term Debt (Continued) |
|--------------|------------------------------------------------|

| Long-Term      Debt                                                                                                    |    |    |
|------------------------------------------------------------------------------------------------------------------------|---------|---------|
| December      31                                                                                                       | 2007    | 2006    |
| Millions                                                                                                               |    |    |
|                                                                                                                   |    |    |
| First      Mortgage Bonds                                                                                              |    |    |
| 6.68%      Series Due 2007                                                                                             | – | $20.0   |
| 7.00%      Series Due 2007                                                                                             | – | 60.0    |
| 5.28%      Series Due 2020                                                                                             | $35.0   | 35.0    |
| 4.95%      Pollution Control Series F Due 2022                                                                         | 111.0   | 111.0   |
| 5.99%      Series Due 2027                                                                                             | 60.0    | – |
| 5.69%      Series Due 2036                                                                                             | 50.0    | 50.0    |
| Senior      Unsecured Notes 5.99% Due 2017                                                                             | 50.0    | – |
| Variable      Demand Revenue Refunding Bonds    Series      1997 A, B, and C Due 2009 – 2020 | 36.5    | 39.0    |
| Industrial      Development Revenue Bonds 6.5% Due 2025                                                                | 6.0     | 6.0     |
| Industrial      Development Variable Rate Demand Refunding                                                             |    |    |
| Revenue      Bonds Series 2006 Due 2025                                                                                | 27.8    | 27.8    |
| Other      Long-Term Debt, 2.0% – 8.0% Due 2008 – 2037                                                     | 46.4    | 40.7    |
| Total      Long-Term Debt                                                                                              | 422.7   | 389.5   |
| Less:      Due Within One Year                                                                                         | 11.8    | 29.7    |
| Net      Long-Term Debt                                                                                                | $410.9  | $359.8  |

----

----

|   | (1)  make      emissions reductions; |
|--------|------------------------------------------------|

|   | (2)  purchase      mercury, SO2      and NOX      allowances through the EPA’s cap-and-trade system;  and/or |
|--------|------------------------------------------------------------------------------------------------------------------------------|
|   | (3)      use a combination of both.                                                                                          |

----

----

| Note      9. | Common      Stock and Earnings Per Share |
|--------------|------------------------------------------|

| Summary      of Common Stock                            | Shares    | Equity   |
|---------------------------------------------------------|-----------|----------|
|                                                    | Thousands | Millions |
|                                                    |      |     |
| Balance      at December 31, 2004                       | 29,651    | $400.1   |
| 2005   Employee      Stock Purchase Plan | 13        | 0.5      |
| Invest Direct (a)                                       | 238       | 10.5     |
| Options      and Stock Awards                           | 241       | 10.0     |
| Balance      at December 31, 2005                       | 30,143    | 421.1    |
| 2006   Employee      Stock Purchase Plan | 12        | 0.5      |
| Invest      Direct (a)                                  | 218       | 10.0     |
| Options      and Stock Awards                           | 63        | 7.1      |
| Balance      at December 31, 2006                       | 30,436    | 438.7    |
| 2007   Employee      Stock Purchase Plan | 17        | 0.7      |
| Invest      Direct (a)                                  | 331       | 15.1     |
| Options      and Stock Awards                           | 43        | 6.7      |
| Balance      at December 31, 2007                       | 30,827    | $461.2   |

| (a) | Invest      Direct is ALLETE’s direct stock purchase and dividend reinvestment      plan. |
|-----|-------------------------------------------------------------------------------------------------|

----

| Reconciliation      of Basic and Diluted  |   |       |    |
|-------------------------------------------|--------|------------|---------|
| Earnings      Per Share                   |   | Dilutive   |    |
| For      the Year Ended December 31       | Basic  | Securities | Diluted |
| Millions      Except Per Share Amounts    |   |       |    |
|                                      |   |       |    |
| 2007                                      |   |       |    |
|                                      |   |       |    |
| Income      from Continuing Operations    | $87.6  | –    | $87.6   |
| Common      Shares                        | 28.3   | 0.1        | 28.4    |
| Per      Share from Continuing Operations | $3.09  | –    | $3.08   |
|                                      |   |       |    |
| 2006                                      |   |       |    |
|                                      |   |       |    |
| Income      from Continuing Operations    | $77.3  | –    | $77.3   |
| Common      Shares                        | 27.8   | 0.1        | 27.9    |
| Per      Share from Continuing Operations | $2.78  | –    | $2.77   |
|                                      |   |       |    |
| 2005                                      |   |       |    |
|                                      |   |       |    |
| Income      from Continuing Operations    | $17.6  | –    | $17.6   |
| Common      Shares                        | 27.3   | 0.1        | 27.4    |
| Per      Share from Continuing Operations | $0.65  | –    | $0.64   |

| Note      10. | Kendall      County Charge |
|---------------|----------------------------|

| For      the Year Ended December 31                              | 2007    | 2006   | 2005    |
|------------------------------------------------------------------|---------|--------|---------|
| Millions                                                         |    |   |    |
| Loss      on Emerging Technology Investments                     | $(1.3)  | $(0.9) | $(6.1)  |
| AFUDC      - Equity                                              | 3.8     | 0.5    | 0.2     |
| Debt      Prepayment Premium and Unamortized Debt Issuance Costs | – | (0.6)  | – |
| Investments      and Other Income                                | 13.0    | 12.9   | 7.0     |
| Total      Other Income                                          | $15.5   | $11.9  | $1.1    |

----

| Income      Tax Expense                                       |    |   |   |   |   |   |
|---------------------------------------------------------------|---------|--------|--------|--------|--------|--------|
| Year      Ended December 31                                   | 2007    |   | 2006   |   | 2005   |   |
| Millions                                                      |    |   |   |   |   |   |
|                                                          |    |   |   |   |   |   |
| Current      Tax Expense                                      |    |   |   |   |   |   |
| Federal                                                       | $26.5   |   | $8.9   | (a)    | $27.2  | (b)    |
| State                                                         | 7.2     |   | 9.6    |   | 6.5    | (b)    |
| Total      Current Tax Expense                                | 33.7    |   | 18.5   |   | 33.7   |   |
| Deferred      Tax Expense (Benefit)                           |    |   |   |   |   |   |
| Federal                                                       | 10.7    |   | 28.0   | (a)    | (26.4) | (b)    |
| State                                                         | 4.7     |   | 2.0    |   | (9.5)  |   |
| Total      Deferred Tax Expense (Benefit)                     | 15.4    |   | 30.0   |   | (35.9) |   |
| Change      in Valuation Allowance                            | (0.3)   |   | (1.1)  |   | 3.0    |   |
| Investment      Tax Credit Amortization                       | (1.1)   |   | (1.1)  |   | (1.3)  |   |
| Income      Tax Expense (Benefit) for Continuing Operations   | 47.7    |   | 46.3   |   | (0.5)  |   |
| Income      Tax Expense (Benefit) for Discontinued Operations | – |   | (0.6)  |   | 3.4    |   |
| Total      Income Tax Expense                                 | $47.7   |   | $45.7  |   | $2.9   |   |

| (a) | Included      a current federal tax benefit of $24.3 million and a deferred federal tax      expense of $24.3 million related to the refund from the Kendall County      capital loss carryback. (See Note10.) |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (b) | Included      a current federal tax benefit of $1.3 million, current state tax benefit      of $0.4 million and deferred federal tax benefit of $25.8 million      related to the Kendall County charge. (See Note  10.) |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Reconciliation      of Taxes from Federal Statutory                                  |   |    |      |
|--------------------------------------------------------------------------------------|--------|---------|-----------|
| Rate      to Total Income Tax Expense for Continuing Operations                      |   |    |      |
| Year      Ended December 31                                                          | 2007   | 2006    | 2005      |
| Millions                                                                             |   |    |      |
| Income      from Continuing OperationsBefore      Minority Interest and Income Taxes | $137.2 | $128.2  | $19.8     |
| Statutory      Federal Income Tax Rate                                               | 35%    | 35%     | 35%       |
| Income      Taxes Computed at 35% Statutory Federal Rate                             | $48.0  | $44.9   | $6.9      |
| Increase      (Decrease) in Tax Due to:                                              |   |    |      |
| Amortization      of Deferred Investment Tax Credits                                 | (1.1)  | (1.1)   | (1.3)     |
| State      Income Taxes – Net of Federal Income Tax Benefit                    | 7.4    | 6.5     |  1.1 |
| Depletion                                                                            | (0.9)  | (1.1)   | (1.0)     |
| Employee      Benefits                                                               | 0.4    | 0.1     | (0.5)     |
| Domestic      Manufacturing Deduction                                                | (1.1)  | (0.6)   | (0.4)     |
| Regulatory      Differences for Utility Plant                                        | (2.2)  | (0.9)   | (0.6)     |
| Positive      Resolution of Audit Issues                                             | (1.6)  | – | (3.7)     |
| Other                                                                                | (1.2)  | (1.5)   | (1.0)     |
| Total      Income Tax Expense (Benefit) for Continuing Operations                    | $47.7  | $46.3   | $(0.5)    |

----

| Deferred      Tax Assets and Liabilities           |   |   |
|----------------------------------------------------|--------|--------|
| December      31                                   | 2007   | 2006   |
| Millions                                           |   |   |
|                                               |   |   |
| Deferred      Tax Assets                           |   |   |
| Employee      Benefits and Compensation (a)        | $80.5  | $95.5  |
| Property      Related                              | 26.5   | 32.8   |
| Investment      Tax Credits                        | 11.4   | 12.1   |
| Other                                              | 13.4   | 17.9   |
| Gross      Deferred Tax Assets                     | 131.8  | 158.3  |
| Deferred      Tax Asset Valuation Allowance        | (3.3)  | (3.6)  |
| Total      Deferred Tax Assets                     | $128.5 | $154.7 |
| Deferred      Tax Liabilities                      |   |   |
| Property      Related                              | $201.7 | $204.7 |
| Regulatory      Asset for Benefit Obligations      | 21.6   | 34.8   |
| Unamortized      Investment Tax Credits            | 16.1   | 17.2   |
| Employee      Benefits and Compensation            | 19.5   | 13.2   |
| Fuel      Clause Adjustment                        | 10.7   | 6.0    |
| Other                                              | 8.1    | 9.3    |
| Total      Deferred Tax Liabilities                | $277.7 | $285.2 |
| Accumulated      Deferred Income Taxes             | $149.2 | $130.5 |
|                                               |   |   |
| Recorded      as:                                  |   |   |
| Net      Current Deferred Tax Liabilities (Assets) | $5.0   | $(0.3) |
| Net      Long-Term Deferred Tax Liabilities        | 144.2  | 130.8  |
| Net      Deferred Tax Liabilities                  | $149.2 | $130.5 |

| (a) | Includes      Unfunded Employee Benefits |
|-----|------------------------------------------|

| Uncertain      Tax Positions                                                                                               |
|----------------------------------------------------------------------------------------------------------------------------|
| December      31, 2007                                                                                                     |
| Millions                                                                                                                   | Gross      Unrecognized Income Tax Benefits |
| Balance      at January 1, 2007                                                                                            | $10.4 |
| Additions      for Tax Positions Related to the Current Year                                                               | 0.8 |
| Reductions      for Tax Positions Related to the Current Year                                                              | – |
| Additions      for Tax Positions Related to Prior Years                                                                    | – |
| Reduction      for Tax Positions Related to Prior Years                                                                    | (2.4) |
| Settlements                                                                                                                | (3.5) |
| Balance      at December 31, 2007                                                                                          | $5.3 |
| Less:      Tax Attributable to Temporary Items and Federal Benefit on State      Tax                                       | (2.3) |
| Total      Unrecognized Tax Benefits that, if Recognized, Would Impact the Effective      Tax Rate as of December 31, 2007 |  $3.0 |

----

| Discontinued      Operations             |    |   |
|------------------------------------------|---------|--------|
| Summary      Income Statement            |    |   |
| For      the Year Ended December 31      | 2006    | 2005   |
| Millions                                 |    |   |
|                                     |    |   |
| Operating      Revenue                   |    |   |
| Enventis      Telecom                    | – | $50.7  |
| Total      Operating Revenue             | – | $50.7  |
|                                     |    |   |
| Pre-Tax      Income from Operations |    |   |
| Enventis      Telecom                    | – | $3.0   |
|                                     | – | 3.0    |
| Income      Tax Expense                  |    |   |
| Enventis      Telecom                    | – | 1.2    |
|                                     | – | 1.2    |
| Total      Income from Operations        | – | 1.8    |
| Loss      on Disposal                    |    |   |
| Water      Services                      | $(1.5)  | (4.5)  |
| Enventis      Telecom                    | – | 0.6    |
|                                     | (1.5)   | (3.9)  |
| Income      Tax Expense (Benefit)        |    |   |
| Water      Services                      | (0.6)   | (2.0)  |
| Enventis      Telecom                    | – | 4.2    |
|                                     | (0.6)   | 2.2    |
| Net      Loss on Disposal                | (0.9)   | (6.1)  |
| Loss      from Discontinued Operations   | $(0.9)  | $(4.3) |

----

| Other      Comprehensive Income (Loss)                      | Pre-Tax | Tax      Expense | Net-of-Tax |
|-------------------------------------------------------------|---------|------------------|------------|
| Year      Ended December 31                                 | Amount  | (Benefit)        | Amount     |
| Millions                                                    |    |             |       |
|                                                        |    |             |       |
| 2007                                                        |    |             |       |
| Unrealized      Gain on Securities During the Year          | $1.4    | $0.3             | $1.1       |
| Defined      Benefit Pension and Other Postretirement Plans | 5.5     | 2.3              | 3.2        |
| Other      Comprehensive Income                             | $6.9    | $2.6             | $4.3       |
|                                                        |    |             |       |
| 2006                                                        |    |             |       |
| Unrealized      Gain on Securities During the Year          | $2.5    | $0.6             | $1.9       |
| Additional      Pension Liability                           | 11.0    | 4.6              | 6.4        |
| Other      Comprehensive Income                             | $13.5   | $5.2             | $8.3       |
|                                                        |    |             |       |
| 2005                                                        |    |             |       |
| Unrealized      Gain on Securities During the Year          | $1.3    | $0.7             | $0.6       |
| Additional      Pension Liability                           | (3.4)   | (1.4)            | (2.0)      |
| Other      Comprehensive Loss                               | $(2.1)  | $(0.7)           | $(1.4)     |

| December      31                                            | 2007   | 2006   |
|-------------------------------------------------------------|--------|--------|
| Millions                                                    |   |   |
|                                                        |   |   |
| Unrealized      Gain on Securities                          | $5.1   | $4.0   |
| Defined      Benefit Pension and Other Postretirement Plans | (9.6)  | (12.8) |
| Total      Accumulated Other Comprehensive Loss             | $(4.5) | $(8.8) |

----

| Pension      Obligation and Funded Status                                          |    |    |
|------------------------------------------------------------------------------------|---------|---------|
| At      September 30                                                               | 2007    | 2006    |
| Millions                                                                           |    |    |
|                                                                               |    |    |
| Accumulated      Benefit Obligation                                                | $384.9  | $376.1  |
|                                                                               |    |    |
| Change      in Benefit Obligation                                                  |    |    |
| Obligation,      Beginning of Year                                                 | $417.7  | $412.4  |
| Service      Cost                                                                  | 5.3     | 9.1     |
| Interest      Cost                                                                 | 23.4    | 22.2    |
| Actuarial      Gain                                                                | (7.1)   | (12.2)  |
| Benefits      Paid                                                                 | (21.6)  | (19.8)  |
| Participant      Contributions                                                     | 2.7     | 6.0     |
| Obligation,      End of Year                                                       | $420.4  | $417.7  |
| Change      in Plan Assets                                                         |    |    |
| Fair      Value, Beginning of Year                                                 | $364.7  | $337.1  |
| Actual      Return on Assets                                                       | 58.9    | 32.5    |
| Employer      Contribution                                                         | 3.6     | 8.9     |
| Benefits      Paid                                                                 | (21.6)  | (19.8)  |
| Other                                                                              | – | 6.0     |
| Fair      Value, End of Year                                                       | $405.6  | $364.7  |
| Funded      Status, End of Year                                                    | $(14.8) | $(53.0) |
|                                                                               |    |    |
| Net      Pension Amounts Recognized in Consolidated Balance Sheet Consist      of: |    |    |
| Noncurrent      Assets                                                             | $29.3   | – |
| Current      Liabilities                                                           | $0.8    | $0.8    |
| Noncurrent      Liabilities                                                        | $43.3   | $52.3   |
|                                                                               |    |    |

----

| Pension      Costs          |    |   |
|-----------------------------|---------|--------|
| Year      Ended December 31 | 2007    | 2006   |
| Millions                    |    |   |
|                        |    |   |
| Net      Loss               | $31.1   | $69.9  |
| Prior      Service Cost     | 3.2     | 3.9    |
| Transition      Obligation  | – | (0.1)  |
| Total      Pension Cost     | $34.3   | $73.7  |

| Components      of Net Periodic Pension Expense |    |    |   |
|-------------------------------------------------|---------|---------|--------|
| Year      Ended December 31                     | 2007    | 2006    | 2005   |
| Millions                                        |    |    |   |
| Service      Cost                               | $5.3    | $9.1    | $8.7   |
| Interest      Cost                              | 23.4    | 22.2    | 21.3   |
| Expected      Return on Assets                  | (30.6)  | (28.6)  | (28.2) |
| Amortized      Amounts                          |    |    |   |
| Loss                                            | 3.4     | 4.6     | 3.1    |
| Prior      Service Cost                         | 0.6     | 0.6     | 0.6    |
| Transition      Obligation                      | – | – | 0.2    |
| Net      Pension Expense                        | $2.1    | $7.9    | $5.7   |

| Other      Changes in Plan Assets and Benefit Obligations Recognized in Other      Comprehensive Income |    |    |
|---------------------------------------------------------------------------------------------------------|---------|---------|
| Year      Ended December 31                                                                             | 2007    | 2006    |
| Millions                                                                                                |    |    |
| Net      Gain                                                                                           | $(35.4) | $(5.9)  |
| Amortization                                                                                            |    | – |
| Prior      Service Cost                                                                                 | (0.6)   | (0.6)   |
| Prior      Loss                                                                                         | (3.3)   | (4.6)   |
| Total      Recognized in Other Comprehensive Income                                                     | $(39.3) | $(11.1) |

| Information      for Pension Plans with an                   |   |   |
|--------------------------------------------------------------|--------|--------|
| Accumulated      Benefit Obligation in Excess of Plan Assets |   |   |
| At      September 30                                         | 2007   | 2006   |
| Millions                                                     |   |   |
| Projected      Benefit Obligation                            | $170.6 | $180.4 |
| Accumulated      Benefit Obligation                          | $188.3 | $160.6 |
| Fair      Value of Plan Assets                               | $145.3 | $130.9 |

----

| Postretirement      Health and Life Obligation and Funded Status                   |    |    |
|------------------------------------------------------------------------------------|---------|---------|
| At      September 30                                                               | 2007    | 2006    |
| Millions                                                                           |    |    |
| Change      in Benefit Obligation                                                  |    |    |
| Obligation,      Beginning of Year                                                 | $138.9  | $136.9  |
| Service      Cost                                                                  | 4.2     | 4.4     |
| Interest      Cost                                                                 | 7.9     | 7.4     |
| Actuarial      Loss (Gain)                                                         | 7.5     | (4.7)   |
| Participation      Contributions                                                   | 1.4     | 1.4     |
| Benefits      Paid                                                                 | (6.2)   | (6.4)   |
| Amendments                                                                         | – | (0.1)   |
| Obligation,      End of Year                                                       | $153.7  | $138.9  |
| Change      in Plan Assets                                                         |    |    |
| Fair      Value, Beginning of Year                                                 | $78.9   | $60.9   |
| Actual      Return on Assets                                                       | 9.6     | 5.8     |
| Employer      Contribution                                                         | 6.8     | 17.2    |
| Participation      Contributions                                                   | 1.4     | 1.4     |
| Benefits      Paid                                                                 | (5.8)   | (6.4)   |
| Fair      Value, End of Year                                                       | $90.9   | $78.9   |
| Funded      Status, End of Year                                                    | ($62.8) | $(60.0) |
|                                                                               |    |    |
| Net      Pension Amounts Recognized in Consolidated Balance Sheet Consist      of: |    |    |
| Current      Liabilities                                                           | $0.6    |    |
| Noncurrent      Liabilities                                                        | $62.2   | $60.0   |

| Postretirement      Health and Life Costs       |   |   |
|-------------------------------------------------|--------|--------|
| Year      Ended December 31                     | 2007   | 2006   |
| Millions                                        |   |   |
| Net      Loss                                   | $22.7  | $19.2  |
| Prior      Service Cost                         | (0.1)  | (0.1)  |
| Transition      Obligation                      | 12.6   | 15.0   |
| Total      Postretirement Health and Life Costs | $35.2  | $34.1  |

| Components      of Net Periodic Postretirement Health and Life Expense      (Income) |   |   |
|--------------------------------------------------------------------------------------|--------|--------|
| Year      Ended December 31                                                          | 2007   | 2006   | 2005 |
| Millions                                                                             |   |   |   |
| Service      Cost                                                                    | $4.2   | $4.4   | $4.0 |
| Interest      Cost                                                                   | 7.8    | 7.4    | 6.7 |
| Expected      Return on Assets                                                       | (6.5)  | (5.6)  | (4.8) |
| Amortized      Amounts                                                               |   |   |   |
| Loss                                                                                 | 1.0    | 1.7    | 0.7 |
| Transition      Obligation                                                           | 2.4    | 2.4    | 2.4 |
| Net      Expense                                                                     | $8.9   | $10.3  | $9.0 |

----

|                                   |    | Postretirement       |
|----------------------------------------|---------|----------------------|
| Estimated      Future Benefit Payments | Pension | Health      and Life |
| Millions                               |    |                 |
|                                   |    |                 |
| 2008                                   | $22.5   | $5.9                 |
| 2009                                   | $23.1   | $6.7                 |
| 2010                                   | $24.0   | $7.6                 |
| 2011                                   | $25.0   | $8.4                 |
| 2012                                   | $25.9   | $9.0                 |
| Years      2013 – 2017           | $148.2  | $54.8                |

|                                                        |    | Postretirement       |
|-------------------------------------------------------------|---------|----------------------|
|                                                        | Pension | Health      and Life |
| Millions                                                    |    |                 |
|                                                        |    |                 |
| Net      Loss                                               | $1.5    | $1.4                 |
| Prior      Service Costs                                    | $0.6    | –              |
| Transition      Obligations                                 | – | $2.5                 |
| Total      Pension and Postretirement Health and Life Costs | $2.1    | $3.9                 |

| Weighted-Average      Assumptions         |                  |                  |
|-------------------------------------------|-----------------------|-----------------------|
| Used      to Determine Benefit Obligation |                  |                  |
| At      September 30                      | 2007                  | 2006                  |
|                                      |                  |                  |
| Discount      Rate                        | 6.25%                 | 5.75%                 |
| Rate      of Compensation Increase        | 4.3      – 4.6% | 3.5      – 4.5% |
| Health      Care Trend Rates              |                  |                  |
| Trend      Rate                           | 10%                   | 10%                   |
| Ultimate      Trend Rate                  | 5%                    | 5%                    |
| Year      Ultimate Trend Rate Effective   | 2012                  | 2011                  |

| Weighted-Average      Assumptions                 |                  |                  |                  |
|---------------------------------------------------|-----------------------|-----------------------|-----------------------|
| Used      to Determine Net Periodic Benefit Costs |                  |                  |                  |
| Year      Ended December 31                       | 2007                  | 2006                  | 2005                  |
|                                              |                  |                  |                  |
| Discount      Rate                                | 5.75%                 | 5.50%                 | 5.75%                 |
| Expected      Long-Term Return on Plan Assets     |                  |                  |                  |
| Pension                                           | 9.0%                  | 9.0%                  | 9.0%                  |
| Postretirement      Health and Life               | 5.0      – 9.0% | 5.0      – 9.0% | 5.0      – 9.0% |
| Rate      of Compensation Increase                | 4.3      – 4.6% | 3.5      – 4.5% | 3.5      – 4.5% |

----

| Sensitivity      of a One-Percentage-Point                                            | One      Percent | One      Percent |
|---------------------------------------------------------------------------------------|------------------|------------------|
| Change      in Health Care Trend Rates                                                | Increase         | Decrease         |
| Millions                                                                              |             |             |
|                                                                                  |             |             |
| Effect      on Total of Postretirement Health and Life Service and Interest      Cost | $1.9             | $(1.5)           |
| Effect      on Postretirement Health and Life Obligation                              | $18.4            | $(15.1)          |

|                        | Pension | PostretirementHealth      and Life (a) |
|-----------------------------|---------|----------------------------------------|
| Plan      Asset Allocations | 2007    | 2006                                   | 2007 | 2006 |
|                        |    |                                   |   |   |
| Equity      Securities      | 61.3%   | 65.1%                                  | 61.6% | 68.9% |
| Debt      Securities        | 25.1%   | 29.6%                                  | 27.9% | 30.6% |
| Real      Estate            | 1.6%    | 0.8%                                   | – | – |
| Private      Equity         | 9.4%    | 4.2%                                   | 5.5% | – |
| Cash                        | 2.6%    | 0.3%                                   | 5.0% | 0.5% |
|                        | 100.0%  | 100.0%                                 | 100.0% | 100.0% |

| (a) | Includes      VEBAs and irrevocable grantortrust. |
|-----|---------------------------------------------------|

|                               |    | Postretirement      |
|------------------------------------|---------|---------------------|
| Plan      Asset Target Allocations | Pension | Health and Life (a) |
|                               |    |                |
| Equity      Securities             | 60%     | 69%                 |
| Debt      Securities               | 24      | 30                  |
| Real      Estate                   | 9       | –             |
| Private      Equity                | 6       | –             |
| Cash                               | 1       | 1                   |
|                               | 100%    | 100%                |

----

| Year      Ended December 31           | 2007   | 2006   | 2005   |
|---------------------------------------|--------|--------|--------|
| Millions                              |   |   |   |
|                                  |   |   |   |
| ESOP      Shares                      |   |   |   |
| Allocated                             | 1.8    | 1.7    | 1.9    |
| Unallocated                           | 2.2    | 2.5    | 2.6    |
| Total                                 | 4.0    | 4.2    | 4.5    |
| Fair      Value of Unallocated Shares | $87.1  | $115.2 | $115.0 |

----

|                         | 2007               | 2006         |
|------------------------------|--------------------|--------------|
| Risk-Free      Interest Rate | 4.8%               | 4.5%         |
| Expected      Life           |  5      Years | 5      Years |
| Expected      Volatility     | 20%                | 20%          |
| Dividend      Growth Rate    | 5%                 | 5%           |

| Share-Based      Compensation Expense       |   |   |
|---------------------------------------------|--------|--------|
| For      the Year Ended December 31         | 2007   | 2006   |
| Millions                                    |   |   |
|                                        |   |   |
| Stock      Options                          | $0.8   | $0.8   |
| Performance      Shares                     | 1.0    | 1.0    |
|                                        |   |   |
| Total      Share-Based Compensation Expense | $1.8   | $1.8   |
|                                        |   |   |
| Income      Tax Benefit                     | $0.7   | $0.7   |

----

| Pro      Forma Effect of SFAS 123                                                                     |   |
|-------------------------------------------------------------------------------------------------------|--------|
| Accounting      for Stock-Based Compensation                                                          | 2005   |
| Millions      Except Per Share Amounts                                                                |   |
| Net      Income                                                                                       |   |
| As      Reported                                                                                      | $13.3  |
| Less: Employee      Stock Compensation Expense Determined Under SFAS 123 – Net of      Tax | 1.5    |
| Plus: Employee      Stock Compensation Expense Included in Net Income – Net of    Tax      | 1.5    |
| Pro      Forma Net Income                                                                             | $13.3  |
| Basic      Earnings Per Share                                                                         |   |
| As      Reported                                                                                      | $0.49  |
| Pro      Forma                                                                                        | $0.49  |
| Diluted      Earnings Per Share                                                                       |   |
| As      Reported                                                                                      | $0.48  |
| Pro      Forma                                                                                        | $0.48  |

|                         | 2005         |
|------------------------------|--------------|
| Risk-Free      Interest Rate | 3.7%         |
| Expected      Life           | 5      Years |
| Expected      Volatility     | 20.0%        |
| Dividend      Growth Rate    | 5%           |

|                                  |           |             |      | Weighted-Average |
|---------------------------------------|----------------|------------------|-----------|------------------|
|                                  |           | Weighted-Average | Aggregate | Remaining        |
|                                  | Number      of | Exercise         | Intrinsic | Contractual      |
|                                  | Options        | Price            | Value     | Term             |
|                                  |           |             | Millions  |             |
| Outstanding      at December 31, 2006 | 438,351        | $37.35           | $4.0      | 7.2      years   |
| Granted                               | 100,702        | $48.65           |      |             |
| Exercised                             | (28,061)       | $32.80           |      |             |
| Forfeited                             | –        | –          |      |             |
| Outstanding      at December 31, 2007 | 510,992        | $39.83           | $(0.1)    | 6.8      years   |
| Exercisable      at December 31, 2007 | 327,473        | $36.43           | $1.0      | 6.0      years   |
| Fair      Value of Options            |           |             |      |             |
| Granted      During the Year          | $8.15          |             |      |             |

----

|                                |           | Weighted-Average |
|-------------------------------------|----------------|------------------|
|                                | Number      of | Grant      Date  |
|                                | Shares         | Fair      Value  |
| Nonvested      at December 31, 2006 | 71,004         | $45.39           |
| Granted                             | 23,974         | $54.48           |
| Awarded                             | (24,714)       | $42.80           |
| Forfeited                           | (3,299)        | $49.70           |
| Nonvested      at December 31, 2007 | 66,965         | $49.39           |

----

| Quarter      Ended                                                                                            | Mar.      31 | Jun.      30 | Sept.      30 | Dec.      31 |
|---------------------------------------------------------------------------------------------------------------|--------------|--------------|---------------|--------------|
| Millions      Except Earnings Per Share                                                                       |         |         |          |         |
|                                                                                                          |         |         |          |         |
| 2007                                                                                                          |         |         |          |         |
| Operating      Revenue                                                                                        | $205.3       | $223.3       | $200.8        | $212.3       |
|                                                                                                          |         |         |          |         |
| Operating      Income from Continuing Operations                                                              | $41.3        | $33.9        | $24.7         | $33.8        |
|                                                                                                          |         |         |          |         |
| Income      from Continuing Operations                                                                        | $26.3        | $22.6        | $16.5         | $22.2        |
|                                                                                                          |         |         |          |         |
| Net      Income                                                                                               | $26.3        | $22.6        | $16.5         | $22.2        |
|                                                                                                          |         |         |          |         |
| Earnings      Per Share of Common Stock                                                                       |         |         |          |         |
| Basic             Continuing      Operations | $0.93        | $0.80        | $0.58         | $0.78        |
|                                                                                                          |         |         |          |         |
| Diluted           Continuing      Operations           | $0.93        | $0.80        | $0.58         | $0.77        |
|                                                                                                          |         |         |          |         |
| 2006                                                                                                          |         |         |          |         |
| Operating      Revenue                                                                                        | $192.5       | $178.3       | $199.1        | $197.2       |
|                                                                                                          |         |         |          |         |
| Operating      Income from Continuing Operations                                                              | $36.4        | $26.3        | $38.7         | $39.3        |
|                                                                                                          |         |         |          |         |
| Income      from     Continuing Operations                                           | $18.8        | $13.6        | $21.9         | $23.0        |
| Loss      from         Discontinued      Operations              | –      | (0.4)        | (0.1)         | (0.4)        |
| Net      Income                                                                                               | $18.8        | $13.2        | $21.8         | $22.6        |
|                                                                                                          |         |         |          |         |
| Earnings      (Loss) Per Share of Common Stock                                                                |         |         |          |         |
| Basic             Continuing      Operations | $0.68        | $0.50        | $0.78         | $0.82        |
| Discontinued      Operations                                                                                  | –      | (0.02)       | –       | (0.01)       |
|                                                                                                          | $0.68        | $0.48        | $0.78         | $0.81        |
|                                                                                                          |         |         |          |         |
| Diluted           Continuing      Operations           | $0.68        | $0.49        | $0.78         | $0.82        |
| Discontinued      Operations                                                                                  | –      | (0.02)       | –       | (0.01)       |
|                                                                                                          | $0.68        | $0.47        | $0.78         | $0.81        |

----

|                                           | Balance      at | Additions      | Deductions | Balance      at   |
|------------------------------------------------|-----------------|----------------|------------|-------------------|
|                                           | Beginning       | Charged        | Other      | from              | End      of |
| For      the Year Ended December 31            | of      Year    | to      Income | Changes    | Reserves      (a) | Period |
| Millions                                       |            |           |       |              |   |
|                                           |            |           |       |              |   |
| Reserve      Deducted from Related Assets      |            |           |       |              |   |
| Reserve      For Uncollectible Accounts        |            |           |       |              |   |
| 2007  Trade      Accounts Receivable | $1.1            | $1.0           | –    | $1.1              | $1.0 |
| Finance      Receivables – Long-Term     | 0.2             | –        | –    | –           | 0.2 |
| 2006  Trade      Accounts Receivable | 1.0             | 0.7            | _          | 0.6               | 1.1 |
| Finance      Receivables – Long-Term     | 0.6             | _              | _          | 0.4               | 0.2 |
| 2005  Trade      Accounts Receivable | 1.0             | 1.1            | –    | 1.1               | 1.0 |
| Finance      Receivables – Long-Term     | 0.7             | –        | –    | 0.1               | 0.6 |
| Deferred      Asset Valuation Allowance        |            |           |       |              |   |
| 2007  Deferred      Tax Assets       | 3.6             | (0.3)          | –    | –           | 3.3 |
| 2006  Deferred      Tax Assets       | 4.1             | (1.1)          | $0.6       | –           | 3.6 |
| 2005  Deferred      Tax Assets       | 1.1             | 3.8            | –    | 0.8               | 4.1 |

| (a) | Includes      uncollectible accounts written off. |
|-----|---------------------------------------------------|

----