SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended SEPTEMBER 30, 2001
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File No. 1-3548
ALLETE, INC.
A Minnesota Corporation
IRS Employer Identification No. 41-0418150
30 West Superior Street
Duluth, Minnesota 55802-2093
Telephone - (218) 279-5000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
Common Stock, no par value,
83,200,947 shares outstanding
as of September 30, 2001
INDEX
Page
Definitions 2
Safe Harbor Statement Under the Private Securities
Litigation Reform Act of 1995 3
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet -
September 30, 2001 and December 31, 2000 4
Consolidated Statement of Income -
Quarter and Nine Months Ended September 30, 2001 and 2000 5
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 2001 and 2000 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 20
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
1 ALLETE Third Quarter 2001 Form 10-Q
DEFINITIONS
The following abbreviations or acronyms are used in the text. References in this
report to "we," "us" and "our" are to ALLETE, Inc. and its subsidiaries,
collectively.
ABBREVIATION OR ACRONYM TERM
--------------------------------------------------------------------------------
2000 Form 10-K ALLETE's Annual Report on Form 10-K for
the Year Ended December 31, 2000
ACE ACE Limited
ADESA ADESA Corporation
AFC Automotive Finance Corporation
ALLETE ALLETE, Inc.
ALLETE Water Services ALLETE Water Services, Inc.
Capital Re Capital Re Corporation
CIP Conservation Improvement Programs
Cleveland-Cliffs Cleveland-Cliffs Inc.
Company ALLETE, Inc. and its subsidiaries
ComSearch ComSearch, Inc.
Dicks Creek Dicks Creek Wastewater Utility
EBITDAL Earnings Before Interest, Taxes, Depreciation,
Amortization and Lease Expense
Enventis Enventis, Inc.
EPS Earnings Per Share
ESOP Employee Stock Ownership Plan
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Florida Water Florida Water Services Corporation
FPSC Florida Public Service Commission
Heater Heater Utilities, Inc.
LTV LTV Steel Mining Company
MPUC Minnesota Public Utilities Commission
MW Megawatt
NCUC North Carolina Utilities Commission
PSCW Public Service Commission of Wisconsin
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standard No.
Square Butte Square Butte Electric Cooperative
SWL&P Superior Water, Light and Power Company
ALLETE Third Quarter 2001 Form 10-Q 2
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, 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 that term is
defined in the Private Securities Litigation Reform Act of 1995) made by or on
behalf of ALLETE in this quarterly report on Form 10-Q, in presentations, in
response to questions or otherwise. Any statements that express, or involve
discussions as to, expectations, beliefs, plans, objectives, assumptions or
future events or performance (often, but not always, through the use of words or
phrases such as "anticipates," "believes," "estimates," "expects," "intends,"
"plans," "predicts," "projects," "will likely result," "will continue" or
similar expressions) are not statements of historical facts and may be
forward-looking.
Forward-looking statements involve estimates, assumptions and uncertainties and
are qualified in their entirety by reference to, and are accompanied by, the
following important factors, which are difficult to predict, contain
uncertainties, are beyond our control and may cause actual results to differ
materially from those contained in forward-looking statements:
- war and acts of terrorism;
- 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 and other development opportunities; and
- legal and administrative proceedings (whether civil or criminal) and
settlements that affect the business and profitability of ALLETE.
Any forward-looking statement speaks only as of the date on which that 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 those
factors, nor can it assess the impact of each of those factors on the businesses
of ALLETE or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statement.
3 ALLETE Third Quarter 2001 Form 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLETE
CONSOLIDATED BALANCE SHEET
Millions
SEPTEMBER 30, DECEMBER 31,
2001 2000
Unaudited Audited
---------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and Cash Equivalents $ 206.8 $ 219.3
Trading Securities 165.9 90.8
Accounts Receivable (Less Allowance of $13.4 and $11.7) 455.9 265.7
Inventories 30.9 26.4
Prepayments and Other 139.2 128.8
---------------------------------------------------------------------------------------------------------------
Total Current Assets 998.7 731.0
Property, Plant and Equipment 1,536.5 1,479.7
Investments 122.3 116.4
Goodwill 498.3 472.8
Other Assets 121.6 114.1
---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $3,277.4 $2,914.0
---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Accounts Payable $ 378.3 $ 269.1
Accrued Taxes, Interest and Dividends 48.2 52.3
Notes Payable 180.8 274.2
Long-Term Debt Due Within One Year 12.1 15.8
Other 98.1 95.6
---------------------------------------------------------------------------------------------------------------
Total Current Liabilities 717.5 707.0
Long-Term Debt 1,066.1 952.3
Accumulated Deferred Income Taxes 123.6 125.1
Other Liabilities 170.0 153.8
---------------------------------------------------------------------------------------------------------------
Total Liabilities 2,077.2 1,938.2
---------------------------------------------------------------------------------------------------------------
Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary ALLETE Capital I
Which Holds Solely Company Junior Subordinated Debentures 75.0 75.0
---------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common Stock Without Par Value, 130.0 Shares Authorized
83.2 and 74.7 Shares Outstanding 756.1 576.9
Unearned ESOP Shares (53.1) (55.7)
Accumulated Other Comprehensive Loss (16.0) (4.2)
Retained Earnings 438.2 383.8
---------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 1,125.2 900.8
---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,277.4 $2,914.0
---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
ALLETE Third Quarter 2001 Form 10-Q 4
ALLETE
CONSOLIDATED STATEMENT OF INCOME
Millions Except Per Share Amounts - Unaudited
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
-------------------------------------------------------------------------------------------------------------------
OPERATING REVENUE
Energy Services $168.0 $ 146.1 $ 475.3 $426.6
Automotive Services 212.5 137.4 644.4 386.6
Water Services 31.0 30.2 91.9 89.9
Investments 8.7 9.8 64.6 70.0
-------------------------------------------------------------------------------------------------------------------
Total Operating Revenue 420.2 323.5 1,276.2 973.1
-------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Fuel and Purchased Power 60.2 60.1 179.4 166.7
Operations 280.3 198.3 845.5 600.7
Interest Expense 22.3 15.7 65.7 47.2
-------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 362.8 274.1 1,090.6 814.6
-------------------------------------------------------------------------------------------------------------------
OPERATING INCOME BEFORE ACE 57.4 49.4 185.6 158.5
INCOME FROM DISPOSITION OF INVESTMENT IN ACE - - - 48.0
-------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 57.4 49.4 185.6 206.5
DISTRIBUTIONS ON REDEEMABLE
PREFERRED SECURITIES OF ALLETE CAPITAL I 1.5 1.5 4.5 4.5
INCOME TAX EXPENSE 18.1 12.9 67.9 72.4
-------------------------------------------------------------------------------------------------------------------
NET INCOME $ 37.8 $ 35.0 $ 113.2 $129.6
-------------------------------------------------------------------------------------------------------------------
AVERAGE SHARES OF COMMON STOCK
Basic 79.0 70.0 74.6 69.6
Diluted 79.8 70.4 75.3 69.8
-------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE OF COMMON STOCK
Basic $0.48 $0.50 $1.52 $1.85
Diluted $0.47 $0.50 $1.50 $1.84
-------------------------------------------------------------------------------------------------------------------
DIVIDENDS PER SHARE OF COMMON STOCK $0.2675 $0.2675 $0.8025 $0.8025
-------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
5 ALLETE Third Quarter 2001 Form 10-Q
ALLETE
CONSOLIDATED STATEMENT OF CASH FLOWS
Millions - Unaudited
NINE MONTHS ENDED
SEPTEMBER 30,
2001 2000
--------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 113.2 $ 129.6
Gain from Disposition of Investment in ACE - (48.0)
Depreciation and Amortization 76.6 63.2
Deferred Income Taxes 4.3 (16.3)
Changes In Operating Assets and Liabilities
Trading Securities (75.1) 75.4
Accounts Receivable (190.2) (89.9)
Inventories (4.5) (4.2)
Accounts Payable 109.2 143.4
Other Current Assets and Liabilities (16.1) (58.5)
Other - Net 21.0 18.3
--------------------------------------------------------------------------------------------------------------------
Cash From Operating Activities 38.4 213.0
--------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from Sale of Investments 2.6 144.6
Additions to Investments (10.8) (37.4)
Additions to Property, Plant and Equipment (108.4) (94.0)
Acquisitions - Net of Cash Acquired (71.5) (189.4)
Other - Net 13.3 10.7
--------------------------------------------------------------------------------------------------------------------
Cash For Investing Activities (174.8) (165.5)
--------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of Common Stock 175.3 18.4
Issuance of Long-Term Debt 125.0 51.6
Changes in Notes Payable - Net (93.4) 111.2
Reductions of Long-Term Debt (14.9) (53.8)
Redemption of Preferred Stock - (31.5)
Dividends on Preferred and Common Stock (58.8) (56.2)
--------------------------------------------------------------------------------------------------------------------
Cash From Financing Activities 133.2 39.7
--------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (9.3) (6.0)
--------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS (12.5) 81.2
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 219.3 101.5
--------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 206.8 $ 182.7
--------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Period For
Interest - Net of Capitalized $67.5 $44.7
Income Taxes $49.3 $83.0
--------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
ALLETE Third Quarter 2001 Form 10-Q 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements and notes should be
read in conjunction with our 2000 Form 10-K. In our opinion all adjustments
necessary for a fair statement of the results for the interim periods have been
included. The results of operations for an interim period may not give a true
indication of results for the year.
NOTE 1. BUSINESS SEGMENTS
Millions
Energy Automotive Water Corporate
Consolidated Services Services Services Investments Charges
---------------------------------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED
SEPTEMBER 30, 2001
Operating Revenue $420.2 $168.0 $212.5<F1> $31.0 $8.7 -
Operation and Other Expense 306.2 122.0 156.5 17.6 5.4 $ 4.7
Depreciation and Amortization Expense 25.7 11.4 10.5 3.8 - -
Lease Expense 8.6 0.7 7.0 0.9 - -
Interest Expense 22.3 5.0 8.7 2.6 - 6.0
---------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 57.4 28.9 29.8 6.1 3.3 (10.7)
Distributions on Redeemable
Preferred Securities of Subsidiary 1.5 0.6 - - - 0.9
Income Tax Expense (Benefit) 18.1 11.1 9.7 2.3 1.3 (6.3)
---------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 37.8 $ 17.2 $ 20.1 $ 3.8 $2.0 $(5.3)
---------------------------------------------------------------------------------------------------------------------
EBITDAL $114.0 $46.0 $56.0 $13.4 $3.3 $(4.7)
---------------------------------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED
SEPTEMBER 30, 2000
Operating Revenue $323.5 $146.1 $137.4<F1> $30.2 $9.8 -
Operation and Other Expense 229.4 109.7 94.3 17.2 4.0 $ 4.2
Depreciation and Amortization Expense 21.8 11.3 6.8 3.5 0.1 0.1
Lease Expense 7.2 0.6 6.0 0.6 - -
Interest Expense 15.7 5.2 5.4 2.7 - 2.4
---------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 49.4 19.3 24.9 6.2 5.7 (6.7)
Distributions on Redeemable
Preferred Securities of Subsidiary 1.5 0.6 - - - 0.9
Income Tax Expense (Benefit) 12.9 7.3 9.5 2.4 0.7 (7.0)
---------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 35.0 $ 11.4 $ 15.4 $ 3.8 $5.0 $(0.6)
---------------------------------------------------------------------------------------------------------------------
EBITDAL $94.1 $36.4 $43.1 $13.0 $5.8 $(4.2)
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<FN>
<F1> Included $38.0 million of Canadian operating revenue in 2001 ($33.9 million in 2000).
</FN>
7 ALLETE Third Quarter 2001 Form 10-Q
NOTE 1. BUSINESS SEGMENTS CONTINUED
Millions
Energy Automotive Water Corporate
Consolidated Services Services Services Investments Charges
---------------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2001
Operating Revenue $1,276.2 $475.3 $644.4<F1> $91.9 $64.6 -
Operation and Other Expense 923.3 358.2 470.2 53.5 23.9 $ 17.5
Depreciation and Amortization Expense 76.6 34.4 30.6 11.3 0.1 0.2
Lease Expense 25.0 2.1 20.9 2.0 - -
Interest Expense 65.7 15.2 29.3 7.9 - 13.3
---------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 185.6 65.4 93.4 17.2 40.6 (31.0)
Distributions on Redeemable
Preferred Securities of Subsidiary 4.5 1.8 - - - 2.7
Income Tax Expense (Benefit) 67.9 25.0 35.5 6.6 15.8 (15.0)
---------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 113.2 $ 38.6 $ 57.9 $10.6 $24.8 $(18.7)
---------------------------------------------------------------------------------------------------------------------
EBITDAL $352.9 $117.1 $174.2 $38.4 $40.7 $(17.5)
Total Assets $3,277.4 $992.9 $1,631.3<F2> $350.0 $303.0 $0.2
Property, Plant and Equipment $1,536.5 $799.0 $459.4 $278.1 - -
Accumulated Depreciation and
Amortization $1,044.8 $694.9 $120.8 $226.8 $2.3 -
Capital Expenditures $108.4 $43.0 $43.0 $22.4 - -
---------------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
Operating Revenue $973.1 $426.6 $386.6<F1> $89.9 $70.0 -
Operation and Other Expense 684.6 321.4 269.5 52.8 29.0 $ 11.9
Depreciation and Amortization Expense 63.2 34.4 17.3 11.0 0.2 0.3
Lease Expense 19.6 2.1 16.0 1.5 - -
Interest Expense 47.2 15.7 13.1 7.8 - 10.6
---------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) Before ACE 158.5 53.0 70.7 16.8 40.8 (22.8)
Income from Disposition of ACE 48.0 - - - 48.0 -
---------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 206.5 53.0 70.7 16.8 88.8 (22.8)
Distributions on Redeemable
Preferred Securities of Subsidiary 4.5 1.5 - - - 3.0
Income Tax Expense (Benefit) 72.4 20.1 28.7 6.5 31.7 (14.6)
---------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $129.6 $ 31.4 $ 42.0 $10.3 $57.1 $(11.2)
---------------------------------------------------------------------------------------------------------------------
EBITDAL $288.5 $105.2 $117.1 $37.1 $41.0 $(11.9)
Total Assets $2,596.4 $879.7 $1,101.5<F2> $325.0 $289.8 $0.4
Property, Plant and Equipment $1,327.3 $773.7 $291.3 $262.3 - -
Accumulated Depreciation and
Amortization $948.9 $660.3 $78.3 $208.3 $2.0 -
Capital Expenditures $94.0 $34.9 $40.3 $18.8 - -
---------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Included $111.0 million of Canadian operating revenue in 2001 ($77.2 million in 2000).
<F2> Included $203.6 million of Canadian assets in 2001 ($184.2 million in 2000).
</FN>
ALLETE Third Quarter 2001 Form 10-Q 8
NOTE 2. ACQUISITIONS AND DIVESTITURES
ADESA AUCTION FACILITIES. On January 18, 2001 we acquired all of the outstanding
stock of ComSearch in exchange for ALLETE common stock and paid cash to purchase
all of the assets of Auto Placement Center (now ADESA Impact) in transactions
with an aggregate value of $62.4 million. ADESA Impact was accounted for using
the purchase method. ADESA Impact 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. ComSearch was
accounted for as a pooling of interests with financial results included in our
consolidated financial statements since January 18, 2001. Consolidated financial
results for prior periods have not been restated due to immateriality. ADESA
Impact is a provider of "total loss" vehicle recovery services with 12 auction
facilities in the United States. ComSearch provides Internet-based parts
location and insurance adjustment audit services nationwide.
On May 1, 2001 ADESA purchased the assets of the I-44 Auto Auction in Tulsa,
Oklahoma. The transaction was accounted for using the purchase method. 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. The I-44 Auto Auction, which is located on 75 acres, was renamed
ADESA Tulsa and offers six auction lanes, storage for over 3,000 vehicles and a
five-bay reconditioning and detail facility.
DICKS CREEK. In February 2001 ALLETE Water Services finalized the December 2000
purchase of the assets of Dicks Creek, a wastewater utility located near
Atlanta, Georgia, for $6.6 million plus a commitment to pay the seller a fee for
residential connections. The commitment requires the payment of a minimum of
$400,000 annually beginning December 31, 2001 for four years or until cumulative
payments reach $2 million, whichever occurs first. The transaction was accounted
for using the purchase method. Financial results have been included in our
consolidated financial statements since February 2001. Pro forma financial
results have not been presented due to immateriality.
ENVENTIS. On July 31, 2001 we acquired Enventis, a data network systems provider
headquartered in the Minneapolis-St. Paul area. In connection with this
acquisition, we issued 310,878 shares of our common stock. Enventis was
accounted for as a pooling of interests with financial results included in our
consolidated financial statements since July 31, 2001. Consolidated financial
results for prior periods have not been restated due to immateriality.
DISPOSAL OF WATER PLANT ASSETS. Effective August 24, 2001 the City of New Smyrna
Beach (City) assumed control of the water and wastewater facilities in the Sugar
Mill Country Club service area following a successful condemnation action filed
with the Circuit Court for Volusia County, Florida (Circuit Court). The
facilities serve approximately 600 customers. In October 2001 a $2.9 million
deposit was disbursed to Florida Water in accordance with a Circuit Court order.
Settlement negotiations to determine the final purchase price are currently
underway between Florida Water and the City.
NOTE 3. INVESTMENT IN ACE
In May 2000 we recorded a $30.4 million, or $0.44 per share, after-tax gain on
the sale of the 4.7 million shares of ACE that we received in December 1999 when
Capital Re merged with ACE. At the time of the merger we owned 7.3 million
shares, or 20 percent, of Capital Re.
NOTE 4. LONG-TERM DEBT
On February 21, 2001 ALLETE issued $125 million of 7.80% Senior Notes, due
February 15, 2008. Proceeds were used to repay a portion of ALLETE's short-term
borrowings incurred for the acquisition of vehicle auction facilities purchased
in 2000 and early 2001, and for general corporate purposes.
9 ALLETE Third Quarter 2001 Form 10-Q
NOTE 5. COMMON STOCK
During the quarter ended June 30, 2001, we issued and sold 6.6 million shares of
common stock at $23.68 per share in an underwritten public offering. Net
proceeds of $150 million were used to repay a portion of our short-term
borrowings and invested in our securities portfolio.
NOTE 6. INCOME TAX EXPENSE
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------------
Millions
Current Tax Expense
Federal $16.0 $15.1 $54.2 $ 77.8
Foreign 1.0 0.7 2.2 1.8
State 2.6 0.6 7.2 9.1
--------------------------------------------------------------------------------------------------------------------
19.6 16.4 63.6 88.7
--------------------------------------------------------------------------------------------------------------------
Deferred Tax Expense (Benefit)
Federal (1.5) (2.2) 3.6 (12.8)
Foreign (0.1) (0.2) (0.5) (0.5)
State 0.6 (0.5) 2.3 (1.8)
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(1.0) (2.9) 5.4 (15.1)
--------------------------------------------------------------------------------------------------------------------
Deferred Tax Credits (0.5) (0.6) (1.1) (1.2)
--------------------------------------------------------------------------------------------------------------------
Total Income Tax Expense $18.1 $12.9 $67.9 $ 72.4
--------------------------------------------------------------------------------------------------------------------
NOTE 7. 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
EARNINGS PER SHARE
----------------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
----------------------------- ----------------------------------
Basic Dilutive Diluted Basic Dilutive Diluted
EPS Securities EPS EPS Securities EPS
----------------------------------------------------------------------------------------------------------------------
Net Income $37.8 - $37.8 $113.2 - $113.2
Common Shares 79.0 0.8 79.8 74.6 0.7 75.3
----------------------------------------------------------------------------------------------------------------------
Per Share $0.48 - $0.47 $1.52 - $1.50
----------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, 2000
----------------------------------
Basic Dilutive Diluted
EPS Securities EPS
----------------------------------------------------------------------------------------------------------------------
Net Income $129.6 - $129.6
Less: Dividends on Preferred Stock 0.9 - 0.9
----------------------------------------------------------------------------------------------------------------------
$128.7 - $128.7
Common Shares 69.6 0.2 69.8
----------------------------------------------------------------------------------------------------------------------
Per Share $1.85 - $1.84
----------------------------------------------------------------------------------------------------------------------
We paid dividends on preferred stock of $0.1 million for the quarter ended
September 30, 2000. There was no difference between basic and diluted earnings
per share for the quarter ended September 30, 2000.
ALLETE Third Quarter 2001 Form 10-Q 10
NOTE 8. TOTAL COMPREHENSIVE INCOME
For the quarter ended September 30, 2001 total comprehensive income was $22.2
million ($31.8 million for the quarter ended September 30, 2000). For the nine
months ended September 30, 2001 total comprehensive income was $101.4 million
($123.5 million for the nine months ended September 30, 2000). Total
comprehensive income includes net income, unrealized gains and losses on
securities classified as available-for-sale, changes in the fair value of an
interest rate swap and foreign currency translation adjustments.
NOTE 9. NEW ACCOUNTING STANDARD
In July 2001 the FASB issued SFAS 142, "Goodwill and Other Intangible Assets."
SFAS 142 changes the accounting for goodwill from an amortization method to an
impairment-only approach. Amortization of goodwill will cease January 1, 2002,
the date we expect to adopt this standard. We have $536 million of goodwill as
of September 30, 2001 and after-tax goodwill amortization expense of
approximately $8 million for the nine months ended September 30, 2001. Annual
after-tax goodwill amortization expense is expected to be approximately $11
million in 2001. We do not believe we have any goodwill impairment at this time.
NOTE 10. SQUARE BUTTE POWER PURCHASE CONTRACT
Minnesota Power, our electric utility business, 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 percent 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 percent annually, to a minimum of 50 percent. 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 September 30, 2001 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, Ltd., our subsidiary, under a long-term
contract. Minnesota Power's payments to Square Butte are approved as purchased
power expense for ratemaking purposes by both the MPUC and FERC.
NOTE 11. SUBSEQUENT EVENT
In October 2001 we executed an asset purchase agreement with LTV and
Cleveland-Cliffs to acquire certain non-mining properties from LTV for $75
million. The non-mining properties include LTV's 225 MW electric generating
facility and existing coal pile at Taconite Harbor, a sixty-mile transmission
line, railroad trackage rights, and approximately 30,000 acres of forest and
recreation land in northeast Minnesota. The transaction is expected to close
during the fourth quarter.
11 ALLETE Third Quarter 2001 Form 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ALLETE has operations in four business segments: (1) ENERGY SERVICES, which
include electric and gas services, coal mining and telecommunications; (2)
AUTOMOTIVE SERVICES, which include a network of vehicle auctions, an automobile
dealer finance company, and several subsidiaries that are integral parts of the
vehicle redistribution business; (3) WATER SERVICES, which include water and
wastewater services; and (4) INVESTMENTS, which include 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.
CONSOLIDATED OVERVIEW
Each of our operating segments continued to produce solid financial results
during the first nine months of 2001, reflecting the success of ALLETE's growth
initiatives. The terrorist attacks of September 11, 2001 and their aftermath
have negatively impacted quarterly results for Automotive Services and our
securities portfolio. However, performance from Energy Services and our real
estate operations remained strong. For the quarter ended September 30, 2001 net
income increased 8 percent over the same period in 2000. Earnings per share for
the quarter ended September 30, 2001 decreased 6 percent compared to the same
period in 2000. For the nine months ended September 30, 2001, excluding the ACE
transaction (see net income discussion below), net income was up 14 percent and
earnings per share were up 7 percent over the same period in 2000. The 2001
earnings per share calculation was impacted by the second quarter common stock
issuance.
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
---------------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts
OPERATING REVENUE
Energy Services $168.0 $146.1 $ 475.3 $426.6
Automotive Services 212.5 137.4 644.4 386.6
Water Services 31.0 30.2 91.9 89.9
Investments 8.7 9.8 64.6 70.0
---------------------------------------------------------------------------------------------------------------------
$420.2 $323.5 $1,276.2 $973.1
---------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Energy Services $139.1 $126.8 $ 409.9 $373.6
Automotive Services 182.7 112.5 551.0 315.9
Water Services 24.9 24.0 74.7 73.1
Investments 5.4 4.1 24.0 29.2
Corporate Charges 10.7 6.7 31.0 22.8
---------------------------------------------------------------------------------------------------------------------
$362.8 $274.1 $1,090.6 $814.6
---------------------------------------------------------------------------------------------------------------------
NET INCOME
Energy Services $17.2 $ 11.4 $ 38.6 $ 31.4
Automotive Services 20.1 15.4 57.9 42.0
Water Services 3.8 3.8 10.6 10.3
Investments 2.0 5.0 24.8 26.7<F1>
Corporate Charges (5.3) (0.6) (18.7) (11.2)
---------------------------------------------------------------------------------------------------------------------
37.8 35.0 113.2 99.2
ACE Transaction - - - 30.4
---------------------------------------------------------------------------------------------------------------------
$37.8 $ 35.0 $113.2 $129.6
---------------------------------------------------------------------------------------------------------------------
DILUTED AVERAGE SHARES OF COMMON STOCK 79.8 70.4 75.3 69.8
---------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE OF COMMON STOCK
Before ACE Transaction $0.47 $0.50 $1.50 $1.40
ACE Transaction - - - 0.44
---------------------------------------------------------------------------------------------------------------------
$0.47 $0.50 $1.50 $1.84
---------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Including the $30.4 million gain associated with the ACE transaction, net income from Investments was $57.1
million for the nine months ended September 30, 2000. (See Note 3.)
</FN>
ALLETE Third Quarter 2001 Form 10-Q 12
NET INCOME
The following net income discussion summarizes significant events for the nine
months ended September 30, 2001.
ENERGY SERVICES' net income was higher in 2001 reflecting more profitable
wholesale marketing and trading activities due to warmer weather, additional
power available to sell from a recent 240 MW power purchase agreement and
overall market conditions. Net income also reflected partial recovery of 1998
CIP lost margins, decreased sales to industrial customers and additional costs
incurred as a result of a severe ice storm and planned maintenance outages.
AUTOMOTIVE SERVICES reported a 38 percent increase in net income in 2001 due to
significant acquisitions made in 2000 and early 2001 and increased financing
activity at AFC's loan production offices. EBITDAL for ADESA's 28 same-store
auction facilities was up 9 percent for the nine months ended September 30, 2001
(13 percent for the quarter ended September 30, 2001). Increased costs and
reduced sales volumes because of inclement weather in early 2001 hampered
financial results, as did the events of September 11. For the third quarter of
2001 we estimated that the impact of the events of September 11 resulted in a
$3.5 million decrease to net income. A drop in conversion rates, the percentage
of vehicles sold from those that were run through auction lanes, was primarily
due to a decline in dealer attendance caused by the disruption in air travel and
wholesale prices that were further depressed following the events of September
11. Sellers have been reluctant to accept lower wholesale prices. The conversion
rate was 58 percent for the quarter ended September 30, 2001 (60 percent for the
same period in 2000) and 61 percent for the nine months ended September 30, 2001
(62 percent for the same period in 2000). Costs of assimilating the 28 vehicle
auction facilities acquired or opened in 2000 also impacted 2001 results.
WATER SERVICES' net income was slightly higher in 2001 reflecting customer
growth, gains related to the disposal of certain assets and an October 2000 rate
increase implemented by Heater. Above-average rainfall in Florida and North
Carolina during the second and third quarters, and conservation efforts in
Florida negatively impacted net income in 2001.
INVESTMENTS reported lower net income in 2001 primarily due to losses incurred
by our securities portfolio as a result of the economic fallout from the events
of September 11. These losses were subsequently recovered in October 2001. For
the nine months ended September 30, our securities portfolio earned an after-tax
annualized return of 4.52 percent in 2001 (7.00 percent in 2000) on a lower
average balance in 2001. During 2000 we reduced the size of our securities
portfolio to partially fund significant acquisitions made by Automotive
Services. Income from our emerging technology funds was also lower in 2001 as a
result of fewer sales of these investments. Our real estate operations reported
stronger sales in 2001, including its largest sale ever.
CORPORATE CHARGES reflected increased interest expense and additional expenses
for incentive compensation accruals and severance packages. In 2000 we reflected
the reversal of previously recorded tax accruals related to various federal and
state tax issues.
ACE TRANSACTION. In May 2000 we recorded a $30.4 million, or $0.44 per share,
after-tax gain on the sale of the 4.7 million shares of ACE that we received in
December 1999 when Capital Re merged with ACE.
13 ALLETE Third Quarter 2001 Form 10-Q
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 2001 AND 2000
OPERATING REVENUE
ENERGY SERVICES' operating revenue was up $21.9 million, or 15 percent, in 2001.
Wholesale power marketing and trading activities were higher due to warmer
weather and additional power available to sell. Retail megawatthour sales were
down 8 percent because of temporary shutdowns and reduced production by taconite
customers. Operating revenue from retail sales, however, was up due to
additional demand revenue from large power customers who converted a portion of
their interruptible power to firm power and fuel clause recoveries for higher
purchased power and gas prices. Operating revenue also included $2.8 million of
1998 CIP lost margins and Enventis operations. Enventis was acquired in July
2001 and accounted for as a pooling of interests.
Revenue from electric sales to taconite customers accounted for 9 percent of
consolidated operating revenue in 2001 (13 percent in 2000). Electric sales to
paper and pulp mills accounted for 4 percent of consolidated operating revenue
in 2001 (5 percent in 2000). Sales to other power suppliers accounted for 8
percent of consolidated operating revenue in 2001 (7 percent in 2000).
AUTOMOTIVE SERVICES' operating revenue was up $75.1 million, or 55 percent, in
2001 primarily due to significant acquisitions made in 2000 and early 2001. At
ADESA auction facilities 463,000 vehicles were sold in 2001 (337,000 in 2000),
an increase of 37 percent. Financial results for 2001 included three months of
operations from 9 auction facilities acquired in 2000 and results from
acquisitions made in early 2001. Sales volumes in 2001 were negatively impacted
by the events of September 11 as dealer attendance and already depressed
wholesale prices both dropped suddenly during the last half of September.
Operating revenue from AFC was higher in 2001 reflecting a 13 percent increase
in vehicles financed through existing loan production offices. AFC financed
approximately 223,000 vehicles in 2001 (198,000 in 2000). AFC had 82 loan
production offices at September 30, 2001 (86 at September 30, 2000).
WATER SERVICES' operating revenue was up $0.8 million, or 3 percent, in 2001 due
to gains from the disposal of certain assets, a 4 percent increase in customers
and an October 2000 rate increase implemented by Heater. A 6 percent decrease in
consumption was primarily attributable to above-average rainfall in Florida and
North Carolina, and conservation efforts in Florida. Operating revenue in 2000
included regulatory relief granted by Florida's Hillsborough Board of County
Commissioners.
INVESTMENTS' operating revenue was down $1.1 million, or 11 percent, in 2001
primarily because turbulence in the financial markets after the events of
September 11 had a negative impact on our securities portfolio. This decrease
was partially offset by two large sales from our real estate operations which
contributed $4.5 million to operating revenue.
OPERATING EXPENSES
ENERGY SERVICES' operating expenses were up $12.3 million, or 10 percent, in
2001 primarily due to the inclusion of Enventis operations. Operating expenses
also increased in 2001 due to higher plant maintenance expenses.
AUTOMOTIVE SERVICES' operating expenses were up $70.2 million, or 62 percent, in
2001 primarily due to significant acquisitions made in 2000 and early 2001.
Expenses in 2001 included increased direct costs associated with processing
vehicles multiple times that did not sell as a result of the events of September
11 which caused low auction attendance and further depressed wholesale prices.
Integration costs, additional amortization of goodwill and additional interest
expense related to debt issued in late 2000 to finance acquisitions also
increased 2001 expenses.
WATER SERVICES' operating expenses were up $0.9 million, or 4 percent, in 2001
due to customer growth and the inclusion of water and wastewater systems
acquired in December 2000.
INVESTMENTS' operating expenses were up $1.3 million, or 32 percent, in 2001 as
a result of higher sales by our real estate operations.
ALLETE Third Quarter 2001 Form 10-Q 14
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
OPERATING REVENUE
ENERGY SERVICES' operating revenue was up $48.7 million, or 11 percent, in 2001.
Wholesale power marketing and trading activities were higher due to warmer
weather and additional power available to sell. Retail megawatthour sales were
down 6 percent because of temporary shutdowns and reduced production by taconite
customers. Operating revenue from retail sales, however, was up due to
additional demand revenue from large power customers who converted a portion of
their interruptible power to firm power and fuel clause recoveries for higher
purchased power and gas prices. Operating revenue also included $2.8 million of
1998 CIP lost margins and Enventis operations.
Revenue from electric sales to taconite customers accounted for 9 percent of
consolidated operating revenue in 2001 (13 percent in 2000). Electric sales to
paper and pulp mills accounted for 4 percent of consolidated operating revenue
in 2001 (5 percent in 2000). Sales to other power suppliers accounted for 6
percent of consolidated operating revenue in both 2001 and 2000.
AUTOMOTIVE SERVICES' operating revenue was up $257.8 million, or 67 percent, in
2001 primarily due to significant acquisitions made in 2000 and early 2001. At
ADESA auction facilities 1,456,000 vehicles were sold in 2001 (940,000 in 2000),
an increase of 55 percent. Financial results for 2001 included nine months of
operations from 28 auction facilities acquired or opened primarily in the second
half of 2000 and results from acquisitions made in January and May 2001. Sales
volumes in 2001 were negatively impacted by the events of September 11 as dealer
attendance and already depressed wholesale prices both dropped suddenly during
the last half of September. Also, inclement weather earlier in the year resulted
in both low attendance at and canceled auctions. Operating revenue from AFC was
higher in 2001 reflecting a 14 percent increase in vehicles financed through
existing loan production offices. AFC financed approximately 676,000 vehicles in
2001 (595,000 in 2000). AFC had 82 loan production offices at September 30, 2001
(86 at September 30, 2000).
WATER SERVICES' operating revenue was up $2.0 million, or 2 percent, in 2001 due
to gains from the disposal of certain assets, a 4 percent increase in customers
and an October 2000 rate increase implemented by Heater. Above-average rainfall
in Florida and North Carolina, and conservation efforts in Florida negatively
impacted revenue in 2001. Operating revenue in 2000 included regulatory relief
granted by Florida's Hillsborough Board of County Commissioners.
INVESTMENTS' operating revenue was down $5.4 million, or 8 percent, in 2001
primarily because turbulence in the financial markets after the events of
September 11 had a negative impact on our securities portfolio. In addition, our
securities portfolio had a lower average balance in 2001. The decrease in
revenue was also attributed to $4.9 million less from our emerging technology
investments as a result of fewer sales of these investments in 2001. Our real
estate operations reported stronger sales at all locations in 2001. Six large
real estate sales in 2001 contributed $37.5 million to revenue and included our
largest single real estate transaction to date. In 2000 seven large real estate
sales contributed $31.9 million to revenue.
OPERATING EXPENSES
ENERGY SERVICES' operating expenses were up $36.3 million, or 10 percent, in
2001 because of higher prices paid for purchased power and purchased gas, and
the inclusion of Enventis operations. Operating expenses also increased in 2001
due to higher plant maintenance expenses and additional costs incurred as a
result of a severe ice storm.
AUTOMOTIVE SERVICES' operating expenses were up $235.1 million, or 74 percent,
in 2001 primarily due to significant acquisitions made in 2000 and early 2001.
Expenses in 2001 included increased direct costs associated with processing
vehicles multiple times that did not sell as a result of the events of September
11 which caused low auction attendance and further depressed wholesale prices.
Operating expenses in 2001 also included integration costs, additional
amortization of goodwill, additional interest expense related to debt issued in
late 2000 to finance acquisitions, higher utility expense and more labor costs
incurred as a result of inclement weather in early 2001.
15 ALLETE Third Quarter 2001 Form 10-Q
WATER SERVICES' operating expenses were up $1.6 million, or 2 percent, in 2001
due to customer growth and the inclusion of water and wastewater systems
acquired in 2000.
INVESTMENTS' operating expenses were down $5.2 million, or 18 percent, in 2001
due to reduced expenses associated with sales by our real estate operations.
OUTLOOK
CORPORATE. In late August 2001 we began a process of systematically evaluating
our businesses to determine the strategic value of our assets and explore ways
to unlock that value. The potential sale of our Water Services businesses is one
result of this process. (See Water Services below.) We are focusing on our core
competencies, which include Automotive and Energy Services businesses, in an
effort to provide more clarity for investors. We will disclose further
development of this plan in early 2002.
The events that affected the United States since September 11 have had a
negative impact on our financial results for Automotive Services and our
securities portfolio. In light of continued economic uncertainty, we are
revising our EPS growth projection for 2001 from 12 percent to between 6 percent
and 8 percent over 2000.
Our plan for 2002 will be a part of the strategy development. At this time we
expect EPS growth from operations to exceed 2001 EPS growth.
ENERGY SERVICES. The economic health of the taconite industry continues to be
adversely impacted by cheap foreign steel imports. With the closure of LTV in
January 2001 and various temporary shutdowns at other Minnesota taconite
facilities, the current taconite production level for 2001 is now estimated to
be approximately 35 million tons. In October 2001 we executed an agreement with
LTV and Cleveland-Cliffs to acquire LTV's 225 MW generating facility and other
non-mining assets for $75 million. One of the three 75 MW units in this facility
is expected to be on-line in January 2002. Our power purchase agreement with
Lakefield Junction for 240 MW which began in June 2001, extends to April 2003
and declines to 80 MW from May 2003 to April 2004. It provides additional power
to sell in the wholesale market. We recently initiated the permitting process
for a 160 MW peaking plant in Superior, Wisconsin and a 225 MW energy facility
at Blandin Paper in Grand Rapids, Minnesota. Overall, we believe Energy Services
is well positioned for future growth opportunities.
AUTOMOTIVE SERVICES acquisitions made during 2000 and early 2001, and continued
growth of AFC's vehicle finance business, contributed significantly to net
income for the first nine months of 2001. Even with the events of September 11,
we continue to expect that Automotive Services' 2001 net income contribution
will be about 40 percent over last year. We also expect that EBITDAL from
same-store ADESA auction facilities will increase 10 percent to 15 percent.
In 2001, industry-wide sales of used vehicles at auction have been down due to
pricing pressure in the used vehicle market. The pricing pressure is partially
caused by aggressive incentives currently offered by vehicle manufacturers on
new vehicles. We continue to believe that used vehicle sales within the auto
auction industry will rise at a rate of 2 percent to 4 percent annually over the
next several years.
WATER SERVICES. Even though Florida and North Carolina had above-average
rainfall during the second and third quarters of 2001 and water use restrictions
remain in effect, Water Services' 2001 financial results are still on target due
to customer growth in both Florida and North Carolina.
In September 2001 we announced that discussions with the Florida Governmental
Utility Authority (Authority) are underway regarding the possible purchase by
the Authority of all of the water, wastewater and water reuse assets of Florida
Water. We entered into an agreement giving the Authority the exclusive
opportunity through December 21, 2001 to review a potential transaction. We will
be examining alternative strategies for redeployment of the proceeds if the sale
occurs.
ALLETE Third Quarter 2001 Form 10-Q 16
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW ACTIVITIES
During the first nine months of 2001 cash flow from operations reflected strong
operating results and continued focus on working capital management. The
decrease in cash flow from operations in 2001 was primarily attributable to
changes in trading securities. In 2001 additional trading securities were
purchased with a portion of the proceeds from our second quarter common stock
issuance (see Securities below), while in 2000 trading securities were sold to
partially fund the acquisition of Auction Finance Group, Inc. Cash flow from
operations was also affected by a number of factors representative of normal
operations.
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 5.5 million original issue shares
of our common stock are available for issuance through INVEST DIRECT, our direct
stock purchase and dividend reinvestment plan.
A substantial amount of ADESA's working capital is generated internally from
payments for services provided. However, ADESA has arrangements to use 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
issued by ALLETE 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
September 30, 2001 AFC had sold $403.1 million of finance receivables to the
special purpose subsidiary ($335.7 million at December 31, 2000). Third party
purchasers had purchased an undivided interest in finance receivables of $283.0
million from this subsidiary at September 30, 2001 ($239 million at December 31,
2000). Unsold finance receivables and unfinanced receivables held by the special
purpose subsidiary 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 $116.9 million at September
30, 2001 ($106.2 million at December 31, 2000). 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
September 30, 2001 compared to December 31, 2000 were due to increased sales and
financing activity at Automotive Services. Typically auction volumes are down
during the winter months and in December because of the holidays. As a result,
both ADESA and AFC had higher receivables and higher payables at September 30,
2001.
ACQUISITIONS. In January 2001 we acquired all of the outstanding stock of
ComSearch in exchange for ALLETE common stock and paid cash to purchase all of
the assets of Auto Placement Center (now ADESA Impact) in transactions with an
aggregate value of $62.4 million. ADESA Impact was funded with internally
generated funds and short-term debt which was refinanced with long-term debt.
(See Securities below.) ADESA Impact is a provider of "total loss" vehicle
recovery services with 12 auction facilities in the United States. ComSearch
provides Internet-based parts location and insurance adjustment audit services
nationwide. Both ADESA Impact and ComSearch are based in Rhode Island.
17 ALLETE Third Quarter 2001 Form 10-Q
In February 2001 ALLETE Water Services completed the purchase of the assets of
Dicks Creek, a wastewater utility located near Atlanta, Georgia, for $6.6
million plus a commitment to pay the seller a fee for future residential
connections. The commitment requires payment of a minimum of $400,000 annually
beginning December 31, 2001 for four years or until cumulative payments reach $2
million, whichever occurs first. The transaction was funded with internally
generated funds.
In May 2001 ADESA purchased the assets of the I-44 Auto Auction in Tulsa,
Oklahoma. The I-44 Auto Auction, which is located on 75 acres, was renamed ADESA
Tulsa and offers six auction lanes, storage for over 3,000 vehicles and a
five-bay reconditioning and detail facility. The transaction was funded with
internally generated funds.
In July 2001 we acquired Enventis, a data network systems provider headquartered
in the Minneapolis- St. Paul area. In connection with this acquisition, we
issued 310,878 shares of our common stock. This transaction complements our
existing infrastructure and fiber optics network in Minnesota and Wisconsin, and
helps position our telecommunications business as one of the leading integrated
data service providers in the Upper Midwest.
In October 2001 we executed an asset purchase agreement with LTV and
Cleveland-Cliffs to acquire certain non-mining properties from LTV for $75
million. The non-mining properties include LTV's 225 MW electric generating
facility and existing coal pile at Taconite Harbor, a sixty-mile transmission
line, railroad trackage rights, and approximately 30,000 acres of forest and
recreation land in northeast Minnesota. The transaction is expected to close
during the fourth quarter.
SECURITIES. In February 2001 we issued $125 million of 7.80% Senior Notes, due
February 15, 2008. Proceeds were used to repay a portion of ALLETE's short-term
bank borrowings incurred for the acquisition of vehicle auction facilities in
2000 and early 2001 and for general corporate purposes.
In March 2001 ALLETE, ALLETE Capital II and ALLETE Capital III, jointly filed a
registration statement with the SEC pursuant to Rule 415 under the Securities
Act of 1933. The registration statement, which has been declared effective by
the SEC, relates to the possible issuance, from time to time when market
conditions and the needs of ALLETE warrant, of an aggregate amount of $500
million of securities which may include ALLETE common stock, first mortgage
bonds, and other debt securities and ALLETE Capital II and ALLETE Capital III
preferred trust securities, of which approximately $387 million remains
available to be issued. ALLETE also previously filed a registration statement,
which has been declared effective by the SEC, relating to the possible issuance,
from time to time when market conditions and the needs of ALLETE warrant, of $25
million of first mortgage bonds and other debt securities. We may sell all or a
portion of the remaining registered securities if warranted by market conditions
and our capital requirements. Any offer and sale of the above mentioned
securities will be made only by means of a prospectus meeting the requirements
of the Securities Act of 1933 and the rules and regulations thereunder.
On May 30, 2001 we issued and sold in an underwritten public offering 6.5
million shares of common stock at $23.68 per share. In addition, an
over-allotment option for 100,000 shares at $23.68 per share was exercised by
the underwriters and sold on June 7, 2001. Total net proceeds of $150 million
were used to repay a portion of our short-term borrowings with the remainder
invested in short-term instruments. The increase in the number of shares of our
common stock outstanding as of September 30, 2001 had an immaterial impact on
earnings per share for the 2001 periods.
INVESTMENTS. 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 private companies included in our emerging technology investments went
public by completing initial public offerings. Typically, investors in a private
company are not permitted to sell stock in the company for a period of 180 days
following the company's initial public offering. Other restrictions on sale may
also apply and certain shares are held indirectly by us through our investments
in independent investment funds. Since going public, the market value of these
companies has experienced significant volatility, particularly following the
events of September 11. Our investment in the companies that have gone public
has a cost basis of approximately $12 million. The aggregate market value of our
investment in these companies at September 30, 2001 was $14 million.
ALLETE Third Quarter 2001 Form 10-Q 18
Our emerging technology investments provide us with access to developing
technologies before their commercial debut, as well as potential financial
returns and diversification opportunities. We view these investments as a source
of capital for redeployment in existing businesses.
CAPITAL REQUIREMENTS
Consolidated capital expenditures for the nine months ended September 30, 2001
totaled $108.4 million ($94.0 million in 2000). Expenditures for 2001 included
$43.0 million for Energy Services, $43.0 million for Automotive Services and
$22.4 million for Water Services. Internally generated funds and the issuance of
long-term debt were the primary sources of funding for these expenditures.
NEW ACCOUNTING STANDARDS
In July 2001 the FASB issued SFAS 141, 142 and 143. SFAS 141, "Business
Combinations" requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Use of the pooling of
interests method of accounting will be prohibited. We do not have any pending
acquisitions that will be impacted by this new rule.
SFAS 142, "Goodwill and Other Intangible Assets" changes the accounting for
goodwill from an amortization method to an impairment-only approach.
Amortization of goodwill will cease January 1, 2002, the date we expect to adopt
this standard. We have $536 million of goodwill as of September 30, 2001 and
after-tax goodwill amortization expense of approximately $8 million for the nine
months ended September 30, 2001. Annual after-tax goodwill amortization expense
is expected to be approximately $11 million in 2001. We do not believe we have
any goodwill impairment at this time.
SFAS 143, "Accounting for Asset Retirement Obligations" requires the recognition
of a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the carrying amount of the
related long-lived asset is correspondingly increased. Over time, the liability
is accreted to its present value and the related capitalized charge is
depreciated over the useful life of the asset. SFAS 143 is effective for fiscal
years beginning after June 15, 2002. We are currently reviewing the impact of
SFAS 143 on the Company.
In August 2001 the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 addresses accounting and reporting for
the impairment or disposal of long-lived assets, including the disposal of a
segment of business. SFAS 144 is effective for fiscal years beginning after
December 15, 2001, with earlier application encouraged. We are currently
reviewing the impact of SFAS 144 on the Company.
---------------------------
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 3 OF THIS FORM 10-Q.
19 ALLETE Third Quarter 2001 Form 10-Q
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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
the 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. Available-for-sale securities consist of our direct
investments in emerging technology companies and securities in a grantor trust
established to fund certain employee benefits.
SEPTEMBER 30, 2001 FAIR VALUE
--------------------------------------------------------------------------------
Millions
Trading Securities Portfolio $165.9
Available-For-Sale Securities Portfolio $16.9
--------------------------------------------------------------------------------
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Reference is made to our 2000 Form 10-K for background information on the
following updates. Unless otherwise indicated, cited references are to our 2000
Form 10-K.
Ref. Page 24. - Insert after Second Paragraph
On August 9, 2001 Minnesota Power announced plans to build a 160 MW natural
gas-fired electric generating facility near Superior, Wisconsin, to help meet
the region's energy needs during times of peak electrical demand. The
construction cost is estimated to be between $70 million and $80 million with
completion in late 2003 contingent on the timely receipt of approvals and
permits.
Ref. Page 25. - Fourth Paragraph
On August 16, 2001 Minnesota Power and Blandin Paper Company (Blandin Paper), a
subsidiary of UPM-Kymmene of Helsinki, Finland, proposed building a
state-of-the-art 225 MW energy facility adjacent to Blandin Paper in Grand
Rapids, Minnesota, through a partnering arrangement. A new company, Rapids Power
LLC, was created to own the facility. Through a subsidiary we own 71.5 percent
of Rapids Power LLC and Blandin Paper Company, a subsidiary of UPM-Kymmene, owns
28.5 percent. The project, which is expected to cost more than $200 million, is
contingent on timely receipt of necessary federal and state approvals and
permits. Construction could begin in the fall of 2002 and is slated for
completion in mid-2005.
Ref. Page 26 - Third Full Paragraph
Ref. Form 8-K dated and filed May 18, 2001
Ref. Form 8-K dated and filed October 10, 2001
On October 23, 2001 the U.S. Bankruptcy Court approved the Asset Purchase
Agreement Rainy River Energy Corporation - Taconite Harbor, a wholly owned
subsidiary of the Company, and Cleveland-Cliffs have executed with LTV. We
expect the transaction to close in the fourth quarter of 2001.
ALLETE Third Quarter 2001 Form 10-Q 20
Ref. Page 28. - Ninth Full Paragraph
Effective September 12, 2001 the PSCW approved a 12.25 percent return on common
equity and a 1.1 percent average increase in retail utility rates for SWL&P
customers. This average increase is comprised of a 3.4 percent decrease in
electric rates, a 1.5 percent increase in gas rates and a 24.5 percent increase
in water rates. The water increase is designed to recover the cost of replacing
an aging well system. SWL&P originally requested an average increase in retail
utility rates of 1.8 percent which was later increased to 2.5 percent.
Ref. Page 28. - Tenth Paragraph
On August 17, 2001 the PSCW unanimously agreed that construction of the 250-mile
Wausau-to-Duluth electric transmission line is necessary. On October 23, 2001
the PSCW issued its written order that outlines the details and route specifics
of the line. Minnesota Power and Wisconsin Public Service Corporation will
proceed with the joint project and begin the engineering and geographical
surveys that need to be completed before 2002 when construction is expected to
begin.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10 Retirement Agreement dated August 28, 2001 between ALLETE and Edwin
L. Russell.
(b) Reports on Form 8-K.
Report on Form 8-K filed August 29, 2001 with respect to Item 5. Other
Information.
Report on Form 8-K filed September 24, 2001 with respect to Item 5. Other
Information.
Report on Form 8-K filed October 10, 2001 with respect to Item 5. Other
Information.
Report on Form 8-K filed October 18, 2001 with respect to Item 7. Financial
Statements and Exhibits.
21 ALLETE Third Quarter 2001 Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLETE, INC.
October 26, 2001 James K. Vizanko
---------------------------------------
James K. Vizanko
Vice President,
Chief Financial Officer and Treasurer
October 26, 2001 Mark A. Schober
---------------------------------------
Mark A. Schober
Vice President and Controller
ALLETE Third Quarter 2001 Form 10-Q 22
EXHIBIT INDEX
Exhibit
Number
10 Retirement Agreement dated August 28, 2001 between ALLETE and Edwin L.
Russell.