UPDATE 1-Allete to buy power line, build wind to reduce CO2

(Updates with company comment)

NEW YORK, May 13 (Reuters) - Allete Inc's (ALE.N) Minnesota Power subsidiary agreed to buy a power line in North Dakota, phase out a contract to buy coal-based electricity, and add hundreds of megawatts of wind to reduce its carbon emissions, the company said in a release Tuesday.

Minnesota Power wants to buy a direct current (DC) transmission line from Square Butte Electric Cooperative for about $80 million in early 2009.

Allete said the agreement will not materially change its previously disclosed five-year capital expenditure forecast.

The DC cable extends from the wind-rich plains of central North Dakota to the Arrowhead Substation in Hermantown, Minnesota. It is now used to transmit electricity form the 705-megawatt Milton R Young lignite coal-fired power plant in North Dakota 465 miles eastward to Minnesota Power.

"Three decades ago, the DC line was built to move low-cost coal-based electricity from North Dakota to power the growing taconite industry in northeast Minnesota's Iron Range," Allete Chief Executive Don Shippar said in the release. "Back then, it was described as a way to transport 'coal by wire.' Now we will use the line to transmit 'wind by wire.'"

Taconite is a raw material used to make steel.

Minnesota Power shares the power from the Young station with Minnkota Power Cooperative, an affiliate of the Square Butte Cooperative.

Over the next several years, Minnesota Power, which takes about 300 MW from the plant, plans to phase out its generation rights from the 455-MW Unit 2 at Young.

Minnkota said in the release the deal would delay its need to build new generation.

In addition, Minnesota Power said it plans to add several hundred megawatts of new wind generation near Center, North Dakota. It will transmit this wind-generated power over the DC line, partially making up for the lost Young 2 power.

The company, which now gets about 95 percent of its power from coal, has committed not to increase its carbon dioxide emissions.

Minnesota Power said this deal will help the company meet growing customer power demand and achieve its carbon reduction goals while meeting the Minnesota state mandate that 25 percent of the power come from renewable sources by 2025.

The company hopes to finalize the deal in the late summer/early fall, a company spokesman said.

Allete, of Duluth, Minnesota, supplies electricity to 156,000 customers in Minnesota and Wisconsin and has real-estate holdings in Florida. (Reporting by Scott DiSavino; Editing by John Picinich)