SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended MARCH 31,JUNE 30, 1999
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 1-3548
MINNESOTA POWER, INC.
A Minnesota Corporation
IRS Employer Identification No. 41-0418150
30 West Superior Street
Duluth, Minnesota 5580255802-2093
Telephone - (218) 722-2641
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
---- --------- -----
Common Stock, no par value,
72,821,08773,125,473 shares outstanding
as of April 30,July 31, 1999
MINNESOTA POWER, INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet -
March 31,June 30, 1999 and December 31, 1998 1
Consolidated Statement of Income -
Quarter Ended March 31,and Six Months Ended
June 30, 1999 and 1998 2
Consolidated Statement of Cash Flows -
QuarterSix Months Ended March 31,June 30, 1999 and 1998 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 810
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 1317
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 1319
Item 6. Exhibits and Reports on Form 8-K 1520
Signatures 1621
i
DEFINITIONS
The following abbreviations or acronyms are used in the text.
Abbreviation or Acronym Term
- ----------------------- ----------------------------------------------------
1998 Form 10-K Minnesota Power's Annual Report on Form 10-K for
the Year Ended December 31, 1998
ACE ACE Limited
ADESA ADESA Corporation
ADT ADT Automotive, Inc.
AFC Automotive Finance Corporation
Capital Re Capital Re Corporation
CFS Commercial Financial Services Inc.
CIP Conservation Improvement Programs
Common Stock Minnesota Power, Inc. Common Stock
Company Minnesota Power, Inc. and its subsidiaries
DRIP Dividend Reinvestment and Stock Purchase Plan
ESOP Employee Stock Ownership Plan
FERC Federal Energy Regulatory Commission
Heater Heater Utilities, Inc.
Florida Water Florida Water Services Corporation
FPSC Florida Public Service Commission
kWh Kilowatthour(s)
MAPP Mid-Continent Area Power Pool
Mid South Mid South Water System Inc.
Minnesota Power Minnesota Power, Inc. and its subsidiaries
MP Real Estate MP Real Estate Holdings, Inc.
MPUC Minnesota Public Utilities Commission
MW Megawatt(s)
NCUC North Carolina Utilities Commission
Palm Coast Palm Coast Holdings, Inc.
PCUC Palm Coast Utilities Corporation
PSCW Public Service Commission of Wisconsin
Square Butte Square Butte Electric Cooperative
SWL&P Superior Water, Light and Power Company
ii
SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (Reform Act), the Company is hereby filing
cautionary statements identifying important factors that could cause the
Company's actual results to differ materially from those projected in
forward-looking statements (as such term is defined in the Reform Act) made by
or on behalf of the Company in this quarterly report on Form 10-Q, in
presentations, in response to questions or otherwise. Any statements that
express, or involve discussions as to expectations, beliefs, plans, objectives,
assumptions or future events or performance (often, but not always, through the
use of words or phrases such as "anticipates", "believes", "estimates",
"expects", "intends", "plans", "predicts", "projects", "will likely result",
"will continue", or similar expressions) are not statements of historical facts
and may be forward-looking.
Forward-looking statements involve estimates, assumptions and uncertainties and
are qualified in their entirety by reference to, and are accompanied by, the
following important factors, which are difficult to predict, contain
uncertainties, are beyond the control of the Company and may cause actual
results to differ materially from those contained in forward-looking statements:
- prevailing governmental policies and regulatory actions, including
those of the FERC, the MPUC, the FPSC, the NCUC and the PSCW, with
respect to allowed rates of return, industry and rate structure,
acquisition and disposal of assets and facilities, operation and
construction of plant facilities, recovery of purchased power and
other capital investments, and present or prospective wholesale and
retail competition (including but not limited to retail wheeling and
transmission costs);
- economic and geographic factors including political and economic risks;
- changes in and compliance with environmental and safety laws and
policies;
- weather conditions;
- population growth rates and demographic patterns;
- competition for retail and wholesale customers;
- Year 2000 issues;
- delays or changes in costs of Year 2000 compliance;
- failure of major suppliers, customers or others with whom the companyCompany
does business to resolve their own Year 2000 issues on a timely basis;
- pricing and transportation of commodities;
- market demand, including structural market changes;
- changes in tax rates or policies or in rates of inflation;
- changes in project costs;
- unanticipated changes in operating expenses and capital expenditures;
- capital market conditions;
- competition for new energy development opportunities; and
- legal and administrative proceedings (whether civil or criminal)
and settlements that influence the business and profitability of
the Company.
Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time and it is not possible for management to
predict all of such factors, nor can it assess the impact of any such factor on
the business or the extent to which any factor, or combination of factors, may
cause results to differ materially from those contained in any forward-looking
statement.
iii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MINNESOTA POWER
CONSOLIDATED BALANCE SHEET
Millions
MARCH 31, DECEMBER 31,
1999 1998
Unaudited Audited
- ------------------------------------------------------------------------------------------------------
ASSETS
PLANT AND INVESTMENTS
Electric Operations $ 766.0 $ 771.5
Water Services 414.1 329.4
Automotive Services 195.4 186.2
Investments 266.5 263.5
--------- --------
Total Plant and Investments 1,642.0 1,550.6
--------- --------
CURRENT ASSETS
Cash and Cash Equivalents 147.9 89.4
Trading Securities 167.2 169.9
Accounts Receivable (less Allowance of $10.3 and $9.6) 275.4 156.1
Fuel, Material and Supplies 23.4 24.0
Prepayments and Other 56.0 48.1
--------- --------
Total Current Assets 669.9 487.5
--------- --------
OTHER ASSETS
Goodwill 169.1 169.8
Deferred Regulatory Charges 52.4 56.1
Other 55.2 53.1
--------- --------
Total Other Assets 276.7 279.0
--------- --------
TOTAL ASSETS $ 2,588.6 $2,317.1
- ------------------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock without Par Value, 130.0 Shares Authorized;
72.7 and 72.3 Shares Outstanding $ 538.2 $ 529.0
Unearned ESOP Shares (61.7) (62.5)
Accumulated Other Comprehensive Income 2.5 1.5
Retained Earnings 320.5 317.6
--------- --------
Total Common Stock Equity 799.5 785.6
Cumulative Preferred Stock 11.5 11.5
Redeemable Serial Preferred Stock 20.0 20.0
Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary MP&L Capital I Which Holds Solely Company
Junior Subordinated Debentures 75.0 75.0
Long-Term Debt 672.1 672.2
--------- --------
Total Capitalization 1,578.1 1,564.3
--------- --------
CURRENT LIABILITIES
Accounts Payable 244.5 123.3
Accrued Taxes, Interest and Dividends 77.4 62.9
Notes Payable 160.4 81.0
Long-Term Debt Due Within One Year 8.9 9.0
Other 46.7 69.8
--------- --------
Total Current Liabilities 537.9 346.0
--------- --------
OTHER LIABILITIES
Accumulated Deferred Income Taxes 149.0 153.4
Contributions in Aid of Construction 170.8 108.2
Deferred Regulatory Credits 56.1 55.2
Other 96.7 90.0
--------- --------
Total Other Liabilities 472.6 406.8
--------- --------
TOTAL CAPITALIZATION AND LIABILITIES $ 2,588.6 $2,317.1
- ------------------------------------------------------------------------------------------------------MINNESOTA POWER
CONSOLIDATED BALANCE SHEET
Millions
JUNE 30, DECEMBER 31,
1999 1998
Unaudited Audited
- --------------------------------------------------------------------------------
ASSETS
PLANT AND INVESTMENTS
Electric Operations $ 768.6 $ 771.5
Water Services 425.1 329.4
Automotive Services 199.5 186.2
Investments 259.1 263.5
--------- --------
Total Plant and Investments 1,652.3 1,550.6
--------- --------
CURRENT ASSETS
Cash and Cash Equivalents 141.1 89.4
Trading Securities 168.8 169.9
Accounts Receivable
(less Allowance of $10.7 and $9.6) 284.3 156.1
Fuel, Material and Supplies 24.4 24.0
Prepayments and Other 65.3 48.1
--------- --------
Total Current Assets 683.9 487.5
--------- --------
OTHER ASSETS
Goodwill 171.4 169.8
Deferred Regulatory Charges 53.0 56.1
Other 50.0 53.1
--------- --------
Total Other Assets 274.4 279.0
--------- --------
TOTAL ASSETS $ 2,610.6 $2,317.1
- --------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock without Par Value, 130.0 Shares
Authorized;
73.1 and 72.3 Shares Outstanding $ 544.9 $ 529.0
Unearned ESOP Shares (60.8) (62.5)
Accumulated Other Comprehensive Income (0.9) 1.5
Retained Earnings 303.9 317.6
--------- --------
Total Common Stock Equity 787.1 785.6
Cumulative Preferred Stock 11.5 11.5
Redeemable Serial Preferred Stock 20.0 20.0
Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary
MP&L Capital I Which Holds Solely
Company Junior Subordinated Debentures 75.0 75.0
Long-Term Debt 693.7 672.2
--------- --------
Total Capitalization 1,587.3 1,564.3
--------- --------
CURRENT LIABILITIES
Accounts Payable 248.4 123.3
Accrued Taxes, Interest and Dividends 63.1 62.9
Notes Payable 164.3 81.0
Long-Term Debt Due Within One Year 5.4 9.0
Other 57.2 69.8
--------- --------
Total Current Liabilities 538.4 346.0
--------- --------
OTHER LIABILITIES
Accumulated Deferred Income Taxes 160.5 153.4
Contributions in Aid of Construction 172.3 108.2
Deferred Regulatory Credits 55.9 55.2
Other 96.2 90.0
--------- --------
Total Other Liabilities 484.9 406.8
--------- --------
TOTAL CAPITALIZATION AND LIABILITIES $ 2,610.6 $2,317.1
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
-1-
MINNESOTA POWER
CONSOLIDATED STATEMENT OF INCOME
Millions Except Per Share Amounts - Unaudited
QUARTER ENDED MARCH 31,SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------
OPERATING REVENUE
Electric Operations $ 132.2135.3 $ 134.0140.7 $ 267.5 $ 274.8
Water Services 24.4 20.829.9 25.0 54.3 45.7
Automotive Services 96.8 76.7104.0 84.8 200.8 161.5
Investments 4.1 15.110.0 18.7 14.1 33.9
------- -------- -------- -------
Total Operating Revenue 257.5 246.6279.2 269.2 536.7 515.9
------- -------- -------- -------
OPERATING EXPENSES
Fuel and Purchased Power 47.6 49.752.3 53.7 99.9 103.4
Operations 164.0 152.4170.9 160.5 334.9 312.9
Interest Expense 14.2 19.814.4 15.6 28.6 35.5
------- -------- -------- -------
Total Operating Expenses 225.8 221.9237.6 229.8 463.4 451.8
------- -------
INCOME (LOSS) FROM EQUITY INVESTMENTS (2.2) 4.2
--------------- -------- -------
OPERATING INCOME 29.5 28.941.6 39.4 73.3 64.1
DISTRIBUTIONS ON REDEEMABLE
PREFERRED SECURITIES OF
SUBSIDIARY 1.5 1.5 3.0 3.0
INCOME TAX EXPENSE 7.1 8.916.4 16.1 28.5 22.3
------- -------- -------- -------
INCOME BEFORE INCOME (LOSS)
FROM EQUITY INVESTMENTS 23.7 21.8 41.8 38.8
INCOME (LOSS) FROM
EQUITY INVESTMENTS -
NET OF TAX (21.8) 1.0 (19.0) 2.5
------- -------- -------- -------
NET INCOME 20.9 18.51.9 22.8 22.8 41.3
DIVIDENDS ON PREFERRED STOCK 0.5 0.5 1.0 1.0
------- -------- -------- -------
EARNINGS AVAILABLE FOR
COMMON STOCK $ 20.41.4 $ 18.022.3 $ 21.8 $ 40.3
======= ======== ======== =======
AVERAGE SHARES OF COMMON STOCK 67.8 62.368.2 62.6 68.0 62.5
BASIC AND DILUTED
EARNINGS PER SHARE OF
COMMON STOCK $0.30 $0.29$0.02 $0.36 $0.32 $0.65
DIVIDENDS PER SHARE OF
COMMON STOCK $0.2675 $0.255 $0.535 $0.51
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
-2-
MINNESOTA POWER
CONSOLIDATED STATEMENT OF CASH FLOWS
Millions - Unaudited
QUARTER ENDED
MARCH 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 20.9 $ 18.5
Loss (Income) From Equity Investments - Net of Dividends Received 2.2 (4.2)
Depreciation and Amortization 18.4 18.5
Deferred Income Taxes (4.5) (1.9)
Deferred Investment Tax Credits (0.4) (0.3)
Changes In Operating Assets and Liabilities
Trading Securities 2.7 (8.4)
Notes and Accounts Receivable (119.3) (80.4)
Fuel, Material and Supplies 0.6 2.1
Accounts Payable 121.2 59.0
Other Current Assets and Liabilities (16.5) (2.4)
Other - Net 4.3 10.2
------- -------
Cash From Operating Activities 29.6 10.7
------- -------
INVESTING ACTIVITIES
Proceeds From Sale of Investments in Securities 9.9 13.5
Additions to Investments (15.8) (10.0)
Additions to Plant (32.1) (16.5)
Changes to Other Assets - Net (3.8) (1.6)
------- -------
Cash For Investing Activities (41.8) (14.6)
------- -------
FINANCING ACTIVITIES
Issuance of Common Stock 8.7 8.7
Issuance of Long-Term Debt 3.6 2.0
Changes in Notes Payable - Net 79.4 67.7
Reductions of Long-Term Debt (3.8) (2.4)
Dividends on Preferred and Common Stock (18.0) (16.7)
------- -------
Cash From Financing Activities 69.9 59.3
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 0.8 0.2
------- -------
CHANGE IN CASH AND CASH EQUIVALENTS 58.5 55.6
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 89.4 41.8
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 147.9 $ 97.4
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Period For
Interest - Net of Capitalized $17.7 $22.0
Income Taxes $3.4 $5.5
- -------------------------------------------------------------------------------------------------------------------MINNESOTA POWER
CONSOLIDATED STATEMENT OF CASH FLOWS
Millions - Unaudited
SIX MONTHS ENDED
JUNE 30,
1999 1998
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 22.8 $ 41.3
Loss (Income) From Equity Investments - Net
of Dividends Received 15.6 (7.6)
Depreciation and Amortization 37.8 37.2
Deferred Income Taxes 8.3 0.4
Deferred Investment Tax Credits (0.7) (0.6)
Pre-Tax Gain on Sale of Property - (0.3)
Changes In Operating Assets and Liabilities
Trading Securities 1.1 (9.7)
Notes and Accounts Receivable (128.2) (95.1)
Fuel, Material and Supplies (0.4) 2.0
Accounts Payable 125.1 73.0
Other Current Assets and Liabilities (29.9) (11.6)
Other - Net 10.1 14.2
------- ------
Cash From Operating Activities 61.6 43.2
------- ------
INVESTING ACTIVITIES
Proceeds From Sale of Investments in Securities 36.1 27.0
Proceeds From Sale of Property - 1.0
Additions to Investments (20.1) (26.2)
Additions to Plant (68.4) (33.0)
Acquisition of Subsidiaries - Net of Cash Acquired (38.8) (23.8)
Changes to Other Assets - Net (0.4) 0.2
------- ------
Cash For Investing Activities (91.6) (54.8)
------- ------
FINANCING ACTIVITIES
Issuance of Common Stock 14.9 13.3
Issuance of Long-Term Debt 25.6 2.1
Changes in Notes Payable - Net 83.3 58.7
Reductions of Long-Term Debt (7.7) (5.8)
Dividends on Preferred and Common Stock (36.5) (33.0)
------- ------
Cash From Financing Activities 79.6 35.3
------- ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 2.1 (2.4)
------- ------
CHANGE IN CASH AND CASH EQUIVALENTS 51.7 21.3
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 89.4 41.8
------- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 141.1 $ 63.1
======= ======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Period For
Interest - Net of Capitalized $30.8 $37.4
Income Taxes $27.2 $24.7
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
-3-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements and notes should be
read in conjunction with the Company's 1998 Form 10-K. In the opinion of the
Company, all adjustments necessary for a fair statement of the results for the
interim periods have been included. The results of operations for an interim
period may not give a true indication of results for the year. Prior year
balances have been reclassified to present comparable information for all
periods.
NOTE 1. STOCK SPLIT
On March 2, 1999 the Company's Common Stock was split two-for-one. All common
share and per share amounts have been adjusted for all periods to reflect the
two-for-one stock split.
NOTE 2. BUSINESS SEGMENTS
Millions
Investments
-------------------------------------------
Electric Water Automotive Portfolio & Real Corporate
Consolidated Operations Services Services Reinsurance Estate Charges
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
For the Quarter Ended
March 31,June 30, 1999
- ---------------------------------------------------------
Operating Revenue $ 257.5 $ 132.2 $ 24.4 $ 96.8279.2 $135.3 $29.9 $104.0 $ 0.66.8 $ 3.63.2 $ (0.1)-
Operation and Other Expense 193.2 97.8 15.7 72.9 1.1 3.0 2.7203.8 104.1 17.8 75.9 1.0 2.5 2.5
Depreciation and Amortization 18.4 10.9 3.2 4.219.4 11.4 3.4 4.4 - -0.1 0.1
Interest Expense 14.214.4 5.3 2.4 2.42.5 2.5 - - 4.1
Loss from Equity Investments (2.2) - - - (2.2) - -
--------- -------- -------- ------- -------------- ----- ------ ------- ------ -----
Operating Income (Loss) 29.5 18.2 3.1 17.3 (2.7)41.6 14.5 6.2 21.2 5.8 0.6 (7.0)(6.7)
Distributions on Redeemable
Preferred Securities
of Subsidiary 1.5 0.40.5 - - - - 1.11.0
Income Tax Expense (Benefit) 7.1 6.8 1.2 7.7 (5.2) 0.2 (3.6)
--------- -------- --------16.4 5.4 2.4 9.2 2.0 0.3 (2.9)
------- -------------- ----- ------ ------- ------ -----
Income (Loss) before
Loss from Equity
Investments 23.7 8.6 3.8 12.0 3.8 0.3 (4.8)
Loss from
Equity Investments -
Net of Tax (21.8) - - - (21.8) - -
------- ------ ----- ------ ------- ------ -----
Net Income (Loss) $ 20.9 $ 11.0 $ 1.9 $ 9.68.6 $ 2.53.8 $ 0.412.0 $ (4.5)
========= ======== ========(18.0) $ 0.3 $(4.8)
======= ============== ===== ====== ======= Total Assets $ 2,588.6 $1,034.5 $ 463.1 $ 722.6 $ 290.8 $ 77.2 $ 0.4
Accumulated Depreciation
and Amortization $ 843.1 $ 607.1 $ 189.6 $ 44.7====== =====
- $ 1.7 -
Construction Work in Progress $ 32.8 $ 14.4 $ 16.4 $ 2.0 - - -
Capital Expenditures $ 15.3 $ 6.6 $ 4.2 $ 4.5 - - -
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
For the Quarter Ended
March 31,June 30, 1998
- ---------------------------------------------------------
Operating Revenue $ 246.6269.2 $140.7 $25.0 $ 134.0 $ 20.8 $ 76.784.8 $ 7.16.1 $ 8.112.6 $ (0.1)-
Operation and Other Expense 183.6 100.8 14.0 60.1 0.9 4.9 2.9195.5 107.2 15.4 61.9 0.7 6.9 3.4
Depreciation and Amortization 18.5 11.8 2.9 3.618.7 11.9 2.8 3.9 - 0.1- 0.1
Interest Expense 19.815.6 5.5 2.5 2.6 2.2 - - 9.5
Income from Equity Investments 4.2 - - - 4.2 - -
--------- -------- --------5.0
------- -------- ------ ------------ ------ ------ ----- -----
Operating Income (Loss) 28.9 15.9 1.3 10.8 10.4 3.1 (12.6)39.4 16.1 4.3 16.4 5.4 5.7 (8.5)
Distributions on Redeemable
Preferred Securities of
Subsidiary 1.5 0.40.5 - - - - 1.11.0
Income Tax Expense (Benefit) 8.9 6.0 0.6 5.4 3.9 1.3 (8.3)
--------- -------- --------16.1 5.9 1.5 7.9 1.8 2.7 (3.7)
------- -------------- ----- ------ ------- ------ -----
Income (Loss) before
Income from Equity
Investments 21.8 9.7 2.8 8.5 3.6 3.0 (5.8)
Income from
Equity Investments -
Net of Tax 1.0 - - - 1.0 - -
------- ------ ----- ------ ------- ------ -----
Net Income (Loss) $ 18.522.8 $ 9.59.7 $ 0.72.8 $ 5.48.5 $ 6.54.6 $ 1.8 $ (5.4)
========= ======== ========3.0 $(5.8)
======= ============== ===== ====== ======= Total Assets $ 2,312.2 $1,012.0 $ 380.2 $ 557.1 $ 296.0 $ 66.3 $ 0.6
Accumulated Depreciation
and Amortization $ 732.2 $ 573.6 $ 126.9 $ 30.3====== =====
- $ 1.4 -
Construction Work in Progress $ 43.9 $ 17.2 $ 10.7 $ 16.0 - - -
Capital Expenditures $ 16.5 $ 9.2 $ 3.0 $ 4.3 - - -
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Included $11.4$15.1 million of Canadian operating revenue in 1999 ($7.69.8 million in 1998).
Included $89.1$0.1 million of minority interest in 1999 ($0.7 million in 1998).
Included a $24.1 million non-cash charge to reflect the estimated valuation of the transaction between
Capital Re and ACE at June 30, 1999. (See Note 5.)
-4-
NOTE 2. BUSINESS SEGMENTS (Continued)
Millions
Investments
----------------------
Electric Water Automotive Portfolio & Real Corporate
Consolidated Operations Services Services Reinsurance Estate Charges
- -------------------------------------------------------------------------------------------------------------------
For the Six Months Ended
June 30, 1999
- ------------------------
Operating Revenue $ 536.7 $ 267.5 $54.3 $200.8 $ 7.4 $ 6.8 $ (0.1)
Operation and Other Expense 397.0 201.9 33.5 148.8 2.1 5.5 5.2
Depreciation and Amortization 37.8 22.3 6.6 8.6 - 0.1 0.2
Interest Expense 28.6 10.6 4.9 4.9 - - 8.2
--------- -------- ------ ------ ------- ------ ------
Operating Income (Loss) 73.3 32.7 9.3 38.5 5.3 1.2 (13.7)
Distributions on Redeemable
Preferred Securities of
Subsidiary 3.0 0.9 - - - - 2.1
Income Tax Expense (Benefit) 28.5 12.2 3.6 16.9 1.8 0.5 (6.5)
--------- -------- ------ ------ ------- ------ ------
Income (Loss) before
Loss from Equity
Investments 41.8 19.6 5.7 21.6 3.5 0.7 (9.3)
Loss from
Equity Investments -
Net of Tax (19.0) - - - (19.0) - -
--------- -------- ------ ------ ------- ------ ------
Net Income (Loss) $ 22.8 $ 19.6 $ 5.7 $ 21.6 $ (15.5) $ 0.7 $ (9.3)
========= ======== ====== ====== ======= ====== ======
Total Assets $ 2,610.6 $1,020.0 $480.4 $733.0 $ 265.7 $111.1 $ 0.4
Accumulated Depreciation
and Amortization $ 865.7 $ 617.7 $197.0 $ 49.2 - $ 1.8 -
Construction Work in Progress $ 40.5 $ 17.6 $18.9 $ 4.0 - - -
Capital Expenditures $ 42.7 $ 20.9 $9.3 $ 12.5 - - -
- -------------------------------------------------------------------------------------------------------------------
For the Six Months Ended
June 30, 1998
- ------------------------
Operating Revenue $ 515.9 $ 274.8 $ 45.7 $161.5 $ 13.2 $ 20.7 $ -
Operation and Other Expense 379.1 208.0 29.3 122.0 1.6 11.8 6.4
Depreciation and Amortization 37.2 23.7 5.7 7.5 - 0.1 0.2
Interest Expense 35.5 11.1 5.1 4.8 - - 14.5
--------- -------- ------ ------ ------- ----- ------
Operating Income (Loss) 64.1 32.0 5.6 27.2 11.6 8.8 (21.1)
Distributions on Redeemable
Preferred Securities
of Subsidiary 3.0 0.9 - - - - 2.1
Income Tax Expense (Benefit) 22.3 11.9 2.1 13.3 3.0 4.0 (12.0)
--------- -------- ------ ------ ------- ------ ------
Income (Loss) before
Income from Equity
Investments 38.8 19.2 3.5 13.9 8.6 4.8 (11.2)
Income from
Equity Investments -
Net of Tax 2.5 - - - 2.5 - -
--------- -------- ------ ------ ------- ------ ------
Net Income (Loss) $ 41.3 $ 19.2 $ 3.5 $ 13.9 $ 11.1 $ 4.8 $(11.2)
========= ======== ====== ====== ======= ====== ======
Total Assets $ 2,319.1 $ 977.3 $387.3 $583.6 $ 301.8 $ 68.7 $ 0.4
Accumulated Depreciation
and Amortization $ 747.9 $ 581.7 $130.7 $ 34.0 - $ 1.5 -
Construction Work in Progress $ 48.2 $ 17.6 $14.0 $ 16.6 - - -
Capital Expenditures $ 33.0 $ 17.2 $7.1 $ 8.7 - - -
- -------------------------------------------------------------------------------------------------------------------
Included $26.5 million of Canadian operating revenue in 1999 ($17.4 million in 1998).
Included $128.7 million of Canadian assets in 1999 ($54.562.4 million in 1998).
Included a $24.1 million non-cash charge to reflect the estimated valuation of the transaction between
Capital Re and ACE at June 30, 1999. (See Note 5.) Also included a $1.7 million charge for the net impact
of a loss reserve established by Capital Re for reinsurance of securities issued by CFS.
Included $0.1$0.2 million of minority interest in 1999 ($0.51.2 million in 1998).
-4--5-
NOTE 3. REGULATORY MATTERS
Florida WaterFLORIDA WATER 1995 Rate Case.RATE CASE. Florida Water requested an $18.1 million annual
rate increase in June 1995 for all water and wastewater customers of Florida
Water regulated by the FPSC. In October 1996 the FPSC issued its final order
approving an $11.1 million annual increase. The new rates were implemented in
September 1996. In November 1996 Florida Water filed with the Florida First
District Court of Appeals (Court of Appeals) an appeal of the FPSC's final order
seeking judicial review of issues relating to the amount of investment in
utility facilities recoverable in rates from current customers. Other parties to
the rate case also filed appeals. In the course of the appeals process, the FPSC
reconsidered an issue in its initial decision and, in June 1997, allowed Florida
Water to resume collecting approximately $1 million, on an annual basis, in new
customer fees. On June 10, 1998 the Court of Appeals ruled in Florida Water's
favor on all material issues appealed by Florida Water and remanded the matter
back to the FPSC for action consistent with the Court's order. The Court of
Appeals also overturned its decision in Florida Water's 1991 Rate Case which had
required a "functional relationship" between service areas as a precondition to
implementation of uniform rates. On December 15, 1998 the FPSC granted Florida
Water an additional annual revenue increase of approximately $1.2 million
related to several of the issues reversed by the Court of Appeals, and permitted
collection of approximately $2.4 million in surcharges to reimburse Florida
Water for revenue (plus interest) wrongfully denied in the FPSC's October 1996
order. Florida Water began collecting the new rates in January 1999 and expects
to begin collecting the surcharges in mid 1999. Intervenors
protested the surcharge allocation methodology. As a result collection of the
surcharges is delayed and interest accumulates until the FPSC approves a
methodology. The FPSC reopened the record on two remaining issues on remand from
the Court of Appeals regarding the amount of investment in utility facilities
recoverable in rates from current customers,
but no hearing dates will be set until procedural matterscustomers. Hearings have been resolved. A
decisionset for January
2000 and pre-filed testimony is due in November 1999. On June 14, 1999 the
Company filed a motion seeking approval of an offer of settlement. The offer
would increase annual revenue by approximately $1 million; place accumulated
surcharges, including interest accrued through August 1, 1999, into a regulatory
asset recoverable in rate base in the Company's favor would result in additional revenuenext ratemaking proceeding; and, surcharges.provide a
three-year moratorium on the initiation of rate cases by the Company or the
FPSC, exclusive of index filings. The motion is scheduled to be heard by the
FPSC on August 23, 1999. The Company is unable to predict the timing or outcome
of these proceedings.
1991 Rate Case Refunds.RATE CASE REFUNDS. In 1995 the Court of Appeals reversed a 1993 FPSC order
establishing uniform rates for most of Florida Water's service areas. With
"uniform rates" all customers in each uniform rate area pay the same rates for
water and wastewater services. In response to the Court of Appeals' order, in
August 1996 the FPSC ordered Florida Water to issue refunds to those customers
who paid more since October 1993 under uniform rates than they would have paid
under stand-alone rates. This order did not permit a balancing surcharge to
customers who paid less under uniform rates. Florida Water appealed, and the
Court of Appeals ruled in June 1997 that the FPSC could not order refunds
without balancing surcharges. In response to the Court of Appeals' ruling, the
FPSC issued an order on January 26, 1998 that did not require refunds. Florida
Water's potential refund liability at that time was about $12.5 million, which
included interest, to customers who paid more under uniform rates.
In the same January 26, 1998 order, the FPSC required Florida Water to refund
$2.5 million, the amount paid by customers in the Spring Hill service area from
January 1996 through June 1997 under uniform rates which exceeded the amount
these customers would have paid under a modified stand-alone rate structure. No
balancing surcharge was permitted. The FPSC ordered this refund because Spring
Hill customers continued to pay uniform rates after other customers began paying
modified stand-alone rates effective January 1996 pursuant to the FPSC's interim
rate order in Florida Water's 1995 Rate Case (see Florida Water 1995 Rate Case).
The FPSC did not include Spring Hill in this interim rate order because Hernando
County had assumed jurisdiction over Spring Hill's rates. In June 1997 Florida
Water reached an agreement with Hernando County to revert prospectively to
stand-alone rates for Spring Hill customers.
Customer groups which paid more under uniform rates have appealed the FPSC's
January 26, 1998 order, arguing that they are entitled to a refund because the
FPSC had no authority to order uniform rates. The Company has appealed the $2.5
million refund order. Initial briefs were filed by all parties on May 22, 1998.
Upon issuance of the June 10, 1998 opinion of the Court of Appeals with respect
to Florida Water's 1995 Rate Case (see 1995 Rate Case) in which the court
reversed its previous ruling that the FPSC was without authority to order
uniform rates, customer groups supporting the FPSC's January 1998 order filed
-6-
NOTE 3. REGULATORY MATTERS - CONTINUED
a motion with the Court of Appeals seeking dismissal of the appeal by customer
groups seeking refunds. Customers seeking refunds filed amended briefs on
September 14, 1998. No provision for refund has been recorded. The Company is
unable to predict the timing or outcome of the appeals process.
-5-
ELECTRIC MPUC ORDERS. On July 27, 1999 the MPUC issued an order approving the
Company's Conservation Improvement Program (CIP) filing, except for the recovery
of lost margins which was denied. The annual filing requested approval for a
1998 year end CIP tracker account balance (deferred charge) of $18.9 million;
recovery in 1999 of $3.5 million of 1998 lost margins; and a continuation of the
2.75 percent billing adjustment factor. The MPUC's primary rationale for denial
of lost margin recovery was that in 1998 Electric Operations earned in excess of
its allowed return on equity. In a companion order, the MPUC opened an
investigation into the reasonableness of Minnesota Power's rates. The Company is
required to file within 60 days a report evaluating 1998 electric earnings and
explain why current rates are just and reasonable. The Company intends to
request reconsideration of both orders. The Company is unable to predict the
outcome of these matters.
NOTE 4. TOTAL COMPREHENSIVE INCOME
For the quarter ended March 31, 1999 total comprehensive income was $21.9
million ($19.0 million for the quarter ended March 31, 1998). Total
comprehensive income includes net income, unrealized gains and losses on
securities classified as available-for-sale, and foreign currency translation
adjustments.
NOTE 5. INCOME TAX EXPENSE
Quarter Ended
March 31,
1999 1998
- --------------------------------------------------------------------------------
Millions
Current Tax
Federal $ 10.0 $ 7.8
Foreign 0.4 0.8
State 1.6 2.5
------ -----
12.0 11.1
------ -----
Deferred Tax
Federal (1.6) (1.4)
State (2.9) (0.5)
------ -----
(4.5) (1.9)
------ -----
Deferred Tax Credits (0.4) (0.3)
------ -----
Total Income Tax Expense $ 7.1 $ 8.9
- --------------------------------------------------------------------------------
NOTE 6. ACQUISITIONS
Palm Coast Utilities Corporation.PALM COAST UTILITIES CORPORATION. On January 22, 1999 Florida Water purchased
the assets and assumed certain liabilities of PCUC from ITT Industries, Inc. for
$16.8 million plus $1,000 per new water connection for an eight-year period. The
Company estimates the present value of these future water connections at $5.1
million. The transaction was accounted for using the purchase method. Financial
results have been included in the Company's consolidated financial statements
since the date of purchase. Pro forma financial results have not been presented
due to immateriality. PCUC provides service to approximately 15,000 water and
14,000 wastewater customers in Flagler County, Florida.
-6-ADESA DES MOINES. On April 30, 1999 ADESA acquired Des Moines Auto Auction
located in Des Moines, Iowa. The transaction was accounted for using the
purchase method. Financial results have been included in the Company's
consolidated financial statements since the date of purchase. Pro forma
financial results have not been presented due to immateriality. The 33 acre
facility has three auction lanes and primarily serves consignment and
fleet/lease accounts. The auction offers on-site reconditioning and pick up and
delivery services. AFC provides dealer floorplan financing at this auction.
MID SOUTH WATER SYSTEM, INC. On June 17, 1999 Heater acquired the assets of Mid
South Water System, Inc. (Mid South) located in Sherills Ford, North Carolina
for $9 million. The acquisition was accounted for using the purchase method.
Financial results have been included in the Company's consolidated financial
statements since the date of purchase. Pro forma financial results have not been
presented due to immateriality. Mid South serves approximately 12,000 customers.
CAPE CORAL. On June 30, 1999 MP Real Estate purchased, for $45.0 million,
certain real estate properties located in Cape Coral, Florida, from a subsidiary
of Avatar Holdings Inc., a publicly traded developer and home builder
headquartered in Coral Gables, Florida. Cape Coral, located adjacent to Fort
Myers, Florida, has a population of 100,000 and is Florida's second largest
municipality in land area. Properties purchased include approximately 2,500
acres of commercial and residential zoned land, including home sites, a golf
resort, marina and commercial buildings. Concurrently with the purchase, MP Real
Estate assigned to a third party the rights to a shopping center and a portion
of the vacant land for $8.8 million. The net amount of the transaction was $36.2
million. The transaction was accounted for using the purchase method. Financial
results have been included in the Company's consolidated financial statements
since the date of purchase. Pro forma financial results have not been presented
due to immateriality.
ADESA VANCOUVER. On July 2, 1999 ADESA Canada, Inc., purchased the Vancouver
Auto Auction of New Westminster, British Columbia. The transaction was accounted
for in the third quarter of 1999 using the purchase method. Financial results
will be included in the Company's consolidated financial statements as of the
date of purchase. Pro forma financial results will not be presented due to
immateriality. The 70 acre facility has six auction lanes. The purchase of the
Vancouver auction facility is a major component of the Company's Canadian growth
strategy.
-7-
NOTE 5. INVESTMENT IN CAPITAL RE
On May 27, 1999 Capital Re announced an agreement by which it will be acquired
by ACE Limited (ACE), a publicly traded company listed on the New York Stock
Exchange under the symbol ACL. Under the agreement, Capital Re shareholders will
receive 0.6 shares of ACE for each share of Capital Re, subject to a maximum
value to Capital Re shareholders of $22 per share. The Company owns 7.3 million
shares, or 19.9 percent, of Capital Re. Subject to the maximum exchange value,
upon closing (which is expected to occur in the second half of 1999) the
Company will own approximately 4.4 million shares, or 2 percent of the
outstanding shares, of ACE. The Company has agreed to vote in favor of the
merger and not to dispose of the ACE shares received for 180 days following the
closing date, except in a single private sale of all or substantially all of the
original shares the Company will receive.
The quarter and six months ended June 30, 1999 included a $24.1 million non-cash
charge, which reflected the estimated valuation of this transaction at June 30,
1999. The final valuation of this transaction will be based on the ACE share
price at closing, and may differ from the amount recognized in the second
quarter of 1999. The charge will be recouped to the extent ACE shares appreciate
over time. The ultimate realized gain or loss on the transaction will occur when
the Company sells the ACE shares. The Company no longer accounts for its
investment in Capital Re using the equity method.
NOTE 6. INCOME TAX EXPENSE
Quarter Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------
Millions
Current Tax
Federal $ 12.5 $ 12.6 $ 22.5 $ 20.4
Foreign 0.5 1.8 0.9 2.6
State (0.7) 2.4 0.9 4.9
------ ------ ------ ------
12.3 16.8 24.3 27.9
------ ------ ------ ------
Deferred Tax
Federal 13.3 2.6 11.7 1.2
State (0.5) (0.3) (3.4) (0.8)
------ ------ ------ ------
12.8 2.3 8.3 0.4
------ ------ ------ ------
Deferred Tax Credits (0.3) (0.3) (0.7) (0.6)
------ ------ ------ ------
Total Income Tax Expense $ 24.8(a) $ 18.8(a) $ 31.9(b) $ 27.7(b)
- --------------------------------------------------------------------------------
(a) Included income tax expense of $8.4 million in 1999 ($2.7 million in 1998)
associated with income from equity investments.
(b) Included income tax expense of $3.4 million in 1999 ($5.4 million in 1998)
associated with income from equity investments.
NOTE 7. TOTAL COMPREHENSIVE INCOME
For the quarter ended June 30, 1999 total comprehensive income was a $1.5
million loss ($21.1 million of income for the quarter ended June 30, 1998). For
the six months ended June 30, 1999 total comprehensive income was $20.4 million
($40.1 million for the six months ended June 30, 1998). Total comprehensive
income includes net income, unrealized gains and losses on securities classified
as available-for-sale, and foreign currency translation adjustments.
-8-
NOTE 8. SQUARE BUTTE PURCHASED POWER CONTRACT
The Company has had a power purchase agreement with Square Butte since 1977
to
providewhich has provided a long-term supply of low-cost energy to customers in the
Company's service territory and enabled the Company to meet power pool reserve
requirements. Square Butte, a North Dakota cooperative corporation, owns a
455-megawatt coal-fired generating unit (Unit) near Center, North Dakota. The
Unit is adjacent to a generating unit owned by Minnkota Power Cooperative, Inc.
(Minnkota), a North Dakota cooperative corporation whose Class A members are
also members of Square Butte. Minnkota serves as the operator of the Unit and
also purchases power from Square Butte.
In May 1998 the Company and Square Butte entered into a new power purchase
agreement (1998 Agreement), replacing the 1977 agreement. The Company extended
by 20 years, to January 1, 2027, its access to Square Butte's low-cost
electricity and eliminated its unconditional obligation for all of Square
Butte's costs if not paid by Square Butte when due. The 1998 Agreement was
reached in conjunction with the termination of Square Butte's previous leveraged
lease financing arrangement and refinancing of associated debt.
Similar to the previous agreement, the Company is initially entitled to
approximately 71 percent of the Unit's output under the 1998 Agreement. After
2005 and upon compliance with a two-year advance notice requirement, Minnkota
has the option to reduce the Company's entitlement by 5 percent annually, to a
minimum of 50 percent.
Under the 1998 Agreement, the Company is obligated to pay its pro rata share of
Square Butte's costs based on the Company's entitlement to Unit output. The
Company's payment obligation is suspended if Square Butte fails to deliver any
power, whether produced or purchased, for a period of one year. Under the 1977
agreement the Company was unconditionally obligated to pay all of Square Butte's
costs, if not paid by Square Butte when due. Square Butte's fixed costs consist
primarily of debt service. At March 31,June 30, 1999 Square Butte had total debt
outstanding of $343.4 million. Total annual debt service for Square Butte is
expected to be approximately $36 million in each of the years 1999 through 2002
and $23 million in 2003. Variable operating costs include the price of coal
purchased from BNI Coal, a subsidiary of Minnesota Power, under a long-term
contract. The Company's payments to Square Butte are approved as purchased power
expense for ratemaking purposes by both the MPUC and FERC.
-7--9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MINNESOTA POWER is a broadly diversified service company with operations in four
business segments: (1) Electric Operations, which include electric and gas
services, coal mining and telecommunications; (2) Water Services, which include
water and wastewater services; (3) Automotive Services, which include a network
of vehicle auctions, a finance company, an auto transport company and a vehicle
remarketing company; and (4) Investments, which include a securities portfolio,
a 23 percent equity investment in a financial guaranty reinsurance and specialty
insurance company, intermediate-term investments and real estate operations. Corporate Charges
represent general corporate expenses, including interest, not specifically
allocated to any one business segment.
CONSOLIDATED OVERVIEW
Strong performances bySignificant growth in the Company's Electric Operations, Water Services and Automotive Services
segments contributed to higher operating results in 1999. For the quarter and
six months ended June 30, 1999, the Company reported a 13 percent increase$24.1 million non-cash
charge associated with the Company's investment in 1999Capital Re. Excluding the
non-cash charge, net income for the quarter and six months ended June 30, 1999
increased 14 percent over 1998. Excluding the non-cash charge, earnings per
share were $0.38 for the second quarter of 1999, an increase of 6 percent over
the first threeprior year period ($0.68 per share for the six months of 1998.ended June 30, 1999, 5
percent over the prior year period). Earnings per share increased 3 percent over the
first three months of 1998 andin 1999 reflected the
impact of the additional 4.2 million shares of Common Stock issued by the
Company in an underwritten public offering in September 1998.
Quarter Ended March 31,Year to Date
June 30, June 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------
Millions
Operating Revenue
Electric Operations $ 132.2135.3 $140.7 $ 134.0267.5 $ 274.8
Water Services 24.4 20.829.9 25.0 54.3 45.7
Automotive Services 96.8 76.7104.0 84.8 200.8 161.5
Investments 4.1 15.210.0 18.7 14.2 33.9
Corporate Charges .0- - (0.1) -
------- ------ -------- -------
$ 257.5279.2 $269.2 $ 246.6
======= =======536.7 $ 515.9
Operating Expenses
Electric Operations $ 114.0120.8 $124.6 $ 118.1234.8 $ 242.8
Water Services 21.3 19.523.7 20.7 45.0 40.1
Automotive Services 79.5 65.982.8 68.4 162.3 134.3
Investments 4.0 5.93.6 7.6 7.7 13.5
Corporate Charges 7.0 12.56.7 8.5 13.6 21.1
------- ------ -------- -------
$ 225.8237.6 $229.8 $ 221.9
======= =======463.4 $ 451.8
Net Income
Electric Operations $ 11.08.6 $9.7 $ 9.519.6 $ 19.2
Water Services 1.9 0.73.8 2.8 5.7 3.5
Automotive Services 9.6 5.412.0 8.5 21.6 13.9
Investments 2.9 8.3(17.7)(a) 7.6 (14.8)(a) 15.9
Corporate Charges (4.5) (5.4)(4.8) (5.8) (9.3) (11.2)
------- ------ ------- -------
$ 20.91.9 $22.8 $ 18.5
======= =======22.8 $ 41.3
- --------------------------------------------------------------------------------
Basic and Diluted
Earnings Per Share
of Common Stock $0.30 $0.29$0.02(a) $0.36 $0.32(a) $0.65
Average Shares of Common
Stock - Millions 67.8 62.368.2 62.6 68.0 62.5
- --------------------------------------------------------------------------------
(a) Included a $24.1 million ($0.36 cent per share) non-cash charge to reflect
the estimated valuation of the transaction between Capital Re and ACE at
June 30, 1999.
-10-
NET INCOME
The following net income discussion summarizes significant events for the
quarter and six months ended June 30, 1999.
Electric Operations reflected increasedreductions in sales to residential and commerciallarge industrial customers
and reduced operating expenses in 1999. Margins from bulk electric power sales were also lower when compared to
margins resulting from the strong market in 1998 created by extremely hot
weather in June.
Water Services generated higher net income in 1999 due to increased consumption
as a result of the recent purchase of PCUC assets and drydrier weather conditions compared toand additional customers from the PCUC
acquisition. Consumption in the first quarter of 1998 was adversely impacted by
record rainfall during the same period in 1998. In addition,that period. The 1999 results of Water Services also
included increased rates approved by the FPSC in December 1998.
-8-
Automotive Services recognized record sales volume in 1999 as theshowed significant growth during 1999. The number of
vehicles offered for sale at ADESA auction facilities increased 16 percent. The10 percent over
the second quarter of 1998 (13 percent over the six months ended June 30, 1998).
Increased financing activity and the maturing of AFC's recently opened loan production offices that
opened in 1998 at AFC also contributed to higher net income from Automotive
Services.
Investments reported lower net income in 1999 primarily due to a $24.1 million
non-cash charge that reflected the estimated valuation of the transaction
between Capital Re and ACE at June 30, 1999.
On May 27, 1999 Capital Re announced an agreement by which it will be acquired
by ACE Limited (ACE), a publicly traded company listed on the New York Stock
Exchange under the symbol ACL. Under the agreement, Capital Re shareholders will
receive 0.6 shares of ACE for each share of Capital Re, subject to a maximum
value to Capital Re shareholders of $22 per share. The Company owns 7.3 million
shares, or 19.9 percent, of Capital Re. Subject to the maximum exchange value
upon closing (which is expected to occur in the second half of 1999), the
Company will own approximately 4.4 million shares, or 2 percent of the
outstanding shares, of ACE. The Company has agreed to vote in favor of the
merger and not to dispose of the ACE shares received for 180 days following the
closing date, except in a single private sale of all or substantially all of the
original shares the Company will receive.
The final valuation of this transaction will be based on the ACE share price at
closing, and may differ from the amount recognized in the second quarter of
1999. The charge will be recouped to the extent ACE shares appreciate over time.
The ultimate realized gain or loss on the transaction will occur when the
Company sells the ACE shares. The Company no longer accounts for its investment
in Capital Re using the equity method.
Investments also reflected lower net income from Portfolio and Reinsurance
because of stock market volatility affecting returns from short-term investments
during the first quarter of 1999 and a loss reserve established by Capital Re
for reinsurance of securities issued by CFS. Together,CFS is under investigation by the
Company's securities portfolioSecurities and its equity
investmentExchange Commission and the Oklahoma Securities Commission for
allegations of irregularities relating to the CFS issued securities. CFS filed
for Chapter 11 bankruptcy protection in Capital Re earned an annualized after-tax return of 3.2 percent in
1999 (5.8 percent in 1998).December 1998. In addition, 1998 net
income included dividend income received from a venture capital investment and
twofive large bulk land sales by Real Estate Operations.
-11-
COMPARISON OF THE QUARTERS ENDED MARCH 31,JUNE 30, 1999 AND 1998
OPERATING REVENUE
Electric Operations operating revenue was slightly$5.4 million lower in 1999 primarily
due to a 4 percent reduction in total kilowatthour sales and less demand revenue
from large power customers. Decreased taconite production, paper manufacturing
and pipeline usage reduced revenue from large industrial customers in 1999.
Revenue from electric sales to taconite customers accounted for 14 percent of
consolidated operating revenue in 1999 (16 percent in 1998). Electric sales to
paper and pulp mills accounted for 5 percent of consolidated operating revenue
in 1999 (6 percent in 1998). Sales to other power suppliers and marketers
accounted for 8 percent of consolidated operating revenue in both 1999 and 1998.
Water Services operating revenue was about$4.9 million higher in 1999, with $3.5
million of the same, even thoughincrease coming from PCUC which was purchased in January 1999.
The remainder of the increase resulted from higher rates approved by the FPSC in
December 1998 and more consumption due to drier weather conditions in 1999.
Overall consumption increased 16 percent in 1999.
Automotive Services operating revenue was $19.2 million higher in 1999 due to
stronger sales at ADESA auction facilities, and increased financing activity and
the maturing of loan production offices opened in 1998 at AFC. ADESA offered for
sale on consignment 428,000 vehicles (388,000 in 1998) at its 29 auction
facilities in 1999 (28 in 1998). In 1999 financial results for ADESA auctions
included a full three months of operations from three vehicle auctions acquired
in late April and May 1998, and two months of operations from a vehicle auction
acquired in late April 1999. AFC financed approximately 174,000 vehicles
(133,000 in 1998) through its 84 loan production offices in 1999 (63 in 1998).
AFC financial results in 1999 included a full three months of operations from
the 26 loan production offices opened at ADT auctions. Only six of these offices
were open as of June 30, 1998.
Investments operating revenue was $8.7 million lower in 1999. Portfolio and
Reinsurance operating revenue was $0.7 million higher in 1999 due to a larger
portfolio balance. The Company's securities portfolio, excluding Capital Re
shares, earned an annualized after-tax return of 6.8 percent in 1999 (8.5
percent in 1998). Real Estate Operations operating revenue was $9.4 million
lower in 1999 because 1998 included two large sales at Palm Coast and the sale
of a partnership interest in a development at Lehigh. Combined, the three sales
contributed $6.4 million to revenue in 1998. The remainder of the decrease was
due to normal fluctuations in Florida real estate sales.
OPERATING EXPENSES
Electric Operations operating expenses were $3.8 million lower in 1999 primarily
due to reductions in fuel and purchased power expenses. Operating expenses were
also lower in 1999 because the amortization of an early retirement program was
completed in July 1998.
Water Services operating expenses were $3.0 million higher in 1999 due to
inclusion of PCUC operations.
Automotive Services operating expenses were $14.4 million higher in 1999
primarily due to increased sales activity at the auction facilities and the
floorplan financing business. Additional expenses associated with more auction
facilities and loan production offices also contributed to higher expenses in
1999.
Investments operating expenses were $4.0 million lower in 1999 primarily due to
fewer sales by Real Estate Operations.
INCOME (LOSS) FROM EQUITY INVESTMENTS - NET OF TAX
Income (loss) from equity investments - net of tax was $22.8 million lower in
1999 due to a $24.1 million non-cash charge that reflected the estimated
valuation of the transaction between Capital Re and ACE at June 30, 1999.
-12-
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
OPERATING REVENUE
Electric Operations operating revenue was $7.3 million lower in 1999 primarily
due to a 4 percent reduction in total kilowatthour sales were down 4
percentand less demand revenue
from 1998.large power customers. Decreased taconite production, paper manufacturing
and pipeline usage reduced revenue from large industrial customers in 1999.
Revenue from residential and commercial customers was higher in 1999 because the
winter weather in Northern Minnesota and Wisconsin was colder than in 1998.
Sales to other power suppliers in 1999 were lower due to less hydro generation availableabout the same as in Canada and
the Midwest and a sufficient supply of generation available in the region.1998.
Revenue from electric sales to taconite customers accounted for 1615 percent of
consolidated operating revenue in 1999 (17(16 percent in 1998). Electric sales to
paper and pulp mills accounted for 65 percent of consolidated operating revenue
in both 1999 and 1998.(6 percent in 1998). Sales to other power suppliers and marketers
also
accounted for 67 percent of consolidated operating revenue in both 1999 and 1998.
Water Services operating revenue was $3.6$8.6 million higher in 1999, with $1.9$5.4
million of the increase coming from PCUC which was purchased in January 1999.
The remainder of the increase resulted from higher rates approved by the FPSC in
December 1998 and more consumption due to drydrier weather conditions in 1999
compared1999.
Overall consumption increased 21 percent in 1999. In 1998 overall consumption
was lower than normal due to record rainfall in 1998. Overall consumption increased 29 percent in
1999.during that period.
Automotive Services operating revenue was $20.1$39.3 million higher in 1999 due to
increasedstronger sales at ADESA auction facilities, and increased financing activity and
the maturing of AFC loan production offices opened in 1998.1998 at AFC. ADESA offered for
sale on consignment 396,000824,000 vehicles (340,000(728,000 in 1998) at its 2829 auction
facilities in 1999 (25(28 in 1998). In 1999 ADESA auction financial results
included a full six months of operations from three vehicle auctions acquired in
late April and May 1998, and two months of operations from a vehicle auction
acquired in late April 1999. AFC financed approximately 149,000323,000 vehicles
(120,000(253,000 in 1998) through its 84 loan production offices in 1999 (57(63 in 1998).
Investments. PortfolioAFC financial results in 1999 included a full six months of operations from the
26 loan production offices opened at ADT auctions. Only six of these offices
were open as of June 30, 1998.
Investments operating revenue was $6.5$19.7 million lower in 1999. Portfolio and
Reinsurance operating revenue was $5.8 million lower in 1999 due to stock market
volatility affecting returns from short-term investments. The Company's
securities portfolio, excluding Capital Re shares, earned an annualized
after-tax return of 3.3 percent in 1999 (6.1 percent in 1998). Also, revenue in
1998 included $3.9 million of dividend income received from a venture capital
investment. Real Estate Operations operating revenue was $4.5$13.9 million lower in
1999 because 1998 included $5.1 million of revenue from twofour large bulk
land sales at Palm Coast.Coast and the sale of a
partnership interest in a development at Lehigh. Combined, the five sales
contributed $11.5 million to revenue in 1998. The remainder of the decrease was
due to normal fluctuations in Florida real estate sales.
OPERATING EXPENSES
Electric Operations operating expenses were $4.1$8.0 million lower in 1999 primarily
due to a reduction in purchased power expense. Operating expenses were also
lower in 1999 because the amortization of an early retirement program was
completed in July 1998.
Water Services operating expenses were $1.8$4.9 million higher in 1999 due to
inclusion of PCUC operations.
Automotive Services operating expenses were up $13.6$28.0 million higher in 1999
primarily due to increased sales activity at the auction facilities and the
floorplan financing business. Additional expenses associated with more auction
facilities and loan production offices also contributed to higher expenses in
1999.
Investments. Real Estate OperationsInvestments operating expenses were $2.0$5.8 million lower in 1999 primarily due to
fewer sales.
-9-sales by Real Estate Operations.
-13-
Corporate Charges operating expenses were $5.6$7.5 million lower in 1999. The
decrease is partially attributed to less interest expense in 1999 because of
smaller commercial paper balances. Also, interest expense in 1998 reflected a
settlement with the Internal Revenue Service on tax issues relating to prior
years. As a result of the settlement, in the first quarter of 1998 amounts
previously accrued as income tax expense were reversed and recorded as interest
expense. There was no impact on consolidated net income from this transaction.
INCOME (LOSS) FROM EQUITY INVESTMENTS - NET OF TAX
Income (loss) from equity investments reflected a loss- net of $2.4tax was $21.5 million lower in
1999 (incomedue to a $24.1 million non-cash charge that reflected the estimated
valuation of $4.2the transaction between Capital Re and ACE at June 30, 1999. Also
included in 1999 is a $1.7 million in 1998) from the Company's equity investment in Capital
Re. The decrease was attributed to a loss reserve established by Capital Re for
reinsurance of securities issued by CFS.
CFSOUTLOOK
ELECTRIC OPERATIONS. On July 27, 1999 the MPUC issued an order approving the
Company's CIP filing, except for the recovery of lost margins which was denied.
The annual filing requested approval for a 1998 year end CIP tracker account
balance (deferred charge) of $18.9 million; recovery in 1999 of $3.5 million of
1998 lost margins; and a continuation of the 2.75 percent billing adjustment
factor. The MPUC's primary rationale for denial of lost margin recovery was that
in 1998 Electric Operations earned in excess of its allowed return on equity. In
a companion order, the MPUC opened an investigation into the reasonableness of
Minnesota Power's rates. The Company is under investigation byrequired to file within 60 days a report
evaluating 1998 electric earnings and explain why current rates are just and
reasonable. The Company intends to request reconsideration of both orders. The
Company is unable to predict the Securities and Exchange Commission and the Oklahoma Securities Commission for
allegationsoutcome of irregularities relating to these securities. CFS filed for
Chapter 11 bankruptcy protection in December 1998.matters.
LIQUIDITY AND FINANCIAL POSITION
CASH FLOW ACTIVITIES. Cash flow from operations during the first quarter ofsix months ended June
30, 1999 reflected improved operating results and continued focus on working
capital management. Cash from operating activities was also affected by a number
of factors representative of normal operations.
Working capital, if and when needed, generally is provided by the sale of
commercial paper. In addition, securities investments can be liquidated to
provide funds for reinvestment in existing businesses or acquisition of new
businesses, and approximately 9 million original issue shares of Common Stock
are available for issuance through the DRIP.
A substantial amount of ADESA's working capital is generated internally from
payments made by vehicle purchasers. However, ADESA uses commercial paper issued
by the Company to meet short-term working capital requirements arising from the
timing of payment obligations to vehicle sellers and the availability of funds
from vehicle purchasers. During the sales process, ADESA does not typically take
title to vehicles.
AFC also uses proceeds from the sale of commercial paper issued by the Company
to meet its operational requirements. AFC offers short-term on-site financing
for dealers to purchase vehicles at auctions in exchange for a security interest
in those vehicles. The financing is provided through the earlier of the date the
dealer sells the vehicle or a general borrowing term of 30 to 45 days. AFC sells
certain finance receivables on a revolving basis to a wholly owned,
unconsolidated, qualified special purpose subsidiary. This subsidiary in turn
sells, on a revolving basis, an undivided interest in eligible finance
receivables, up to a maximum at any one time outstanding of $225.0 million, to
third party purchasers under an agreement which expires at the end of 2001. At
March 31,June 30, 1999 AFC had sold $260.9$291.5 million of finance receivables to this
subsidiary ($202.9 million at December 31, 1998). Third party purchasers had
purchased an undivided interest in finance receivables of $193.0$211.0 million from
this subsidiary at March 31,June 30, 1999 ($170.0 million at December 31, 1998). Proceeds
from the sale of the receivables were used to repay borrowings from the Company
and fund vehicle inventory purchases for AFC's customers.
-14-
Significant changes in accounts receivable and accounts payable balances at March 31,June
30, 1999 compared to December 31, 1998 were due to increased sales activity by
Automotive Services. Typically auction volumes are down during the winter months
and in December because of the holidays. As a result, both ADESA and AFC had
lower receivables and fewer payables at year end.
Notes payable increased temporarily to finance Automotive Services' cash
requirements due to significant auction sales and financing growth. The Company
also used the temporary increase in notes payable and proceeds from the
September 1998 issuance of Common Stock to fund the January 1999 purchase of
PCUC. Florida Water purchased the assets of PCUC from ITT Industries, Inc. for
$16.8 million plus $1,000 per new water connection for an eight-year period. The
Company estimates the present value of these future water connections to be $5.1
million.
-10-
On April 30, 1999 ADESA acquired Des Moines Auto Auction located in Des Moines,
Iowa. The Company funded this transaction with internally generated funds.
On June 17, 1999 Heater acquired the assets of Mid South of Sherills Ford, North
Carolina for $9 million. The Company funded this transaction with internally
generated funds and proceeds from a long-term revolving line of credit.
On June 30, 1999 MP Real Estate purchased, for $36.2 million, certain real
estate properties located in Cape Coral, Florida, from a subsidiary of Avatar
Holdings Inc. The Company funded this transaction with internally generated
funds and proceeds from a long-term revolving line of credit.
CAPITAL REQUIREMENTS. Consolidated capital expenditures for the threesix months ended
March 31,June 30, 1999 totaled $15.3$42.7 million ($16.533.0 million in 1998). Expenditures for
1999 included $6.6$20.9 million for Electric Operations, $4.2$9.3 million for Water
Services and $4.5$12.5 million for Automotive Services. Internally generated funds
and proceeds from the September 1998 issuance of Common Stock were the primary
sources of funding for these expenditures.
NEW ACCOUNTING STANDARDS. In June 1998 the FASBFinancial Accounting Standards Board
issued SFASStatement of Financial Accounting Standards No. (SFAS) 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS 137,
effective for fiscal years beginning after June 15, 1999.2000. SFAS 133 establishes
accounting and reporting standards requiring that every derivative instrument be
recorded on the balance sheet as either an asset or liability measured at fair
value. SFAS 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset the related results on the hedged item. The Company currently
has only a limited amount of derivative activity and adoption of SFAS 133 is not
expected to have a material impact on the Company's financial position and
results of operations.
However,
Capital Re has determined that it is likely that its credit default swap
business will be subject to the requirements of SFAS 133 and is in the process
of determining what the effect will be on its earnings and financial position.
The Company accounts for its investment in Capital Re under the equity method
and is unable to predict the impact of Capital Re's adoption of SFAS 133.
YEAR 2000. The Year 2000 issue relates to computer systems that recognize the
year in a date field using only the last two digits. Unless corrected, the Year
2000 may be interpreted as 1900, causing errors or shutdowns in computer systems
which may, in turn, disrupt operations.
State of Readiness.STATE OF READINESS. The Company has been addressing the Year 2000 issue for over
five years. In the ordinary course of business, it has replaced, or is in the
process of replacing, many of its major computer systems with new systems that
have been designed to be Year 2000 compliant. These updated systems handle
critical aspects of the Company's operations, including energy management and
generation control for Electric Operations, and customer information and
financial management Company-wide.
Each of the business segments has its own Year 2000 plan, which has been
reviewed and is being monitored by a corporate-level Year 2000 Risk Assessment
Team. The Company's plan for Year 2000 readiness involves four phases:
inventory, evaluation, remediation and contingency planning. Testing is an
ongoing and integral part of the evaluation, remediation and contingency
planning phases.
Inventory.INVENTORY. Each business segment has performed an extensive inventory
of its information technology systems and other systems that use
embedded microprocessors (collectively, "Systems"). The business
processes supported by each System have been prioritized based on the
degree of impact business operations would encounter if the System
were disrupted.
-15-
The inventory phase also includes identifying third parties with whom
the Company has material relationships. The degree to which each
business segment depends on third party support varies. Water
Services, Automotive Services and Real Estate Operations have
identified minimal risk in most areas. Where a third party is critical
to a business process, efforts have been initiated to obtain Year 2000
compliance information to identify the degree of risk exposure the
Company may encounter. Electric Operations is working with its large
power customers to share Year 2000 information and determine their
readiness. In addition, Electric Operations is working with its fuel
and transportation providers in an effort to ensure adequate supplies
of fuel.
The internal inventory phase was substantially completed in June 1998.
Regular contact with third parties with whom the Company has material
relationships will continue throughout 1999.
EVALUATION. This phase involves computer program code review and
testing, vendor contacts, System testing and fully-integrated System
testing where practical. The objective of this phase is to develop and
update the remediation plan. Some Systems, upon inspection, are
determined to be non-compliant and are immediately placed on the
remediation schedule. Some Systems require testing to determine
compliance status. The evaluation phase was substantially complete in
February 1999.
REMEDIATION. In this phase each System is either fixed, replaced or
removed. Critical Systems fixed or replaced are tested again for Year
2000 readiness.
The electric industry is unique in its reliance on the integrity of
the power pool grid to support and maintain reliable, efficient
operations. Preparation for the Year 2000 by Electric Operations is
linked to the Year 2000 compliance efforts of other utilities as well
as to those of its major customers whose loads support the integrity
of the power pool grid. Electric Operations is coordinating its Year
2000 efforts with the plans established by the North American Electric
Reliability Council (NERC) under the direction of the U.S. Department
of Energy and is also working with the MAPP Year 2000 Task Force and a
utility industry consortium to obtain and share utility-specific Year
2000 compliance information.
The internal inventory phase was substantially completed in June 1998.
Regular contact with third parties with whom the Company has material
relationships will continue throughout 1999.
-11-
Evaluation. This phase involves computer program code review and testing,
vendor contacts, System testing and fully-integrated System testing where
practical. The objectiveestimates that as of this phase is to develop and updateAugust 6, 1999 the remediation plan. Some Systems, upon inspection,phase
for mission-critical systems within Electric Operations is 95 percent
complete. As defined by NERC, mission-critical systems are determinedthose
systems that could be related to be
non-compliantthe loss of a 50-megawatt or larger
generation source, the loss of a transmission facility or the
interruption of system load. With the exception of certain systems
reserved for final integrated testing during scheduled maintenance
outages at certain Company generating units at the Boswell Energy
Center in the second half of 1999, the Company's mission-critical
systems used to produce, deliver and transmit electricity are immediately placed on the remediation schedule. Some
Systems require testing to determine compliance status. The evaluation
phase was substantially complete in February 1999.
Remediation. In this phase each System is either fixed, replaced or
removed. Critical Systems fixed or replaced are tested againready
for date changes associated with Year 2000
readiness. Remediation is expected to be substantially complete by
June 30, 1999.2000.
The Company estimates that as of May 7,August 6, 1999 the remediation phase
for all business segment systems is approximately 5783 percent complete
based on the number of systems remediated. Contingency Planning.The bulk of the remaining
systems are support systems within Electric Operations that are not
critical to daily operations. The remediation phase for the Company's
other business segments was substantially complete in June 1999.
CONTINGENCY PLANNING. Each business segment has developed contingency
plans designed to continue critical processes in the event the Company
experiences Year 2000 disruptions despite remediation and testing.
These plans include establishment of internal communications, securing
adequate on-site supplies of certain critical materials and staffing
for key Year 2000 dates. Contingency plans will also be tested when
appropriate. Some contingency plans have already undergone testing.
The Company successfully participated in the April 9, 1999 NERC drill
which tested inter and intra backup communications for the scenario
that assumed 10 percent of voice and data communications had failed.
The Company plans to participate in the September 1999 NERC drill
which will be a dress rehearsal for the millennium rollover. Contingency plans are expected to be substantially
complete by June 30, 1999. TheAs of
August 6, 1999 the Company estimates that as of May 7, 1999 the contingency planning phase is
approximately 7587 percent complete.
The Company is on schedule for substantial Year 2000 readiness by June 30, 1999,
with certain systems reserved for final integrated testing during scheduled
maintenance outages at certain Company generating facilities in the second half
of 1999.
Costs.-16-
COSTS. In the ordinary course of business over the last five years, the Company
has replaced major business and operating computer systems. These systems should
require minimal remediation efforts because of their recent implementation.
Formal Year 2000 readiness plans were established in March 1998. Since that
time, the Company has incurred $1.7$3 million in expenses primarily for labor
associated with inventory, evaluation and remediation efforts. The Company
estimates its remaining costs to prepare for the Year 2000 will be $5 million to
$7approximately
$2 million, the majority of which are non-labor costs that will be incurred
during the second and third quartersremainder of 1999. Funds to address Year 2000 issues have been
provided for in the Company's existing budgets. These costs include the
assignment of existing personnel to Year 2000 projects, maintenance and repair
expenses, and capitalized improvements. To date no critical projects have been
deferred because of Year 2000 issues. The Company does not anticipate that its
costs associated with Year 2000 readiness will materially impact the Company's
earnings in any year.
Risks.RISKS. Based upon information to date, the Company believes that, in the most
reasonably likely worst-case scenario, Year 2000 issues could result in abnormal
operating conditions, such as short-term interruption of generation,
transmission and distribution functions within Electric Operations, as well as
Company-wide loss of system monitoring and control functions, and loss of voice
communications. These conditions, along with power outages due to possible
instability of the regional electric transmission grid,grids, could result in temporary
interruption of service to customers. The Company does not believe the overall
impact of this scenario will have a material impact on its financial condition
or operations due to the anticipated short-term nature of interruptions.
------------------------------------------------------
Readers are cautioned that forward-looking statements including those contained
above, should be read in conjunction with the Company's disclosures under the
heading: "SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995" located in the preface of this Form 10-Q.
-12-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's securities portfolio has exposure to both price and interest rate
risk. Investments held principally for near-term sale are classified as trading
securities and recorded at fair value. Trading securities consist primarily of
the common stock of publicly traded companies, with utilities being the largest
industry sector. Investments held for an indefinite period of time are
classified as available-for-sale securities and also recorded at fair value. The
available-for-sale securities portfolio consists primarily of the preferred
stock of utilities and financial institutions with investment grade debt ratings.ratings
and Capital Re shares. (See Note 5 to the consolidated financial statements in
Item 1 of this quarterly report on Form 10-Q.)
In strategies designed to reduce market risks, the Company sells common stock
short and enters into short sales of treasury futures contracts. Selling common
stock short is intended to reduce price risks associated with securities in the
Company's trading securities portfolio. The stock sold short consists primarily
of the stock of companies in similar industries. Treasury futures are used as a
hedge to reduce interest rate risks associated with holding fixed dividend
preferred stocks included in the Company's available-for-sale securities
portfolio. Generally, treasury futures contracts mature in 90 days.
March 31, 1999 Fair Value
- --------------------------------------------------------------------------------
Millions
Trading Securities Portfolio $167.2
Available-For-Sale Securities Portfolio $53.3
Other Available-For-Sale Securities $17.2
- --------------------------------------------------------------------------------
The notional fair value of outstanding short sales of common stock was
approximately 85 percent of the fair value of the trading securities
portfolio.
The notional fair value of outstanding sales of treasury futures contracts
was $25.7 million, which represented 213 contracts with a notional basis of
$25.7 million.
Securities in a grantor trust established to fund certain employee
benefits.
June 30, 1999 Fair Value
- --------------------------------------------------------------------------------
Millions
Trading Securities Portfolio $165.3(a)
Available-For-Sale Securities Portfolio $153.5(b)
Other Available-For-Sale Securities $18.2(c)
- --------------------------------------------------------------------------------
(a) The notional fair value of outstanding short sales of common stock was
approximately 85 percent of the fair value of the trading securities
portfolio.
(b) The notional fair value of outstanding sales of treasury futures contracts
was $9.3 million, which represented 80 contracts with a notional basis of
$9.4 million.
(c) Securities in a grantor trust established to fund certain employee benefits.
-17-
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Shareholders on May 11, 1999.
(b) Not applicable.
(c) The election of directors, the appointment of independent accountants, and
the amendments to the Company's Executive Long-Term Incentive Compensation
Plan, including the reservation of additional shares of Common Stock of the
Company to be issued thereunder, were voted on at the Annual Meeting of
Shareholders.
The results were as follows:
Votes
Withheld or Broker
Directors Votes For Against Abstentions Nonvotes
--------- ---------- ----------- ----------- --------
Kathleen A. Brekken 58,791,570 995,473 - -
Merrill K. Cragun 58,893,540 893,503 - -
Dennis E. Evans 58,750,185 1,036,858 - -
Peter J. Johnson 58,930,157 856,886 - -
George L. Mayer 58,919,487 867,556 - -
Jack I. Rajala 58,858,784 928,259 - -
Edwin L. Russell 58,838,967 948,076 - -
Arend J. Sandbulte 58,835,996 951,047 - -
Nick Smith 58,864,142 922,901 - -
Bruce W. Stender 58,918,503 868,540 - -
Donald C. Wegmiller 58,845,450 941,593 - -
Independent Accountants
-----------------------
PricewaterhouseCoopers LLP 58,809,081 508,057 436,861 33,044
Minnesota Power Executive
Long-Term Incentive
Compensation Plan
-------------------------
Amendments and
reservation of additional
shares to be issued 45,558,168 12,337,810 1,492,671 398,394
(d) Not applicable.
-18-
ITEM 5. OTHER INFORMATION
Reference is made to the Company's 1998 Form 10-K for background information on
the following updates. Unless otherwise indicated, cited references are to the
Company's 1998 Form 10-K.
Ref. Page 2. - Electric Sales - Eighth Paragraph
Ref. Page 25. - OutlookTenth Paragraph
Ref. 10-Q for the quarter ended March 31, 1999 Page 13. - Electric Operations - Tenth ParagraphFourth and
Fifth Paragraphs
Steel imports continue to be a critical issue facing American steel producers.
Total imports for the first five months of 1999 are running slightly below the
record levels of 1998. The surge of imported steel in recent years continues to
depress average prices for steel mill products. First quarter prices for 1999
are about 27 percent below the same period in 1998.
First quarter steel shipments from American mills are 10 percent lower this year
compared to the same period in 1998, with capacity utilization also down
compared to last year. In 1998 the United States imported a record 42 million
tons of steel, which represented an 83 percent increase over the 23 million ton
average for the previous eight years (1990-1997).
For the first three months of 1999, United States imports were running at about
the same levels as 1998. However, the United States Commerce Department has made
preliminary findings that set substantial antidumping margins on hot rolled
steel products from Japan and Brazil, and countervailing duty margins on
products from Brazil. This action should have a positive effect for the domestic
steel industry by reducing imports.
If imports continue at 1998 levels,The continued lower worldwide demand for steel produced in the United States is
likely to have an adverse affect on thenorthern Minnesota's taconite producers and
the economy as a whole in Northernof northern Minnesota. The Company is unable to predict the eventual
impact of this issue on the Company's Electric Operations.
-13-
Ref. Page 3. - Contract Status for Minnesota Power Large Power Customers
On March 25, 1999 Potlatch Corp. signed an agreement with Minnesota Power to
extend its contract to December 31, 2004 and to include in the billing the
Potlatch location in Grand Rapids. This agreement is pending regulatory
approval.
Ref. Page 4. - Purchased Power and Capacity Sales - Purchased Power - SecondFirst Full Paragraph
Ref. Page 25. - Outlook - Electric Operations - FirstEleventh Paragraph
On March 18, 1999 the Company, through wholly owned subsidiary Rainy River
Energy Corporation, entered into a 15-year power purchase agreement with a
subsidiary of LS Power, LLC (LS Power), a privately owned independent power
producer. Under the agreement, the Company will purchase approximately 275
megawatts from a 1,100 megawatt natural gas-fired combined cycle generation
facility to be built, owned and operated by LS Power near Chicago, Illinois.
ConstructionSix of the generation facility is scheduled to beginseven taconite producers in mid 1999Minnesota have collective bargaining
agreements with commercial operation expectedthe United Steel Workers of America (USWA). These agreements
expire in mid 2001. The Company expectsAugust 1999. Tentative five-year collective bargaining agreements have
been reached with five of the agreement
will enhance its ability to serve an expanding customer base outsidesix USWA taconite producers. Contract negotiations
with the sixth taconite producer have been put on hold pending the outcome of
Wisconsin and Minnesota, as well as enable additional participation in the
wholesale bulk power marketplace.
Generally, there will be a charge for both capacity made available and energy
delivered. The Company will be obligated to pay the capacity related charge as
long as capacity is made available. The capacity related charge will be reduced
if capacity is not available and replacement power is not provided. The Company
will be responsible for the purchase and transportation of natural gas. The
Company will incur no significant charges until the facility commences
operations.
The Company can terminate the agreement under certain circumstances, including
prolonged construction delays or facility outages.acquisition discussions with another company.
Ref. Page 6. - Minnesota Public Utilities Commission - Seventh Full Paragraph
Ref. Page 25. - OutlookInsert after Eleventh Paragraph
Ref. 10-Q for the quarter ended March 31, 1999 Page 14. - Electric Operations - FirstFifth Paragraph
In 1998On July 27, 1999 the MPUC initiated a proceeding to analyzeissued an order approving the recommendation made by
the Minnesota Department of Public Service to discontinueCompany's CIP filing,
except for the recovery of lost margins which was denied. The annual filing
requested approval for investmentsa 1998 year end CIP tracker account balance (deferred
charge) of $18.9 million; recovery in Conservation Improvement Programs (CIP).1999 of $3.5 million of 1998 lost margins;
and a continuation of the 2.75 percent billing adjustment factor. The MPUC's
primary rationale for denial of lost margin recovery was that in 1998 Electric
Operations earned in excess of its allowed return on equity. In a companion
order, the MPUC requiredopened an investigation into the reasonableness of Minnesota
Power's rates. The Company and other gas and electric utilitiesis required to file specific plans
for phasing-out lost margin recovery.within 60 days a report
evaluating 1998 electric earnings and explain why current rates are just
and reasonable. The Company has proposed a phase-out plan
that would recover the lost margins associated with large power customer
contract revisions relatedintends to CIP activity. If the plan is accepted by the MPUC,
the Company would recover approximately $3.5 million in 1999, and $2.0 million
in eachrequest reconsideration of the years 2000, 2001, 2002 and 2003.both orders.
The MPUC has not established a
time frame for acting on these proposals, and the Company is unable to predict the outcome of this matter.
Ref. Page 6. - Insert after Seventh Full Paragraph
Ref. Page 25. - Outlook - Electric Operations - First Paragraph
Public Service Commission of Wisconsin. On April 15, 1999 Wisconsin Public
Service Corporation (WPSC) and Minnesota Power announced a preliminary plan to
construct a 250 mile 345-kilovolt transmission line from Wausau, Wisconsin to
Duluth, Minnesota. The project, called "Power Up Wisconsin," is being
constructed to enhance reliability in Wisconsin and is estimated to cost between
$125 million and $175 million. Potential routes for the line are being
developed, using current rights-of-way where possible. The plan will be
submitted to the PSCW and the Minnesota Environmental Quality Board when
construction permit applications are filed this summer. Depending on siting and
regulatory review and approval, the line could be in service during 2002. The
Company currently anticipates an approximate 50 percent ownership in the
project.
-14-
these matters.
Ref. Page 9. - National Pollutant Discharge Elimination System Permits Table
Ref. 10-Q for the quarter ended March 31, 1999 Page 15. - First Paragraph
The Company anticipates the Minnesota Pollution Control Agency will issue new
National Pollutant Discharge Elimination System Permits (NPDES) for the Boswell
Energy Center in the third quarter of 1999 and the M.L. Hibbard Station in the
fourth quarter of 1999.
A new NPDES permit for the Laskin Energy Center (Laskin) inwas issued effective
April 27, 1999 and has an expiration date of February 28, 2004. As expected the second quarter of 1999. The
Laskin permit will containcontains a schedule of compliance requiring the construction of a
new ash disposal pond by December 31, 2000. The Company expects to spend
approximately $3.3 million in 1999 and another $3.3 million in 2000 to construct
the Laskin ash disposal pond.
-19-
Ref. Page 10. - Water Services - Third Full Paragraph
Ref. Page 25. - Outlook - Water Services - Twelfth Paragraph
OnRef. 10-Q for the quarter ended March 31, 1999, Page 15. - Second Paragraph
On June 17, 1999 Heater announced it had reached an agreement to acquireacquired the water and wastewater operationsassets of Mid South Water System, Inc. oflocated in Sherills
Ford, North Carolina for $9 million. The acquisition was accounted for using the
purchase method. With the acquisition of Mid South, which serves approximately
12,000 customers. The
acquisition is expected to be completed in the next few months pending
regulatory approval. Upon completion,customers, Heater will bebecame the largest investor-owned water utility in
North Carolina serving almost 45,000 customers in 29 counties.
Ref. Page 12.10. - Automotive Services - SecondSeventh Full Paragraph
Ref. Page 17. - Automotive Services - Table
Ref. Page 26. - Outlook - Automotive Services -1995 RATE CASE. The FPSC reopened the record on two remaining issues on remand
from the Florida First ParagraphDistrict Court of Appeals regarding the amount of
investment in utility facilities recoverable in rates from current customers.
Hearings have been set for January 2000 and pre-filed testimony is due in
November 1999. On April 30,June 14, 1999 ADESA acquired Des Moines Auto Auction located in Des Moines,
Iowa. The three lane auction which primarily serves consignment and fleet/lease
accounts operates on a 25 acre facility. The auction offers on site
reconditioning and pick up and delivery services. AFC provides dealer
floorplanning at this auction. ADESA operates 28 vehicle auction facilities.
Ref. Page 13. - Investments - Real Estate Operations - Sixth Paragraph
Ref. Page 18. - Third Paragraph
Ref. Page 26. - Outlook - Investments - Second Paragraph
On May 4, 1999 MP Real Estate Holdings, Inc., a wholly owned subsidiary of the Company signedfiled a motion seeking approval of
an agreement to purchase, for $45 million, certain real estate
properties locatedoffer of settlement. The offer would increase annual revenue by approximately
$1 million; place accumulated surcharges, including interest accrued through
August 1, 1999, into a regulatory asset recoverable in Cape Coral, Florida, fromrate base in the next
ratemaking proceeding; and, provide a subsidiarythree-year moratorium on the initiation of
Avatar Holdings
Inc., a publicly traded developer and home builder headquartered in Coral
Gables, Florida. Cape Coral, located adjacent to Fort Myers, Florida, has a
populationrate cases by the Company or the FPSC, exclusive of 100,000 andindex filings. The motion is
Florida's second largest municipality in land area.
Propertiesscheduled to be purchased include approximately 2,500 acres of commercial and
residential zoned land, including home sites, a golf resort, marina, shopping
center and commercial buildings.heard by the FPSC on August 23, 1999. The Company anticipates closing this
transaction in June 1999, onceis unable to
predict the necessary state regulatory approval has been
received. The Company anticipates funding this transaction with internally
generated funds and proceeds from the saletiming or outcome of certain investments in the
Company's securities portfolio.these proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
2727(a) Financial Data Schedule for the Six Months Ended June 30, 1999.
27(b) Restated Financial Data Schedule for the Six Months Ended
June 30, 1998.
(b) Reports on Form 8-K.
Report on Form 8-K dated and filed February 12,May 27, 1999 with respect to Item 5.
Other Events.
Report on Form 8-K dated and filed February 26,June 15, 1999 with respect to Item 5.
Other Events.
-15-Report on Form 8-K dated and filed July 7, 1999 with respect to Item 5.
Other Events.
-20-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Minnesota Power, Inc.
-----------------------------------------------------------------
(Registrant)
May 7,August 6, 1999 D. G. Gartzke
---------------------------------
D.--------------------------------
David G. Gartzke
Senior Vice President - Finance
and Chief Financial Officer
May 7,August 6, 1999 Mark A. Schober
-----------------------------------------------------------------
Mark A. Schober
Controller
-16--21-
INDEX TO EXHIBITS
Exhibit
Number
27- -------
27(a) Financial Data Schedule for the Six Months Ended June 30, 1999
27(b) Restated Financial Data Schedule for the Six Months Ended June 30, 1998