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SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 1-3548
ALLETE
(LEGALLY INCORPORATED AS MINNESOTA POWER, INC.)
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0418150
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
30 WEST SUPERIOR STREET, DULUTH, MINNESOTA 55802-2093
(Address of principal executive offices including Zip Code)
(218) 279-5000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH STOCK EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, without par value New York Stock Exchange
8.05% Cumulative Quarterly Income
Preferred Securities of ALLETE
Capital I, a subsidiary of ALLETE New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of voting stock held by nonaffiliates on January 29,
2001 was $1,668,941,155.
As of January 29, 2001 there were 75,335,983 shares of ALLETE Common Stock,
without par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2001 Annual Meeting of Shareholders are
incorporated by reference in Part III.
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ALLETE 2000 ANNUAL REPORT 19
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FORM 10-K
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TABLE OF CONTENTS
PAGE
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DEFINITIONS ............................................................. 21
SAFE HARBOR STATEMENT...................................................... 22
PART I
Item 1. Business.......................................................... 23
Energy Services................................................... 24
Retail Electric Sales........................................ 25
Purchased Power and Capacity Sales........................... 26
Fuel......................................................... 27
Wholesale Electric Sales..................................... 27
Regulatory Issues............................................ 27
Competition.................................................. 29
Franchises................................................... 29
Environmental Matters........................................ 29
Automotive Services............................................... 31
Competition.................................................. 33
Environmental Matters........................................ 33
Water Services.................................................... 34
Regulatory Issues............................................ 34
Competition.................................................. 35
Franchises................................................... 35
Environmental Matters........................................ 35
Investments....................................................... 35
Environmental Matters........................................ 36
Executive Officers of the Registrant.............................. 37
Item 2. Properties........................................................ 38
Item 3. Legal Proceedings................................................. 38
Item 4. Submission of Matters to a Vote of Security Holders............... 38
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters......................................................... 38
Item 6. Selected Financial Data........................................... 39
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 41
Consolidated Overview........................................ 41
2000 Compared to 1999........................................ 42
1999 Compared to 1998........................................ 43
Outlook...................................................... 43
Liquidity and Capital Resources.............................. 45
Capital Requirements......................................... 46
Market Risk.................................................. 47
New Accounting Standards..................................... 47
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........ 47
Item 8. Financial Statements and Supplementary Data....................... 47
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 47
PART III
Item 10. Directors and Executive Officers of the Registrant................ 48
Item 11. Executive Compensation............................................ 48
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 48
Item 13. Certain Relationships and Related Transactions.................... 48
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 48
SIGNATURES................................................................. 52
CONSOLIDATED FINANCIAL STATEMENTS.......................................... 53
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20 ALLETE 2000 ANNUAL REPORT
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FORM 10-K
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DEFINITIONS
The following abbreviations or acronyms are used in the text.
ABBREVIATION OR ACRONYM TERM
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ACE ACE Limited
ADESA ADESA Corporation
ADESA Canada ADESA Canada Inc.
ADESA Importation ADESA Importation Services, Inc.
ADT ADT Automotive, Inc.
AFC Automotive Finance Corporation
Americas' Water Americas' Water Services Corporation
APC Auto Placement Center, Inc.
AutoVIN AutoVIN, Inc.
BNI Coal BNI Coal, Ltd.
Boswell Boswell Energy Center
CAG Canadian Auction Group
Cape Coral Holdings Cape Coral Holdings, Inc.
Capital Re Capital Re Corporation
CIP Conservation Improvement Program(s)
Company ALLETE and its subsidiaries
ComSearch ComSearch, Inc.
Dicks Creek Dicks Creek Wastewater Utility
EBITDAL Earnings Before Interest, Taxes, Depreciation,
Amortization and Lease Expense
EndTrust EndTrust Lease End Services, LLC
EPA Environmental Protection Agency
ESOP Employee Stock Ownership Plan
FERC Federal Energy Regulatory Commission
Florida Water Florida Water Services Corporation
Form 8-K ALLETE Current Report on Form 8-K
Form 10-K ALLETE Annual Report on Form 10-K
Form 10-Q ALLETE Quarterly Report on Form 10-Q
FPSC Florida Public Service Commission
Georgia Water Georgia Water Services Corporation
Great Rigs Great Rigs Incorporated
Great River Great River Energy
Heater Heater Utilities, Inc.
Hibbard M.L. Hibbard Station
Impact Auto Impact Auto Auctions Ltd. And Suburban Auto
Parts Inc., collectively
Invest Direct ALLETE's Direct Stock Purchase and Dividend
Reinvestment Plan
kWh Kilowatthour(s)
Laskin Laskin Energy Center
Lehigh Lehigh Acquisition Corporation
LS Power LS Power, LLC
Manheim Manheim Auctions, Inc.
MAPP Mid-Continent Area Power Pool
MBtu Million British thermal units
Mid South Mid South Water Systems, Inc.
Minnesota Power Minnesota Power, Inc.
Minnkota Power Minnkota Power Cooperative, Inc.
MP Telecom Minnesota Power Telecom, Inc.
MPUC Minnesota Public Utilities Commission
MW Megawatt(s)
MWh Megawatthour(s)
NCUC North Carolina Utilities Commission
Note___ Note___ to the consolidated financial statements
indexed in Item 14(a) of this Form 10-K
NPDES National Pollutant Discharge Elimination System
Palm Coast Palm Coast Holdings, Inc.
PAR PAR, Inc.
PCUC Palm Coast Utility Corporation
PSCW Public Service Commission of Wisconsin
Rainy River Rainy River Energy Corporation
SFAS Statement of Financial Accounting Standards No.
Split Rock Split Rock Energy LLC
Spruce Creek Spruce Creek South Utilities Inc.
Square Butte Square Butte Electric Cooperative
SWL&P Superior Water, Light and Power Company
WPPI Wisconsin Public Power, Inc.
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ALLETE 2000 ANNUAL REPORT 21
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FORM 10-K
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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), we are hereby filing cautionary
statements identifying important factors that could cause our 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 ALLETE in this Annual
Report on Form 10-K, 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 our control 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 United States Congress, state legislatures, the FERC, the
MPUC, the FPSC, the NCUC, the PSCW and various county regulators, about
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 capital investments, and
present or prospective wholesale and retail competition (including but
not limited to 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;
- 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
ALLETE.
Any forward-looking statement speaks only as of the date on which such statement
is made, and we undertake no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which that statement is
made or to reflect the occurrence of unanticipated events. New factors emerge
from time to time and it is not possible for management to predict all of these
factors, nor can it assess the impact of each of these factors on the businesses
of ALLETE or the extent to which any factor, or combination of factors, may
cause results to differ materially from those contained in any forward-looking
statement. [GRAPHIC OMITTED - SQUARE]
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NEW NAME.
NEW OPPORTUNITIES.
NEW SPOT ON THE NYSE.
Now that we've changed our name, it's a whole new ballgame.
We've moved up toward the top of the New York Stock Exchange. [ALLETE LOGO]
Look for our new ticker symbol, ALE, formerly MPL.
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22 ALLETE 2000 ANNUAL REPORT
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FORM 10-K
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PART I
ITEM 1. BUSINESS
ALLETE is a multi-services company incorporated under the laws of Minnesota
since 1906. ALLETE is legally incorporated as Minnesota Power, Inc. References
in this report to "we" and "our" are to ALLETE and its subsidiaries,
collectively.
We have operations in 43 states and nine Canadian provinces engaged in four
business segments:
- ENERGY SERVICES includes electric and gas services, coal mining and
telecommunications;
- AUTOMOTIVE SERVICES includes a network of vehicle auctions, a finance
company, an auto transport company, a vehicle remarketing company, a
company that provides field information services to the automotive
industry and its lenders, and a company that provides Internet-based
parts location and insurance adjustment audit services nationwide;
- WATER SERVICES includes water and wastewater services; and
- INVESTMENTS includes real estate operations, investments in emerging
technologies related to the electric utility industry and a securities
portfolio.
Corporate charges represent general corporate expenses, including interest, not
specifically related to any one business segment. As of December 31, 2000 we had
approximately 13,000 employees, 4,000 of which were not full time.
Since the inception of the 1996 corporate strategic plan, we have pursued and
will continue to pursue a course of expanding our existing business segments.
Acquisitions have been and will continue to be a primary means of expansion.
Energy Services continues to pursue plans to construct in partnership with
Wisconsin Public Service Corporation a 250-mile, 345-kilovolt transmission line
from Wausau, Wisconsin to Duluth, Minnesota and pursue regional wholesale
merchant generating plant opportunities. In 2000 Minnesota Power in alliance
with Great River formed Split Rock. (See Energy Services.) Minnesota Power also
signed an agreement to install, by mid-2001, a 24-MW turbine generator at
Potlatch Corp.'s facility in Cloquet, Minnesota and Electric Odyssey expanded
into the Minneapolis/St. Paul area.
In 2000 and early 2001 Automotive Services expanded significantly with the
addition of 28 vehicle auction facilities and 19 auction facilities that provide
"total loss" vehicle recovery services to insurance companies. These additions
established ADESA as the premier automotive services company in Canada and the
second largest vehicle auction business in North America and position us as the
third largest provider of "total loss" vehicle recovery services in North
America.
In 2000 Water Services experienced customer growth through increased population
in the states they serve and the acquisition of Spruce Creek in Florida and
other small water and wastewater systems in North Carolina and Florida. Water
Services also closed on a transaction, subject to certain conditions, that will
expand its wastewater services into a third state, Georgia.
In 2000 Investments sold its investment in ACE and reported record sales by its
real estate operations.
Year Ended December 31 2000 1999 1998
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Consolidated Operating
Revenue - Millions $1,332 $1,132 $1,039
Percentage of Consolidated
Operating Revenue
Energy Services
Retail
Industrial
Taconite Producers 13% 13% 16%
Paper and Pulp Mills 5 5 6
Pipelines and Other Industries 3 3 3
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Total Industrial 21 21 25
Residential 5 6 6
Commercial 5 6 6
Sales to Other Power Suppliers 6 9 8
Other Revenue 7 7 9
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Total Energy Services 44 49 54
Automotive Services 41 36 32
Water Services 9 10 9
Investments 6 5 5
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100% 100% 100%
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For a detailed discussion of results of operations and trends, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations. For business segment information, see Notes 1 and 2. [GRAPHIC
OMITTED - SQUARE]
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ALLETE 2000 ANNUAL REPORT 23
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FORM 10-K
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ENERGY SERVICES
The businesses we include in Energy Services generate, transmit, distribute,
market and trade electricity. Coal mining and telecommunications are also
included in Energy Services. The discussion below summarizes the major
businesses we include in Energy Services. Statistical information is presented
as of December 31, 2000. All subsidiaries are wholly owned unless otherwise
specifically indicated.
MINNESOTA POWER provides electricity in a 26,000 square mile electric service
territory located in northeastern Minnesota. Minnesota Power supplies retail
electric service to 130,000 customers and wholesale electric service to 16
municipalities. SWL&P sells electricity and natural gas, and provides water
service in northwestern Wisconsin. SWL&P has 14,000 electric customers, 11,000
natural gas customers and 10,000 water customers.
Minnesota Power had an annual net peak load of 1,454 MW on December 11, 2000.
Our power supply sources are shown below.
We have electric transmission and distribution lines of 500 kilovolts (kV) (8
miles), 230 kV (606 miles), 161 kV (43 miles), 138 kV (6 miles), 115 kV (1,259
miles) and less than 115 kV (6,393 miles). We own and operate 177 substations
with a total capacity of 8,534 megavoltamperes. Some of our transmission and
distribution lines interconnect with other utilities.
We own offices and service buildings, an energy control center, repair shops,
motor vehicles, construction equipment and tools, office furniture and
equipment, and lease offices and storerooms in various localities. Substantially
all of our electric plant is subject to our mortgages which collateralize our
outstanding first mortgage bonds. Generally, our properties are held by the
Company in fee and are free from other encumbrances, subject to minor
exceptions. Some property, including certain offices and equipment, is utilized
under leases. Some of our electric lines are located on land not owned in fee,
but are covered by necessary permits of governmental authorities or by
appropriate easement rights. In 1990 we sold a portion of Boswell Unit 4 to
WPPI. WPPI has the right to use our transmission line facilities to transport
its share of generation.
MPEX is Minnesota Power's power marketing division which buys and sells capacity
and energy in the wholesale power market. Customers are other power suppliers in
the Midwest and Canada. During 2000 Minnesota Power and Great River formed Split
Rock. Headquartered in Elk River, Minnesota, Great River is a consumer-owned
generation and transmission cooperative and is Minnesota's second largest
utility in terms of generating capacity. Split Rock combines the two companies'
power supply capabilities and customer loads for power pool operations and
generation outage protection. Ownership of generation assets and current
customer supply arrangements have not changed for either company. Split Rock
contracts for wholesale power marketing services from MPEX.
For the Year Ended
Unit Year Net Winter December 31, 2000
Power Supply No. Installed Capability Electric Requirements
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MW MWh %
Steam
Coal-Fired
Boswell Energy Center - near Grand Rapids, MN 1 1958 69
2 1960 69
3 1973 353
4 1980 428
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919 5,774,422 46.7%
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Laskin Energy Center - Hoyt Lakes, MN 1 1953 55
2 1953 55
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110 573,765 4.6
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Purchased Steam
M.L. Hibbard - Duluth, MN 3&4 1949, 1951 53 45,101 0.4
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Total Steam 1,082 6,393,288 51.7
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Hydro
Group consisting of ten stations in MN Various 115 544,908 4.4
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Purchased Power
Square Butte burns lignite in Center, ND 322 2,351,916 19.0
All other - Net - 3,069,176 24.9
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Total Purchased Power 322 5,421,092 43.9
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Total 1,519 12,359,288 100.0%
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24 ALLETE 2000 ANNUAL REPORT
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FORM 10-K
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BNI COAL owns and operates a lignite mine in North Dakota. Two electric
generating cooperatives, Minnkota Power and Square Butte, presently consume
virtually all of BNI Coal's production of lignite coal under cost-plus coal
supply agreements expiring in 2027. (See Fuel and Note 14.) A large dragline,
shop complex and other property at BNI Coal are leased under a leveraged lease
agreement that expires in 2002. During 2000 BNI Coal entered into an agreement
to purchase in 2002 all property and equipment subject to this lease for $4.7
million.
ELECTRIC OUTLET, INC., doing business as Electric Odyssey, is a retail store,
catalog and e-commerce merchandiser that sells electric-related products.
Electric Odyssey has three Minnesota stores located in leased mall facilities.
Its catalogs are distributed nationwide. In addition, Electric Odyssey has
established alliances with several utilities, membership-based organizations and
other Internet businesses to market Electric Odyssey products through Internet
electronic commerce.
MP TELECOM provides highly reliable fiber optic-based communication and advanced
data services to businesses and communities in Minnesota and Wisconsin. MP
Telecom owns or has rights to approximately 1,500 route miles of fiber optic
cable. These route miles contain multiple fibers that total approximately 47,500
fiber miles. MP Telecom also owns optronic and data switching equipment that is
used to "light up" the fiber optic cable and provides customer bandwidth
services. Most of the locations from which MP Telecom services customers are
leased from third parties.
RAINY RIVER is engaged in wholesale power marketing. (See Wholesale Electric
Sales.)
RETAIL ELECTRIC SALES
Approximately 62% of the ore consumed by integrated steel facilities in the
Great Lakes region originates from five taconite customers of Minnesota Power.
Taconite, an iron-bearing rock of relatively low iron content that is abundantly
available in Minnesota, is an important domestic source of raw material for the
steel industry. Taconite processing plants use large quantities of electric
power to grind the ore-bearing rock, and agglomerate and pelletize the iron
particles into taconite pellets. Annual taconite production in Minnesota was 47
million tons in 2000 (43 million tons in 1999; 47 million tons in 1998). Based
on our research of the taconite industry, Minnesota taconite production for 2001
is anticipated to be about 37 million tons. The anticipated decrease in 2001
taconite production is due to high import levels and a softening economy. The
majority of the anticipated 10-million ton reduction in taconite production for
2001 is occurring at mines that are not Large Power Customers. Two Large Power
Customers have announced temporary shut downs, accounting for approximately 2
million tons of the anticipated decrease. While taconite production is currently
expected to continue at annual levels of about 40 million tons, the longer-term
outlook of this cyclical industry is less certain. We expect any excess energy
not used by our Large Power Customers will be marketed by MPEX and Split Rock.
LARGE POWER CUSTOMER CONTRACTS. Minnesota Power has large power customer
contracts with twelve customers (Large Power Customers), each of which requires
10 MW or more of generating capacity. Large Power Customer contracts require
Minnesota Power to have a certain amount of generating capacity available. (See
table on next page.) In turn, each Large Power Customer is required to pay a
minimum monthly demand charge that covers the fixed costs associated with having
this capacity available to serve the customer, including a return on common
equity. Most contracts allow customers to establish the level of megawatts
subject to a demand charge on a bi-annual (power pool season) basis and require
that a portion of their megawatt needs be comitted on a take-or-pay basis for
the entire term of the agreement. In addition to the demand charge, each Large
Power Customer is billed an energy charge for each kilowatthour used that
recovers the variable costs incurred in generating electricity. Six of the Large
Power Customers have interruptible service for a portion of their needs which
provides a discounted demand rate and energy priced at Minnesota Power's
incremental cost after serving all firm power obligations. Minnesota Power also
provides incremental production service for customer demand levels above the
contract take-or-pay levels. There is no demand charge for this service and
energy is priced at an increment above Minnesota Power's cost. Incremental
production service is interruptible. Contracts with ten of the twelve Large
Power Customers provide for deferral without interest of one-half of demand
charge obligations incurred during the first three months of a strike or illegal
walkout at a customer's facilities, with repayment required over the 12-month
period following resolution of the work stoppage.
Each contract continues past the contract termination date unless the required
four-year advance notice of cancellation has been given. Such contracts minimize
the impact on earnings that otherwise would result from significant reductions
in kilowatthour sales to such customers. Large Power Customers are required to
purchase any electric service requirements from Minnesota Power for the duration
of their contracts. The rates and corresponding revenue associated with capacity
and energy provided under these contracts are subject to change through the same
regulatory process governing all retail electric rates. (See Regulatory Issues -
Electric Rates.)
Minimum Revenue and Demand Under Contract
As of February 1, 2001
- ------------------------------------------------------------
Minimum Monthly
Annual Revenue Megawatts
- ------------------------------------------------------------
2001 $89.4 million 560
2002 $69.7 million 419
2003 $62.7 million 368
2004 $57.1 million 336
2005 $41.6 million 248
- ------------------------------------------------------------
Based on past experience and projected operating levels, we
believe revenue from Large Power Customers will be
substantially in excess of the minimum contract amounts.
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ALLETE 2000 ANNUAL REPORT 25
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FORM 10-K
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Contract Status for Minnesota Power Large Power Customers
As of February 1, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Earliest
Customer Industry Location Ownership Termination Date
- ------------------------------------------------------------------------------------------------------------------------------------
Eveleth Mines LLC Taconite Eveleth, MN 45% Rouge Steel Co. October 31, 2008
40% AK Steel Co.
15% Stelco Inc.
Hibbing Taconite Co. Taconite Hibbing, MN 70.3% Bethlehem Steel Corp. December 31, 2008
15% Cleveland-Cliffs Inc.
14.7% Stelco Inc.
Ispat Inland Mining Company Taconite Virginia, MN Ispat Inland Steel Company December 31, 2007
National Steel Pellet Co. Taconite Keewatin, MN National Steel Corp. December 31, 2005
USX Corporation Taconite Mt. Iron, MN USX Corporation December 31, 2007
Blandin Paper Co. Paper Grand Rapids, MN UPM-Kymmene Corporation April 30, 2006
Boise Cascade Corporation Paper International Falls, MN Boise Cascade Corporation December 31, 2002
Potlatch Corp. Paper Cloquet, MN Potlatch Corp. December 31, 2008
Brainerd, MN
Grand Rapids, MN
Stora Enso North America, Paper and Pulp Duluth, MN Stora Enso Oyj July 31, 2008
Duluth Paper Mill and
Duluth Recycled Pulp Mill
USG Interiors, Inc. Manufacturer Cloquet, MN USG Corporation December 31, 2005
Lakehead Pipe Line Co. L.P. Pipeline Deer River, MN Lakehead Pipe Line May 31, 2001
Floodwood, MN Partners, L.P.
Minnesota Pipeline Company Pipeline Staples, MN 60% Koch Pipeline Co. L.P. September 30, 2002
Little Falls, MN 40% Marathon Ashland
Park Rapids, MN Petroleum LLC
- ------------------------------------------------------------------------------------------------------------------------------------
PURCHASED POWER AND CAPACITY SALES
A purchase or sale is generally made to balance the supply or demand, thereby
capping the cost of power or fixing a margin. Minnesota Power's risk management
policy, contract provisions, operational flexibility, credit policy and
procedures for purchasing power to cap cost or fix margins are designed to
minimize Minnesota Power's risk and exposure in a market with volatile prices.
Minnesota Power has contracts to purchase capacity and energy from various
entities. The largest contract is with Square Butte. Under an agreement with
Square Butte, expiring at the end of 2026, Minnesota Power is currently entitled
to approximately 71% of the output of a 455-MW coal-fired generating unit
located near Center, North Dakota. (See Note 14.)
Minnesota Power has a power purchase contract with LTV Steel Mining Co. under
which it may purchase approximately 60 MW of capacity from LTV to the extent LTV
does not utilize this capacity for its own use. LTV has historically supplied
its own power requirements through its own 225 MW generation plant. In December
2000 LTV filed for bankruptcy in a Chapter 11 reorganization proceeding and in
January 2001 shut down its taconite pellet operation in Hoyt Lakes, Minnesota.
LTV was not a Large Power Customer. Minnesota Power is in discussions with LTV
concerning existing capacity purchase and interconnection contracts and ongoing
electric needs.
In October 2000 Minnesota Power entered into a power purchase agreement with
Great River. Under this agreement Minnesota Power will purchase 240 MW from June
2001 to April 2003 and 80 MW from May 2003 to April 2004 from a natural
gas-fired Lakefield Junction generating plant located in southern Minnesota.
Excess energy will be marketed by Split Rock.
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26 ALLETE 2000 ANNUAL REPORT
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FORM 10-K
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FUEL
Minnesota Power purchases low-sulfur, sub-bituminous coal from the Powder River
Basin coal field located in Montana and Wyoming. Coal consumption for electric
generation at Minnesota Power's Minnesota coal-fired generating stations in 2000
was about 4 million tons. As of December 31, 2000 Minnesota Power had a coal
inventory of about 300,000 tons. Minnesota Power has three coal supply
agreements with Montana suppliers. Under these agreements Minnesota Power has
the tonnage flexibility to procure 70% to 100% of its total coal requirements.
Minnesota Power will obtain coal in 2001 under these agreements and in the spot
market. This mix of coal supply options allows Minnesota Power to manage market
price and supply risk and to take advantage of favorable spot market prices.
Minnesota Power is exploring future coal supply options and believes that
adequate supplies of low-sulfur, sub-bituminous coal will continue to be
available.
Burlington Northern Santa Fe Railroad transports coal by unit train from the
Powder River Basin to Minnesota Power's generating stations. Minnesota Power and
Burlington Northern Santa Fe Railroad have two long-term coal freight-rate
contracts. One contract provides for coal deliveries through 2003 to Boswell.
The other contract provides for coal deliveries through 2003 to Laskin via a
Duluth Missabe & Iron Range Railway interchange.
Coal Delivered to Minnesota Power
Year Ended December 31 2000 1999 1998
- --------------------------------------------------------
Average Price Per Ton $21.19 $20.60 $20.37
Average Price Per MBtu $1.16 $1.14 $1.12
- --------------------------------------------------------
The Square Butte generating unit operated by Minnkota Power burns North Dakota
lignite supplied by BNI Coal, pursuant to the terms of a contract expiring in
2027. Square Butte's cost of lignite burned in 2000 was approximately 63 cents
per MBtu. The lignite acreage that has been dedicated to Square Butte by BNI
Coal is located on lands essentially all of which are under private control and
presently leased by BNI Coal. This lignite supply is sufficient to provide the
fuel for the anticipated useful life of the generating unit.
WHOLESALE ELECTRIC SALES
Minnesota Power has wholesale contracts with a number of municipal customers.
(See Regulatory Issues - Federal Energy Regulatory Commission.)
In an increasingly volatile wholesale marketplace, Minnesota Power's wholesale
alliance through Split Rock mitigates marketplace risk while creating additional
marketing opportunities for both Minnesota Power and Great River. MPEX provides
power trading, energy sourcing and risk management services to Split Rock. Split
Rock's risk management policies are consistent with Minnesota Power's.
In September 1999 Rainy River entered into an amended 15-year power purchase
agreement with a subsidiary of LS Power, a privately owned, independent power
producer. Rainy River will take the full output of one entire unit
(approximately 275 MW) of a four unit (approximately 1,100 MW) natural gas-fired
combined cycle generation facility located near Chicago, Illinois. Construction
of the generation facility began in 2000 with commercial operation expected in
May 2002. Minnesota Power expects the agreement will enhance its ability to
serve an expanding customer base outside of the MAPP region, as well as enable
additional participation in the wholesale bulk power marketplace. Rainy River
has entered into a 15-year agreement to resell approximately 50 MW, has a letter
of intent to sell another 50 MW and is engaged in the wholesale marketing of the
remaining electrical power. There will be a charge for both capacity made
available and energy delivered. Rainy River will be responsible for the purchase
and transportation of natural gas to the facility. Rainy River will be obligated
to pay fixed capacity related charges when commercial operation of the unit
occurs.
In June 1999 Minnesota Power announced plans to build a natural gas-fired,
combustion turbine power plant near Superior, Wisconsin. Combustion turbines
produce low emissions and will help alleviate a developing regional shortage of
electricity during periods of peak electrical demand. Unavailability of
combustion turbines led to a decision to purchase near-term peaking capacity
from Great River's new Lakefield Junction Project for 2001 to 2004. The project
in Superior is still being considered along with a number of other options to
meet regional needs beyond this time period.
REGULATORY ISSUES
We are exempt from regulation under the Public Utility Holding Company Act of
1935, except as to Section 9(a)(2) which relates to acquisition of securities of
public utility companies.
We are subject to the jurisdiction of various regulatory authorities. The MPUC
has regulatory authority over Minnesota Power's service area in Minnesota,
retail rates, retail services, issuance of securities and other matters. The
FERC has jurisdiction over the licensing of hydroelectric projects, the
establishment of rates and charges for the sale of electricity for resale and
transmission of electricity in interstate commerce, and certain accounting and
record keeping practices. The PSCW has regulatory authority over the retail
sales of electricity, water and gas by SWL&P. The MPUC, FERC and PSCW had
regulatory authority over 29%, 3% and 3%, respectively, of our 2000 consolidated
operating revenue.
ELECTRIC RATES. Minnesota Power has historically designed its electric service
rates based on cost of service studies under which allocations are made to the
various classes of customers. Nearly all retail sales include billing adjustment
clauses which adjust electric service rates for changes in the cost of fuel and
purchased energy, and recovery of current and deferred CIP expenditures.
In addition to Large Power Customer contracts, Minnesota Power also has
contracts with large industrial and commercial customers with monthly demands of
more than 2 MW but less than 10 MW of capacity. The terms of these contracts
vary depending upon the customer's demand for power and the cost of extending
Minnesota Power's facilities to provide electric service.
Minnesota Power requires that all large industrial and commercial customers
under contract specify the date when power is first required, and thereafter the
customer is billed for at least the minimum power for which they contracted.
These conditions are part of all contracts covering power to be supplied to new
large industrial and commercial customers and to current customers as
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their contracts expire or are amended. All contracts provide that new rates
which have been approved by appropriate regulatory authorities will be
substituted immediately for existing rates, without regard to any unexpired term
of the existing contract. All rate schedules and other contract terms are
subject to approval by appropriate regulatory authorities.
FEDERAL ENERGY REGULATORY COMMISSION. The FERC has jurisdiction over our
wholesale electric service and open access transmission service. Minnesota
Power's hydroelectric facilities, which are located in Minnesota, are licensed
by the FERC. (See Environmental Matters - Water.)
Minnesota Power has long-term contracts with 16 Minnesota municipalities
receiving wholesale electric service. Four contracts are for service through
2002 and 2005, while the other 12 are for service through at least 2007. The
contracts limit rate increases (including fuel costs) to about 2% per year on a
cumulative basis. In 2000 municipal customers purchased 703,555 MWh from
Minnesota Power.
Minnesota Power filed a pro forma open access transmission tariff with FERC in
1996, as required. The tariff governs Minnesota Power's rates for transmission
and ancillary services to transmission customers.
Issued in December 1999 FERC Order No. 2000 strongly encouraged
transmission-owning utilities to participate in large independent regional
transmission organizations (RTOs). The formation and structure of RTOs are
evolving in the implementation of this federal policy. RTOs will plan and
operate, and sometimes own regional transmission systems. Members will be
required to turn over ownership or operational control of their transmission
facilities to the RTO. In compliance with FERC Order No. 2000, in October 2000
Minnesota Power filed its intent to join an RTO, indicating a preference for the
Midwest Independent System Operator, Inc. (MISO) while seeking to resolve
certain organizational issues at the MISO. Order No. 2000 seeks voluntary
participation in an RTO by December 15, 2001. SWL&P is impacted by a Wisconsin
statute that mandates membership in an RTO.
Minnesota Power participates in MAPP, a power pool operating in parts of eight
states in the Upper Midwest and in three provinces in Canada. MAPP functions
include a regional reliability council that maintains generation reserve sharing
requirements, a regional transmission planning group and a wholesale power and
energy market committee. MAPP enhances regional electric service reliability,
provides the opportunity for members to enter into various economic wholesale
power transactions and coordinates the planning and operation of existing as
well as the installation of new generation and transmission facilities. MAPP has
open membership which includes various electric utilities within the MAPP area,
and marketers and brokers located throughout North America. MAPP operates under
a 1996 agreement, as amended, and an open access transmission tariff approved by
FERC. Under this agreement, any member who elects to withdraw from MAPP must
first provide a three-year notice of their intent to do so.
MINNESOTA PUBLIC UTILITIES COMMISSION. Minnesota Power's retail rates are based
on a 1994 MPUC retail rate order that allows for an 11.6% return on common
equity dedicated to utility plant.
Minnesota requires investor owned electric utilities to spend a minimum of 1.5%
of gross annual retail electric revenue on conservation improvement programs
(CIP) each year. These investments are recovered from retail customers through a
billing adjustment and amounts included in retail base rates. The MPUC allows
utilities to accumulate, in a deferred account for future recovery, all CIP
expenditures as well as a carrying charge on the deferred account balance, which
amount was $1.1 million at December 31, 2000. During 1999 the Minnesota
legislature enacted Minnesota Power-supported legislation allowing customers
with 20 MW or more of connected load at one service point to opt out of the CIP
minimum spending requirements, and associated expense recovery, upon showing the
MPUC that they had implemented all reasonably available conservation measures.
Opt outs were approved in early 2000 for seven of Minnesota Power's industrial
customers. As a result, the 2000 CIP investment goal was $2.7 million with
actual spending at $1.9 million, down substantially from the $7.1 million spent
in 1999. The 2000 spending shortfall is expected to be made up by additional
2001 spending.
Until 1999 the MPUC approved Minnesota Power's request to recover lost margins.
Lost margins represent energy sales lost over a five-year period due to
Minnesota Power's efforts to assist customers in conserving energy. Lost margin
recovery compensates utilities for reduced sales resulting from CIP activities.
In 1999 the MPUC denied Minnesota Power's request to recover $3.5 million of
lost margins related to 1998 CIP activities. Minnesota Power appealed the
decision to the Minnesota Court of Appeals. In December 2000 the court reversed
the MPUC's denial of Minnesota Power's 1998 lost margin claim. The court found
that the MPUC's action constituted retroactive ratemaking and was arbitrary and
capricious. In January 2001 the MPUC appealed the court's decision to the
Minnesota Supreme Court. We are unable to predict the outcome of this matter.
PUBLIC SERVICE COMMISSION OF WISCONSIN. In December 1999 SWL&P filed an
application with the PSCW for authority to increase retail utility rates 1.8%.
This average increase is comprised of a 3.2% decrease in electric rates, a 1.1%
increase in gas rates and a 31% increase in water rates. The proposed water
increase is the result of construction currently under way to replace an aging
well system. A final order is expected in March 2001. SWL&P's current retail
rates are based on a 1996 PSCW retail rate order that allows for an 11.6% return
on common equity.
In April 1999 Minnesota Power and Wisconsin Public Service Corporation (WPS)
announced plans to construct a 250-mile, 345-kilovolt transmission line from
Wausau, Wisconsin to Duluth, Minnesota. The proposal, called "Power Up
Wisconsin," is a direct response to former Wisconsin Governor Thompson's call to
address the pressing need for more dependable electricity in Wisconsin and the
Upper Midwest. Alternative routes for the line using existing rights-of-way are
proposed where feasible. The Final Environmental Impact Statement was issued in
October 2000 by the PSCW. Hearings in Wisconsin for public input were completed
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in December 2000. Technical hearings are under way and expected to be completed
in early 2001. The PSCW is expected to make a decision in mid 2001 based on
evidence introduced at the hearings. Application for approval of the Minnesota
portion of the line was filed with the Minnesota Environmental Quality Board
(MEQB) in 1999. The scope of the MEQB hearings was defined as limited to impacts
from construction and operation of the transmission line on human health and the
environment within Minnesota. Minnesota evidentiary and public hearings were
held in August and September 2000. A recommendation for approval was received
from the Administrative Law Judge and the application is expected to be voted on
by the full MEQB in mid 2001. Depending on siting and regulatory review and
approval, the new transmission line could be in service in 2004 at an estimated
cost of between $125 million and $175 million. Approximately $30 million to $40
million of the estimated cost is for facilities in Minnesota that will be owned
by Minnesota Power. The facilities in Wisconsin are being financed and owned by
WPS and may ultimately be owned in part by Minnesota Power (if it exercises a
buy-out option for roughly one half the line), WPS or the American Transmission
Company RTO in Wisconsin.
In December 2000 the PSCW ordered SWL&P to apply for membership in a federally
approved RTO by February 1, 2001, which was extended to April 1, 2001. In
January 2001 SWL&P filed an application for rehearing and reopening of this
order. We are unable to predict the outcome of this matter. (See Federal Energy
Regulatory Commission.)
The PSCW must approve the ownership, control and operation of any affiliated
wholesale merchant generating plants in Wisconsin. (See Wholesale Electric
Sales.)
COMPETITION
INDUSTRY RESTRUCTURING. The electric utility industry continues to restructure
in response to growing competition at both the wholesale and retail levels. This
restructuring has primarily affected Minnesota Power's wholesale power marketing
and trading activity through Split Rock discussed above. New legislation and
regulation to increase reliability and address wholesale price volatility while
encouraging competition at both the wholesale and retail levels is being
considered at both the federal and state levels. Legislative and regulatory
activity as well as the actions of competitors affect the way Minnesota Power
strategically plans for its future.
CUSTOMER CHOICE. Twenty-five states representing approximately 70% of the United
States population have passed either legislation or regulation that initiates a
process which may lead to retail customer choice. In 2001 retail competition
legislation will likely again be debated at the federal level and in Minnesota
and Wisconsin though these initiatives currently lack momentum. We cannot
predict the timing or substance of any future legislation.
FRANCHISES
Minnesota Power holds franchises to construct and maintain an electric
distribution and transmission system in 84 cities and towns located within its
electric service territory. SWL&P holds franchises in 15 cities and towns within
its service territory. The remaining cities and towns served do not require a
franchise to operate within their boundaries.
ENVIRONMENTAL MATTERS
Certain businesses included in our Energy Services segment are subject to
regulation by various federal, state and local authorities about air quality,
water quality, solid wastes and other environmental matters. We consider these
businesses to be in substantial compliance with those environmental regulations
currently applicable to their operations and believe all necessary permits to
conduct such operations have been obtained. We do not currently anticipate that
potential capital expenditures for environmental matters will be material.
However, because environmental laws and regulations are constantly evolving, the
character, scope and ultimate costs of environmental compliance cannot be
estimated.
AIR. Minnesota Power's generating facilities in Minnesota burn mainly low-sulfur
western coal and Square Butte, located in North Dakota, burns lignite coal. All
of these facilities are equipped with pollution control equipment such as
scrubbers, baghouses or electrostatic precipitators. The federal Clean Air Act
Amendments of 1990 (Clean Air Act) created emission allowances for sulfur
dioxide. Each allowance is an authorization to emit one ton of sulfur dioxide,
and each utility must have sufficient allowances to cover its annual emissions.
Sulfur dioxide emission requirements are currently being met by all of Minnesota
Power's generating facilities, creating a surplus allowance situation for
Minnesota Power. Square Butte anticipates meeting its sulfur dioxide
requirements through increased use of existing scrubbers and by annually
purchasing additional allowances as necessary.
In accordance with the Clean Air Act, the EPA has established nitrogen oxide
limitations for electric generating units. To meet nitrogen oxide limitations,
Minnesota Power installed advanced low emission burner technology and associated
control equipment to operate the Boswell and Laskin facilities at or below the
compliance emission limits. Nitrogen oxide limitations at Square Butte are being
met by combustion tuning. Minnesota Power has obtained all necessary Title V air
operating permits from the Minnesota Pollution Control Agency for its applicable
facilities to conduct electric operations.
In December 2000 the EPA announced their decision to regulate mercury emissions
from coal and oil fired power plants under Section 112 of the Clean Air Act.
Section 112 will require all such power plants in the United States to adhere to
the EPA maximum achievable control technology (MACT) standards for mercury. The
EPA's announcements clarified that the EPA will establish applicable mercury
MACT standards through a four-year rule making and public comment period, giving
consideration to factors such as a facility's installed design and operation.
Final regulations defining control requirements are planned for December 2004.
Cost estimates are premature at this time.
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In December 2000 Minnesota Power received a request from the EPA, under Section
114 of the Clean Air Act, seeking information regarding capital expenditures at
all of its coal-fired generating stations. This action is part of an
industry-wide investigation assessing compliance with the New Source Review and
the New Source Performance Standards (emissions standards that apply to new and
changed units) of the Clean Air Act at electric generating stations. We are
unable to predict whether any further action will be taken by the EPA on this
matter or whether Minnesota Power will be required to incur any costs as a
result.
WATER. The Federal Water Pollution Control Act of 1972 (FWPCA), as amended by
the Clean Water Act of 1977 and the Water Quality Act of 1987, established the
National Pollutant Discharge Elimination System (NPDES) permit program. The
FWPCA requires NPDES permits to be obtained from the EPA (or, when delegated,
from individual state pollution control agencies) for any wastewater discharged
into navigable waters. Minnesota Power has obtained all necessary NPDES permits,
including NPDES storm water permits for applicable facilities, to conduct their
electric operations.
Minnesota Power holds FERC licenses authorizing the ownership and operation of
seven hydroelectric generating projects with a total generating capacity of
about 118 MW. In June 1996 Minnesota Power filed in the U.S. Court of Appeals
for the District of Columbia Circuit a petition for review of the license as
issued by the FERC for Minnesota Power's St. Louis River project. Separate
petitions for review were also filed by the U.S. Department of the Interior and
the Fond du Lac Band of Lake Superior Chippewa (Fond du Lac Band), two
intervenors in the licensing proceedings. The court consolidated the three
petitions for review and suspended the briefing schedule while Minnesota Power
and the Fond du Lac Band negotiate the reasonable fee for use of tribal lands as
mandated by the new license. Both parties informed the court that these
negotiations may resolve other disputed issues, and they are obligated to report
to the court periodically the status of these discussions. Beginning in 1996,
and most recently in January 2001, Minnesota Power filed requests with the FERC
for extensions of time to comply with certain plans and studies required by the
license that might conflict with the settlement discussions.
SOLID AND HAZARDOUS WASTE. The Resource Conservation and Recovery Act of 1976
regulates the management and disposal of solid wastes. As a result of this
legislation, the EPA has promulgated various hazardous waste rules. Minnesota
Power is required to notify the EPA of hazardous waste activity and routinely
submits the necessary annual reports to the EPA.
In response to EPA Region V's request for utilities to participate in the Great
Lakes Initiative by voluntarily removing remaining polychlorinated biphenyl
(PCB) inventories, Minnesota Power has scheduled replacement of PCB-contaminated
oil by 2004. The total cost is expected to be between $2.5 million and $3
million, of which $1.1 million was spent through December 31, 2000. [GRAPHIC
OMITTED - SQUARE]
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AUTOMOTIVE SERVICES
Automotive Services includes several subsidiaries that are integral parts of the
vehicle redistribution business. Vehicle sales within the auto auction industry
are expected to rise at a rate of 2% to 4% annually over the next several years.
With the continued increased popularity of leasing and the high cost of new
vehicles, a steady flow of vehicles is expected to return to auction. Automotive
Services plans to grow through increased sales at existing businesses, selective
acquisitions and expansion of its services to customers. The discussion below
summarizes the major businesses we include in Automotive Services. Statistical
information is presented as of the date of this Form 10-K. All subsidiaries are
wholly owned unless otherwise specifically indicated.
ADESA is the second largest vehicle auction network in North America.
Headquartered in Indianapolis, Indiana, ADESA owns (or leases) and operates 54
vehicle auction facilities in the United States and Canada through which used
cars and other vehicles are sold to franchised automobile dealers and licensed
used car dealers. Sellers at ADESA's auctions include domestic and foreign auto
manufacturers, car dealers, automotive fleet/lease companies, banks and finance
companies. ADESA also has 19 auction facilities in the United States and Canada
that provide "total loss" vehicle recovery services to insurance companies.
During 2000 ADESA acquired or opened 28 new vehicle auction facilities and
purchased the remaining 53% of Canada's largest provider of "total loss" vehicle
recovery services.
Also in 2000 ADESA Importation Services, Inc. purchased all of the assets of
International Vehicle Importers, Inc., a United States registered importer.
ADESA Importation is headquartered in Flint, Michigan with facilities in
Buffalo, New York; Grand Forks, North Dakota; Sweetgrass, Montana and Blaine,
Washington. ADESA Importation is the second largest independent commercial
registered importer of vehicles in the United States.
In January 2001 ALLETE and ADESA acquired all of the outstanding stock of
ComSearch, Inc. and purchased the assets of Auto Placement Center, Inc. (APC),
in an overall transaction valued at $62.4 million. APC provides "total loss"
vehicle recovery services at eight auction facilities in the United States.
ComSearch provides Internet-based parts location and insurance adjustment audit
services nationwide. Both APC and ComSearch are based in Rhode Island.
The table on the next page lists the vehicle auctions currently owned or leased
by ADESA. Each auction has a multi-lane, drive-through auction facility, as well
as additional buildings for reconditioning, registration, maintenance, body
work, and other ancillary and administrative services. Each auction also has
secure parking areas to store vehicles for auction. All vehicle auction property
owned by ADESA is subject to liens securing various notes payable.
AFC provides inventory financing for wholesale and retail automobile dealers who
purchase vehicles from ADESA auctions, independent auctions, other auction
chains and outside sources. AFC is headquartered in Indianapolis, Indiana and
has 86 loan production offices at or near auto auctions across North America.
These offices provide qualified dealers credit to purchase vehicles at any of
the 400 plus auctions approved by AFC. In October 2000 AFC launched its new
computer application system, COSMOS (an acronym for computer operating system
managing our success). COSMOS, an Oracle-based system, follows each loan from
origination to payoff and allows AFC to better manage its business, while
expediting services through its branch network to more than 15,000 registered
dealers.
GREAT RIGS is one of the nation's largest independent used automobile transport
carriers with more than 140 automotive carriers, the majority of which are
leased. Headquartered in Moody, Alabama, Great Rigs offers customers pick up and
delivery services as well as marshalling services through 11 strategically
located transportation hubs. Customers of Great Rigs include both ADESA and
competitors' auctions, car dealerships, vehicle manufacturers, leasing companies
and finance companies. Great Rigs' major customers include Ford Motor Credit, GE
Capital, General Motors Acceptance Corp., Nissan and DaimlerChrysler.
PAR, which is doing business as PAR North America, provides customized vehicle
remarketing services to various companies such as banks, non-prime finance,
non-prime servicing, captive finance, credit unions, company owned fleets,
commercial fleets and rental car dealers in the United States and Canada. PAR's
services include repossessions, remarketing, pre- and post-term lease-end
management, United States and Canadian registration title service, and Canadian
registered importation. PAR offers its telemarketing service through its
affiliate company, EndTrust and its Canadian import service through ADESA
Importation. Together PAR and ADESA Importation offer a complete and full range
of import servicing, including marshalling, point-to-point transportation,
Department of Transportation compliance registration, odometer replacement,
auction representation and sales tax processing.
AUTOVIN is a 90% owned subsidiary that provides professional field information
services to the automotive industry and the industry's secured lenders. Its
services include vehicle condition reporting, inventory verification auditing,
program compliance auditing and facility inspection. AutoVIN works closely with
AFC to offer auto dealers one-stop shopping for financial and information
services. AutoVIN expanded its inspection services in 2000 to include dealers
selling other products, such as motorcycles and lawn equipment. While inventory
verification is still the core of AutoVIN's business, its growth potential is
increased by providing inspection services for other products.
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FORM 10-K
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Year Number of
State/ Operations Auction
ADESA Auctions City Province Commenced Lanes
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United States
ADESA Birmingham Moody Alabama 1987 10
ADESA Phoenix Phoenix Arizona 1988 12
ADESA Central Arkansas <F1> Beebe Arkansas 1987 6
ADESA Little Rock <F1> Little Rock Arkansas 1984 10
ADESA Los Angeles Mira Loma California 2000 6
ADESA Sacramento Sacramento California 1997 5
ADESA San Diego San Diego California 1982 6
ADESA Golden Gate San Francisco California 1985 6
ADESA Colorado Springs <F1> Colorado Springs Colorado 1982 3
ADESA Clearwater <F1> Clearwater Florida 1972 4
ADESA Jacksonville Jacksonville Florida 1996 6
ADESA Ocala <F2> Ocala Florida 1996 5
ADESA Orlando-Sanford Orlando Florida 1987 6
ADESA Tampa Tampa Florida 1989 8
ADESA Atlanta Atlanta Georgia 1986 6
ADESA Southern Indiana <F3> Columbus Indiana 1997 3
ADESA Indianapolis Plainfield Indiana 1983 10
ADESA Des Moines <F1> Des Moines Iowa 1967 3
ADESA Lexington Lexington Kentucky 1982 6
ADESA Ark-La-Tex Shreveport Louisiana 1979 5
ADESA Concord Concord Massachusetts 1947 5
ADESA Boston <F1> Framingham Massachusetts 1995 11
ADESA Lansing Dimondale Michigan 1976 5
ADESA St. Louis Barnhart Missouri 1987 3
ADESA Kansas City Kansas City Missouri 1963 7
ADESA New Jersey Manville New Jersey 1996 8
ADESA Buffalo Akron New York 1992 10
ADESA Charlotte <F1> Charlotte North Carolina 1994 10
ADESA Cincinnati/Dayton Franklin Ohio 1986 8
ADESA Cleveland <F1> Northfield Ohio 1994 8
ADESA Pittsburgh Mercer Pennsylvania 1971 7
ADESA Knoxville <F1> Lenoir City Tennessee 1984 6
ADESA Memphis Memphis Tennessee 1990 6
ADESA Austin <F1> Austin Texas 1990 6
ADESA Houston Houston Texas 1995 8
ADESA Dallas Mesquite Texas 1990 8
ADESA San Antonio San Antonio Texas 1989 8
ADESA Seattle Seattle Washington 1984 4
ADESA Wisconsin Portage Wisconsin 1984 5
Canada
ADESA Calgary Airdrie Alberta 2000 4
ADESA Edmonton <F1> Edmonton Alberta 1988 3
ADESA Vancouver New Westminster British Columbia 1972 7
CAG Vancouver <F1> Surrey British Columbia 1986 2
ADESA Winnipeg Winnipeg Manitoba 1987 4
ADESA Moncton Moncton New Brunswick 1987 2
ADESA St. John's <F1> St. John's Newfoundland 1994 1
ADESA Dartmouth Dartmouth Nova Scotia 1985 3
ADESA Halifax Enfield Nova Scotia 1993 3
ADESA Kitchener Ayr Ontario 1988 4
ADESA Toronto Brampton Ontario 1987 6
CAG Hamilton Hamilton Ontario 1978 2
ADESA Ottawa Vars Ontario 1990 5
ADESA Montreal St. Eustache Quebec 1974 12
ADESA Saskatoon <F1> Saskatoon Saskatchewan 1980 2
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<FN>
<F1> Leased auction facilities. (See Note 7.)
<F2> ADESA owns 51% of this auction business.
<F3> ADESA owns 80% of this auction business.
</FN>
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COMPETITION
Within the automobile auction industry, ADESA's competition includes
independently owned auctions as well as a major chain and associations with
auctions in geographic proximity. ADESA competes with these other auctions for a
supply of vehicles to be sold on consignment for automobile dealers, financial
institutions and other sellers. ADESA also competes for a supply of rental
repurchase vehicles from automobile manufacturers for auction at factory sales.
Automobile manufacturers often choose between auctions across multi-state areas
in distributing rental repurchase vehicles. ADESA competes for these customers
by attempting to attract a large number of dealers to purchase vehicles, which
ensures competitive prices and supports the volume of vehicles auctioned. ADESA
also competes by providing a full range of automotive services, including dealer
inventory financing, reconditioning services that prepare vehicles for auction,
transportation of vehicles and processing of sales transactions.
ADESA utilizes e-commerce as another component in its array of services. Dealers
are provided training on how to use on-line products, including the purchase of
vehicles on-line. The dealers can also access auction runlists and other market
report information offered on ADESA's website, www.ADESA.com. ADESA believes it
has a competitive advantage in a small but growing segment of the used vehicle
market combining on-line services with auction facilities and knowledgeable
auction personnel located across North America.
AFC is the largest provider of dealer floorplan financing to independent
automobile dealers in North America. AFC's competition includes other specialty
lenders, banks and other financial institutions. AFC has distinguished itself
from its competitors by convenience of payment, quality of service and scope of
services offered. In addition to its floorplan services, AFC, through alliances
with other experienced vendors, has expanded its service array to include
sub-prime financing, physical damage insurance and warranty products to its
dealer base. These alliances make AFC a one-stop shopping provider.
PAR provides customized remarketing services throughout North America. Although
other providers are larger in size and volume, PAR's competition comes from a
handful of similar service providers, none of which offer as many diverse
services as it does. In June 2000 PAR introduced its interactive website,
electronically connecting customers with its services. Further enhancements
scheduled for availability in the first quarter of 2001 include interactive
connection with repossession agents and auction vendor networks. PAR's
affiliation with EndTrust gives it a competitive edge in gaining market share in
the lease-end management services arena. Another area that distinguishes PAR
from its competition is ADESA Importation.
ENVIRONMENTAL MATTERS
Certain businesses in our Automotive Services segment are subject to regulation
by various federal, state and local authorities concerning air quality, water
quality, solid wastes and other environmental matters. We consider these
businesses to be in substantial compliance with those environmental regulations
currently applicable to their operations and believe all necessary permits to
conduct such operations have been obtained. We do not currently anticipate that
potential capital expenditures for environmental matters will be material.
However, because environmental laws and regulations are constantly evolving, the
character, scope and ultimate costs of environmental compliance cannot be
estimated. [GRAPHIC OMITTED - SQUARE]
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WATER SERVICES
Our Water Services segment consists of regulated and non-regulated wholly owned
subsidiaries. Non-regulated subsidiaries market our water expertise outside
traditional utility boundaries. The discussion below summarizes the major
businesses we include in Water Services. Statistical information is presented as
of December 31, 2000.
REGULATED SUBSIDIARIES. FLORIDA WATER, the largest investor owned water supplier
in Florida, owns and operates water and wastewater treatment facilities within
that state. Florida Water serves 152,000 water customers and 73,000 wastewater
customers, and maintains 157 water and wastewater facilities with plants ranging
in size from 6 connections to greater than 25,000 connections. Florida Water
provides customers with over 19 billion gallons of water per year, primarily
from Florida's underground aquifer. Substantially all of Florida Water's
properties used in water and wastewater operations are encumbered by a mortgage.
During 2000 Florida Water purchased the assets of Spruce Creek which serves
5,600 water and wastewater customers in three communities in Marion County,
Florida. The systems acquired are designed to accommodate a total of 10,000
water and wastewater customers. In December 2000 Florida Water also purchased
the assets of Steeplechase Utility Company, Inc. which serves 1,200 water and
wastewater customers in Marion County, Florida. The system is designed to
accommodate a total of 3,200 water and wastewater customers.
HEATER provides water and wastewater treatment services in North Carolina.
Heater serves 44,000 water customers and 5,000 wastewater customers. Heater has
water and wastewater systems located in subdivisions surrounding Raleigh and
Fayetteville, North Carolina, and the Piedmont and Mountain regions of North
Carolina. Water supply is primarily from ground water deep wells. Community
ground water systems vary in size from 25 connections to 6,000 connections. Some
systems are supplied by purchased water. Heater has approximately 415
interconnected and stand-alone systems and 972 wells. Heater also has 33
wastewater treatment plants, ranging in size from 10,000 gallons per day to
670,000 gallons per day, and 79 lift stations located in its wastewater
collection systems. Substantially all of Heater's properties used in its water
and wastewater operations are encumbered by a mortgage. During 2000 Heater
acquired the assets of several small water and wastewater systems which added
approximately 1,100 customers.
NON-REGULATED SUBSIDIARIES. AMERICAS' WATER was incorporated in 1997 and has
offices in Grand Rapids, Michigan, Plymouth, Wisconsin and Orlando, Florida.
Americas' Water offers contract management, operations and maintenance services
for water and wastewater treatment facilities to governments and industries.
Americas' Water provides services in Minnesota, Michigan, Wisconsin, Ohio and
Florida.
INSTRUMENTATION SERVICES, INC. provides predictive maintenance and
instrumentation consulting services to water and wastewater utilities and other
industrial operations throughout the southeastern part of the United States as
well as Texas and Minnesota.
GEORGIA WATER SERVICES CORPORATION was established in 2000. In December 2000
ALLETE Water Services, Inc. purchased, subject to certain conditions, the assets
of Dicks Creek Wastewater Utility for $6.6 million plus a commitment to pay a
fee for residential connections. Beginning in 2001, the commitment fee will be a
minimum of $400,000 annually for four years or until the cumulative fees paid
reach $2 million. Dicks Creek, which is located near Atlanta in Forsyth County,
Georgia, will be operated by Georgia Water. The transaction is expected to be
completed in early 2001.
REGULATORY ISSUES
FLORIDA PUBLIC SERVICE COMMISSION. In 1995 the Florida First District Court of
Appeals (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 in January 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 1998 order, the FPSC required Florida Water to refund, with
interest, $2.5 million, the amount paid by customers in the Spring Hill service
area from January 1996 through June 1997 under uniform rates that 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. 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 that paid more under uniform rates appealed the FPSC's January
1998 order, arguing that they are entitled to a refund because the FPSC had no
authority to order uniform rates. Florida Water also appealed the $2.5 million
refund order. Initial briefs were filed by all parties in May 1998. In June 1998
the Court of Appeals reversed its previous ruling that the FPSC was without
authority to order uniform rates at which time customer groups supporting the
FPSC's January 1998 order filed a motion with the Court of Appeals seeking
dismissal of the appeal by customer groups seeking refunds. Customers seeking
refunds filed amended briefs in September 1998. A provision for refund related
to the $2.5 million refund order was recorded in 1999.
- --------------------------------------------------------------------------------
34 ALLETE 2000 ANNUAL REPORT
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
In December 2000 Hernando County approved a settlement agreement relating to the
Spring Hill refund issue that was before the Court of Appeals. Under the
settlement agreement, Spring Hill customers would receive a prospective rate
reduction over three years totaling $1.8 million with no refunds. Florida Water
also agreed it would not file a rate case to increase rates to Spring Hill
customers for a period of three years. In December 2000 the Court of Appeals
remanded the issue back to the FPSC for settlement consideration. We are unable
to predict the timing or outcome of the appeal and settlement process.
NORTH CAROLINA UTILITIES COMMISSION. In October 2000 the NCUC issued a final
order approving a $2.2 million, or 18%, annual rate increase for water and
wastewater customers of Heater. Heater had requested an annual rate increase of
$3.3 million, or 26%, for its water and waste water customers.
COMPETITION
Water Services provides water and wastewater services at regulated rates within
exclusive service territories granted by regulators. Significant competition
exists for the provision of the types of services provided by Americas' Water.
Although a few private contractors control a large percentage of the market for
contract management, operations and maintenance services, we believe that
continued growth in these markets will enable emerging companies like Americas'
Water to succeed.
FRANCHISES
Florida Water provides water and wastewater treatment services in 21 counties
regulated by the FPSC and holds franchises in 5 counties which have retained
authority to regulate such operations. (See Regulatory Issues - Florida Public
Service Commission.) Water and wastewater services provided by Heater are under
the jurisdiction of the NCUC. The NCUC grants franchises for Heater's service
territory when the rates are authorized.
ENVIRONMENTAL MATTERS
Our Water Services are subject to regulation by various federal, state and local
authorities concerning water quality, solid wastes and other environmental
matters. We consider these businesses to generally be in compliance with those
environmental regulations currently applicable to their operations and have the
permits necessary to conduct such operations. We do not currently anticipate
that potential capital expenditures for environmental matters will be material.
However, because environmental laws and regulations are constantly evolving, the
character, scope and ultimate costs of environmental compliance cannot be
estimated. [GRAPHIC OMITTED - SQUARE]
INVESTMENTS
Our Investments segment consists of real estate operations, investments in
emerging technologies related to the electric utility industry and an actively
traded securities portfolio. The discussion below summarizes the major
components of Investments. Statistical information is presented as of December
31, 2000. All subsidiaries are wholly owned unless otherwise specifically
indicated.
REAL ESTATE OPERATIONS. Our real estate operations include CAPE CORAL HOLDINGS
and an 80% ownership in LEHIGH. Through subsidiaries, we own Florida real estate
operations in four different locations:
- Lehigh Acres with 1,000 acres of land and approximately 700 home sites
adjacent to Fort Myers, Florida;
- Sugarmill Woods with 530 home sites in Citrus County, Florida;
- Palm Coast with 1,950 home sites and 9,300 acres of residential,
commercial and industrial land at Palm Coast, Florida. Palm Coast is a
planned community between St. Augustine and Daytona Beach; and
- Cape Coral, also located adjacent to Fort Myers, Florida, with
approximately 1,000 acres of commercial and residential zoned land,
including home sites, marina and commercial buildings.
The real estate strategy is to continue to acquire large properties at low cost,
add value and sell them at going market prices.
EMERGING TECHNOLOGY INVESTMENTS. Since 1985 we have invested $38.6 million in
start-up companies that are developing technologies that may be utilized by the
electric utility industry. We are comitted to invest an additional $13.3
million through 2008. The investments were first made through emerging
technology funds initiated by us and other electric utilities. More recently, we
have made investments directly in privately held companies. The majority of our
direct investments relate to distributed generation technology, such as micro
generation and fuel cell technology.
Emerging Technology Investments Future
As of December 31, 2000 Investment Commitment
- -----------------------------------------------------------
Millions
Emerging Technology Funds $27.2 $12.8
Proton Energy Systems, Inc. 3.1 -
Metallic Power, Inc. 3.7 -
Enporion, Inc. 3.0 -
Other 1.6 0.5
- -----------------------------------------------------------
Total $38.6 $13.3
- -----------------------------------------------------------
- --------------------------------------------------------------------------------
ALLETE 2000 ANNUAL REPORT 35
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
The emerging technology funds (Funds) have made investments in companies that
develop advanced technologies to be used by the utility industry, including
electrotechnologies and renewable energy technologies and software and
communications technologies related to utility customer support systems.
Customer support systems include customer information systems, energy management
systems, Internet marketing, broadband communications and power quality.
PROTON ENERGY SYSTEMS, INC. develops and manufactures proton exchange membrane
products for use in hydrogen generating devices and regenerative fuel cell
systems that function as power generating and energy storage devices. In
addition to our direct investment, the Funds are also invested in Proton.
METALLIC POWER, INC. is engaged in the development and commercialization of
zinc/air fuel cells to be used in place of battery operated and small combustion
engines (i.e., forklifts, golf carts, lawn mowers and portable generation for
mobile applications). Metallic is privately held and located in California. In
addition to our direct investment, the Funds are also invested in Metallic.
ENPORION, INC. is a start-up business-to-business electronic marketplace
focusing on the supply chain of energy utilities. Enporion was founded in 2000
by seven electric and gas utilities, including us. The electronic marketplace
began transacting business in the fourth quarter of 2000. Our $3 million
investment represents a 12.5% ownership interest.
As companies included in our emerging technology investments are sold, we may
recognize a gain or loss. In the second half of 2000, several of the companies
included in the Funds completed an initial public offering. Typically, investors
are not permitted to sell stock of the companies for a period of 180 days
following an initial public offering. Other restrictions on sale may also apply.
Since going public, the market value of these companies has experienced
significant volatility. Our investment in the companies that have gone public
has a cost basis of approximately $13 million. The aggregate market value of
these companies at December 31, 2000 was $52 million.
Our emerging technology investments provide us with access to developing
technologies before their commercial debut, as well as financial returns and
diversification opportunities. We view these investments as a source of capital
for redeployment in existing businesses and a potential entree into additional
business opportunities. Portions of any proceeds received on these investments
may be reinvested back into companies to encourage development of future
technology.
SECURITIES PORTFOLIO. Our securities portfolio is managed by selected outside
managers as well as internal managers. It is intended to provide stable earnings
and liquidity. Proceeds from the securities portfolio are available for
investment in existing businesses, to fund strategic initiatives and for other
corporate purposes. Our investment in the securities portfolio at December 31,
2000 was $91 million ($257 million at December 31, 1999).
In May 2000 we sold 4.7 million shares of ACE common stock that we received in
exchange for 7.3 million shares of Capital Re common stock in December 1999. The
exchange of stock was the result of a merger in which each Capital Re share was
exchanged for 0.65 ordinary shares of ACE plus $3.4456 in cash. At the time of
the merger we owned 20% of Capital Re which converted to 2% of ACE. The ACE
shares were included in our securities portfolio at December 31, 1999.
ENVIRONMENTAL MATTERS
Certain businesses included in our Investments segment are subject to regulation
by various federal, state and local authorities concerning air quality, water
quality, solid wastes and other environmental matters. We consider these
businesses to be in substantial compliance with those environmental regulations
currently applicable to their operations and believe all necessary permits to
conduct such operations have been obtained. We do not currently anticipate that
potential capital expenditures for environmental matters will be material.
However, because environmental laws and regulations are constantly evolving, the
character, scope and ultimate costs of environmental compliance cannot be
estimated. [GRAPHIC OMITTED - SQUARE]
- --------------------------------------------------------------------------------
36 ALLETE 2000 ANNUAL REPORT
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS OF THE REGISTRANT
Initial
Executive Officers Effective Date
- -------------------------------------------------------------------------------------------------------------
John Cirello, Age 57
Executive Vice President ALLETE and President and
Chief Executive Officer - ALLETE Water Services, Inc. July 24, 1995
Donnie R. Crandell, Age 56
Executive Vice President ALLETE and President - ALLETE Properties, Inc. January 15, 1999
Senior Vice President and President - ALLETE Properties, Inc. January 1, 1996
Robert D. Edwards, Age 56
Executive Vice President ALLETE and President - Minnesota Power July 26, 1995
Brenda J. Flayton, Age 45
Vice President - Human Resources July 22, 1998
John E. Fuller, Age 57
Executive Vice President ALLETE and President and Chief Executive Officer - AFC January 15, 1999
Senior Vice President and President and Chief Executive Officer - AFC April 23, 1997
President and Chief Executive Officer - AFC January 1, 1994
Laurence H. Fuller, Age 52
Vice President - Corporate Development February 10, 1997
David G. Gartzke, Age 57
Senior Vice President - Finance and Chief Financial Officer December 1, 1994
James P. Hallett, Age 47
Executive Vice President ALLETE and President and Chief Executive Officer - ADESA April 23, 1997
President and Chief Executive Officer - ADESA August 21, 1996
President - ADESA Canada Inc. May 26, 1994
Philip R. Halverson, Age 52
Vice President, General Counsel and Secretary January 1, 1996
David P. Jeronimus, Age 58
Vice President - Environmental Services February 1, 1999
James A. Roberts, Age 50
Vice President - Corporate Relations January 1, 1996
Edwin L. Russell, Age 55
Chairman, President and Chief Executive Officer May 14, 1996
President and Chief Executive Officer January 22, 1996
President May 9, 1995
Mark A. Schober, Age 45
Controller March 1, 1993
James K. Vizanko, Age 47
Treasurer March 1, 1993
Claudia Scott Welty, Age 48
Vice President - Information Technology February 1, 1999
Vice President - Support Services July 1, 1995
- --------------------------------------------------------------------------------
ALLETE 2000 ANNUAL REPORT 37
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
All of the executive officers except Mr. Laurence Fuller have been employed by
us for more than five years in executive or management positions.
MR. LAURENCE FULLER was previously senior vice president, new business
development and strategic planning, for Diners Club International, a
subsidiary of Citicorp, Inc.
In the five years prior to election to the positions shown above, Ms. Flayton
and Mr. Jeronimus held other positions with us.
MS. FLAYTON was director of human resources.
MR. JERONIMUS was director of environmental resources.
There are no family relationships between any of the executive officers. All
officers and directors are elected or appointed annually.
The present term of office of the above executive officers extends to the first
meeting of our Board of Directors after the next annual meeting of shareholders.
Both meetings are scheduled for May 8, 2001. [GRAPHIC OMITTED - SQUARE]
ITEM 2. PROPERTIES
Properties are included in the discussion of our business in Item 1. and are
incorporated by reference herein.
ITEM 3. LEGAL PROCEEDINGS
Material legal and regulatory proceedings are included in the discussion of our
business in Item 1. and are incorporated by reference herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
We have paid dividends without interruption on our common stock since 1948. A
quarterly dividend of $0.2675 per share on our common stock will be paid on
March 1, 2001 to the holders of record on February 15, 2001. Our common stock is
listed on the New York Stock Exchange under the symbol ALE. Dividends paid per
share, and the high and low prices for our common stock for the periods
indicated as reported by THE WALL STREET JOURNAL, Midwest Edition, are in the
accompanying chart.
On March 2, 1999 our 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.
The amount and timing of dividends payable on our common stock are within the
sole discretion of our Board of Directors. In 2000 we paid out 51% (64%
excluding the gain related to the ACE transaction) of our per share earnings in
dividends.
Our Articles of Incorporation, and Mortgage and Deed of Trust contain provisions
which under certain circumstances would restrict the payment of common stock
dividends. As of December 31, 2000 no retained earnings were restricted as a
result of these provisions. At January 29, 2001 there were approximately 38,000
common stock shareholders of record. [GRAPHIC OMITTED - SQUARE]
Price Range
------------------ Dividends
Quarter High Low Paid
- ------------------------------------------------------------------
2000 - First $18.06 $14.75 $0.2675
Second 20.75 16.00 0.2675
Third 24.25 17.31 0.2675
Fourth 25.50 20.13 0.2675
- ------------------------------------------------------------------
Annual Total $1.07
- ------------------------------------------------------------------
1999 - First $22.09 $19.53 $0.2675
Second 21.81 18.94 0.2675
Third 19.88 16.56 0.2675
Fourth 18.69 16.00 0.2675
- ------------------------------------------------------------------
Annual Total $1.07
- ------------------------------------------------------------------
- --------------------------------------------------------------------------------
38 ALLETE 2000 ANNUAL REPORT
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
All common share and per share amounts have been adjusted for all periods to
reflect our March 2, 1999 two-for-one common stock split. Financial information
presented in the table below may not be comparable between periods due to our
purchase of 80% of ADESA, including AFC and Great Rigs, in July 1995, another 3%
in January 1996 and the remaining 17% in August 1996.
BALANCE SHEET 2000 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Millions
Assets
Current Assets $ 731.0 $ 564.5 $ 487.5 $ 385.3 $ 334.4 $ 251.9
Property, Plant and Equipment 1,479.7 1,258.8 1,178.9 1,170.2 1,188.8 1,149.1
Investments 116.4 197.2 263.5 252.9 236.5 201.4
Goodwill 472.8 181.0 169.8 158.9 167.0 120.2
Other Assets 114.1 111.1 109.2 119.0 123.6 126.8
- ------------------------------------------------------------------------------------------------------------------------------------
$2,914.0 $2,312.6 $2,208.9 $2,086.3 $2,050.3 $1,849.4
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities $ 707.0 $ 398.3 $ 346.0 $ 342.6 $ 339.7 $ 256.8
Long-Term Debt 952.3 712.8 672.2 685.4 694.4 639.5
Other Liabilities 278.9 289.2 298.6 301.8 298.9 320.5
Mandatorily Redeemable Preferred
Securities of ALLETE Capital I 75.0 75.0 75.0 75.0 75.0 -
Redeemable Preferred Stock - 20.0 20.0 20.0 20.0 20.0
Stockholders' Equity 900.8 817.3 797.1 661.5 622.3 612.6
- ------------------------------------------------------------------------------------------------------------------------------------
$2,914.0 $2,312.6 $2,208.9 $2,086.3 $2,050.3 $1,849.4
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
- ------------------------------------------------------------------------------------------------------------------------------------
Millions
Operating Revenue
Energy Services $ 589.5 $ 554.5 $ 559.8 $ 541.9 $ 529.2 $ 503.5
Automotive Services 546.4 406.6 328.4 255.5 183.9 61.6
Water Services 118.6 112.9 95.6 95.5 85.2 66.1
Investments 77.4 57.8 55.5 60.7 48.6 36.1
- ------------------------------------------------------------------------------------------------------------------------------------
1,331.9 1,131.8 1,039.3 953.6 846.9 667.3
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses
Fuel and Purchased Power 229.0 200.2 205.7 194.1 190.9 177.0
Operations 842.6 705.9 635.4 579.9 512.2 389.1
Interest Expense 69.2 59.5 64.9 64.2 62.1 48.0
- ------------------------------------------------------------------------------------------------------------------------------------
1,140.8 965.6 906.0 838.2 765.2 614.1
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Income Before Capital Re and ACE 191.1 166.2 133.3 115.4 81.7 53.2
Income (Loss) from Investment in Capital Re
and Related Disposition of ACE 48.0 (34.5) 15.2 14.8 11.8 9.8
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Income 239.1 131.7 148.5 130.2 93.5 63.0
Distributions on Redeemable Preferred
Securities of ALLETE Capital I 6.0 6.0 6.0 6.0 4.7 -
Income Tax Expense 84.5 57.7 54.0 46.6 19.6 1.1
- ------------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 148.6 68.0 88.5 77.6 69.2 61.9
Income from Discontinued Operations - - - - - 2.8
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income 148.6 68.0 88.5 77.6 69.2 64.7
Preferred Dividends 0.9 2.0 2.0 2.0 2.4 3.2
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings Available for Common Stock 147.7 66.0 86.5 75.6 66.8 61.5
Common Stock Dividends 74.5 73.0 65.0 62.5 59.6 57.9
- ------------------------------------------------------------------------------------------------------------------------------------
Retained (Deficit) in the Business $ 73.2 $ (7.0) $ 21.5 $ 13.1 $ 7.2 $ 3.6
- ------------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALLETE 2000 ANNUAL REPORT 39
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding - Millions
Year-End 74.7 73.5 72.3 67.1 65.5 62.9
Average<F1> 69.8 68.4 64.0 61.2 58.6 57.0
Diluted Earnings Per Share
Continuing Operations $2.11<F2> $0.97<F2> $1.35 $1.24 $1.14 $1.03
Discontinued Operations - - - - - 0.05
- --------------------------------------------------------------------------------------------------------------------------------
$2.11<F2> $0.97<F2> $1.35 $1.24 $1.14 $1.08
- --------------------------------------------------------------------------------------------------------------------------------
Return on Common Equity 17.1%<F2> 8.3%<F2> 12.4% 12.1% 11.3% 10.7%
Common Equity Ratio 46.3% 49.3% 49.9% 44.9% 43.1% 45.6%
Dividends Paid Per Share $1.07 $1.07 $1.02 $1.02 $1.02 $1.02
Dividend Payout 50.7%<F2> 110%<F2> 76% 83% 89% 94%
Book Value Per Share at Year-End $12.06 $10.97 $10.86 $9.69 $9.32 $9.28
Market Price Per Share
High $25.50 $22.09 $23.13 $22.00 $14.88 $14.63
Low $14.75 $16.00 $19.03 $13.50 $13.00 $12.13
Close $24.81 $16.94 $22.00 $21.78 $13.75 $14.19
Market/Book at Year-End 2.06 1.54 2.03 2.25 1.48 1.53
Price Earnings Ratio at Year-End 11.8<F2> 17.5<F2> 16.3 17.6 12.1 13.1
Dividend Yield at Year-End 4.3% 6.3% 4.6% 4.7% 7.4% 7.2%
Employees 12,633 8,246 7,003 6,817 6,537 5,649
Net Income
Energy Services $43.1 $45.0 $47.4 $43.1 $39.4 $41.0
Automotive Services 48.5 39.9 25.5 14.0 3.7 -
Water Services 13.1 12.2 7.5 8.2 5.4 (1.0)
Investments 59.7<F2> (9.4)<F2> 29.6 32.1 38.1 41.3
Corporate Charges (15.8) (19.7) (21.5) (19.8) (17.4) (19.4)
- --------------------------------------------------------------------------------------------------------------------------------
148.6 68.0 88.5 77.6 69.2 61.9
Discontinued Operations - - - - - 2.8
- --------------------------------------------------------------------------------------------------------------------------------
$148.6 $68.0 $88.5 $77.6 $69.2 $64.7
- --------------------------------------------------------------------------------------------------------------------------------
Customers - Thousands
Electric 141.0 139.7 138.1 135.8 135.1 135.8
Water 273.8 255.3 205.1 201.0 197.2 198.4
Electric Sales - Millions of MWh 11.7 11.3 12.0 12.4 13.2 11.5
Power Supply - Millions of MWh
Steam Generation 6.4 6.2 6.3 6.1 6.4 6.0
Hydro Generation 0.5 0.7 0.6 0.6 0.7 0.7
Long-Term Purchase - Square Butte 2.4 2.3 2.1 2.3 2.4 1.9
Purchased Power 3.1 2.6 3.2 3.8 4.4 3.6
- --------------------------------------------------------------------------------------------------------------------------------
12.4 11.8 12.2 12.8 13.9 12.2
- --------------------------------------------------------------------------------------------------------------------------------
Water Sold - Billions of Gallons 22.7 20.3 18.1 16.5 16.0 14.7
Coal Sold - Millions of Tons 4.4 4.5 4.2 4.2 4.5 4.0
Vehicles Sold - Thousands 1,319 1,037 897 769 637 230
Vehicles Financed - Thousands 795 695 531 323 140 70
Capital Expenditures - Millions
Energy Services $ 64.7 $47.7 $36.1 $34.6 $ 37.5 $ 39.4
Automotive Services 74.2 23.8 22.0 11.2 41.7 42.7
Water Services 29.6 26.9 21.8 22.2 22.2 32.7
Investments 0.2 0.9 0.1 0.2 0.1 -
Corporate - 0.4 0.8 4.0 - -
Discontinued Operations - - - - - 0.7
- --------------------------------------------------------------------------------------------------------------------------------
$168.7 $99.7 $80.8 $72.2 $101.5 $115.5
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Excludes unallocated ESOP Shares.
<F2> In May 2000 we recorded a $30.4 million, or $0.44 per share, after-tax gain on the sale of 4.7 million shares of ACE that
we received in December 1999 when Capital Re merged with ACE. As a result of the merger, in 1999 we recorded a $36.2
million, or $0.52 per share, after-tax non-cash charge. Excluding the Capital Re and ACE transactions, diluted earnings
per share were $1.67 in 2000 ($1.49 in 1999), the return on common equity was 13.6% in 2000 (12.9% in 1999), the dividend
payout was 64.1% in 2000 (72% in 1999), the price earnings ratio was 14.9 in 2000 (11.4 in 1999) and net income from
Investments was $29.3 million in 2000 ($26.8 million in 1999).
</FN>
- --------------------------------------------------------------------------------
40 ALLETE 2000 ANNUAL REPORT
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CONSOLIDATED OVERVIEW
2000 1999 1998
- ------------------------------------------------------------------------------
Millions
Operating Revenue
Energy Services $ 589.5 $ 554.5 $ 559.8
Automotive Services 546.4 406.6 328.4
Water Services 118.6 112.9 95.6
Investments 77.4 57.8 55.5
- ------------------------------------------------------------------------------
$1,331.9 $1,131.8 $1,039.3
- ------------------------------------------------------------------------------
Operating Expenses
Energy Services $ 516.0 $479.0 $480.5
Automotive Services 464.3 337.3 281.5
Water Services 96.7 93.3 83.1
Investments 32.7 23.9 22.3
Corporate Charges 31.1 32.1 38.6
- ------------------------------------------------------------------------------
$1,140.8 $965.6 $906.0
- ------------------------------------------------------------------------------
Net Income
Energy Services $ 43.1 $ 45.0 $ 47.4
Automotive Services 48.5 39.9 25.5
Water Services 13.1 12.2 7.5
Investments 29.3<F1> 26.8<F2> 29.6
Corporate Charges (15.8) (19.7) (21.5)
- ------------------------------------------------------------------------------
118.2 104.2 88.5
Capital Re and ACE Transactions 30.4 (36.2) -
- ------------------------------------------------------------------------------
$ 148.6 $ 68.0 $ 88.5
- ------------------------------------------------------------------------------
Diluted Average Shares
of Common Stock - Millions 70.1 68.7 64.2
- ------------------------------------------------------------------------------
Diluted Earnings Per Share
of Common Stock
Before Capital Re and
ACE Transactions $1.67 $1.49 $1.35
Capital Re and ACE Transactions 0.44 (0.52) -
- ------------------------------------------------------------------------------
$2.11 $0.97 $1.35
- ------------------------------------------------------------------------------
Return on Common Equity 13.6%<F1> 12.9%<F2> 12.4%
- ------------------------------------------------------------------------------
<FN>
<F1> Including the $30.4 million gain associated with the ACE transaction, 2000
net income from Investments was $59.7 million and the return on equity was
17.1%. (See Note 6.)
<F2> Including the $36.2 million non-cash charge associated with the Capital Re
transaction, 1999 net income from Investments was a $9.4 million loss and
the return on equity was 8.3%. (See Note 6.)
</FN>
We achieved strong earnings growth as 2000 net income, exclusive of the Capital
Re and ACE transactions (see net income discussion for Capital Re and ACE
transactions on the next page), increased $14.0 million, or 13%, and earnings
per share increased $0.18, or 12%, over 1999. Much of the growth came from
Automotive Services, as net income from that segment in 2000 was up $8.6
million, or 22%, over 1999. Although a cooler summer in 2000 resulted in lower
net income from Energy Services, financial results for all business segments
reflected ongoing operational improvements and the successful strategies
initiated to grow and diversify each business.
We measure performance of our operations through careful budgeting and
monitoring of contributions by each business segment to consolidated net income.
Corporate Charges represent general corporate expenses, including interest, not
specifically related to any one business segment.
The following summarizes significant events which impacted net income for each
of our business segments for the past three years.
ENERGY SERVICES' net income in 2000 declined $1.9 million, or 4%, from 1999 as
strong megawatthour sales were more than offset by lower margins on wholesale
power marketing activities. Megawatthour sales increased 4% to 11.7 million in
2000 (11.3 million in 1999; 12 million in 1998) primarily due to more sales to
large industrial customers. Lower demand in the region's wholesale power market
as a result of more moderate summer weather led to the decrease in wholesale
margins in 2000. In 1999 Energy Services reflected lower megawatthour sales to
industrial customers and higher margins from wholesale power marketing
activities, a denial of lost margin recovery for conservation improvement
programs and a one-time property tax levy associated with an industrial
development project. The 1999 decline in sales was primarily attributable to
fewer sales to taconite, paper and pipeline customers because of lower demand
for domestic steel, stronger competition in the paper markets and lower pipeline
pumping levels. In 1998 net income reflected higher margins from wholesale power
marketing activities. An unusually mild winter in 1998 negatively impacted both
net income and megawatthour sales to retail customers.
AUTOMOTIVE SERVICES continued its strong growth, as 2000 net income increased
$8.6 million, or 22%, over 1999. The growth was due to increased sales activity
at ADESA auction facilities and increased financing activity at AFC's loan
production offices. ADESA added 28 new auction facilities in 2000 (two in 1999;
three in 1998) and completed the acquisition of 11 auction facilities that
provide "total loss" vehicle recovery services to insurance companies. At ADESA
auction facilities 1.3 million vehicles were sold in 2000 (1.0 million in 1999;
0.9 million in 1998). Same store growth at ADESA auction facilities increased
12% as measured by earnings before interest, taxes, depreciation, amortization
and lease expense. AFC contributed 48% of the net income from Automotive
Services in 2000. AFC had 86 loan production offices in 2000 (84 in 1999; 84 in
1998). The growth of AFC's dealer/customer base from 11,500 in 1998 to 15,000 in
2000 has enabled AFC to finance more vehicles, 795,000 vehicles in 2000 (695,000
in 1999; 531,000 in 1998). In 1999 Automotive Services showed significant growth
reflecting a profitable mix of same-store growth and selective acquisitions at
ADESA as well as increased financing activity and the maturing of loan
production offices that were opened in 1998 by AFC. In 1998 AFC added 30 loan
production offices.
WATER SERVICES' net income in 2000 was up $0.9 million, or 7%, compared to 1999
due to increased water consumption as a result of drier weather conditions and
customer growth, regulatory relief granted by Florida's Hillsborough Board of
County Commissioners
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in 2000 and higher rates approved by the FPSC in 1999. In 1999 Water Services
generated higher net income due to strategic acquisitions and customer growth
that increased the customer base by 24%, regulatory relief granted by the FPSC
in the settlement of Florida Water's 1995 rate case and increased average
consumption. In 1998 Water Services results reflected regulatory relief,
customer growth, increased consumption and operating efficiencies.
INVESTMENTS' net income in 2000 was $2.5 million, or 9%, more than 1999 due to
record sales by our real estate operations. While the balance of our securities
portfolio was reduced to fund significant acquisitions by Automotive Services,
improved returns on our investments contributed to higher net income. Our
securities portfolio earned an annualized after-tax return of 7.0% in 2000 (3.3%
in 1999; 5.5% in 1998). In 1999 Investments reported gains from an emerging
technology investment and lower returns on our securities portfolio due to stock
market volatility. In 1998 Investments reported a lower after-tax return from
our securities portfolio due to the under performance of certain investments,
which was offset by dividend income received from an emerging technology
investment and strong sales by our real estate operations.
CORPORATE CHARGES in 2000 were $3.9 million, or 20%, less than 1999 due to the
resolution of various federal and state tax issues and less preferred dividends
because of redemption. Corporate Charges in 1999 reflected reduced interest
expense as a result of a lower average commercial paper balance. Corporate
Charges in 1998 included reduced interest expense due to the availability of
cash from the sale of common stock offset by higher expenses associated with
benefit incentives, a change in accounting for start-up costs, and technological
and communication improvements made to corporate-wide systems.
CAPITAL RE AND ACE TRANSACTIONS. In May 2000 we recorded a $30.4 million, or
$0.44 per share, after-tax gain on the sale of 4.7 million shares of ACE that we
received in December 1999 when Capital Re merged with ACE. As a result of the
merger, in 1999 we recorded a $36.2 million, or $0.52 per share, after-tax
non-cash charge as follows: a $24.1 million, or $0.35 per share, charge in the
second quarter following the merger agreement and discontinuance of our equity
accounting for Capital Re; and a $12.1 million, or $0.17 per share, charge in
the fourth quarter upon completion of the merger.
2000 COMPARED TO 1999
OPERATING REVENUE
ENERGY SERVICES' operating revenue was up $35.0 million, or 6%, in 2000 due to a
6% increase in retail megawatthour sales because of higher demand from large
industrial customers. This increase was partially offset by fewer sales from
wholesale power marketing activities. Wholesale prices and volumes were down
from 1999 because of lower demand for electricity in the region's wholesale
power market as a result of more moderate summer weather and transmission
constraints.
AUTOMOTIVE SERVICES' operating revenue was up $139.8 million, or 34%, in 2000
primarily due to a 27% increase in vehicles sold through ADESA auction
facilities and a 14% increase in the number of vehicles financed by AFC. The
increase in vehicles sold was primarily attributable to new auctions acquired or
opened in 1999 and 2000. Financial results for 2000 included a full year of
operations for auction facilities acquired in 1999 and a partial year of
operations for auction facilities acquired or opened in 2000.
WATER SERVICES' operating revenue was up $5.7 million, or 5%, in 2000 because of
a 12% increase in water consumption. Drier weather conditions, customer growth
and the inclusion of water systems acquired during 1999 and early 2000 all
influenced the increase in water consumption. In addition, revenue in 2000 was
$1.0 million higher due to regulatory relief granted by Florida's Hillsborough
Board of County Commissioners in 2000 and $0.8 million higher due to higher
rates approved by the FPSC in 1999. Revenue in 1999 reflected the recognition of
$2.7 million of regulatory relief granted by the FPSC.
INVESTMENTS' operating revenue was up $19.6 million, or 34%, in 2000.
Significant sales by our real estate operations were the primary reason for the
increase. In 2000 seven large sales contributed $31.9 million to revenue while
in 1999 five large sales contributed $17.1 million to revenue. Despite a lower
average balance in 2000, income from our securities portfolio was higher due to
improved returns. Income from our emerging technology investments was $4.6
million lower in 2000 because in 1999 we reported gains received from one of our
emerging technology investments.
OPERATING EXPENSES
ENERGY SERVICES' operating expenses were up $37.0 million, or 8%, in 2000
primarily due to increased fuel and purchased power expenses. Fuel expense was
$5.7 million higher in 2000 because we paid higher prices for coal and generated
247,000, or 4%, more megawatthours to meet the higher requirements of our
industrial customers. In 2000 purchased power expense was up $23.1 million
because of higher prices.
AUTOMOTIVE SERVICES' operating expenses were up $127.0 million, or 38%, in 2000
primarily due to the inclusion of new vehicle auction facilities acquired or
opened in 1999 and 2000. Increased sales activity at the auction facilities and
increased financing activity at AFC also increased operating expenses in 2000.
WATER SERVICES' operating expenses were up $3.4 million, or 4%, in 2000 due to
the inclusion of water systems acquired in 1999 and 2000.
INVESTMENTS' operating expenses were up $8.8 million, or 37%, in 2000 due to the
cost of property sold by our real estate operations.
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42 ALLETE 2000 ANNUAL REPORT
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1999 COMPARED TO 1998
OPERATING REVENUE
ENERGY SERVICES' operating revenue was down $5.3 million, less than 1%, in 1999.
Revenue in 1999 reflected a $23.0 million increase from wholesale power
marketing activities because of extreme weather conditions affecting power
market prices during the third quarter of 1999. Temperatures, which were at
record highs during the last week of July 1999, created a high demand for power
from other power suppliers. Revenue from industrial customers was down
approximately $19 million in 1999 due to decreased taconite production, paper
manufacturing and pipeline usage. Revenue from residential and commercial
customers was $3.8 million higher in 1999 because the winter weather in northern
Minnesota and Wisconsin was colder than 1998 and July 1999 was unusually hot.
Revenue in 1998 included $3.8 million of CIP lost margin recovery. Minnesota
Power was denied CIP lost margin recovery in 1999. (See Item 1. - Energy
Services - Minnesota Public Utilities Commission.)
AUTOMOTIVE SERVICES' operating revenue was up $78.2 million, or 24%, in 1999 due
to stronger sales at ADESA auction facilities, and increased financing activity
and 12 months of operations at loan production offices opened in 1998 by AFC. At
ADESA auction facilities 16% more vehicles were sold in 1999 compared to 1998.
In 1999 ADESA auction financial results included 12 months of operations from
three vehicle auctions acquired in 1998 and partial year results for two vehicle
auction facilities acquired in 1999. AFC financed 31% more vehicles in 1999
compared to 1998. AFC has had 84 loan production offices since August 1998, 30
of which were opened during 1998.
WATER SERVICES' operating revenue was up $17.3 million, or 18%, in 1999, with
$12.3 million of the increase coming from PCUC, which was purchased in January
1999. The remainder of the increase was attributed to regulatory relief granted
by the FPSC in December 1998 and September 1999, the acquisition of Mid South
and more consumption due to customer growth. Overall consumption increased 12%
in 1999. In 1998 overall consumption was lower than normal due to some of our
water systems being adversely impacted by record rainfall during the first
quarter. Gains totaling $600,000 from the sale of a water system and the sale of
land were included in 1998 revenue.
INVESTMENTS' operating revenue was up $2.3 million, or 4%, in 1999 primarily due
to $10.7 million in gains from an investment in an emerging technology fund and
higher sales by our real estate operations. These increases were partially
offset by lower returns on the securities portfolio due to stock market
volatility. Also, revenue in 1998 included $4.3 million of dividend income
received from an emerging technology investment.
OPERATING EXPENSES
ENERGY SERVICES' operating expenses decreased $1.5 million, or 3%, in 1999
primarily due to a $5.5 million reduction in fuel and purchased power expenses
because of less steam generation and fewer purchases from other power suppliers,
and a $1.9 million decrease in depreciation expense primarily the result of an
updated production plant depreciation study. Operating expenses were also $2.7
million lower in 1999 because the amortization of an early retirement program
was completed in July 1998. These decreases were partially offset by a one-time
property tax levy and other expenses related to an industrial development
project totaling $3.6 million, and higher compensation and consulting service
expenses.
AUTOMOTIVE SERVICES' operating expenses were up $55.8 million, or 20%, 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.
WATER SERVICES' operating expenses were up $10.2 million, or 12%, in 1999
primarily due to inclusion of PCUC and Mid South operations.
INVESTMENTS' operating expenses were up $1.6 million, or 7%, in 1999 primarily
due to more sales by our real estate operations.
CORPORATE CHARGES decreased $6.5 million, or 17%, in 1999 because 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, a previous $4.7
million income tax expense accrual was reversed and recorded as interest expense
in the first quarter of 1998. There was no impact on consolidated net income
from this transaction. Also, interest expense was reduced in 1999 because the
average commercial paper balance was lower.
OUTLOOK
CORPORATE. Our businesses in 43 states and nine Canadian provinces employ 13,000
employees engaged in Energy Services, Automotive Services, Water Services and
Investments. We expect to continue to focus on attaining our strategic
objectives of substantially growing earnings, achieving market leadership in
each of our businesses, significantly enhancing total shareholder return with
the objective of increasing our market capitalization to over $4 billion by 2005
and achieving market recognition as a multi-services company. While maintaining
the quality of our credit and security ratings, we plan to achieve these goals
through selective acquisitions and internal growth within our businesses. Our
$438 million investment in new vehicle auction facilities during 2000, followed
by our $63 million investment in auction facilities that provide "total loss"
vehicle recovery services in January 2001, is consistent with our growth
strategy. These investments are expected to contribute to our goal of 12% growth
in operating earnings in 2001.
ENERGY SERVICES. Energy Services continues to be a strong cash flow generator
for us. Our access to and ownership of low-cost power are Energy Services'
greatest strengths and we will continue to look for opportunities to add to our
low-cost energy portfolio. We have more than adequate generation to serve our
native load. Power over and above our customers' requirements is marketed
through MPEX and Split Rock.
Since approximately half of the electricity Minnesota Power sells is to large
industrial customers, primarily taconite producers, which have long-term
all-requirements contracts, the livelihood of the taconite industry is important
to us. Annual taconite production in Minnesota was 47 million tons in 2000 (43
million tons in 1999; 47 million tons in 1998). Based on our research of the
taconite industry, Minnesota taconite production for 2001 is anticipated to be
about 37 million tons.
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The anticipated decrease in 2001 taconite production is due to high import
levels and a softening economy. The majority of the anticipated 10-million ton
reduction in taconite production for 2001 is occurring at mines that are not
Large Power Customers. Two Large Power Customers have announced temporary shut
downs, accounting for approximately 2 million tons of the decrease. While
taconite production is currently expected to continue at annual levels of about
40 million tons, the longer-term outlook for this cyclical industry is less
certain. Long-term contracts with our Large Power Customers help minimize the
impact on earnings that otherwise would result from such decreases in taconite
production. We expect any excess energy not used by our Large Power Customers
will be marketed by MPEX and Split Rock.
Energy Services continues to pursue plans to construct in partnership with
Wisconsin Public Service Corporation a 250-mile, 345-kilovolt transmission line
from Wausau, Wisconsin to Duluth, Minnesota and pursue regional wholesale
merchant generating plant opportunities. Minnesota Power also signed an
agreement to install a 24-MW turbine generator at Potlatch Corp.'s facility in
Cloquet, Minnesota by mid-2001. While Minnesota Power will own the turbine
generator and have access to its excess power in times of high demand, Potlatch
will operate and maintain the facility. Energy Services intends to seek
additional cost saving alternatives and efficiencies, and expand its
non-regulated services to maintain its contribution to overall net income.
AUTOMOTIVE SERVICES. We anticipate earnings from Automotive Services to increase
by more than 40% in 2001. This earnings growth includes a 10% to 15% increase
in EBITDAL from same store ADESA auction facilities. Since 1995 when we first
entered the automotive industry, we have transformed and expanded our Automotive
Services operations. Automotive Services is now our largest contributor to net
income.
ADESA is the second largest and fastest growing vehicle auction business in
North America. The 2000 acquisition of CAG added 13 Canadian vehicle auction
facilities and associated dealer financing business to Automotive Services and
established ADESA as the premier automotive services company in Canada. ADESA
also acquired or opened 15 other vehicle auction facilities in 2000.
ADESA's purchase of the remaining 53% ownership in Impact Auto in 2000 and APC
in January 2001 position us as the third largest provider of "total loss"
vehicle recovery services in North America with 19 auction facilities.
Simultaneously with the APC transaction, ADESA acquired ComSearch. Supplementing
Internet product offerings at ADESA and APC, ComSearch brings Internet-based
technology in the auto parts location and insurance adjustment business. We will
continue to look for accretive acquisitions not only in the wholesale vehicle
auction business, but also in the "total loss" vehicle recovery auction
business.
AFC's new computer application system allows AFC to manage its business more
effectively while expediting services through its branch network to more than
15,000 registered dealers. AutoVIN expanded its inventory inspection services in
2000 to include dealers selling other products, such as motorcycles and lawn
equipment. While inventory verification is still the core of AutoVIN's business,
its growth potential is dramatically increased by providing inspection services
for other products.
Vehicle sales within the auto auction industry are expected to rise at a rate of
2% to 4% annually over the next several years. With the continued increased
popularity of leasing and the high cost of new vehicles, a steady flow of
vehicles is expected to return to auction. Automotive Services also expects to
participate in the industry's growth through selective acquisitions and expanded
services.
ADESA and AFC continue to focus on growth in the volume of vehicles sold and
financed, increased ancillary services, and operating and technological
efficiencies. Great Rigs, PAR and ADESA Importation plan to participate in the
growth of auction volume and enhance market share.
WATER SERVICES. Florida Water will continue to grow by selectively acquiring
targeted water systems. The strategic emphasis at Heater is growth in North
Carolina. Both Florida Water and Heater operate in states that are currently
experiencing rapid population growth, which should contribute to our expected
annual customer growth of 4% to 7% over the next two years.
Severe drought conditions over the last several months in Florida have prompted
three out of the five Florida water management districts to issue Water Shortage
Orders limiting lawn watering to one or two days per week. The Orders request
all local governments to enforce the restrictions which will be in effect until
further notice from each water district. The Water Shortage Orders affect the
majority of Florida Water's customers (all but one community) and could affect
water revenue in 2001. At this time, however, we are unable to predict what
impact these Orders may have on Water Services' financial results for 2001.
INVESTMENTS. Over the last 5 years, sales by real estate operations have been 3
to 4 times more than the acquisition cost of property sold, creating strong cash
generation and profitability. Our real estate operations may, from time to time,
acquire large residential community properties at low cost, add value and sell
them at current market prices in order to continue a consistent earnings
contribution from this business.
Our investments in emerging technology funds make capital available to companies
developing products and services critical to the future of the electric utility
industry. Our focus has been primarily on micro generation and fuel cell
technology. We view our investments in these funds as a source of capital for
redeployment into existing businesses and additional business opportunities.
With many of these funds now maturing, our investments may add to income in the
future. The balance in our securities portfolio declined significantly in 2000
due to acquisitions. We plan to continue to concentrate on market-neutral
investment strategies designed to provide stable and acceptable returns without
sacrificing needed liquidity. Our portfolio is hedged against market downturns.
Our objective is to maintain corporate liquidity.
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44 ALLETE 2000 ANNUAL REPORT
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LIQUIDITY AND CAPITAL RESOURCES
A primary goal of the strategic plan is to improve cash flow from operations.
Since 1996 cash from operating activities has tripled. This increase in cash
flow from operations has been accomplished due to operating results and better
management of working capital throughout our company. Our strategy includes
growing the businesses both internally with expanded facilities, services and
operations (see Capital Requirements) and externally through acquisitions.
WORKING CAPITAL. Additional working capital, if and when needed, generally is
provided by the sale of commercial paper. Our securities investments can be
liquidated to provide funds for reinvestment in existing businesses or
acquisition of new businesses. Approximately 6 million original issue shares of
our common stock are available for issuance through Invest Direct, our direct
stock purchase and dividend reinvestment plan. ALLETE's $205 million bank line
of credit provides credit support for our commercial paper program. The amount
and timing of future sales of our securities will depend upon market conditions
and our specific needs. We may from time to time sell securities to meet capital
requirements, to provide for the retirement or early redemption of issues of
long-term debt, to reduce short-term debt and for other corporate purposes.
A substantial amount of ADESA's working capital is generated internally from
payments for services provided. However, ADESA has arrangements to use the
proceeds from the sale of commercial paper issued by ALLETE 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 has arrangements to use proceeds from the sale of commercial paper
ALLETE has issued 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 $300 million, to
third party purchasers under an agreement that expires at the end of 2002. At
December 31, 2000 AFC had sold $335.7 million of finance receivables to the
special purpose subsidiary ($296.8 million at December 31, 1999). Third party
purchasers had purchased an undivided interest in finance receivables of $239
million from this subsidiary at December 31, 2000 ($225 million at December 31,
1999). AFC has also entered into an arrangement in December 2000 with a
manufacturer to floorplan certain vehicles located at auctions awaiting resale
for a security interest in those vehicles. AFC sells these finance receivables,
on a revolving basis, to another wholly owned, unconsolidated, qualified special
purpose subsidiary. This subsidiary borrows money from a third party under an
agreement that expires June 15, 2001. At December 31, 2000 AFC had sold $53.5
million of these finance receivables to the special purpose subsidiary. The
third party lender had advanced $43 million against these receivables. Unsold
finance receivables and unfinanced receivables held by the special purpose
subsidiaries are recorded by AFC as residual interest at fair value. Fair value
is based upon estimates of future cash flows, using assumptions that market
participants would use to value such instruments, including estimates of
anticipated credit losses over the life of the receivables sold without
application of a discount rate due to the short-term nature of the receivables
sold. The fair value of AFC's residual interest was $106.2 million at December
31, 2000 ($57.6 million at December 31, 1999). Proceeds from the sale of the
receivables were used to repay borrowings from ALLETE and fund vehicle inventory
purchases for AFC's customers.
Significant changes in accounts receivable and accounts payable balances at
December 31, 2000 compared to December 31, 1999 were due to significant
acquisitions in 2000, and increased sales and financing activity at Automotive
Services.
SALE OF INVESTMENTS. In May 2000 we sold 4.7 million shares of ACE. ALLETE
received the ACE shares and $25 million in cash in December 1999 when Capital Re
merged with ACE. Prior to the merger, we owned 7.3 million shares, or 20%, of
Capital Re. The $127 million in proceeds from the sale of ACE shares and
proceeds from the sale of a portion of our securities portfolio were used to
fund auction acquisitions.
ACQUISITIONS. In February 2000 ADESA purchased the Mission City Auto Auction in
San Diego, California.
In May 2000 ADESA Canada purchased the remaining 27% of Impact Auto. ADESA
Canada acquired 20% of Impact Auto on October 1, 1995, 27% in March 1999 and
another 26% in January 2000. Impact Auto is Canada's largest provider of "total
loss" vehicle recovery services. Impact Auto provides these services to
insurance companies.
In June 2000 ADESA acquired all of the outstanding common shares of Auction
Finance Group, Inc. (AFG). AFG owns CAAG Auto Auction Holdings Ltd., which was
doing business as Canadian Auction Group. This acquisition added 13 vehicle
auction facilities and associated dealer financing business to ADESA's existing
locations and established ADESA as the premier automotive services company in
Canada.
In August 2000 ADESA acquired Beebe Auto Exchange, Inc. which operated two
Arkansas auto auctions: Mid-Ark Auto Auction in North Little Rock and Central
Arkansas Auto Auction in Beebe, Arkansas, and 51% of Interstate Auto Auction
located in Ocala, Florida.
In October 2000 ADESA purchased nine auction facilities from Manheim.
The transactions described in the five preceding paragraphs had a combined
purchase price of approximately $438 million. We funded these transactions with
proceeds from the sale of ACE shares, proceeds from the sale of a portion of our
securities portfolio, internally generated funds and long-term debt.
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ALLETE 2000 ANNUAL REPORT 45
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In June 2000 Florida Water purchased the assets of Spruce Creek for $5.5
million, plus a commitment to pay fees for water connections through June 2005.
Spruce Creek serves 5,600 water and wastewater customers in three communities in
Marion County, Florida. The systems acquired are designed to accommodate a total
of 10,000 water and wastewater customers. The transaction was funded with
internally generated funds.
In December 2000 ALLETE Water Services, Inc. purchased, subject to certain
conditions, the assets of Dicks Creek Wastewater Utility for $6.6 million plus a
commitment to pay a fee for residential connections. Beginning in 2001, the
commitment fee will be a minimum of $400,000 annually for four years or until
the cumulative fees paid reach $2 million. We expect to complete the transaction
in early 2001. Dicks Creek is located near Atlanta in Forsyth County, Georgia.
The transaction was funded with internally generated funds.
In January 2001 ALLETE and ADESA acquired all of the outstanding stock of
ComSearch and all of the assets of APC in an overall transaction valued at $62.4
million. APC is a provider of "total loss" vehicle recovery services with eight
auction facilities in the United States. ComSearch provides Internet-based parts
location and insurance adjustment audit services nationwide. Both APC and
ComSearch are based in Rhode Island. APC and ComSearch's combined revenue for
2000 was $38 million. The transactions were funded with internally generated
funds and the issuance of our common stock.
LONG-TERM DEBT. In March 2000 ADESA issued $35 million of 8.10% Senior Notes,
Series B, due March 2010. Proceeds were used to refinance short-term bank
indebtedness incurred for the acquisition of vehicle auction facilities
purchased in 1999 and for general corporate purposes.
In June 2000 ALLETE refinanced $4.6 million of 6.875% Pollution Control Revenue
Refunding Bonds, Series 1991-A, with $4.6 million of Adjustable Rate Pollution
Control Revenue Refunding Bonds Series 2000 due December 2015. The new bonds had
an initial interest rate of 4.75%.
In June 2000 Heater issued an $8 million, 8.24%, note to CoBank, ACB, due June
2025. Proceeds were used to refinance short-term indebtedness incurred for the
1999 acquisition of Mid South and capital improvements in 1999 and 2000.
In July 2000 we filed a registration statement with the SEC pursuant to Rule 415
under the Securities Act of 1933 for an aggregate of $400 million of first
mortgage bonds and debt securities. In October 2000 we issued $250 million of
Floating Rate First Mortgage Bonds due October 2003. We have the option to
redeem these bonds on or after October 20, 2001, in whole or in part from time
to time, on any interest payment date prior to their maturity. Proceeds were
used to refinance short-term debt incurred in connection with the October 2000
acquisition of nine vehicle auction facilities from Manheim. The new bonds had
an initial interest rate of 7.61%. We may sell the remaining securities if
warranted by market conditions and our capital requirements. Any offer and sale
of the remaining first mortgage bonds and debt securities will be made only by
means of a prospectus.
PREFERRED STOCK. In 2000 we redeemed all of our outstanding Preferred Stock and
Preferred Stock A with proceeds from the sale of a portion of our securities
portfolio and internally generated funds.
All 100,000 outstanding shares of Serial Preferred Stock A, $7.125 Series, were
redeemed in April 2000 for an aggregate of $10 million.
All 100,000 outstanding shares of Serial Preferred Stock A, $6.70 Series, were
redeemed in July 2000 for an aggregate of $10 million.
All 113,358 outstanding shares of 5% Preferred Stock were redeemed in August
2000 at $102.50 per share plus accrued and unpaid dividends of $0.75 per share
for an aggregate of $11.7 million.
LEASES. In April 2000 leases for three ADESA auction facilities (Boston,
Charlotte and Knoxville) were refinanced in a $28.4 million leveraged lease
transaction. The new lease expires on April 1, 2010, but may be terminated after
2005 under certain conditions. ALLETE has guaranteed ADESA's obligations under
the lease.
BOND RATINGS. ALLETE's first mortgage bonds and secured pollution control bonds
are currently rated Baa1 by Moody's Investors Service and A by Standard and
Poor's. The disclosure of these bond ratings is not a recommendation to buy,
sell or hold our securities.
PAYOUT RATIO. In 2000 we paid out 51% (110% in 1999; 76% in 1998) of our per
share earnings in dividends. Excluding the gain related to the ACE transaction,
in 2000 we paid out 64% of our per share earnings in dividends. Excluding the
non-cash charge related to the Capital Re transaction, in 1999 we paid out 72%
of our per share earnings in dividends.
CAPITAL REQUIREMENTS
Consolidated capital expenditures totaled $168.7 million in 2000 ($99.7 million
in 1999; $80.8 million in 1998). Expenditures in 2000 included $64.7 million for
Energy Services, $74.2 million for Automotive Services, $29.6 million for Water
Services and $0.2 million for Investments. Internally generated funds and the
proceeds from the issuance of long-term debt were the primary sources of funding
these capital expenditures.
Capital expenditures are expected to be $166 million in 2001 and total about
$350 million for 2002 through 2005. The 2001 amount includes $58 million for
electric co-generation, system component replacement and upgrades,
telecommunication fiber and coal handling equipment; $75 million for new
auctions currently under construction, expansions and on-going improvements at
existing vehicle auction facilities and associated computer systems; and $33
million to expand water and wastewater treatment facilities to accommodate
customer growth, to meet environmental standards and for water conservation
initiatives. We expect to use internally generated funds, and the proceeds from
the issuance of long-term debt and equity securities to fund these capital
expenditures.
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46 ALLETE 2000 ANNUAL REPORT
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MARKET RISK
Our 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
common stock of publicly traded companies. In strategies designed to hedge
overall market risks, we also sell common stock short. Investments held for an
indefinite period of time are classified as available-for-sale securities and
also recorded at fair value. At December 31, 2000 available-for-sale securities
consisted of equity securities in a grantor trust established to fund certain
employee benefits.
December 31, 2000 Fair Value
- ---------------------------------------------------------
Millions
Trading Securities Portfolio $90.8
Available-For-Sale Securities Portfolio $12.3
- ---------------------------------------------------------
We are also subject to interest rate risk through outstanding debt. (See Note
9.) A portion of the interest rate risk is hedged through the use of interest
rate swap agreements.
In October 2000 we entered into an interest rate swap agreement with a notional
amount of $250 million to hedge $250 million of floating rate debt also issued
in October 2000. Under the one-year swap agreement, we make fixed quarterly
payments based on a fixed rate of 6.5% and receive payments at a floating rate
based on LIBOR (6.8% at December 31, 2000).
In March 2000 Florida Water entered into an interest rate swap agreement with a
notional amount of $35.1 million to hedge $35.1 million of fixed rate industrial
development bond debt. The swap agreement superseded a previous swap agreement
entered into in 1998. Under the 25 year agreement, Florida Water makes quarterly
payments at a floating rate based upon The Bond Market Association Municipal
Swap Index plus 174 basis points (4.8% at December 31, 2000) and receives
payments based on a fixed rate of 6.5%.
NEW ACCOUNTING STANDARDS
As of January 1, 2001 we adopted SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." 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.
Changes in fair value are to be recognized in current earnings or other
comprehensive income, depending on the purpose for which the derivative is held.
Our use of derivative instruments is not significant. Upon adoption of SFAS 133,
we held two derivatives in the form of interest rate swaps, both of which
qualify for hedge accounting. Both hedges are highly effective resulting in
minimal earnings impact. [GRAPHIC OMITTED - SQUARE]
-------------------------------
READERS ARE CAUTIONED THAT FORWARD-LOOKING STATEMENTS INCLUDING THOSE CONTAINED
ABOVE, SHOULD BE READ IN CONJUNCTION WITH OUR DISCLOSURES UNDER THE HEADING:
"SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995" LOCATED ON PAGE 22 OF THIS FORM 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition - Market Risk for information related to quantitative and
qualitative disclosure about market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See our consolidated financial statements as of December 31, 2000 and 1999 and
for each of the three years ended December 31, 2000, and supplementary data,
also included, which are indexed in Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
- --------------------------------------------------------------------------------
ALLETE 2000 ANNUAL REPORT 47
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required for this Item is incorporated by reference herein and
will be set forth under the "Election of Directors" section in our Proxy
Statement for the 2001 Annual Meeting of Shareholders, except for information
with respect to executive officers which is set forth in Part I hereof. The 2001
Proxy Statement will be filed with the Securities and Exchange Commission within
120 days after the end of our 2000 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required for this Item is incorporated by reference herein from
the "Compensation of Executive Officers" section in our Proxy Statement for the
2001 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required for this Item is incorporated by reference herein from
the "Security Ownership of Certain Beneficial Owners and Management" section in
our Proxy Statement for the 2001 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required for this Item is incorporated by reference herein from
the "Certain Relationships and Related Transactions" section in our Proxy
Statement for the 2001 Annual Meeting of Shareholders.
- --------------------------------------------------------------------------------
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Certain Documents Filed as Part of this Form 10-K.
(1) Financial Statements Pages
ALLETE
Report of Independent Accountants .................................... 54
Consolidated Balance Sheet at
December 31, 2000 and 1999 .......................................... 55
For the Three Years Ended December 31, 2000
Consolidated Statement of Income .................................... 56
Consolidated Statement of Cash Flows ................................ 57
Consolidated Statement of Stockholders' Equity ...................... 58
Notes to Consolidated Financial Statements .......................... 59-73
(2) Financial Statement Schedules
Report of Independent Accountants on
Financial Statement Schedule ........................................ 74
Schedule II - ALLETE Valuation and Qualifying
Accounts and Reserves ............................................... 74
All other schedules have been omitted either because the information is
not required to be reported by ALLETE or because the information is
included in the consolidated financial statements or the notes.
(3) Exhibits including those incorporated by reference
Exhibit Number
- --------------------------------------------------------------------------------
*2 - Agreement and Plan of Merger by and among the Company, AC Acquisition
Sub, Inc., ADESA Corporation and Certain ADESA Management
Shareholders dated February 23, 1995 (filed as Exhibit 2 to the March
3, 1995 Form 8-K, File No. 1-3548).
*3(a)1 - Articles of Incorporation, amended and restated as of May 27, 1998
(filed as Exhibit 4(a) to the June 3, 1998 Form 8-K, File No. 1-3548).
*3(a)2 - Amendment to Certificate of Assumed Name, filed with the Minnesota
Secretary of State on August 29, 2000 (filed as Exhibit 4 to the
October 10, 2000 Form 8-K, File No. 1-3548).
*3(b) - Bylaws, as amended effective May 27, 1998 (filed as Exhibit 4(b) to
the June 3, 1998 Form 8-K, File No. 1-3548).
*4(a)1 - Mortgage and Deed of Trust, dated as of September 1, 1945, between
the Company and The Bank of New York (formerly Irving Trust Company)
and Douglas J. MacInnes (successor to Richard H. West), Trustees
(filed as Exhibit 7(c), File No. 2-5865).
- --------------------------------------------------------------------------------
48 ALLETE 2000 ANNUAL REPORT
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
Exhibit Number
- --------------------------------------------------------------------------------
*4(a)2 - Supplemental Indentures to ALLETE's Mortgage and Deed of Trust:
Number Dated as of Reference File Exhibit
- --------------------------------------------------------------------------------
First March 1, 1949 2-7826 7(b)
Second July 1, 1951 2-9036 7(c)
Third March 1, 1957 2-13075 2(c)
Fourth January 1, 1968 2-27794 2(c)
Fifth April 1, 1971 2-39537 2(c)
Sixth August 1, 1975 2-54116 2(c)
Seventh September 1, 1976 2-57014 2(c)
Eighth September 1, 1977 2-59690 2(c)
Ninth April 1, 1978 2-60866 2(c)
Tenth August 1, 1978 2-62852 2(d)2
Eleventh December 1, 1982 2-56649 4(a)3
Twelfth April 1, 1987 33-30224 4(a)3
Thirteenth March 1, 1992 33-47438 4(b)
Fourteenth June 1, 1992 33-55240 4(b)
Fifteenth July 1, 1992 33-55240 4(c)
Sixteenth July 1, 1992 33-55240 4(d)
Seventeenth February 1, 1993 33-50143 4(b)
Eighteenth July 1, 1993 33-50143 4(c)
Nineteenth February 1, 1997 1-3548 (1996 Form 10-K) 4(a)3
Twentieth November 1, 1997 1-3548 (1997 Form 10-K) 4(a)3
Twenty-first October 1, 2000 333-54330 4(c)3
*4(b)1 - Mortgage and Deed of Trust, dated as of March 1, 1943, between
Superior Water, Light and Power Company and Chemical Bank & Trust
Company and Howard B. Smith, as Trustees, both succeeded by U.S. Bank
Trust N.A., as Trustee (filed as Exhibit 7(c), File No. 2-8668).
*4(b)2 - Supplemental Indentures to Superior Water, Light and Power Company's
Mortgage and Deed of Trust:
Number Dated as of Reference File Exhibit
- --------------------------------------------------------------------------------
First March 1, 1951 2-59690 2(d)(1)
Second March 1, 1962 2-27794 2(d)1
Third July 1, 1976 2-57478 2(e)1
Fourth March 1, 1985 2-78641 4(b)
Fifth December 1, 1992 1-3548 (1992 Form 10-K) 4(b)1
Sixth March 24, 1994 1-3548 (1996 Form 10-K) 4(b)1
Seventh November 1, 1994 1-3548 (1996 Form 10-K) 4(b)2
Eighth January 1, 1997 1-3548 (1996 Form 10-K) 4(b)3
*4(c)1 - Indenture, dated as of March 1, 1993, between Southern States
Utilities, Inc. (now Florida Water Services Corporation) and
Nationsbank of Georgia, National Association (now SunTrust Bank,
Central Florida, N.A.), as Trustee (filed as Exhibit 4(d) to the 1992
Form 10-K, File No. 1-3548).
*4(c)2 - Supplemental Indentures to Florida Water Services Corporation's
Indenture:
Number Dated as of Reference File Exhibit
- --------------------------------------------------------------------------------
First March 1, 1993 1-3548 (1996 Form 10-K) 4(c)1
Second March 31, 1997 1-3548 (March 31, 1997
Form 10-Q) 4
Third May 28, 1997 1-3548 (June 30, 1997
Form 10-Q) 4
*4(d) - Amended and Restated Trust Agreement, dated as of March 1, 1996,
relating to MP&L (now ALLETE) Capital I's 8.05% Cumulative Quarterly
Income Preferred Securities, between the Company, as Depositor, and
The Bank of New York, The Bank of New York (Delaware), Philip R.
Halverson, David G. Gartzke and James K. Vizanko, as Trustees (filed
as Exhibit 4(a) to the March 31, 1996 Form 10-Q, File No. 1-3548), as
modified by Amendment No. 1, dated April 11, 1996 (filed as Exhibit
4(b) to the March 31, 1996 Form 10-Q, File No. 1-3548) and First
Amendment [2000] dated August 23, 2000 (filed as Exhibit 4(f)2, File
No. 333-54330).
*4(e) - Indenture, dated as of March 1, 1996, relating to the Company's 8.05%
Junior Subordinated Debentures, Series A, Due 2015, between the
Company and The Bank of New York, as Trustee (filed as Exhibit 4(c)
to the March 31, 1996 Form 10-Q, File No. 1-3548).
*4(f) - Guarantee Agreement, dated as of March 1, 1996, relating to MP&L (now
ALLETE) Capital I's 8.05% Cumulative Quarterly Income Preferred
Securities, between the Company, as Guarantor, and The Bank of New
York, as Trustee (filed as Exhibit 4(d) to the March 31, 1996 Form
10-Q, File No. 1-3548).
*4(g) - Agreement as to Expenses and Liabilities, dated as of March 20, 1996,
relating to MP&L (now ALLETE) Capital I's 8.05% Cumulative Quarterly
Income Preferred Securities, between the Company and MP&L (now
ALLETE) Capital I (filed as Exhibit 4(e) to the March 31, 1996 Form
10-Q, File No. 1-3548).
*4(h) - Officer's Certificate, dated March 20, 1996, establishing the terms
of the 8.05% Junior Subordinated Debentures, Series A, Due 2015
issued in connection with the 8.05% Cumulative Quarterly Income
Preferred Securities of MP&L (now ALLETE) Capital I (filed as Exhibit
4(i) to the 1996 Form 10-K, File No. 1-3548).
*4(i) - Rights Agreement dated as of July 24, 1996, between the Company and
the Corporate Secretary of the Company, as Rights Agent (filed as
Exhibit 4 to the August 2, 1996 Form 8-K, File No. 1-3548).
- --------------------------------------------------------------------------------
ALLETE 2000 ANNUAL REPORT 49
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
Exhibit Number
- --------------------------------------------------------------------------------
*4(j) - Indenture (for Unsecured Debt Securities), dated as of May 15, 1996,
between ADESA Corporation and The Bank of New York, as Trustee
relating to the ADESA Corporation's 7.70% Senior Notes, Series A, Due
2006, and its 8.10% Senior Notes, Series B, Due 2010 (filed as
Exhibit 4(k) to the 1996 Form 10-K, File No. 1-3548).
*4(k) - Guarantee of the Company, dated as of May 30, 1996, relating to the
ADESA Corporation's 7.70% Senior Notes, Series A, Due 2006 (filed as
Exhibit 4(l) to the 1996 Form 10-K, File No. 1-3548).
*4(l) - ADESA Corporation Officer's Certificate 1-D-1, dated May 30, 1996,
relating to the ADESA Corporation's 7.70% Senior Notes, Series A, Due
2006 (filed as Exhibit 4(m) to the 1996 Form 10-K, File No. 1-3548).
*4(m) - Guarantee of the Company, dated as of March 30, 2000, relating to
ADESA Corporation's 8.10% Senior Notes, Series B, Due 2010 (filed as
Exhibit 4(a) to the March 31, 2000 Form 10-Q, File No. 1-3548).
*4(n) - ADESA Corporation Officer's Certificate 2-D-2, dated as of March 30,
2000, relating to ADESA Corporation's 8.10% Senior Notes, Series B,
Due 2010 (filed as Exhibit 4(b) to the March 31, 2000 Form 10-Q, File
No. 1-3548).
*10(a) - Participation Agreement, dated as of March 31, 2000, among Asset
Holdings III, L.P., as Lessor, ADESA Corporation, as Lessee, SunTrust
Bank, as Credit Bank, and Cornerstone Funding Corporation I, as
Issuer (filed as Exhibit 10(a) to the March 31, 2000 Form 10-Q, File
No. 1-3548).
*10(b) - Lease Agreement, dated as of March 31, 2000, between Asset Holdings
III, L.P., as Lessor and ADESA Corporation, as Lessee (filed as
Exhibit 10(b) to the March 31, 2000 Form 10-Q, File No. 1-3548).
*10(c) - Reimbursement Agreement, dated as of March 31, 2000, between SunTrust
Bank, as Credit Bank, and Asset Holdings III, L.P., as Lessor (filed
as Exhibit 10(c) to the March 31, 2000 Form 10-Q, File No. 1-3548).
*10(d) - Appendix I to Participation Agreement, Lease Agreement and
Reimbursement Agreement, all which are dated as of March 31, 2000,
relating to the Lease Financing for ADESA Corporation Auto Auction
Facilities (filed as Exhibit 10(d) to the March 31, 2000 Form 10-Q,
File No. 1-3548).
*10(e) - Assignment of Lease and Rents (without Exhibit A) entered into as of
March 31, 2000, by and between Asset Holdings III, L.P., as Lessor
and SunTrust Bank, as Credit Bank (filed as Exhibit 10(e) to the
March 31, 2000 Form 10-Q, File No. 1-3548).
*10(f) - Limited Guaranty of the Company, dated as of March 31, 2000, relating
to the Lease Financing for ADESA Corporation Auto Auction Facilities
(filed as Exhibit 10(f) to the March 31, 2000 Form 10-Q, File No.
1-3548).
*10(g) - Wholesale Power Coordination and Dispatch Operating Agreement, dated
April 14, 2000, between the Company and Split Rock Energy LLC (filed
as Exhibit 10(a) to the June 30, 2000 Form 10-Q, File No. 1-3548).
*10(h) - Letter addressed to the Federal Regulatory Commission, dated April
21, 2000, amending the Wholesale Power Coordination and Dispatch
Operating Agreement, dated April 14, 2000, between the Company and
Split Rock Energy LLC (filed as Exhibit 10(b) to the June 30, 2000
Form 10-Q, File No. 1-3548).
*10(i) - Guarantee Agreement, dated August 16, 2000, made by and among the
Company, CoBank, ACB and ABN AMRO Bank, N.V. (filed as Exhibit 10 to
the September 30, 2000 Form 10-Q, File No. 1-3548).
*10(j)1 - Receivables Purchase Agreement dated as of December 31, 1996, among
AFC Funding Corporation, as Seller, Automotive Finance Corporation,
as Servicer, Pooled Accounts Receivable Capital Corporation, as
Purchaser, and Nesbitt Burns Securities Inc., as Agent (filed as
Exhibit 10(f) to the 1996 Form 10-K, File No. 1-3548).
*10(j)2 - Amendments to Receivables Purchase Agreement:
Number Dated as of Reference File Exhibit
- --------------------------------------------------------------------------------
First February 28, 1997 1-3548 (1996 Form 10-K) 10(g)
Second August 15, 1997 1-3548 (September 30, 1997
Form 10-Q) 10
Third October 30, 1998 1-3548 (September 30, 1999
Form 10-Q) 10(a)
Fourth September 22, 1999 1-3548 (September 30, 1999
Form 10-Q) 10(b)
*10(k) - Purchase and Sale Agreement dated as of December 31, 1996, between
AFC Funding Corporation and Automotive Finance Corporation (filed as
Exhibit 10(h) to the 1996 Form 10-K, File No. 1-3548).
10(l) - Loan and Servicing Agreement dated as of December 22, 2000 among AFC
AIM Corporation, as Borrower, Automotive Finance Corporation, as
Servicer, and Bank of Montreal, as Lender.
- --------------------------------------------------------------------------------
50 ALLETE 2000 ANNUAL REPORT
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
Exhibit Number
- --------------------------------------------------------------------------------
10(m) - Purchase and Sale Agreement dated as of December 22, 2000 between AFC
AIM Corporation and Automotive Finance Corporation.
*10(n) - Power Purchase and Sale Agreement between the Company and Square
Butte Electric Cooperative, dated as of May 29, 1998 (filed as
Exhibit 10 to the June 30, 1998 Form 10-Q, File No. 1-3548).
+*10(o) - Minnesota Power (now ALLETE) Executive Annual Incentive Plan,
effective January 1, 1996 (filed as Exhibit 10(a) to the 1995 Form
10-K, File No. 1-3548).
+*10(p) - Minnesota Power (now ALLETE) and Affiliated Companies Supplemental
Executive Retirement Plan, as amended and restated, effective August
1, 1994 (filed as Exhibit 10(b) to the 1995 Form 10-K, File No.
1-3548).
*10(q) - Executive Investment Plan-I, as amended and restated, effective
November 1, 1988 (filed as Exhibit 10(c) to the 1988 Form 10-K, File
No. 1-3548).
*10(r) - Executive Investment Plan-II, as amended and restated, effective
November 1, 1988 (filed as Exhibit 10(d) to the 1988 Form 10-K, File
No. 1-3548).
+*10(s) - Deferred Compensation Trust Agreement, as amended and restated,
effective January 1, 1989 (filed as Exhibit 10(f) to the 1988 Form
10-K, File No. 1-3548).
+*10(t) - Minnesota Power (now ALLETE) Executive Long-Term Incentive
Compensation Plan, effective January 1, 1996 (filed as Exhibit 10(a)
to the June 30, 1996 Form 10-Q, File No. 1-3548).
+*10(u) - Minnesota Power (now ALLETE) Director Stock Plan, effective January
1, 1995 (filed as Exhibit 10 to the March 31, 1995 Form 10-Q, File
No. 1-3548).
+*10(v) - Minnesota Power (now ALLETE) Director Long-Term Stock Incentive Plan,
effective January 1, 1996 (filed as Exhibit 10(b) to the June 30,
1996 Form 10-Q, File No. 1-3548).
12 - Computation of Ratios of Earnings to Fixed Charges and Supplemental
Ratios of Earnings to Fixed Charges. (Included as page 75 of this
document.)
*21 - Subsidiaries of the Registrant (reference is made to ALLETE's Form
U-3A-2 for the year ended December 31, 2000, File No. 69-78).
23(a) - Consent of Independent Accountants.
23(b) - Consent of General Counsel.
- --------------------------------------
* INCORPORATED HEREIN BY REFERENCE AS INDICATED.
+ MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED
AS AN EXHIBIT TO THIS REPORT PURSUANT TO ITEM 14(C) OF FORM 10-K.
(b) Reports on Form 8-K.
Report on Form 8-K filed October 10, 2000 with respect to Item 5. Other
Events and Item 7. Financial Statements and Exhibits.
Report on Form 8-K filed October 18, 2000 with respect to Item 7. Financial
Statements and Exhibits.
Report on Form 8-K filed January 19, 2001 with respect to Item 5. Other
Events and Item 7. Financial Statements and Exhibits.
- --------------------------------------------------------------------------------
ALLETE 2000 ANNUAL REPORT 51
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ALLETE
(legally incorporated as Minnesota Power, Inc.)
Dated: February 6, 2001 By Edwin L. Russell
------------------------------------------------
Edwin L. Russell
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
Edwin L. Russell Chairman, President, February 6, 2001
- ----------------------------- Chief Executive Officer and Director
Edwin L. Russell
David G. Gartzke Senior Vice President - Finance February 6, 2001
- ----------------------------- and Chief Financial Officer
David G. Gartzke
Mark A. Schober Controller February 6, 2001
- -----------------------------
Mark A. Schober
Kathleen A. Brekken Director February 6, 2001
- -----------------------------
Kathleen A. Brekken
Merrill K. Cragun Director February 6, 2001
- -----------------------------
Merrill K. Cragun
Dennis E. Evans Director February 6, 2001
- -----------------------------
Dennis E. Evans
Glenda E. Hood Director February 6, 2001
- -----------------------------
Glenda E. Hood
Peter J. Johnson Director February 6, 2001
- -----------------------------
Peter J. Johnson
George L. Mayer Director February 6, 2001
- -----------------------------
George L. Mayer
Jack I. Rajala Director February 6, 2001
- -----------------------------
Jack I. Rajala
Arend J. Sandbulte Director February 6, 2001
- -----------------------------
Arend J. Sandbulte
Nick Smith Director February 6, 2001
- -----------------------------
Nick Smith
Bruce W. Stender Director February 6, 2001
- -----------------------------
Bruce W. Stender
Donald C. Wegmiller Director February 6, 2001
- -----------------------------
Donald C. Wegmiller
- --------------------------------------------------------------------------------
52 ALLETE 2000 ANNUAL REPORT
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
WITH
REPORT OF INDEPENDENT ACCOUNTANTS
AND
REPORT OF MANAGEMENT
- --------------------------------------------------------------------------------
ALLETE 2000 ANNUAL REPORT 53
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
REPORTS
INDEPENDENT ACCOUNTANTS [PRICEWATERHOUSECOOPERS LLP LOGO]
To the Shareholders and
Board of Directors of ALLETE
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of stockholders' equity
present fairly, in all material respects, the financial position of ALLETE and
its subsidiaries at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of ALLETE's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above. [GRAPHIC OMITTED - SQUARE]
Pricewaterhouse Coopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 17, 2001
- --------------------------------------------------------------------------------
MANAGEMENT
The consolidated financial statements and other financial information were
prepared by management, who is responsible for their integrity and objectivity.
The financial statements have been prepared in conformity with generally
accepted accounting principles and necessarily include some amounts that are
based on informed judgments and best estimates and assumptions of management.
To meet management's responsibilities with respect to financial information, we
maintain and enforce a system of internal accounting controls designed to
provide assurance, on a cost effective basis, that transactions are carried out
in accordance with management's authorizations and that assets are safeguarded
against loss from unauthorized use or disposition. The system includes an
organizational structure that provides an appropriate segregation of
responsibilities, careful selection and training of personnel, written policies
and procedures, and periodic reviews by our internal audit department. In
addition, we have personnel policies that require all employees to maintain a
high standard of ethical conduct. Management believes the system is effective
and provides reasonable assurance that all transactions are properly recorded
and have been executed in accordance with management's authorization. Management
modifies and improves our system of internal accounting controls in response to
changes in business conditions. Our internal audit staff is charged with the
responsibility for determining compliance with our procedures.
Four of our directors, not members of management, serve as the Audit Committee.
Our Board of Directors, through the Audit Committee, oversees management's
responsibilities for financial reporting. The Audit Committee meets regularly
with management, the internal auditors and the independent accountants to
discuss auditing and financial matters and to assure that each is carrying out
their responsibilities. The internal auditors and the independent accountants
have full and free access to the Audit Committee without management present.
PricewaterhouseCoopers LLP, independent accountants, are engaged to express an
opinion on the financial statements. Their audit is conducted in accordance with
generally accepted auditing standards and includes a review of internal controls
and tests of transactions to the extent necessary to allow them to report on the
fairness of our operating results and financial condition. [GRAPHIC OMITTED -
SQUARE]
Edwin L. Russell
Edwin L. Russell
Chairman, President and Chief Executive Officer
David G. Gartzke
David G. Gartzke
Chief Financial Officer
- --------------------------------------------------------------------------------
54 ALLETE 2000 ANNUAL REPORT
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
ALLETE Consolidated Balance Sheet
December 31 2000 1999
- -------------------------------------------------------------------------------------------------------
Millions
Assets
Current Assets
Cash and Cash Equivalents $ 219.3 $ 101.5
Trading Securities 90.8 179.6
Accounts Receivable 265.7 176.4
Inventories 26.4 24.2
Prepayments and Other 128.8 82.8
- -------------------------------------------------------------------------------------------------------
Total Current Assets 731.0 564.5
Property, Plant and Equipment 1,479.7 1,258.8
Investments 116.4 197.2
Goodwill 472.8 181.0
Other Assets 114.1 111.1
- -------------------------------------------------------------------------------------------------------
Total Assets $2,914.0 $2,312.6
- -------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities
Current Liabilities
Accounts Payable $ 269.1 $ 124.7
Accrued Taxes, Interest and Dividends 52.3 79.4
Notes Payable and Long-Term Debt Due Within One Year 290.0 105.6
Other 95.6 88.6
- -------------------------------------------------------------------------------------------------------
Total Current Liabilities 707.0 398.3
Long-Term Debt 952.3 712.8
Accumulated Deferred Income Taxes 125.1 139.9
Other Liabilities 153.8 149.3
Commitments and Contingencies
- -------------------------------------------------------------------------------------------------------
Total Liabilities 1,938.2 1,400.3
- -------------------------------------------------------------------------------------------------------
Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary ALLETE Capital I Which Holds Solely Company Junior
Subordinated Debentures 75.0 75.0
- -------------------------------------------------------------------------------------------------------
Redeemable Serial Preferred Stock - 20.0
- -------------------------------------------------------------------------------------------------------
Stockholders' Equity
Cumulative Preferred Stock - 11.5
Common Stock Without Par Value, 130.0 Shares Authorized
74.7 and 73.5 Shares Outstanding 576.9 552.0
Unearned ESOP Shares (55.7) (59.2)
Accumulated Other Comprehensive Income (Loss) (4.2) 2.4
Retained Earnings 383.8 310.6
- -------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 900.8 817.3
- -------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $2,914.0 $2,312.6
- -------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
ALLETE 2000 ANNUAL REPORT 55
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
ALLETE Consolidated Statement of Income
For the Year Ended December 31 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts
Operating Revenue
Energy Services $ 589.5 $ 554.5 $ 559.8
Automotive Services 546.4 406.6 328.4
Water Services 118.6 112.9 95.6
Investments 77.4 57.8 55.5
- ---------------------------------------------------------------------------------------------------------------
Total Operating Revenue 1,331.9 1,131.8 1,039.3
- ---------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel and Purchased Power 229.0 200.2 205.7
Operations 842.6 705.9 635.4
Interest Expense 69.2 59.5 64.9
- ---------------------------------------------------------------------------------------------------------------
Total Operating Expenses 1,140.8 965.6 906.0
- ---------------------------------------------------------------------------------------------------------------
Operating Income Before Capital Re and ACE 191.1 166.2 133.3
Income (Loss) from Investment in Capital Re and
Related Disposition of ACE 48.0 (34.5) 15.2
- ---------------------------------------------------------------------------------------------------------------
Operating Income 239.1 131.7 148.5
Distributions on Redeemable
Preferred Securities of ALLETE Capital I 6.0 6.0 6.0
Income Tax Expense 84.5 57.7 54.0
- ---------------------------------------------------------------------------------------------------------------
Net Income $ 148.6 $ 68.0 $ 88.5
- ---------------------------------------------------------------------------------------------------------------
Average Shares of Common Stock
Basic 69.8 68.4 64.0
Diluted 70.1 68.7 64.2
- ---------------------------------------------------------------------------------------------------------------
Earnings Per Share of Common Stock
Basic $2.12 $0.97 $1.35
Diluted $2.11 $0.97 $1.35
- ---------------------------------------------------------------------------------------------------------------
Dividends Per Share of Common Stock $1.07 $1.07 $1.02
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
56 ALLETE 2000 ANNUAL REPORT
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
ALLETE Consolidated Statement of Cash Flows
For the Year Ended December 31 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Millions
Operating Activities
Net Income $ 148.6 $ 68.0 $ 88.5
Loss (Income) from Investment in Capital Re and Related
Disposition of ACE - Net of Dividends Received (48.0) 34.5 (14.1)
Depreciation and Amortization 86.7 76.9 75.0
Deferred Income Taxes (6.6) (12.8) 1.1
Changes in Operating Assets and Liabilities - Net of the
Effects of Acquisitions
Trading Securities 88.9 16.1 (46.4)
Accounts Receivable (29.1) (20.3) (9.7)
Inventories (2.2) (0.2) 1.0
Accounts Payable 92.7 1.4 26.4
Other Current Assets and Liabilities (75.1) 0.3 5.1
Other - Net 19.6 9.9 19.4
- ---------------------------------------------------------------------------------------------------------------
Cash from Operating Activities 275.5 173.8 146.3
Investing Activities
Proceeds from Sale of Investments 146.0 67.6 35.2
Additions to Investments (42.5) (27.5) (33.1)
Additions to Property, Plant and Equipment (168.7) (99.7) (80.8)
Acquisitions - Net of Cash Acquired (453.0) (93.6) (23.8)
Other - Net 24.4 (16.9) 3.7
- ---------------------------------------------------------------------------------------------------------------
Cash for Investing Activities (493.8) (170.1) (98.8)
- ---------------------------------------------------------------------------------------------------------------
Financing Activities
Issuance of Long-Term Debt 306.3 51.5 2.0
Issuance of Common Stock 23.6 21.8 111.0
Changes in Notes Payable - Net 177.8 15.5 (48.1)
Reductions of Long-Term Debt (58.8) (9.9) (10.0)
Redemption of Preferred Stock (31.5) - -
Dividends on Preferred and Common Stock (75.4) (75.0) (67.0)
- ---------------------------------------------------------------------------------------------------------------
Cash from (for) Financing Activities 342.0 3.9 (12.1)
- ---------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (5.9) 4.5 (3.9)
- ---------------------------------------------------------------------------------------------------------------
Change in Cash and Cash Equivalents 117.8 12.1 31.5
- ---------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Period 101.5 89.4 57.9
- ---------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 219.3 $101.5 $ 89.4
- ---------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information
Cash Paid During the Period for
Interest - Net of Capitalized $66.3 $61.3 $63.0
Income Taxes $107.1 $60.3 $54.4
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
ALLETE 2000 ANNUAL REPORT 57
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
ALLETE Consolidated Statement of Stockholders' Equity
Accumulated
Total Other Unearned Cumulative
Stockholders' Retained Comprehensive ESOP Common Preferred
Equity Earnings Income Shares Stock Stock
- --------------------------------------------------------------------------------------------------------------------------------
Millions
Balance at December 31, 1997 $661.5 $296.1 $ 3.8 $(65.9) $416.0 $11.5
Comprehensive Income
Net Income 88.5 88.5
Other Comprehensive Income - Net of Tax
Unrealized Gains on Securities - Net 1.6 1.6
Foreign Currency Translation Adjustments (3.9) (3.9)
------
Total Comprehensive Income 86.2
Common Stock Issued - Net 113.0 113.0
Dividends Declared (67.0) (67.0)
ESOP Shares Earned 3.4 3.4
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 797.1 317.6 1.5 (62.5) 529.0 11.5
Comprehensive Income
Net Income 68.0 68.0
Other Comprehensive Income - Net of Tax
Unrealized Losses on Securities - Net (3.6) (3.6)
Foreign Currency Translation Adjustments 4.5 4.5
------
Total Comprehensive Income 68.9
Common Stock Issued - Net 23.0 23.0
Dividends Declared (75.0) (75.0)
ESOP Shares Earned 3.3 3.3
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 817.3 310.6 2.4 (59.2) 552.0 11.5
Comprehensive Income
Net Income 148.6 148.6
Other Comprehensive Income - Net of Tax
Unrealized Losses on Securities - Net (0.7) (0.7)
Foreign Currency Translation Adjustments (5.9) (5.9)
------
Total Comprehensive Income 142.0
Common Stock Issued - Net 24.9 24.9
Redemption of Cumulative Preferred Stock (11.5) (11.5)
Dividends Declared (75.4) (75.4)
ESOP Shares Earned 3.5 3.5
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $900.8 $383.8 $(4.2) $(55.7) $576.9 -
- --------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
58 ALLETE 2000 ANNUAL REPORT
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1 BUSINESS SEGMENTS
Millions
Energy Automotive Water Corporate
For the Year Ended December 31 Consolidated Services Services Services Investments Charges
- --------------------------------------------------------------------------------------------------------------------------------
2000
Operating Revenue $1,331.9 $589.5 $546.4<F1> $118.6 $77.4 -
Operation and Other Expense 957.9 445.8 392.4 70.8 32.4<F3> $16.5
Depreciation and Amortization Expense 86.7 46.3 26.4 13.5 0.2 0.3
Lease Expense 27.0 2.8 22.2 2.0 - -
Interest Expense 69.2 21.1 23.3 10.4 0.1 14.3
- --------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) Before ACE 191.1 73.5 82.1 21.9 44.7 (31.1)
Income from Disposition of ACE 48.0 - - - 48.0 -
Distributions on Redeemable
Preferred Securities of Subsidiary 6.0 2.0 - - - 4.0
Income Tax Expense (Benefit) 84.5 28.4 33.6 8.8 33.0 (19.3)
- --------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 148.6 $ 43.1 $ 48.5 $ 13.1 $59.7 $(15.8)
EBITDAL $374.0 $143.7 $154.0 $47.8 $45.0 $(16.5)
Total Assets $2,914.0 $950.7 $1,343.8<F2> $337.7 $281.5 $0.3
Property, Plant and Equipment $1,479.7 $792.5 $409.9 $277.3 - -
Accumulated Depreciation and Amortization $957.7 $661.9 $82.3 $211.3 $2.2 -
Capital Expenditures $168.7 $64.7 $74.2 $29.6 $0.2 -
- --------------------------------------------------------------------------------------------------------------------------------
1999
Operating Revenue $1,131.8 $554.5 $406.6<F1> $112.9 $ 57.8 -
Operation and Other Expense 807.7 409.4 292.0 68.2 23.3 (c) $ 14.8
Depreciation and Amortization Expense 76.9 45.2 17.7 13.5 0.2 0.3
Lease Expense 21.5 3.2 16.7 1.6 - -
Interest Expense 59.5 21.2 10.9 10.0 0.4 17.0
- --------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) Before Capital Re 166.2 75.5 69.3 19.6 33.9 (32.1)
Loss from Investment in Capital Re (34.5) - - - (34.5) -
Distributions on Redeemable
Preferred Securities of Subsidiary 6.0 1.7 - - - 4.3
Income Tax Expense (Benefit) 57.7 28.8 29.4 7.4 8.8 (16.7)
- --------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 68.0 $ 45.0 $ 39.9 $ 12.2 $ (9.4) $(19.7)
EBITDAL $324.1 $145.1 $114.6 $44.7 $34.5 $(14.8)
Total Assets $2,312.6 $995.7 $664.8<F2> $314.8 $336.9 $0.4
Property, Plant and Equipment $1,258.8 $770.0 $234.0 $254.8 - -
Accumulated Depreciation and Amortization $879.7 $629.7 $57.4 $190.7 $1.9 -
Capital Expenditures $99.7 $47.7 $23.8 $26.9 $0.9 $0.4
- --------------------------------------------------------------------------------------------------------------------------------
1998
Operating Revenue $1,039.3 $559.8 $328.4<F1> $95.6 $55.5 -
Operation and Other Expense 749.4 409.3 241.5 60.9 22.2<F3> $ 15.5
Depreciation and Amortization Expense 75.0 47.1 15.7 11.8 0.1 0.3
Lease Expense 16.7 2.0 14.6 0.1 - -
Interest Expense 64.9 22.1 9.7 10.3 - 22.8
- --------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) Before Capital Re 133.3 79.3 46.9 12.5 33.2 (38.6)
Income from Investment in Capital Re 15.2 - - - 15.2 -
Distributions on Redeemable
Preferred Securities of Subsidiary 6.0 1.7 - - - 4.3
Income Tax Expense (Benefit) 54.0 30.2 21.4 5.0 18.8 (21.4)
- --------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 88.5 $ 47.4 $ 25.5 $ 7.5 $ 29.6 $(21.5)
EBITDAL $289.9 $150.5 $86.9 $34.7 $33.3 $(15.5)
Total Assets $2,208.9 $998.6 $529.3<F2> $269.1 $411.6 $0.3
Property, Plant and Equipment $1,178.9 $770.2 $186.2 $222.5 - -
Accumulated Depreciation and Amortization $775.6 $596.1 $42.7 $135.2 $1.6 -
Capital Expenditures $80.8 $36.1 $22.0 $21.8 $0.1 $0.8
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Included $107.4 million of Canadian operating revenue in 2000 ($56.8 million in 1999; $36.2 million in 1998).
<F2> Included $215.6 million of Canadian assets in 2000 ($119.3 million in 1999; $60.9 million in 1998).
<F3> Included $0.5 million of minority interest in 2000 ($1.8 million in 1999; $2.0 million in 1998).
- --------------------------------------------------------------------------------------------------------------------------------
</FN>
- --------------------------------------------------------------------------------
ALLETE 2000 ANNUAL REPORT 59
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FORM 10-K
- --------------------------------------------------------------------------------
2 OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PREPARATION. References in this report to "we" and "our" are
to ALLETE and its subsidiaries, collectively. We prepare our financial
statements in conformity with generally accepted accounting principles. These
principles require management to make informed judgments, best estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION. Our consolidated financial statements include the
accounts of ALLETE and all of our majority owned subsidiary companies. All
material intercompany balances and transactions have been eliminated in
consolidation. Information for prior periods has been reclassified to present
comparable information for all periods.
BUSINESS SEGMENTS. We are a multi-services company that has operations in four
principal business segments. Energy Services, Automotive Services and Water
Services segments were determined based on products and services provided. The
Investment segment was determined based on short-term corporate liquidity needs
and the need to provide financial flexibility to pursue strategic initiatives in
the other business segments. We measure performance of our operations through
careful budgeting and monitoring of contributions to consolidated net income by
business segment. Corporate charges consist of expenses incurred by our
corporate headquarters and interest and preferred stock expense not specifically
identifiable to a business segment. Our policy is to not allocate these expenses
to business segments.
ENERGY SERVICES. Energy Services generate, transmit, distribute, market and
trade electricity. Native load electric service is provided to 144,000 customers
in northeastern Minnesota and northwestern Wisconsin. Large Power Customers,
which include five taconite producers, four paper and pulp mills, two pipeline
companies and one manufacturer, purchase about half of the electricity Minnesota
Power sells under all-requirements contracts with expiration dates extending
from May 2001 through December 2008. (See Item 1. - Energy Services - Large
Power Customers in this Form 10-K.) MPEX, a division of Minnesota Power, markets
power across the Midwest and Canada. Split Rock Energy LLC, formed as an
alliance between Minnesota Power and Great River Energy, combines power supply
capabilities and customer loads to share market and supply risks and to optimize
power trading opportunities. Split Rock contracts for exclusive services from
MPEX. BNI Coal, a wholly owned subsidiary, mines and sells lignite coal to two
North Dakota mine-mouth generating units, one of which is Square Butte. Square
Butte supplies approximately 71% (322 MW) of its output to Minnesota Power under
a long-term contract. (See Note 14.)
Electric rates are under the jurisdiction of various state and federal
regulatory authorities. Billings are rendered on a cycle basis. Revenue is
accrued for service provided but not billed. Electric rates include adjustment
clauses that bill or credit customers for fuel and purchased energy costs above
or below the base levels in rate schedules and bill retail customers for the
recovery of CIP expenditures not collected in base rates.
AUTOMOTIVE SERVICES. Automotive Services include several wholly owned
subsidiaries operating as integral parts of the vehicle redistribution business.
ADESA is the second largest vehicle auction network in North America. ADESA owns
or leases, and operates 54 vehicle auctions in the United States and Canada
through which used cars and other vehicles are purchased and sold by franchised
automobile dealers and licensed used car dealers. Sellers at ADESA's auctions
include domestic and foreign auto manufacturers, car dealers, automotive
fleet/lease companies, banks and finance companies. ADESA also has 19 auction
facilities in the United States and Canada that provide "total loss" vehicle
recovery services to insurance companies. AFC provides inventory financing for
wholesale and retail automobile dealers who purchase vehicles at ADESA auctions,
independent auctions and other auction chains. AFC has 86 loan production
offices located across the United States and Canada. These offices provide
qualified dealers credit to purchase vehicles at any of the 400 plus auctions
approved by AFC. Great Rigs is one of the nation's largest independent used
automobile transport companies with more than 140 automotive carriers. It offers
customers pick up and delivery service through 11 strategically located
transportation hubs in the United States. PAR provides customized remarketing
services, including transporting and liquidating off-lease vehicles, to various
businesses with fleet operations. AutoVIN, a 90% owned subsidiary, provides
professional field information services to the automotive industry, including
vehicle condition reporting, inventory verification auditing, program compliance
auditing and facility inspection. ADESA, Great Rigs, PAR and AutoVIN recognize
revenue when services are performed. AFC revenue is comprised of gains on sales
of receivables, and interest, fee and servicer income. As is customary for
finance companies, AFC revenue is reported net of interest expense of $2.7
million in 2000 ($2.0 million in 1999; $1.8 million in 1998). AFC generally
sells its United States dollar denominated finance receivables through a private
securitization structure. Gains and losses on such sales are generally
recognized at the time of settlement based on the difference between the sales
proceeds and the allocated basis of the finance receivables sold, adjusted for
transaction fees and residual interest retained. AFC also retains the right to
service receivables sold through the securitization and receives a fee for doing
so.
WATER SERVICES. Water Services include several wholly owned subsidiaries.
Florida Water is the largest investor owned supplier of water and wastewater
utility services in Florida. Heater is the largest investor owned water utility
in North Carolina. Heater also provides wastewater services in North Carolina.
In total, 196,000 water and 78,000 wastewater treatment customers are served by
Water Services. Water and wastewater rates are under the jurisdiction of various
state and county regulatory authorities. Billings are rendered on a cycle basis.
Revenue is accrued for services provided but not billed. Instrumentation
Services, Inc. provides predictive and preventive maintenance services to water
utility companies and other industrial operations. Americas' Water offers
contract management, operations and maintenance services to governments and
industries.
- --------------------------------------------------------------------------------
60 ALLETE 2000 ANNUAL REPORT
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
INVESTMENTS. Investments include real estate operations, investments in emerging
technologies funds related to the electric utility industry and a securities
portfolio. Our real estate operations include Cape Coral Holdings and an 80%
ownership in Lehigh. Both are Florida companies which through their subsidiaries
own real estate in Florida. Real estate revenue is recognized on the accrual
basis. Our emerging technology investments provide us with access to developing
technologies before their commercial debut, as well as financial returns and
diversification opportunities. We view these investments as a source of capital
for redeployment in existing businesses and a potential entree into additional
business opportunities. Our securities portfolio is intended to provide stable
earnings and liquidity. Proceeds from the securities portfolio are available for
reinvestment in existing businesses, to fund strategic initiatives and for other
corporate purposes.
DEPRECIATION. Property, plant and equipment are recorded at original cost, and
are reported on the balance sheet net of accumulated depreciation and
contributions in aid of construction. Expenditures for additions and significant
replacements and improvements are capitalized; maintenance and repair costs are
expensed as incurred. Expenditures for major plant overhauls are also accounted
for using this same policy. When property, plant and equipment are retired or
otherwise disposed of, gains or losses are recognized in revenue. When utility
property, plant and equipment are retired or otherwise disposed of, no gain or
loss is recognized. Contributions in aid of construction relate to utility
assets, and are amortized over the estimated life of the associated asset. This
amortization reduces depreciation expense. Contributions in aid of construction
relate to water assets and amounted to $203.9 million in 2000 ($189.6 million in
1999).
Depreciation is computed using the estimated useful lives of the various classes
of plant. In 2000 average depreciation rates for the energy, automotive and
water services segments were 3.3%, 3.7% and 2.0%, respectively (3.3%, 3.9% and
2.2%, respectively, in 1999; 3.5%, 4.1% and 2.6%, respectively, in 1998).
ACCOUNTS RECEIVABLE. Accounts receivable is reported on the balance sheet net of
an allowance for doubtful accounts. The allowance is based on our evaluation of
the receivable portfolio under current conditions, the size of the portfolio,
overall portfolio quality, review of specific problems and such other factors
that in our judgment deserve recognition in estimating losses.
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 $300 million, to
third party purchasers under an agreement that expires at the end of 2002. At
December 31, 2000 AFC had sold $335.7 million of finance receivables to the
special purpose subsidiary ($296.8 million at December 31, 1999). Third party
purchasers had purchased an undivided interest in finance receivables of $239
million from this subsidiary at December 31, 2000 ($225 million at December 31,
1999). AFC has also entered into an arrangement in December 2000 with a
manufacturer to floorplan certain vehicles located at auctions awaiting resale
for a security interest in those vehicles. AFC sells these finance receivables,
on a revolving basis, to another wholly owned, unconsolidated, qualified special
purpose subsidiary. This subsidiary borrows money from a third party under an
agreement that expires June 15, 2001. At December 31, 2000 AFC had sold $53.5
million of these finance receivables to the special purpose subsidiary. The
third party lender had advanced $43 million against these receivables. Unsold
finance receivables and unfinanced receivables held by the special purpose
subsidiaries are recorded by AFC as residual interest at fair value. Fair value
is based upon estimates of future cash flows, using assumptions that market
participants would use to value such instruments, including estimates of
anticipated credit losses over the life of the receivables sold without
application of a discount rate due to the short-term nature of the receivables
sold. The fair value of AFC's residual interest was $106.2 million at December
31, 2000 ($57.6 million at December 31, 1999). Proceeds from the sale of the
receivables were used to repay borrowings from ALLETE and fund vehicle inventory
purchases for AFC's customers.
Accounts Receivable
December 31 2000 1999
- --------------------------------------------------------------------------------
Millions
Trade Accounts Receivable $208.6 $120.6
Less: Allowance for Doubtful Accounts 5.2 7.6
- --------------------------------------------------------------------------------
203.4 113.0
- --------------------------------------------------------------------------------
Finance Receivables 458.0 366.5
Less: Amount Sold 389.2 296.8
Allowance for Doubtful Accounts 6.5 6.3
- --------------------------------------------------------------------------------
62.3 63.4
- --------------------------------------------------------------------------------
Total Accounts Receivable $265.7 $176.4
- --------------------------------------------------------------------------------
INVENTORIES. Inventories, which include fuel, material and supplies, are stated
at the lower of cost or market. Cost is determined by the average cost method.
GOODWILL. Goodwill primarily relates to the Automotive Services segment and
represents the excess of cost over identifiable net assets of businesses
acquired. Amortization is computed on a straight-line basis over a 40 year
period. Operating expenses in 2000 included $8.2 million of goodwill
amortization ($5.1 million in 1999; $4.9 million in 1998).
UNAMORTIZED EXPENSE, DISCOUNT AND PREMIUM ON DEBT. Expense, discount and premium
on debt are deferred and amortized over the lives of the related issues.
CASH AND CASH EQUIVALENTS. We consider all investments purchased with maturities
of three months or less to be cash equivalents.
FOREIGN CURRENCY TRANSLATION. Results of operations for our Canadian
subsidiaries are translated into United States dollars using the average
exchange rates during the period. Assets and liabilities are translated into
United States dollars using the exchange rate on the balance sheet date, except
for intangibles and fixed assets, which are translated at historical rates.
[GRAPHIC OMITTED - SQUARE]
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ALLETE 2000 ANNUAL REPORT 61
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FORM 10-K
- --------------------------------------------------------------------------------
3 ACQUISITIONS AND DIVESTITURES
ADESA AUCTION FACILITIES. In February 2000 ADESA purchased the Mission City Auto
Auction in San Diego, California.
In May 2000 ADESA Canada purchased the remaining 27% of Impact Auto. ADESA
Canada acquired 20% of Impact Auto on October 1, 1995, 27% in March 1999 and
another 26% in January 2000. Impact Auto is Canada's largest national provider
of "total loss" vehicle recovery services to insurance companies.
In June 2000 ADESA acquired all of the outstanding common shares of Auction
Finance Group, Inc. (AFG). AFG owns CAAG Auto Auction Holdings Ltd., which was
doing business as Canadian Auction Group. This acquisition added 13 vehicle
auction facilities and associated dealer financing business to ADESA's existing
locations and established ADESA as the premier automotive services company in
Canada.
In August 2000 ADESA acquired Beebe Auto Exchange, Inc. which operated two
Arkansas auto auctions: Mid-Ark Auto Auction in North Little Rock and Central
Arkansas Auto Auction in Beebe, Arkansas, and 51% of Interstate Auto Auction
located in Ocala, Florida.
In October 2000 ADESA purchased nine auction facilities from Manheim.
The transactions described in the five preceding paragraphs had a combined
purchase price of approximately $438 million and resulted in goodwill of $298
million, which we are amortizing over a 40-year useful life. We used the
purchase method of accounting for these transactions and included an estimated
allocation of the purchase price for the Manheim transaction. Final purchase
accounting adjustments are not expected to be material for this transaction.
Financial results have been included in our consolidated financial statements
since the date of each purchase. Pro forma financial results have not been
presented due to immateriality.
In April 1999 ADESA acquired Des Moines Auto Auction located in Des Moines, Iowa
and in July 1999 ADESA Canada, Inc. purchased the Vancouver Auto Auction of New
Westminster, British Columbia. The two transactions had a combined purchase
price of $31.3 million and were accounted for using the purchase method of
accounting resulting in goodwill of $11.9 million. Financial results for each
facility have been included in our consolidated financial statements since the
date of purchase. Financial results prior to the acquisition were not material.
ADESA acquired the assets of Greater Lansing Auto Auction in Lansing, Michigan
and I-55 Auto Auction in St. Louis, Missouri in April 1998, and Ark-La-Tex Auto
Auction in Shreveport, Louisiana in May 1998 for a combined purchase price of
$23.8 million. The acquisitions were accounted for using the purchase method of
accounting and resulted in additional goodwill of $16.3 million. Financial
results for these three auctions have been included in our consolidated
financial statements since the dates of acquisition. Financial results prior to
the acquisition were not material.
ACQUISITION OF SPRUCE CREEK SOUTH UTILITIES INC. In June 2000 Florida Water
purchased the assets of Spruce Creek for $5.5 million, plus a commitment to pay
a fee for water connections through June 2005. The transaction was accounted for
using the purchase method of accounting. Financial results have been included in
our consolidated financial statements since the date of purchase. Pro forma
financial results have not been presented due to immateriality. Spruce Creek
serves 5,600 water and wastewater customers in three communities in Marion
County, Florida. The systems acquired are designed to accommodate a total of
10,000 water and wastewater customers.
ACQUISITION OF DICKS CREEK. In December 2000 ALLETE Water Services, Inc.
purchased, subject to certain conditions, the assets of Dicks Creek Wastewater
Utility for $6.6 million plus a commitment to pay a fee for residential
connections. Beginning in 2001, the commitment fee will be a minimum of $400,000
annually for four years or until the cumulative fees paid reach $2 million. We
expect to complete the transaction in early 2001. The transaction will be
accounted for using the purchase method of accounting. Dicks Creek is located
near Atlanta in Forsyth County, Georgia.
ACQUISITION OF PALM COAST UTILITY CORPORATION. In January 1999 Florida Water
purchased the assets and assumed certain liabilities of PCUC for $16.8 million
plus $1,000 per new water connection for an eight-year period. We estimate the
present value of these future water connections at $5.1 million. PCUC provides
water and wastewater services in Flagler County, Florida. The transaction was
accounted for using the purchase method of accounting. Financial results have
been included in our consolidated financial statements since the date of
purchase. Financial results prior to the acquisition were not material.
ACQUISITION OF CAPE CORAL. In June 1999 Cape Coral Holdings, a subsidiary of
ALLETE Properties, purchased, for $45.0 million, certain real estate properties
located in Cape Coral, 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 included approximately 2,500
acres of commercial and residential zoned land, including home sites, a golf
resort, marina and commercial buildings. Concurrently with the purchase, Cape
Coral Holdings assigned to a third party the rights to a shopping center and a
portion of the vacant land for $8.8 million, which reduced the net amount paid
by Cape Coral Holdings to $36.2 million. The transaction was accounted for using
the purchase method of accounting. Financial results have been included in our
consolidated financial statements since the date of purchase. Financial results
prior to the acquisition were not material.
MID SOUTH WATER SYSTEMS, INC. In June 1999 Heater acquired the assets of Mid
South Water Systems, Inc. (Mid South) located in Sherills Ford, North Carolina
for $9 million. The acquisition was accounted for using the purchase method of
accounting. Financial results have been included in our consolidated financial
statements since the date of purchase. Financial results prior to the
acquisition were not material. [GRAPHIC OMITTED - SQUARE]
- --------------------------------------------------------------------------------
62 ALLETE 2000 ANNUAL REPORT
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FORM 10-K
- --------------------------------------------------------------------------------
4 REGULATORY MATTERS
We file for periodic rate revisions with the Minnesota Public Utilities
Commission (MPUC), the Federal Energy Regulatory Commission (FERC), the Florida
Public Service Commission (FPSC) and other state and county regulatory
authorities. Interim rates in Minnesota and Florida are placed into effect,
subject to refund with interest, pending a final decision by the appropriate
commission. In 2000 43% of our consolidated operating revenue (47% in 1999; 52%
in 1998) was under regulatory authority. The MPUC had regulatory authority over
approximately 29% in 2000 (31% in 1999; 36% in 1998) of our consolidated
operating revenue.
ELECTRIC RATES. Restructuring of the electric utility industry continues.
Twenty-five states representing approximately 70% of the United States
population have passed either legislation or regulation that initiates a process
leading to retail customer choice. Neither Minnesota nor Wisconsin (where
Minnesota Power has retail electric customers) have passed retail restructuring
laws. In 2001 utility restructuring legislation will likely be debated at both
the federal level and in Minnesota and Wisconsin. It is unlikely, however, that
the United States Congress or the legislatures of Minnesota or Wisconsin will
enact retail choice legislation into law this year. We cannot predict the timing
or substance of any future legislation that might ultimately be enacted. We are
taking all necessary steps to cultivate community and customer relations, and
continue to maintain our competitive position as a low-cost and long-term power
supplier to large industrial customers. With electric rates among the lowest in
the United States, customer satisfaction high, and long-term wholesale and Large
Power Customer retail contracts in place, we believe we are well positioned for
the future.
WATER AND WASTEWATER RATES. In 1995 the Florida First District Court of Appeals
(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 in January 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 1998 order, the FPSC required Florida Water to refund, with
interest, $2.5 million, the amount paid by customers in the Spring Hill service
area from January 1996 through June 1997 under uniform rates that 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. 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 that paid more under uniform rates appealed the FPSC's January
1998 order, arguing that they are entitled to a refund because the FPSC had no
authority to order uniform rates. Florida Water also appealed the $2.5 million
refund order. Initial briefs were filed by all parties in May 1998. In June 1998
the Court of Appeals reversed its previous ruling that the FPSC was without
authority to order uniform rates at which time customer groups supporting the
FPSC's January 1998 order filed a motion with the Court of Appeals seeking
dismissal of the appeal by customer groups seeking refunds. Customers seeking
refunds filed amended briefs in September 1998. A provision for refund related
to the $2.5 million refund order was recorded in 1999.
In December 2000 Hernando County approved a settlement agreement relating to the
Spring Hill refund issue that was before the Court of Appeals. Under the
settlement agreement, Spring Hill customers would receive a prospective rate
reduction over three years totaling $1.8 million with no refunds. Florida Water
also agreed it would not file a rate case to increase rates to Spring Hill
customers for a period of three years. In December 2000 the Court of Appeals
remanded the issue back to the FPSC for settlement consideration. We are unable
to predict the timing or outcome of the appeal and settlement process.
DEFERRED REGULATORY CHARGES AND CREDITS. Deferred regulatory charges and credits
are included in other assets and other liabilities on our consolidated balance
sheet. Our utility operations are subject to the provisions of SFAS 71,
"Accounting for the Effects of Certain Types of Regulation." We capitalize as
deferred regulatory charges incurred costs which are probable of recovery in
future utility rates. Deferred regulatory credits represent amounts expected to
be credited to customers in rates. Based on current rate treatment, we believe
all deferred regulatory charges are probable of recovery. [GRAPHIC OMITTED -
SQUARE]
Deferred Regulatory Charges and Credits
December 31 2000 1999
- --------------------------------------------------------------------------------
Millions
Deferred Charges
Income Taxes $ 15.5 $17.0
Conservation Improvement Programs 1.1 13.5
Premium on Reacquired Debt 5.0 5.6
Other 19.1 21.5
- --------------------------------------------------------------------------------
40.7 57.6
Deferred Credits
Income Taxes 55.0 55.1
- --------------------------------------------------------------------------------
Net Deferred Regulatory Charges (Credits) $(14.3) $ 2.5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALLETE 2000 ANNUAL REPORT 63
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
5 FINANCIAL INSTRUMENTS
SECURITIES INVESTMENTS. Our securities portfolio is managed internally and by
selected outside managers. Securities held principally for near-term sale are
classified as trading securities and included in current assets at fair value.
Changes in the fair value of trading securities are recognized in earnings.
Trading securities consist primarily of the common stock of publicly traded
companies. Securities held for an indefinite period of time are classified as
available-for-sale securities and included in investments at fair value.
Unrealized gains and losses on available-for-sale securities are included in
accumulated other comprehensive income, net of tax. Unrealized losses on
available-for-sale securities that are other than temporary are recognized in
earnings. Realized gains and losses are computed on each specific investment
sold. At December 31, 2000 available-for-sale securities consisted of equity
securities in a grantor trust established to fund certain employee benefits. At
December 31, 1999 available-for-sale securities also included 4.7 million shares
of ACE Limited (which were sold in 2000). Before 1999, available-for-sale
securities consisted primarily of the preferred stock of utilities and financial
institutions with investment grade debt ratings. During 1999, we changed our
strategy for this preferred stock which resulted in a reclassification to
trading and we recognized an unrealized loss of $2.6 million.
Available-For-Sale Securities
- ------------------------------------------------------------------------
Millions
Gross
Unrealized Fair
At December 31 Cost Gain (Loss) Value
- ------------------------------------------------------------------------
2000 $7.6 $4.7 - $12.3
1999 $87.8 $6.3 $(0.3) $93.8
1998 $70.9 $7.7 $(5.1) $73.5
Net
Unrealized
Gain (Loss)
Gross in Other
Sales Realized Comprehensive
At December 31 Proceeds Gain (Loss) Income
- ------------------------------------------------------------------------
2000 $129.9 $49.1 - $(0.5)
1999 $0.2 - - $1.6
1998 $35.7 $1.7 $(2.3) $1.3
- ------------------------------------------------------------------------
Before discontinuance of the equity method of accounting in 1999, we also
recorded our share of unrealized gains and losses from available-for-sale
securities held by Capital Re, a $5.5 million gain in 1998.
The net unrealized loss included in earnings for trading securities in 2000 was
$2.3 million ($1.6 million loss in 1999; $0.7 million gain in 1998).
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS AND RISKS. In portfolio strategies
designed to reduce market risks, we sell common stock securities short.
Unrealized gains and losses on short sales are recognized in earnings.
Previously, treasury futures were used as a hedge to reduce interest rate risks
associated with holding fixed dividend preferred stocks. We no longer utilize
treasury futures as most of the fixed dividend preferred stocks were sold in
2000.
In October 2000 we entered into an interest rate swap agreement with a notional
amount of $250 million to hedge $250 million of floating rate debt also issued
in October 2000. Under the one-year swap agreement, we make fixed quarterly
payments based on a fixed rate of 6.5% and receive payments at a floating rate
based on LIBOR (6.8% at December 31, 2000). The agreement is subject to market
risk due to interest rate fluctuation.
In March 2000 Florida Water entered into an interest rate swap agreement with a
notional amount of $35.1 million to hedge fixed rate long-term debt. The swap
agreement superseded a previous swap agreement entered into in 1998. Under the
25 year agreement, Florida Water makes quarterly payments at a variable rate
based upon The Bond Market Association Municipal Swap Index plus 174 basis
points (4.8% at December 31, 2000) and receives payments based on a fixed rate
of 6.5%. The swap agreement is subject to market risk due to interest rate
fluctuation.
Effective with the January 1, 2001 adoption of SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, both interest rate swaps will be
recorded on the balance sheet at fair value.
The fair value of off-balance sheet financial instruments reflected the
estimated amounts that we would receive or pay if the contracts were terminated
at December 31. This fair value represents the difference between the estimated
future receipts and payments under the terms of each instrument, and is
estimated by obtaining quoted market prices or by using common pricing models.
These fair values should not be viewed in isolation, but rather in relation to
the fair value of the underlying hedged transaction.
Off-Balance-Sheet Financial Instruments
- ------------------------------------------------------------------------
Millions
Fair Value
Contract Receivable
December 31 Amount (Payable)
- ------------------------------------------------------------------------
2000
Short Stock Sales Outstanding $5.3 $(0.5)
Interest Rate Swaps $285.1 $(3.2)
- ------------------------------------------------------------------------
1999
Short Stock Sales Outstanding $58.5 $(2.1)
Treasury Futures $8.6 $0.2
Interest Rate Swap $35.1 $(2.3)
- ------------------------------------------------------------------------
- --------------------------------------------------------------------------------
64 ALLETE 2000 ANNUAL REPORT
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS. With the exception of the items listed
below, the estimated fair values of all financial instruments approximate the
carrying amount. The fair values for the items below were based on quoted market
prices for the same or similar instruments.
Financial Instruments Carrying Fair
December 31 Amount Value
- ------------------------------------------------------------------------
Millions
Long-Term Debt
2000 $952.3 $961.2
1999 $712.8 $694.5
Redeemable Serial Preferred Stock
2000 - -
1999 $20.0 $20.0
Quarterly Income Preferred Securities
2000 $75.0 $72.8
1999 $75.0 $65.3
- ------------------------------------------------------------------------
CONCENTRATION OF CREDIT RISK. Financial instruments that subject us to
concentrations of credit risk consist primarily of accounts receivable.
Minnesota Power sells electricity to about 15 customers in northern Minnesota's
taconite, pipeline, paper and wood products industries. Receivables from these
customers totaled approximately $12 million at December 31, 2000 ($8.2 million
at December 31, 1999). Minnesota Power does not obtain collateral to support
utility receivables, but monitors the credit standing of major customers.
[GRAPHIC OMITTED - SQUARE]
6 INVESTMENTS IN CAPITAL RE AND ACE
In May 2000 we recorded a $30.4 million, or $0.44 per share, after-tax gain on
the sale of 4.7 million shares of ACE Limited. We received 4.7 million shares of
ACE plus $25.1 million in December 1999 when Capital Re merged with ACE. At the
time of the merger we owned 7.3 million shares or 20% of Capital Re.
As a result of the merger, in 1999 we recorded a $36.2 million, or $0.52 per
share, after-tax non-cash charge as follows: a $24.1 million, or $0.35 per
share, charge in the second quarter following the merger agreement and
discontinuance of our equity accounting for Capital Re and a $12.1 million, or
$0.17 per share, charge in the fourth quarter upon completion of the merger.
In 1998 we used the equity method to account for our investment in Capital Re.
As a result of the pending merger with ACE, in 1999 we discontinued the equity
method of accounting for our investment in Capital Re and accounted for our
investment in Capital Re as an available-for-sale security. [GRAPHIC OMITTED -
SQUARE]
7 LEASING AGREEMENTS
In April 2000 leases for three ADESA auction facilities (Boston, Charlotte and
Knoxville) were refinanced in a $28.4 million leveraged lease transaction. The
new lease is treated as an operating lease for financial reporting purposes and
expires in April 2010. The lease may be terminated after 2005 under certain
conditions. We have guaranteed ADESA's obligations under the lease.
We lease other properties and equipment in addition to those listed above under
operating and capital lease agreements with terms expiring through 2010. The
aggregate amount of future minimum lease payments for capital and operating
leases during 2001 is $15.2 million ($11.7 million in 2002; $7.5 million in
2003; $6.0 million in 2004; and $5.2 million in 2005). Total rent expense was
$27.0 million in 2000 ($21.5 million in 1999; $16.7 million in 1998). [GRAPHIC
OMITTED - SQUARE]
8 JOINTLY OWNED ELECTRIC FACILITY
We own 80% of the 534 megawatt Boswell Energy Center Unit 4 (Boswell Unit 4).
While we operate the plant, certain decisions about the operations of Boswell
Unit 4 are subject to the oversight of a committee on which we and Wisconsin
Public Power, Inc. (WPPI), the owner of the other 20% of Boswell Unit 4, have
equal representation and voting rights. Each of us must provide our own
financing and is obligated to pay our ownership share of operating costs. Our
share of direct operating expenses of Boswell Unit 4 is included in operating
expense on our consolidated statement of income. Our 80% share of the original
cost included in electric plant at December 31, 2000 was $309 million ($310
million at December 31, 1999). The corresponding provision for accumulated
depreciation was $157 million at December 31, 2000 ($150 million at December 31,
1999). [GRAPHIC OMITTED - SQUARE]
- --------------------------------------------------------------------------------
ALLETE 2000 ANNUAL REPORT 65
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
9 LONG-TERM DEBT
Long-Term Debt
December 31 2000 1999
- --------------------------------------------------------------------------------
Millions
First Mortgage Bonds
Floating Rate Due 2003 $250.0
6 1/4% Series Due 2003 25.0 $ 25.0
7.70% Senior Notes, Series A Due 2006 90.0 90.0
6.68% Series Due 2007 20.0 20.0
7% Series Due 2007 60.0 60.0
7 1/2% Series Due 2007 35.0 35.0
7 3/4% Series Due 2007 55.0 55.0
7% Series Due 2008 50.0 50.0
8.10% Senior Notes, Series B Due 2010 35.0 -
8.46% Due 2013 51.2 54.7
8.01% Due 2017 28.0 28.0
6% Pollution Control Series E Due 2022 111.0 111.0
Variable Demand Revenue Refunding
Bonds Series 1997 A, B, C and D
Due 2007 - 2020 39.0 39.0
Industrial Development Revenue Bonds,
6.50% Due 2025 35.1 35.1
Other Long-Term Debt, 5.6-9.0%
Due 2001 - 2026 83.8 119.1
Less Due Within One Year (15.8) (9.1)
- --------------------------------------------------------------------------------
Total Long-Term Debt $952.3 $712.8
- --------------------------------------------------------------------------------
The aggregate amount of long-term debt maturing during 2001 is $15.8 million
($10.9 million in 2002; $286.9 million in 2003, $15.6 million in 2004; and $3.5
million in 2005). Substantially all of our electric and water plant is subject
to the lien of the mortgages securing various first mortgage bonds.
At December 31, 2000 we had long-term bank lines of credit aggregating $28.1
million ($58.8 million at December 31, 1999). Drawn portions on these lines of
credit aggregated $14.1 million at December 31, 2000 ($43.5 at December 31,
1999) and are included in other long-term debt.
In March 2000 ADESA issued $35 million of 8.10% Senior Notes, Series B, due
March 2010. Proceeds were used to refinance short-term bank indebtedness
incurred for the acquisition of vehicle auction facilities purchased in 1999 and
for general corporate purposes.
In June 2000 we refinanced $4.6 million of 6.875% Pollution Control Revenue
Refunding Bonds, Series 1991-A with $4.6 million of Adjustable Rate Pollution
Control Revenue Refunding Bonds Series 2000 due December 2015. The new bonds had
an initial interest rate of 4.75%.
Also in June 2000 Heater issued an $8 million, 8.24%, note to CoBank, ACB, due
June 2025. Proceeds were used to refinance short-term indebtedness incurred for
the 1999 acquisition of Mid South and capital improvements in 1999 and 2000.
In October 2000 we issued $250 million of Floating Rate First Mortgage Bonds due
October 2003. We have the option to redeem these bonds on or after October 20,
2001, in whole or in part from time to time, on any interest payment date prior
to their maturity. Proceeds were used to refinance short-term debt incurred in
connection with the October 2000 acquisition of nine vehicle auction facilities
from Manheim. The new bonds had an initial interest rate of 7.61%. [GRAPHIC
OMITTED - SQUARE]
10 SHORT-TERM BORROWINGS AND COMPENSATING BALANCES
We have bank lines of credit aggregating $214.5 million ($75 million at December
31, 1999), which make financing available through short-term bank loans and
provide credit support for commercial paper. At December 31, 2000, $211.0
million was available for use ($74 million at December 31, 1999). At December
31, 2000 we had issued commercial paper with a face value of $260.6 million
($96.9 million in 1999), with support provided by bank lines of credit and our
securities portfolio.
Certain lines of credit require a commitment fee of 0.0125%. Interest rates on
commercial paper and borrowings under the lines of credit ranged from 7.28% to
7.90% at December 31, 2000 (6.42% to 6.70% at December 31, 1999). The weighted
average interest rate on short-term borrowings at December 31, 2000 was 7.57%
(6.59% at December 31, 1999). The total amount of compensating balances at
December 31, 2000 and 1999, was immaterial. [GRAPHIC OMITTED - SQUARE]
- --------------------------------------------------------------------------------
66 ALLETE 2000 ANNUAL REPORT
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
11 COMMON STOCK AND EARNINGS PER SHARE
Our Articles of Incorporation and mortgages contain provisions that, under
certain circumstances, would restrict the payment of common stock dividends. As
of December 31, 2000 no retained earnings were restricted as a result of these
provisions.
COMMON STOCK SPLIT. On March 2, 1999 our common stock was split two-for-one. All
common share and per share amounts in our financial statements and notes to the
financial statements have been adjusted for all periods to reflect the
two-for-one stock split.
Summary of Common Stock Shares Equity
- -----------------------------------------------------------------------------
Millions
Balance at December 31, 1997 67.1 $416.0
1998 Public Offering 4.2 89.9
Employee Stock Purchase Plan - 0.9
Invest Direct<F1> 0.8 17.1
Other 0.2 5.1
- -----------------------------------------------------------------------------
Balance at December 31, 1998 72.3 529.0
1999 Employee Stock Purchase Plan 0.1 1.3
Invest Direct<F1> 0.9 17.4
Other 0.2 4.3
- -----------------------------------------------------------------------------
Balance at December 31, 1999 73.5 552.0
2000 Employee Stock Purchase Plan 0.1 1.1
Invest Direct<F1> 1.0 18.8
Other 0.1 5.0
- -----------------------------------------------------------------------------
Balance at December 31, 2000 74.7 $576.9
- -----------------------------------------------------------------------------
<FN>
<F1> Invest Direct is ALLETE's direct stock purchase and dividend reinvestment
plan.
</FN>
COMMON STOCK ISSUANCE. In September 1998 4.2 million shares of our common stock
were sold in a public offering at $21.875 per share. Total net proceeds of
approximately $89 million were used to repay outstanding commercial paper, to
fund strategic initiatives and for capital expenditures. Net proceeds not
immediately used for the above purposes were invested in our securities
portfolio.
SHAREHOLDER RIGHTS PLAN. In 1996 we adopted a rights plan that provides for a
dividend distribution of one preferred share purchase right (Right) to be
attached to each share of common stock.
The Rights, which are currently not exercisable or transferable apart from our
common stock, entitle the holder to purchase one two-hundredth of a share of
ALLETE's Junior Serial Preferred Stock A, without par value, at an exercise
price of $45. These Rights would become exercisable if a person or group
acquires beneficial ownership of 15% or more of our common stock or announces a
tender offer which would increase the person's or group's beneficial ownership
interest to 15% or more of our common stock, subject to certain exceptions. If
the 15% threshold is met, each Right entitles the holder (other than the
acquiring person or group) to purchase common stock (or, in certain
circumstances, cash, property or other securities of ours) having a market price
equal to twice the exercise price of the Right. If we are acquired in a merger
or business combination, or 50% or more of our assets or earning power are sold,
each exercisable Right entitles the holder to purchase common stock of the
acquiring or surviving company having a value equal to twice the exercise price
of the Right. Certain stock acquisitions will also trigger a provision
permitting the Board of Directors to exchange each Right for one share of our
common stock.
The Rights which expire on July 23, 2006, are nonvoting and may be redeemed by
us at a price of $.005 per Right at any time they are not exercisable. One
million shares of Junior Serial Preferred Stock A have been authorized and are
reserved for issuance under the plan.
EARNINGS PER SHARE. The difference between basic and diluted earnings per share
arises from outstanding stock options and performance share awards granted under
our Executive and Director Long-Term Incentive Compensation Plans.
Reconciliation of
Basic and Diluted Basic Dilutive Diluted
Earnings Per Share EPS Securities EPS
- --------------------------------------------------------------------------------
Millions Except Per Share Amounts
2000
Net Income $148.6 - $148.6
Less: Dividends on Preferred Stock 0.9 - 0.9
- --------------------------------------------------------------------------------
Earnings Available for Common Stock $147.7 - $147.7
Common Shares 69.8 0.3 70.1
Per Share $2.12 - $2.11
- --------------------------------------------------------------------------------
There was no difference between basic and diluted earnings per share for 1999
and 1998.
We paid dividends on preferred stock of $0.9 million in 2000 ($2.0 million in
both 1999 and 1998). [GRAPHIC OMITTED - SQUARE]
- --------------------------------------------------------------------------------
ALLETE 2000 ANNUAL REPORT 67
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
12 PREFERRED STOCK
In 2000 we redeemed all of our outstanding Preferred Stock and Preferred Stock A
with proceeds from the sale of a portion of our securities portfolio and
internally generated funds.
All 100,000 shares of Serial Preferred Stock A, $7.125 Series outstanding at
December 31, 1999 were redeemed in April 2000 for an aggregate of $10 million.
All 100,000 shares of Serial Preferred Stock A, $6.70 Series outstanding at
December 31, 1999 were redeemed in July 2000 for an aggregate of $10 million.
All 113,358 shares of 5% Preferred Stock outstanding at December 31, 1999 were
redeemed in August 2000 at $102.50 per share plus accrued and unpaid dividends
of $0.75 per share for an aggregate of $11.7 million. [GRAPHIC OMITTED - SQUARE]
13 MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
ALLETE Capital I (Trust) was established as a wholly owned business trust of the
Company for the purpose of issuing common and preferred securities (Trust
Securities). In March 1996 the Trust publicly issued three million 8.05%
Cumulative Quarterly Income Preferred Securities (QUIPS), representing preferred
beneficial interests in the assets held by the Trust. The proceeds from the sale
of the QUIPS, and from common securities of the Trust issued to us, were used by
the Trust to purchase from us $77.5 million of 8.05% Junior Subordinated
Debentures, Series A, Due 2015 (Subordinated Debentures), resulting in net
proceeds to us of $72.3 million. Holders of the QUIPS are entitled to receive
quarterly distributions at an annual rate of 8.05% of the liquidation preference
value of $25 per security. We have the right to defer interest payments on the
Subordinated Debentures which would result in the similar deferral of
distributions on the QUIPS during extension periods up to 20 consecutive
quarters. We are the owner of all the common trust securities, which constitute
approximately 3% of the aggregate liquidation amount of all the Trust
Securities. The sole asset of the Trust is Subordinated Debentures, interest on
which is deductible by us for income tax purposes. The Trust will use interest
payments received on the Subordinated Debentures it holds to make the quarterly
cash distributions on the QUIPS.
The QUIPS are subject to mandatory redemption upon repayment of the Subordinated
Debentures at maturity or upon redemption. We have the option to redeem the
Subordinated Debentures upon the occurrence of certain events and, in any event,
may do so at any time on or after March 20, 2001.
We have guaranteed, on a subordinated basis, payment of the Trust's
obligations. [GRAPHIC OMITTED - SQUARE]
14 SQUARE BUTTE POWER PURCHASE AGREEMENT
Minnesota Power has a power purchase agreement with Square Butte that extends
through 2026 (Agreement). It provides a long-term supply of low-cost energy to
customers in our electric service territory and enables Minnesota Power to meet
power pool reserve requirements. Square Butte, a North Dakota cooperative
corporation, owns a 455-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.
Minnesota Power is entitled to approximately 71% of the Unit's output under the
Agreement. After 2005 and upon compliance with a two-year advance notice
requirement, Minnkota has the option to reduce Minnesota Power's entitlement by
5% annually, to a minimum of 50%. Minnesota Power is obligated to pay its pro
rata share of Square Butte's costs based on Minnesota Power's entitlement to
Unit output. Minnesota Power's payment obligation is suspended if Square Butte
fails to deliver any power, whether produced or purchased, for a period of one
year. Square Butte's fixed costs consist primarily of debt service. At December
31, 2000 Square Butte had total debt outstanding of $314.6 million. Total annual
debt service for Square Butte is expected to be approximately $36 million in
each of the years 2001 through 2003 and $23 million in both 2004 and 2005.
Variable operating costs include the price of coal purchased from BNI Coal, our
subsidiary, under a long-term contract.
Minnesota Power's cost of power purchased from Square Butte during 2000 was
$58.7 million ($58.7 million in 1999; $58.2 million in 1998). This reflects
Minnesota Power's pro rata share of total Square Butte costs based on the 71%
output entitlement in 2000, 1999 and 1998. Included in this amount was Minnesota
Power's pro rata share of interest expense of $14.8 million in 2000 ($15.5
million in 1999; $14.6 million in 1998). Minnesota Power's payments to Square
Butte are approved as purchased power expense for ratemaking purposes by both
the MPUC and FERC. [GRAPHIC OMITTED - SQUARE]
- --------------------------------------------------------------------------------
68 ALLETE 2000 ANNUAL REPORT
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
15 INCOME TAX EXPENSE
Income Tax Expense
Year Ended December 31 2000 1999 1998
- --------------------------------------------------------------------------------
Millions
Current Tax Expense
Federal $75.6 $57.6 $38.5
Foreign 8.0 6.9 4.9
State 7.5 6.0 9.8
- --------------------------------------------------------------------------------
91.1 70.5 53.2
Deferred Tax Expense (Benefit)
Federal (4.9) (6.4) 0.9
Foreign 0.9 (0.4) (0.4)
State (2.6) (5.2) (0.4)
- --------------------------------------------------------------------------------
(6.6) (12.0) 0.1
Change in Valuation Allowance 1.8 0.7 2.3
- --------------------------------------------------------------------------------
Deferred Tax Credits (1.8) (1.5) (1.6)
- --------------------------------------------------------------------------------
Total Income Tax Expense $84.5 $57.7 $54.0
- --------------------------------------------------------------------------------
Reconciliation of Taxes from
Federal Statutory Rate to
Total Income Tax Expense
Year Ended December 31 2000 1999 1998
- --------------------------------------------------------------------------------
Millions
Tax Computed at Federal
Statutory Rate $81.6 $44.0 $49.8
Increase (Decrease) in Tax
State Income Taxes -- Net of
Federal Income Tax Benefit 4.4 6.5 6.6
Capital Re Transaction - 10.8 -
Dividend Received Deduction (0.6) (1.4) (2.7)
Foreign Taxes 1.2 2.3 2.0
Tax Credits (1.4) (3.3) (2.4)
Other (0.7) (1.2) 0.7
- --------------------------------------------------------------------------------
Total Income Tax Expense $84.5 $57.7 $54.0
- --------------------------------------------------------------------------------
Deferred Tax Assets and Liabilities
December 31 2000 1999
- ---------------------------------------------------------------------------
Millions
Deferred Tax Assets
Allowance for Bad Debts $ 9.3 $ 10.1
Contributions in Aid of Construction 14.8 16.3
Lehigh Basis Difference 7.9 7.8
Deferred Compensation Plans 15.1 13.4
Depreciation 13.9 13.4
Employee Stock Ownership Plan 9.4 8.6
Investment Tax Credits 18.7 19.7
Postemployment Benefits 9.2 8.8
Other 33.1 39.3
- ---------------------------------------------------------------------------
Gross Deferred Tax Assets 131.4 137.4
Deferred Tax Asset Valuation Allowance (5.1) (3.3)
- ---------------------------------------------------------------------------
Total Deferred Tax Assets 126.3 134.1
- ---------------------------------------------------------------------------
Deferred Tax Liabilities
Depreciation 195.2 196.7
Allowance for Funds Used During
Construction 16.3 16.9
Investment Tax Credits 26.2 28.0
Unrealized Portfolio Gains 0.2 7.9
Other 13.5 24.5
- ---------------------------------------------------------------------------
Total Deferred Tax Liabilities 251.4 274.0
- ---------------------------------------------------------------------------
Accumulated Deferred Income Taxes $125.1 $139.9
- ---------------------------------------------------------------------------
UNDISTRIBUTED EARNINGS. Undistributed earnings of our foreign subsidiaries were
approximately $27.9 million at December 31, 2000 ($19.3 million at December 31,
1999). Foreign undistributed earnings are considered to be indefinitely
reinvested and, accordingly, we have no provision for United States federal and
state income taxes on these earnings. Upon distribution of foreign undistributed
earnings in the form of dividends or otherwise, we would be subject to both
United States income tax (subject to an adjustment for foreign tax credits) and
withholding taxes payable to Canada. Determination of the amount of unrecognized
deferred United States income tax liability is not practical due to the
complexities associated with its hypothetical calculation; however, unrecognized
foreign tax credit carryforwards would be available to reduce some portion of
the United States liability. Withholding taxes of approximately $1.4 million
would be payable upon remittance of all previously unremitted earnings at
December 31, 2000 ($1.0 million at December 31, 1999). [GRAPHIC OMITTED -
SQUARE]
- --------------------------------------------------------------------------------
ALLETE 2000 ANNUAL REPORT 69
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
16 OTHER COMPREHENSIVE INCOME
Other Comprehensive Income Pre-Tax Tax Expense Net-of-Tax
Year Ended December 31 Amount (Benefit) Amount
- ----------------------------------------------------------------------------------------------------------
Millions
2000
Unrealized Gain (Loss) on Securities
Gain During the Year $47.8 $17.4 $30.4
Less: Gain Included in Net Income 49.1 18.0 31.1
- ----------------------------------------------------------------------------------------------------------
Net Unrealized Loss on Securities (1.3) (0.6) (0.7)
Foreign Currency Translation Adjustments (5.9) - (5.9)
- ----------------------------------------------------------------------------------------------------------
Other Comprehensive Loss $(7.2) $(0.6) $(6.6)
- ----------------------------------------------------------------------------------------------------------
1999
Unrealized Gain (Loss) on Securities
Gain During the Year $ 1.6 $ 0.7 $ 0.9
Add: Loss Included in Net Income 1.7 0.7 1.0
Less: Unrealized Gains of Disposed Equity Investee 6.7 1.2 5.5
- ----------------------------------------------------------------------------------------------------------
Net Unrealized Loss on Securities (3.4) 0.2 (3.6)
Foreign Currency Translation Adjustments 4.5 - 4.5
- ----------------------------------------------------------------------------------------------------------
Other Comprehensive Income $ 1.1 $ 0.2 $ 0.9
- ----------------------------------------------------------------------------------------------------------
1998
Unrealized Gain on Securities
Gain During the Year $ 1.9 $ 0.7 $ 1.2
Add: Loss Included in Net Income 0.6 0.2 0.4
- ----------------------------------------------------------------------------------------------------------
Net Unrealized Gain on Securities 2.5 0.9 1.6
Foreign Currency Translation Adjustments (3.9) - (3.9)
- ----------------------------------------------------------------------------------------------------------
Other Comprehensive Loss $(1.4) $ 0.9 $(2.3)
- ----------------------------------------------------------------------------------------------------------
The gain included in net income for the year 2000 included the gain from our
sale of ACE shares. Accumulated other comprehensive income at December 31, 2000
consisted of $2.8 million ($3.5 million at December 31, 1999) in net unrealized
gains on securities and $(7.0) million ($(1.1) million at December 31, 1999) in
foreign currency translation adjustments. [GRAPHIC OMITTED - SQUARE]
- --------------------------------------------------------------------------------
70 ALLETE 2000 ANNUAL REPORT
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
17 PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Certain eligible employees of ALLETE are covered by noncontributory defined
benefit pension plans. A defined benefit plan covering Florida Water employees
was terminated in 2000 and a $0.3 million credit was recognized upon settlement
(curtailment expense of $0.6 million was accrued in 1999). At December 31, 2000
approximately 10% of the defined benefit pension plan assets were invested in
our common stock. We have defined contribution pension plans covering eligible
employees, for which the aggregate annual cost was $6.0 million in 2000 ($4.7
million in 1999; $4.0 million in 1998). We provide certain health care and life
insurance benefits for eligible retired employees. The deferred regulatory
charge for postretirement health and life benefits was fully amortized in 1999.
The assumed health care cost trend rate declines gradually to an ultimate rate
of 6.0% by 2002. For postretirement health and life benefits, a 1% increase in
the assumed health care cost trend rate would result in a $8.4 million and a
$1.1 million increase in the benefit obligation and total service and interest
costs, respectively; a 1% decrease would result in a $6.9 million and $0.9
million decrease in the benefit obligation and total service and interest costs,
respectively. [GRAPHIC OMITTED - SQUARE]
Pension
- --------------------------------------------------------------------------------
Millions
Plan Status
At September 30 2000 1999
- --------------------------------------------------------------------------------
Change in Benefit Obligation
Obligation, Beginning of Year $224.1 $244.6
Service Cost 4.1 4.7
Interest Cost 16.5 16.0
Actuarial (Gain) Loss 2.4 (26.6)
Benefits Paid (18.6) (14.6)
- --------------------------------------------------------------------------------
Obligation, End of Year 228.5 224.1
Change in Plan Assets
Fair Value, Beginning of Year 286.7 267.5
Actual Return on Assets 40.3 31.6
Benefits Paid (18.6) (14.6)
Other 1.4 2.2
- --------------------------------------------------------------------------------
Fair Value, End of Year 309.8 286.7
Funded Status 81.3 62.6
Unrecognized Amounts
Net Gain (76.4) (66.5)
Prior Service Cost 3.8 4.2
Transition Obligation 0.8 1.0
- --------------------------------------------------------------------------------
Prepaid Pension Cost $ 9.5 $ 1.3
- --------------------------------------------------------------------------------
Benefit Expense
Year Ended December 31 2000 1999 1998
- --------------------------------------------------------------------------------
Service Cost $ 4.1 $ 4.7 $ 4.1
Interest Cost 16.5 16.0 16.3
Expected Return on Assets (27.5) (24.9) (23.2)
Amortized Amounts
Unrecognized Gain (2.3) (0.4) (1.1)
Prior Service Cost 0.5 0.5 0.5
Transition Obligation 0.2 0.2 0.2
- --------------------------------------------------------------------------------
(8.5) (3.9) (3.2)
Early Retirement Expense - - 2.8
- --------------------------------------------------------------------------------
Net Pension Credit $ (8.5) $ (3.9) $ (0.4)
- --------------------------------------------------------------------------------
Actuarial Assumptions 2000 1999
- --------------------------------------------------------------------------------
Discount Rate 8.00% 7.75%
Expected Return on Plan Assets 10.25% 10.0%
Rate of Compensation Increase 3.5 - 4.5% 3.5 - 4.5%
- --------------------------------------------------------------------------------
Health and Life
- --------------------------------------------------------------------------------
Millions
Plan Status
At September 30 2000 1999
- --------------------------------------------------------------------------------
Change in Benefit Obligation
Obligation, Beginning of Year $ 62.6 $58.6
Service Cost 2.8 2.7
Interest Cost 4.8 3.8
Actuarial (Gain) Loss (0.2) (0.2)
Participant Contributions 0.7 0.7
Benefits Paid (3.1) (3.0)
- --------------------------------------------------------------------------------
Obligation, End of Year 67.6 62.6
Change in Plan Assets
Fair Value, Beginning of Year 31.6 27.6
Actual Return on Assets 3.1 3.1
Employer Contribution 9.4 3.2
Participant Contributions 0.7 0.7
Benefits Paid (3.1) (3.0)
- --------------------------------------------------------------------------------
Fair Value, End of Year 41.7 31.6
Funded Status (25.9) (31.0)
Unrecognized Amounts
Net Gain (18.2) (18.7)
Prior Service Cost (3.4) (3.6)
Transition Obligation 32.0 34.6
- --------------------------------------------------------------------------------
Accrued Cost $(15.5) $(18.7)
- --------------------------------------------------------------------------------
Benefit Expense
Year Ended December 31 2000 1999 1998
- --------------------------------------------------------------------------------
Service Cost $ 2.7 $ 2.7 $ 2.3
Interest Cost 4.8 3.8 3.8
Expected Return on Assets (2.8) (2.4) (1.7)
Amortized Amounts
Unrecognized Gain (0.9) (0.9) (1.3)
Prior Service Cost (0.2) (0.2) -
Transition Obligation 2.6 2.6 2.3
- --------------------------------------------------------------------------------
6.2 5.6 5.4
Amortization of Deferred Charge - 2.8 2.7
- --------------------------------------------------------------------------------
Net Expense $ 6.2 $ 8.4 $ 8.1
- --------------------------------------------------------------------------------
Actuarial Assumptions 2000 1999
- --------------------------------------------------------------------------------
Discount Rate 8.0% 7.75%
Expected Return on Plan Assets 6.0 - 10.0% 6.0 - 10.0%
Rate of Compensation Increase 3.5 - 4.5% 3.5 - 4.5%
Health Care Cost Trend Rate 6.9% 7.8%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALLETE 2000 ANNUAL REPORT 71
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
18 EMPLOYEE STOCK AND INCENTIVE PLANS
EMPLOYEE STOCK OWNERSHIP PLAN. We sponsor an Employee Stock Ownership Plan
(ESOP) with two leveraged accounts.
A 1989 leveraged ESOP account covers certain eligible nonunion ALLETE employees.
The ESOP used the proceeds from a $16.5 million loan (15 year term at 9.125%),
guaranteed by us, to purchase 1.2 million shares of our common stock on the open
market. These shares fund an annual benefit of not less than 2% of participants'
salaries.
A 1990 leveraged ESOP account covers certain eligible ALLETE employees who
participated in the non-leveraged ESOP plan prior to August 1989. In 1990 the
ESOP issued a $75 million note (term not to exceed 25 years at 10.25%) to us as
consideration for 5.6 million shares of our newly issued common stock. These
shares are used to fund an annual benefit at least equal to the value of (a)
dividends on shares held in the 1990 leveraged ESOP which are used to make loan
payments, and (b) tax benefits obtained from deducting eligible dividends.
The loans will be repaid with dividends received by the ESOP and with employer
contributions. ESOP shares acquired with the loans were initially pledged as
collateral for the loans. The ESOP shares are released from collateral and
allocated to participants based on the portion of total debt service paid in the
year. The ESOP shares that collateralize the loans are not included in the
number of average shares used to calculate basic and diluted earnings per share.
Year Ended December 31 2000 1999 1998
- --------------------------------------------------------------------------------
Millions
Expense
Interest Expense $0.8 $0.9 $1.0
Compensation Expense 2.3 2.2 2.8
- --------------------------------------------------------------------------------
Total Expense $3.1 $3.1 $3.8
- --------------------------------------------------------------------------------
Shares
Allocated Shares 3.9 3.8 3.6
Unreleased Shares 4.2 4.4 4.8
- --------------------------------------------------------------------------------
Total ESOP Shares 8.1 8.2 8.4
- --------------------------------------------------------------------------------
Fair Value of Unreleased Shares $104.6 $75.8 $104.0
- --------------------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLAN. We have an Employee Stock Purchase Plan that
permits eligible employees to buy up to $23,750 per year of our common stock at
95% of the market price. At December 31, 2000, 1.1 million shares had been
issued under the plan and 156,919 shares were held in reserve for future
issuance.
STOCK OPTION AND AWARD PLANS. We have an Executive Long-Term Incentive
Compensation Plan (Executive Plan) and a Director Long-Term Stock Incentive Plan
(Director Plan). The Executive Plan allows for the grant of up to 6.7 million
shares of our common stock to key employees. To date, these grants have taken
the form of stock options, performance share awards and restricted stock awards.
The Director Plan allows for the grant of up to 0.3 million shares of our common
stock to nonemployee directors. Each nonemployee director receives an annual
grant of 1,500 stock options and a biennial grant of performance shares equal to
$10,000 in value of common stock at the date of grant. Stock options are
exercisable at the market price of common shares on the date the options are
granted, and vest in equal annual installments over two years with expiration
ten years from the date of grant. Performance shares are earned over multi-year
time periods and are contingent upon the attainment of certain performance goals
of ALLETE. Restricted stock vests once certain periods of time have elapsed.
We have elected to account for our stock-based compensation plans in accordance
with the Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued
to Employees," and accordingly, compensation expense has not been recognized for
stock options granted. Compensation expense is recognized over the vesting
periods for performance and restricted share awards based on the market value of
our common stock, and was approximately $5 million in 2000 ($3 million in 1999
and in 1998). Pro forma net income and earnings per share under SFAS 123
"Accounting for Stock-Based Compensation" have not been presented because such
amounts are not materially different from actual amounts reported. This may not
be representative of the pro forma effects for future years if additional awards
are granted.
Average
Exercise
Stock Option Activity Options Price
- -----------------------------------------------------------------------------
2000
Outstanding, Beginning of Year 1,603,900 $19.77
Granted 1,022,500 $16.33
Exercised (60,700) $14.91
Canceled (135,800) $18.85
- -----------------------------------------------------------------------------
Outstanding, End of Year 2,429,900 $18.50
- -----------------------------------------------------------------------------
Exercisable, End of Year 1,091,200 $19.42
Fair Value of Options Granted
During the Year $3.20
- -----------------------------------------------------------------------------
1999
Outstanding, Beginning of Year 963,500 $17.31
Granted 889,200 $21.77
Exercised (131,100) $13.91
Canceled (117,700) $21.25
- -----------------------------------------------------------------------------
Outstanding, End of Year 1,603,900 $19.77
- -----------------------------------------------------------------------------
Exercisable, End of Year 586,500 $16.38
Fair Value of Options Granted
During the Year $3.38
- -----------------------------------------------------------------------------
1998
Outstanding, Beginning of Year 667,400 $13.89
Granted 419,800 $21.63
Exercised (112,600) $13.95
Canceled (11,100) $16.73
- -----------------------------------------------------------------------------
Outstanding, End of Year 963,500 $17.31
- -----------------------------------------------------------------------------
Exercisable, End of Year 361,000 $13.99
Fair Value of Options Granted
During the Year $3.11
- -----------------------------------------------------------------------------
- --------------------------------------------------------------------------------
72 ALLETE 2000 ANNUAL REPORT
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
At December 31, 2000 options outstanding consisted of 1,290,966 with an exercise
price of $13.69 to $16.25, and 1,138,922 with an exercise price of $21.63 to
$21.94. The options with an exercise price of $13.69 to $16.25 have an average
remaining contractual life of 8.2 years with 328,062 exercisable on December 31,
2000 at an average price of $13.88. The options with an exercise price of $21.63
to $21.94 have an average remaining contractual life of 7.7 years with 763,146
exercisable on December 31, 2000 at an average price of $21.80.
In 2000, 329,000 performance share grants were awarded, with the ultimate
issuance contingent upon the attainment of certain future performance goals of
ALLETE. The grant date fair value of the share grants was $5.3 million.
A total of 270,000 performance share grants were awarded during 1999 and 1998
for the performance period ended December 31, 1999. The grant date fair value of
these share grants was $5.8 million. At December 31, 2000 50% of the shares had
already been issued, with the balance to be issued in 2001 and 2002.
In January 2001 we granted stock options to purchase approximately 0.7 million
shares of common stock (exercise price of $23.63 per share). [GRAPHIC OMITTED -
SQUARE]
19 QUARTERLY FINANCIAL DATA (UNAUDITED)
Information for any one quarterly period is not necessarily indicative of the
results which may be expected for the year. Financial results for 2000 included
a $30.4 million, or $0.44 per share, after-tax gain on the sale of 4.7 million
shares of ACE in the second quarter. We received the ACE shares in December 1999
when Capital Re merged with ACE. As a result of the merger, in 1999 we recorded
a $36.2 million, or $0.52 per share, after-tax non-cash charge as follows: a
$24.1 million, or $0.35 per share, charge in the second quarter following the
merger agreement and discontinuance of our equity accounting for Capital Re; and
a $12.1 million, or $0.17 per share, charge in the fourth quarter upon
completion of the merger. (See Note 6.) [GRAPHIC OMITTED - SQUARE]
Quarter Ended Mar. 31 Jun. 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------------
Millions Except Earnings Per Share
2000
Operating Revenue $322.6 $327.0 $323.5 $358.8
Operating Income $52.0 $105.1 $49.4 $32.6
Net Income $30.4 $64.2 $35.0 $19.0
Earnings Available for
Common Stock $29.9 $63.9 $34.9 $19.0
Earnings Per Share of
Common Stock
Basic $0.43 $0.92 $0.50 $0.27
Diluted $0.43 $0.92 $0.50 $0.27
- --------------------------------------------------------------------------------
1999
Operating Revenue $257.7 $279.2 $308.0 $286.9
Operating Income $29.5 $28.2 $57.9 $16.1
Net Income $20.9 $1.9 $34.5 $10.7
Earnings Available for
Common Stock $20.4 $1.4 $34.0 $10.2
Earnings Per Share of
Common Stock
Basic $0.30 $0.02 $0.50 $0.15
Diluted $0.30 $0.02 $0.50 $0.15
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALLETE 2000 ANNUAL REPORT 73
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS [PRICEWATERHOUSECOOPERS LOGO]
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of ALLETE
Our audits of the consolidated financial statements referred to in our report
dated January 17, 2001 appearing on page 54 of this Form 10-K also included an
audit of the Financial Statement Schedule listed in Item 14(a) of this Form
10-K. In our opinion, the Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. [GRAPHIC OMITTED - SQUARE]
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 17, 2001
- --------------------------------------------------------------------------------
SCHEDULE II
ALLETE
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Additions
Balance at ------------------- Deductions Balance at
Beginning Charged Other from End of
For the Year Ended December 31 of Year to Income Changes Reserves<F1> Period
- -----------------------------------------------------------------------------------------------------------------
Millions
Reserve Deducted from Related Assets
Reserve For Uncollectible Accounts
2000 Trade Accounts Receivable $7.6 $2.9 - $5.3 $5.2
Finance Receivables 6.3 0.8 - 0.6 6.5
1999 Trade Accounts Receivable 6.0 3.9 - 2.3 7.6
Finance Receivables 3.6 3.8 - 1.1 6.3
1998 Trade Accounts Receivable 5.1 5.4 - 4.5 6.0
Finance Receivables 2.8 2.8 - 2.0 3.6
Deferred Asset Valuation Allowance
2000 Deferred Tax Assets 3.3 1.8 - - 5.1
1999 Deferred Tax Assets 2.6 0.7 - - 3.3
1998 Deferred Tax Assets 0.3 2.3 - - 2.6
- -----------------------------------------------------------------------------------------------------------------
<FN>
<F1> Reserve for uncollectible accounts includes bad debts written off.
</FN>
- --------------------------------------------------------------------------------
74 ALLETE 2000 ANNUAL REPORT
Exhibit Index
Exhibit
Number
- --------------------------------------------------------------------------------
10(l) - Loan and Servicing Agreement dated as of December 22, 2000 among
AFC AIM Corporation, as Borrower, Automotive Finance Corporation,
as Servicer, and Bank of Montreal, as Lender.
10(m) - Purchase and Sale Agreement dated as of December 22, 2000 between
AFC AIM Corporation and Automotive Finance Corporation.
12 - Computation of Ratios of Earnings to Fixed Charges and Supplemental
Ratios of Earnings to Fixed Charges.
23(a) - Consent of Independent Accountants.
23(b) - Consent of General Counsel.