ALLETE FORM 10-K 2002
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FORM 10-K
United States
Securities and Exchange Commission
Washington, D.C. 20549
(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, 2002
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to ______________
Commission File No. 1-3548
ALLETE, 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. / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes /X/ No / /
The aggregate market value of voting stock held by nonaffiliates on June 30,
2002 was $2,296,176,078.
As of February 7, 2003 there were 85,715,304 shares of ALLETE Common Stock,
without par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2003 Annual Meeting of Shareholders
are incorporated by reference in Part III.
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PAGE 15
ALLETE FORM 10-K 2002
TABLE OF CONTENTS
DEFINITIONS...................................................................17
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995.......................................................................18
PART I
Item 1. Business...........................................................19
Energy Services....................................................20
Utility Electric Sales.........................................22
Utility Purchased Power .......................................24
Fuel...........................................................24
Nonregulated Generation and
Power Marketing................................................24
Regulatory Issues..............................................25
Competition....................................................26
Franchises.....................................................26
Environmental Matters..........................................26
Automotive Services................................................28
Competition....................................................28
Environmental Matters..........................................30
Investments and Corporate Charges..................................31
Environmental Matters..........................................31
Executive Officers of the Registrant...............................32
Item 2. Properties.........................................................33
Item 3. Legal Proceedings..................................................33
Item 4. Submission of Matters to a Vote of Security
Holders............................................................33
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters....................................33
Item 6. Selected Financial Data............................................34
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations......................................................36
Consolidated Overview..............................................36
Net Income.........................................................36
2002 Compared to 2001..............................................37
2001 Compared to 2000..............................................38
Critical Accounting Policies.......................................39
Outlook............................................................40
Liquidity and Capital Resources....................................42
Capital Requirements...............................................44
Market Risk........................................................44
New Accounting Standards...........................................45
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk..................................................46
Item 8. Financial Statements and Supplementary
Data...............................................................46
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure.........................................................46
PART III
Item 10. Directors and Executive Officers
of the Registrant..................................................47
Item 11. Executive Compensation.............................................47
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related
Stockholder Matters................................................47
Item 13. Certain Relationships and Related
Transactions.......................................................47
Item 14. Controls and Procedures............................................47
PART IV
Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................................47
SIGNATURES ...............................................................52
CERTIFICATIONS ...............................................................53
CONSOLIDATED FINANCIAL STATEMENTS.............................................55
PAGE 16
ALLETE FORM 10-K 2002
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DEFINITIONS
ABBREVIATION
OR ACRONYM TERM
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ACE ACE Limited
ADESA ADESA Corporation
ADESA Canada ADESA Canada Inc.
AFC Automotive Finance Corporation
ALLETE ALLETE, Inc. and its subsidiaries
APB Accounting Principles Board
AutoVIN AutoVIN, Inc.
BNI Coal BNI Coal, Ltd.
Boswell Boswell Energy Center
Capital Re Capital Re Corporation
CIP Conservation Improvement Program(s)
Company ALLETE, Inc. and its subsidiaries
ComSearch ComSearch, Inc.
EBITDAL Earnings Before Interest, Taxes,
Depreciation, Amortization and
Lease Expense
EndTrust EndTrust Lease End Services, LLC
Enventis
Telecom Enventis Telecom, Inc.
EPA Environmental Protection Agency
ESOP Employee Stock Ownership Plan
EITF Emerging Issues Task Force
FASB Financial Accounting Standards Board
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
FWSA Florida Water Service Authority
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)
kV Kilovolt(s)
Laskin Laskin Energy Center
Lehigh Lehigh Acquisition Corporation
LTV LTV Steel Mining Co.
MAPP Mid-Continent Area Power Pool
MBtu Million British thermal units
Minnesota Power An operating division of ALLETE, Inc.
Minnkota Power Minnkota Power Cooperative, Inc.
MISO Midwest Independent Transmission
System Operator, Inc.
MPCA Minnesota Pollution Control Agency
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 15(a) of
this Form 10-K
NPDES National Pollutant Discharge
Elimination System
NRG Energy NRG Energy, Inc.
PAR PAR, Inc.
PSCW Public Service Commission of
Wisconsin
Rainy River
Energy Rainy River Energy Corporation
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting
Standards No.
Split Rock
Energy Split Rock Energy LLC
Square Butte Square Butte Electric Cooperative
SWL&P Superior Water, Light and Power
Company
Taconite Harbor Taconite Harbor Energy Center
WPPI Wisconsin Public Power, Inc.
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PAGE 17
ALLETE FORM 10-K 2002
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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, 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 Private Securities Litigation Reform Act of 1995) 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," "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, risks 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 or
outcomes 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, financings, 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) as well as general vehicle-related laws,
including vehicle brokerage and auction laws;
- unanticipated impacts of restructuring initiatives in the electric
industry;
- economic and geographic factors, including political and economic risks;
- changes in and compliance with environmental and safety laws and policies;
- weather conditions;
- natural disasters;
- market factors affecting supply and demand for used vehicles;
- wholesale power market conditions;
- population growth rates and demographic patterns;
- the effects of competition, including competition for retail and wholesale
customers, as well as suppliers and purchasers of vehicles;
- pricing and transportation of commodities;
- changes in tax rates or policies or in rates of inflation;
- unanticipated project delays or changes in project costs;
- unanticipated changes in operating expenses and capital expenditures;
- capital market conditions;
- competition for economic expansion or development opportunities;
- our ability to manage expansion and integrate recent acquisitions; and
- the outcome of 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 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 actual results to differ materially from those
contained in any forward-looking statement.
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PAGE 18
ALLETE FORM 10-K 2002
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PART 1
ITEM 1. BUSINESS
ALLETE is a diversified company incorporated under the laws of Minnesota
since 1906. References in this report to "we" and "our" are to ALLETE and its
subsidiaries, collectively.
ALLETE files annual, quarterly and other reports and other information with
the SEC. You can read and copy any information filed by ALLETE with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. You can obtain additional information about the Public Reference Room by
calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet
site (www.sec.gov) that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC,
including ALLETE. ALLETE also maintains an Internet site (www.allete.com) that
contains documents as soon as reasonably practicable after such material is
electronically filed with or furnished to the SEC.
As of December 31, 2002 we had approximately 14,000 employees, 4,600 of which
were part time. Our core operations in 42 states, nine Canadian provinces and
Mexico focus on two segments: ENERGY SERVICES which includes electric and gas
services, coal mining and telecommunications; and AUTOMOTIVE SERVICES which
includes a network of wholesale and total loss vehicle auctions, a finance
company, a vehicle remarketing company, a company that provides vehicle
inspection services to the automotive industry and its lenders, and a company
that provides Internet-based parts location and insurance claim audit services
nationwide.
INVESTMENTS AND CORPORATE CHARGES include our real estate operations,
investments in emerging technologies related to the electric utility industry
and corporate charges. Corporate charges represent general corporate expenses,
including interest, not specifically related to any one business segment.
In 2002 Energy Services completed the restarting of the nonregulated
generating facilities at Taconite Harbor. We integrated our MPEX division into
Split Rock Energy and combined Minnesota Power Telecom, Inc. and Enventis, Inc.
operations into Enventis Telecom. During 2002 we also cancelled a generation
project in Grand Rapids, Minnesota, and indefinitely delayed one that was under
way in Superior, Wisconsin. The construction of the transmission line from
Duluth, Minnesota, to Wausau, Wisconsin, has been delayed. (See Energy
Services.)
In 2002 Automotive Services opened ADESA Golden Gate, the largest vehicle
auction in California, and ADESA Vancouver in Richmond, British Columbia. Both
were built to replace aging facilities that were too small to efficiently serve
our growing customer demand. Wholesale auction facilities in Long Island, New
York; Atlanta, Georgia; and Edmonton, Alberta, are also under construction and
slated to open in 2003. A small auction has been initiated in Mexico at a Ford
Motor Company facility. Finally, we increased our total loss vehicle auctions by
two, buying one and building another.
In 2002 Investments purchased additional real estate for sale in Florida and
liquidated the trading securities portfolio.
YEAR ENDED DECEMBER 31 2002 2001 2000
================================================================================
Consolidated Operating
Revenue - Millions $1,507 $1,526 $1,186
Percentage of Consolidated
Operating Revenue
Energy Services
Utility
Industrial
Taconite Producers 10% 10% 14%
Paper and Wood Products 4 4 5
Pipelines and Other Industries 2 3 3
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Total Industrial 16 17 22
Residential 5 4 6
Commercial 5 5 6
Wholesale 5 6 7
Other Revenue 3 3 4
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Total Utility 34 35 45
Nonregulated/Nonutility 8 5 4
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Total Energy Services 42 40 49
Automotive Services 56 55 44
Investments 2 5 7
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100% 100% 100%
================================================================================
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.
In 2002 we executed plans developed in a 2001 strategic review of all of the
Company's businesses to identify ways of unlocking shareholder value not
reflected in the price of our common stock. Businesses identified as having more
value if operated by potential purchasers than by us include our Water Services
businesses in Florida, North Carolina and Georgia, our auto transport business
and the retail store. We sold our auto transport business and exited our retail
store at the end of first quarter 2002.
In 2002 Florida Water signed an asset purchase agreement for the sale of
substantially all of its assets to the Florida Water Services Authority (FWSA),
a governmental authority formed under the laws of the state of Florida, for
$492.5 million. Florida Water anticipates receiving approximately $420 million
at closing and an additional $36.5 million three years after closing once
certain contingencies have been satisfied. In addition, Florida Water expects to
receive up to $36 million of future customer hookup fees to be paid over the
next six years. Cash proceeds to ALLETE after taxes and
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ALLETE FORM 10-K 2002
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PART I
repayment of existing debt are expected to be approximately $180 million in
2003, and $250 million for the entire transaction. The gain on the transaction
is estimated at $100 million after taxes and related costs. While the majority
of the cash will be received at closing, the gain is expected to be recognized
in future years as required by accounting rules.
Eleven lawsuits seeking to halt the sale of Florida Water assets to the FWSA
have been filed, primarily by local governments which had hoped to purchase
Florida Water's assets through a competing buyer. Pursuant to notice given on
January 28, 2003, the FPSC held an agenda conference on February 4, 2003 in
which it ordered Florida Water to file, in advance of closing the transaction,
an application requesting approval of the transfer of its assets to the FWSA,
and further ordered Florida Water to refrain from closing the transaction before
FPSC approval. Florida Water is asking a court to determine that the FPSC may
not delay closing of the sale and is required by law to approve this transfer as
a matter of right. Florida Water considers the lawsuits to be without merit and
is vigorously contesting these lawsuits. Litigation challenging this transaction
continues to delay its closing.
We anticipate selling our Water Services businesses in North Carolina and
Georgia by the end of 2003.
ENERGY SERVICES
We categorize our Energy Services businesses as utility, nonregulated, or
nonutility. Utility operations include rate regulated activities associated with
generation, transmission and distribution of electricity under the jurisdiction
of state and federal regulatory authorities. Nonregulated generation operations
consist primarily of Taconite Harbor in northern Minnesota and generation
obtained from a facility near Chicago, Illinois, through a 15-year power
purchase agreement with NRG Energy. Nonregulated generation is non-rate base
generation sold at wholesale at market-based rates, pursuant to authority from
the FERC. Coal mining and telecommunications are also included in Energy
Services and are categorized as nonutility. The discussion below summarizes the
major businesses we include in Energy Services. Statistical information is
presented as of December 31, 2002 unless otherwise indicated. All subsidiaries
are wholly owned unless otherwise specifically indicated.
MINNESOTA POWER, an operating division of ALLETE, provides electricity in a
26,000 square mile electric service territory located in northeastern Minnesota.
Minnesota Power supplies utility electric service to 133,000 retail 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, 12,000 natural gas customers and 10,000 water
customers.
Minnesota Power had an annual net peak load of 1,402 MW on January 7, 2002.
Our power supply sources are listed on the following page.
We have electric transmission and distribution lines of 500 kV (8 miles), 230
kV (606 miles), 161 kV (43 miles), 138 kV (66 miles), 115 kV (1,259 miles) and
less than 115 kV (6,557 miles). We own and operate 180 substations with a total
capacity of 8,550 megavoltamperes. Some of our transmission and distribution
lines interconnect with other utilities.
We own offices and service buildings, an energy control center and repair
shops; and lease offices and storerooms in various localities. Substantially all
of our electric plant is subject to mortgages which collateralize the
outstanding first mortgage bonds of Minnesota Power and of SWL&P. Generally, the
Company holds fee interest in its real properties subject only to the lien of
the mortgages. Most of our electric lines are located on land not owned in fee,
but are covered by appropriate easement rights or by necessary permits from
governmental authorities. WPPI owns 20% of Boswell Unit 4. WPPI has the right to
use our transmission line facilities to transport its share of Boswell
generation. (See Note 7.)
In early 2002 Minnesota Power integrated its power marketing division into
Split Rock Energy. (See discussion of Split Rock Energy below.)
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 under cost-plus coal supply
agreements expiring in 2027. (See Fuel and Note 13.)
ENVENTIS TELECOM. In early 2002 our telecommunications subsidiaries,
Minnesota Power Telecom, Inc. and Enventis, Inc. which was acquired in July
2001, were merged to operate as Enventis Telecom. Enventis Telecom is an
integrated data services provider offering fiber optic-based communication and
advanced data services to businesses and communities in Minnesota, Wisconsin and
Missouri. Enventis Telecom provides converged IP (or Internet protocol) services
that allow all communications (voice, video and data) to use the same
optic-based delivery technology. Enventis Telecom owns or has rights to
approximately 1,500 route miles of fiber optic cable. These route miles contain
multiple fibers that total approximately 48,000 fiber miles. Enventis Telecom
also owns optronic and data switching equipment that is used to "light up" the
fiber optic cable. Enventis Telecom services customers from facilities that are
primarily leased from third parties.
RAINY RIVER ENERGY is engaged in the acquisition and development of
nonregulated generation and wholesale power marketing.
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PAGE 20
ALLETE FORM 10-K 2002
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PART I
POWER SUPPLY
======================================================================================================================
FOR THE YEAR ENDED
UNIT YEAR NET WINTER DECEMBER 31, 2002
UTILITY NO. INSTALLED CAPABILITY ELECTRIC REQUIREMENTS
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MW MWH %
Steam
Coal-Fired
Boswell Energy Center 1 1958 69
near Grand Rapids, MN 2 1960 69
3 1973 351
4 1980 425
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914 6,518,081 55.3%
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Laskin Energy Center 1 1953 55
in Hoyt Lakes, MN 2 1953 55
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110 622,586 5.3
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Purchased Steam
M.L. Hibbard in Duluth, MN 3 & 4 1949, 1951 51 17,611 0.1
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Total Steam 1,075 7,158,278 60.7
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Hydro
Group consisting of ten stations in MN Various 115 555,857 4.7
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Purchased Power
Square Butte burns lignite coal near Center, ND 322 2,320,085 19.7
All Other - Net - 1,763,183 14.9
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Total Purchased Power 322 4,083,268 34.6
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Total 1,512 11,797,403 100.0%
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UNIT YEAR YEAR NET
NONREGULATED NO. INSTALLED ACQUIRED CAPABILITY
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MW
Steam
Coal-Fired
Taconite Harbor Energy Center 1, 2 & 3 1957, 1957, 1967 2001 200
in Taconite Harbor, MN
Cloquet Energy Center 5 2001 2001 23
in Cloquet, MN
Rapids Energy Center <F1> 6 & 7 1980 2000 30
in Grand Rapids, MN
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Hydro
Conventional Run-of-River
Rapids Energy Center <F1> 4 & 5 1917 2000 1
in Grand Rapids, MN
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Power Purchase Agreement
Kendall County (RAINY RIVER ENERGY) 3 2002 2002 275
located southwest of Chicago, IL
======================================================================================================================
<FN>
<F1> THE NET GENERATION IS PRIMARILY DEDICATED TO THE NEEDS OF ONE CUSTOMER.
</FN>
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PAGE 21
ALLETE FORM 10-K 2002
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PART I
UTILITY ELECTRIC SALES
Our utility operations include retail and wholesale rate regulated activities
under the jurisdiction of state and federal regulatory authorities. (See
Regulatory Issues.)
UTILITY ELECTRIC SALES
FOR THE YEAR ENDED DECEMBER 31 2002 2001 2000
================================================================================
MILLIONS OF KILOWATTHOURS
Retail
Residential 1,044 998 980
Commercial 1,257 1,234 1,208
Industrial 6,946 6,549 7,194
Other 77 75 76
Wholesale
Municipals 820 787 779
Others 987 1,299 1,494
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11,131 10,942 11,731
================================================================================
Minnesota Power has wholesale contracts with 16 municipal customers. (See
Regulatory Issues - Federal Energy Regulatory Commission.)
Approximately 60% of the ore consumed by integrated steel facilities in the
United States originates from six 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 39
million tons in 2002 (33 million tons in 2001; 47 million tons in 2000). The
decrease in 2001 taconite production was due to the closing of LTV and the
reduced demand for iron ore from the operating mines as a result of high steel
import levels and a softer economy. LTV, which was not a Large Power Customer
(defined below), formerly produced 7 million to 8 million tons of taconite
annually. Based on our research of the taconite industry, Minnesota taconite
production for 2003 is anticipated to be about 37 million tons. As a result of
continuing consolidation in the integrated steel business and its resulting
impact on taconite producers, Minnesota Power is unable to predict taconite
production levels for the next two to five years. We expect any excess energy
not used by our retail customers will be marketed primarily through Split Rock
Energy to the wholesale market.
LARGE POWER CUSTOMER CONTRACTS. Minnesota Power has large power customer
contracts with 13 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 below.) 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 biannual (power pool season) basis and require that a portion
of their megawatt needs be committed 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 11 of the 13 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.
All contracts continue past the contract termination date unless the required
advance notice of cancellation has been given. The advance notice of
cancellation varies from one to four years. 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 all 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, 2003
MINIMUM MONTHLY
ANNUAL REVENUE <F1> MEGAWATTS
============================================================
2003 $85.5 million 523
2004 $62.8 million 382
2005 $46.3 million 282
2006 $32.2 million 193
2007 $29.2 million 178
============================================================
<FN>
<F1> BASED ON PAST EXPERIENCE, WE BELIEVE REVENUE FROM LARGE
POWER CUSTOMERS WILL BE SUBSTANTIALLY IN EXCESS OF THE
MINIMUM CONTRACT AMOUNTS.
</FN>
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PAGE 22
ALLETE FORM 10-K 2002
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PART I
CONTRACT STATUS FOR MINNESOTA POWER LARGE POWER CUSTOMERS
AS OF FEBRUARY 1, 2003
EARLIEST
CUSTOMER INDUSTRY LOCATION OWNERSHIP TERMINATION DATE
=============================================================================================================================
Eveleth Mines LLC <F1> Taconite Eveleth, MN 45% Rouge Steel Co. October 31, 2008
40% AK Steel Co.
15% Stelco Inc.
Hibbing Taconite Co. <F2> Taconite Hibbing, MN 62.3% Bethlehem Steel Corp. December 31, 2008
23% 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. <F3> Taconite Keewatin, MN National Steel Corp. February 28, 2007
U.S. Steel Corp. <F4> Taconite Mt. Iron, MN U.S. Steel Corp. December 31, 2007
Blandin Paper Company <F5> Paper Grand Rapids, MN UPM-Kymmene Corporation April 30, 2006
Boise Paper Solutions Paper International Falls, MN Boise Cascade Corporation December 31, 2008
Potlatch Corporation <F6> Paper Brainerd, MN Potlatch Corporation December 31, 2008
Grand Rapids, MN
Sappi Cloquet LLC <F6> Paper Cloquet, MN Sappi Limited December 31, 2008
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
Enbridge Energy Company, Pipeline Deer River, MN Enbridge Energy Company, May 31, 2004
Limited Partnership Floodwood, MN Limited Partnership
Minnesota Pipeline Company Pipeline Staples, MN 60% Koch Pipeline Co. L.P. September 30, 2004
Little Falls, MN 40% Marathon Ashland
Park Rapids, MN Petroleum LLC
=============================================================================================================================
<FN>
<F1> AS OF FEBRUARY 7, 2003 EVELETH MINES LLC HAD ANNOUNCED THAT APPROXIMATELY 35% OF THE PLANT'S ANNUAL CAPACITY FOR
TACONITE PRODUCTION IS ON ORDER FOR 2003 MAKING PLANT CLOSURE A POSSIBILITY.
<F2> IN FEBRUARY 2003 BETHLEHEM STEEL CORP. ACCEPTED INTERNATIONAL STEEL GROUP, INC.'S (ISG) OFFER TO BUY BETHLEHEM STEEL
CORP.'S MILLS AND OTHER PROPERTY FOR $1.5 BILLION. BETHLEHEM STEEL CORP. FILED FOR BANKRUPTCY PROTECTION UNDER CHAPTER
11 IN 2001. THE AGREEMENT IS SUBJECT TO REVIEW BY THE U. S. BANKRUPTCY COURT. BETHLEHEM STEEL CORP.'S SHARE OF HIBBING
TACONITE IS INCLUDED IN THE SALE AGREEMENT.
<F3> IN MARCH 2002 NATIONAL STEEL CORPORATION FILED FOR BANKRUPTCY PROTECTION UNDER CHAPTER 11. ON JANUARY 30, 2003 AK
STEEL HOLDING COMPANY SIGNED AN AGREEMENT TO PURCHASE SUBSTANTIALLY ALL OF NATIONAL STEEL CORPORATION, INCLUDING
NATIONAL STEEL PELLET COMPANY, FOR $1.1 BILLION. THE TRANSACTION IS CONTINGENT ON APPROVAL BY THE COURTS AND REGULATORS,
AND THE UNITED STEELWORKERS OF AMERICA'S WILLINGNESS TO RENEGOTIATE ITS LABOR CONTRACTS. ON FEBRUARY 6, 2003 AK STEEL
WAS GIVEN PRIORITY STATUS BY THE U. S. BANKRUPTCY COURT.
<F4> IN OCTOBER 2002 U.S. STEEL CORP. ANNOUNCED THE SALE OF 80% OF ITS TACONITE PRODUCTION FACILITY TO AN ENTITY FORMED BY
APOLLO MANAGEMENT, LP, A VENTURE CAPITAL FIRM IN NEW YORK. WE ANTICIPATE THAT THE SALE WILL HAVE NO EFFECT ON CURRENT
TACONITE PRODUCTION ESTIMATES OR MINNESOTA POWER'S LARGE POWER CONTRACT WITH THE FACILITY.
<F5> IN JANUARY 2003 BLANDIN PAPER COMPANY SHUT DOWN TWO OF ITS FOUR PRODUCTION LINES REPRESENTING APPROXIMATELY 30% OF ITS
PRODUCTION CAPABILITIES.
<F6> IN MAY 2002 SAPPI LIMITED PURCHASED THE CLOQUET PAPER MILL FROM POTLATCH CORPORATION. MINNESOTA POWER SIGNED NEW
CONTRACTS WITH BOTH POTLATCH CORPORATION AND SAPPI LIMITED.
</FN>
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PART I
UTILITY PURCHASED POWER
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 13.)
In October 2000 Minnesota Power entered into a power purchase agreement with
Great River Energy. Under this agreement, as amended in 2002, Minnesota Power
purchases 240 MW beginning June 2001 until April 2003 and 80 MW from May 2003 to
October 2003 from Lakefield Junction Station, a natural gas-fired peaking plant
located in southern Minnesota.
FUEL
Minnesota Power purchases low-sulfur, sub-bituminous coal from the Powder
River Basin coal field located in Montana. Coal consumption in 2002 for electric
generation at Minnesota Power's Minnesota coal-fired generating stations was
about 5.3 million tons. As of December 31, 2002 Minnesota Power had a coal
inventory of about 635,000 tons. Minnesota Power has four coal supply agreements
with various expiration dates extending through 2006. 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 2003 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. Although Minnesota Power is exploring future coal
supply options, it believes that adequate supplies of low-sulfur, sub-bituminous
coal will continue to be available.
The Burlington Northern and Santa Fe Railway Company transports coal by unit
train from the Powder River Basin to Minnesota Power's generating stations. In
2001 Minnesota Power and Burlington Northern entered into a 10-year agreement
under which Burlington Northern will ship all of Minnesota Power's coal.
COAL DELIVERED TO MINNESOTA POWER
YEAR ENDED DECEMBER 31 2002 2001 2000
================================================================================
Average Price Per Ton $21.48 $20.52 $21.19
Average Price Per MBtu $1.19 $1.18 $1.16
================================================================================
The Square Butte generating unit operated by Minnkota Power burns North
Dakota lignite coal supplied by BNI Coal, in accordance with the terms of a
contract expiring in 2027. Square Butte's cost of lignite burned in 2002 was
approximately 61 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.
NONREGULATED GENERATION AND POWER MARKETING
SPLIT ROCK ENERGY. Split Rock Energy LLC, is a joint venture of Minnesota
Power and Great River Energy. Great River Energy is a consumer-owned generation
and transmission cooperative and is Minnesota's second largest utility in terms
of generating capacity. The joint venture 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 Energy has access
to members' resources, assets and financial support. Split Rock Energy provides
power marketing, energy sourcing and risk management services to both Minnesota
Power and Great River Energy. Split Rock Energy's risk management policies are
consistent with Minnesota Power's. In a volatile wholesale marketplace, Split
Rock Energy mitigates marketplace risk while creating additional marketing
opportunities for both Minnesota Power and Great River Energy.
TACONITE HARBOR. In 2002 we restarted the Taconite Harbor generating
facilities. The generation output is primarily being sold in the wholesale
market and is allocated in limited circumstances to Minnesota Power's utility
customers.
KENDALL COUNTY. In September 1999 Rainy River Energy entered into an amended
15-year power purchase agreement (Kendall County) with a company that was
subsequently purchased by NRG Energy, an independent power producer. The Kendall
County agreement includes the purchase of the 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 and was completed in 2002. Rainy River
Energy's obligation to pay fixed capacity related charges began May 1, 2002. We
currently have two long-term forward capacity and energy contracts related to
generation obtained through the Kendall County agreement. Each is for 50 MW with
one having a 10-year term and the other a 15-year term. Our strategy is to sell
a significant portion of the remaining nonregulated generation through long-term
contracts of various durations. Any balance will be sold in the spot market
through short-term agreements.
OTHER. In 2002 Minnesota Power canceled plans to construct a 225-MW
combined-heat-and-power facility in Grand Rapids, Minnesota, because its cost
was too high. Minnesota Power also indefinitely delayed plans to build a $70
million 160-MW natural gas-fired electric generating facility in Superior,
Wisconsin, due to lack of growth in the region and the unsettled nature of both
the economy and wholesale power markets. As a result of this indefinite delay,
ALLETE's 2002 earnings included a $5.5 million charge.
In 2002 the Company sold 1.2 million MWh of nonregulated generation (0.2
million in both 2001 and 2000).
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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 25%, 3% and 3%, respectively, of our 2002 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 monthly 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 their contracts expire or are amended. All rates 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 operations. 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. Two contracts are for service through
2005, while the other 14 are for service through at least 2007. All contracts
limit FERC rate increases on a cumulative basis. In 2002 municipal customers
purchased 715,000 MWh from Minnesota Power.
In February 2001 Minnesota Power and SWL&P became members of the MISO
pursuant to FERC's Order No. 2000 and Wisconsin state law. Minnesota Power and
SWL&P retain ownership of their respective transmission assets and control area
functions, but now operate their transmission network under the regional
operational control of the MISO and take and provide transmission service under
the MISO open access transmission tariff. In December 2001 FERC approved the
MISO as the nation's first regional transmission organization (RTO) under Order
No. 2000 criteria, noting that it believes the MISO will benefit the public
interest by enhancing the reliability of the Midwest electric grid and
facilitating and enhancing wholesale competition. The MISO will accomplish this
primarily through standardization of rates, terms and conditions of transmission
service over a broad region encompassing all or parts of 20 states and one
Canadian province, and over 120,000 MW of generating capacity. MISO operations
were phased in during the first half of 2002.
The FERC is currently developing rules for a standard market design intended
to further define the functions and transmission tariff of the MISO and other
regional transmission providers. The MISO has filed proposed energy market rules
with FERC for day-ahead and real time energy markets and financial transmission
rights. The MISO has requested assurances from FERC that all start-up costs will
be recoverable from market participants.
Minnesota Power also 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 and a wholesale power and energy market committee.
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 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. Minnesota Power's 2000/2001 CIP
investment goal was $2.7 million each year with actual spending at $1.9 million
and $2.6 million, respectively. Minnesota Power's 2002/2003 CIP investment goal
is $2.9 million each year. During 2002 Minnesota Power invested $4.0 million
which satisfied current spending requirements and all prior years' spending
shortfalls.
PUBLIC SERVICE COMMISSION OF WISCONSIN. SWL&P's current retail rates are
based on a September 2001 PSCW retail rate order that allows for a 12.25% return
on common equity.
In May 2002 SWL&P filed an application with the PSCW for authority to
increase retail utility rates 4.5%. This average increase is comprised of a 6.8%
increase in gas rates, a 19.2% increase in water rates and no change in electric
rates. The
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ALLETE FORM 10-K 2002
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PART I
proposed increases are due in part to the completion of construction projects
that added a second gas supply line into Superior, Wisconsin, and replaced an
aging well system in the water utility. SWL&P is requesting a 12.25% return on
common equity. Hearings have been held and a final order is expected in the
spring of 2003.
Minnesota Power, the American Transmission Company (ATC) and Wisconsin Public
Service Corporation, filed new cost estimates with the PSCW estimating that the
Wausau-to-Duluth electric transmission line will cost $396 million. When it was
proposed, the line had been projected to cost about $215 million. The increased
costs for the 220-mile, 345-kV line are attributable to higher prices for
construction materials, increased payments to landowners, more aggressive
environmental safeguards and a different estimating system used by ATC. Despite
the cost increase, Minnesota Power and transmission planners throughout the
region believe the transmission line is necessary. Minnesota Power will be
actively involved in the permitting and construction activities; however, it
does not intend to finance nor own the proposed line.
The PSCW must approve the ownership, control and operation of any affiliated
wholesale nonregulated generating plants in Wisconsin. (See Wholesale Electric
Sales.)
COMPETITION
INDUSTRY RESTRUCTURING. State and federal efforts to restructure the electric
utility industry have slowed amid concerns fueled by California's retail
competition experience and Enron Corp.'s collapse, among others. At the
wholesale level, the FERC is in the midst of a major rulemaking called Standard
Market Design (SMD). Once implemented, SMD should facilitate wholesale
transactions by improving the functionality of the wholesale electric
transmission market.
New federal legislation has been proposed that, among other things and in
concert with the FERC's efforts, aims to maintain reliability, assures adequate
energy supply and addresses wholesale price volatility while encouraging
wholesale competition. Legislation or regulation that initiates a process which
may lead to retail customer choice of their electric service provider currently
lacks momentum in both Minnesota and Wisconsin. Federal and state legislative
and regulatory activity, as well as the actions of competitors, affect the way
Minnesota Power strategically plans for its future. We cannot predict the timing
or substance of any future legislation or regulation.
FRANCHISES
Minnesota Power holds franchises to construct and maintain an electric
distribution and transmission system in 90 cities and towns located within its
electric service territory. SWL&P holds similar franchises for electric, natural
gas and/or water systems 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. Our exclusive service territories are established by
state regulatory agencies.
ENVIRONMENTAL MATTERS
Certain businesses included in our Energy Services segment are subject to
regulation by various federal, state and local authorities of 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. Environmental laws and regulations
are constantly evolving. Due to their uncertainty, the character, scope and
ultimate costs of emerging environmental compliance requirements cannot be
estimated.
AIR. Minnesota Power's generating facilities in Minnesota burn mainly
low-sulfur western sub-bituminous 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. Most Minnesota Power
facilities have surplus allowances. Taconite Harbor expects to meet its sulfur
dioxide requirements by annually purchasing allowances, since it receives no
allowance allocation. 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 MPCA for its applicable facilities to conduct electric operations.
In December 2000 the EPA announced its 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.
Final regulations defining control requirements are planned for December 2004.
Cost estimates would be premature at this time.
In May 2002 Minnesota Power received and subsequently responded to a third
request from the EPA, under Section 114 of the Clean Air Act, seeking additional
information
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ALLETE FORM 10-K 2002
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PART I
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 the EPA will take any
action on this matter or whether Minnesota Power will be required to incur any
costs as a result.
In December 2002 the EPA issued changes to the existing New Source Review
rules. These changes are not expected to result in any significant additional
costs to Minnesota Power. The EPA also proposed changes clarifying application
of certain sections of the New Source Review rules. Minnesota Power is
evaluating the proposal. After taking comments in early 2003, the EPA plans to
go through a new rule making process over the next one to two years.
In June 2002 Minnkota Power, the operator of Square Butte, received a Notice
of Violation from the EPA regarding alleged New Source Review violations at the
M.R. Young Station which includes the Square Butte generating unit. The EPA
claims certain capital projects completed by Minnkota Power should have gone
through the New Source Review process potentially resulting in new air permit
operating conditions. The Company is unable to predict the outcome of this
matter or the magnitude of costs should additional pollution controls be
required. Minnesota Power is obligated to pay its pro rata share of Square
Butte's costs based on Minnesota Power's entitlement to the Square Butte
generating unit's output. (See Note 13.)
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 its
electric operations.
Minnesota Power holds FERC licenses authorizing the ownership and operation
of seven hydroelectric generating projects with a total generating capacity of
about 115 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 Hydro 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
periodically to the court the status of these discussions. Beginning in 1996,
and most recently in January 2002, 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. The Fond du Lac
Band and Minnesota Power have reached a confidential settlement agreement for
the St. Louis River Hydro Project and have included the U.S. Department of the
Interior in the settlement process in an effort to achieve a comprehensive
agreement with all intervening parties to the project license. Any final
settlement must be approved by the FERC, who would then amend the project
license in accordance with the settlement agreement.
SOLID AND HAZARDOUS WASTE. The Resource Conservation and Recovery Act of 1976
regulates the management and disposal of solid wastes and hazardous 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. The MPCA and the
Wisconsin Department of Natural Resources (WDNR) are responsible for
administering solid and hazardous waste rules on the state level with oversight
by the EPA.
During 2002 Minnesota Power constructed a dry ash disposal landfill to handle
ash generated from Taconite Harbor. The landfill cost approximately $800,000.
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 the end of 2004. The total cost is expected to be about
$2.0 million of which $1.3 million was spent through December 31, 2002.
In May 2001 SWL&P received notice from the WDNR that the City of Superior had
found soil contamination on property adjoining a former Manufactured Gas Plant
(MGP) site owned and operated by SWL&P's predecessors from 1889 to 1904. The
WDNR requested an environmental investigation be initiated. The WDNR also issued
SWL&P a Responsible Party letter in February 2002 to initiate tracking of the
project in the WDNR database so that progress can be monitored. The
environmental investigation is underway and the Company is unable to predict the
outcome of this matter at this time.
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PART I
AUTOMOTIVE SERVICES
Automotive Services includes several subsidiaries that are integral parts of
the vehicle redistribution business. Automotive Services plans to grow through
increased sales at existing businesses, selective acquisitions in both wholesale
and total loss vehicle auction facilities, integration of total loss vehicle
services at certain wholesale vehicle auction facilities and expansion of
services to customers. The discussion below summarizes the major businesses we
include in Automotive Services. Statistical information is presented as of
December 31, 2002 unless otherwise indicated. All subsidiaries are wholly owned
unless otherwise specifically indicated.
ADESA is the second largest wholesale vehicle auction network in North
America. Headquartered in Indianapolis, Indiana, ADESA owns (or leases) and
operates 52 wholesale 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. Initiated in 2002, ADESA holds auctions
in Mexico City, Mexico, in partnership with Ford Motor Company at Ford's
facilities. Sellers at ADESA's auctions include domestic and foreign auto
manufacturers, car dealers, automotive fleet/lease companies, banks and finance
companies. During the sales process, ADESA does not typically take title to
vehicles.
The table on the next page lists the wholesale vehicle auctions owned or
leased by ADESA. Each auction is a multi-lane, drive-through facility, and has
additional buildings for reconditioning, registration, maintenance, bodywork,
and other ancillary and administrative services. Each auction also has secure
parking areas to store vehicles for auction.
New facilities are under construction in Atlanta, Georgia; Long Island, New
York; and Edmonton, Alberta. The new facility in Long Island is a greenfield (a
newly constructed facility in a new market), while the new facilities in Atlanta
and Edmonton will replace aging facilities that are too small to efficiently
serve our growing customer demand. All three are expected to open in 2003.
ADESA IMPACT in the U.S. and IMPACT AUTO in Canada, collectively ADESA
Impact, represent the third largest total loss vehicle service business in North
America. They provide total loss vehicle auction services to the property and
casualty insurance industry, and vehicle leasing and rental car companies.
Buyers reclaim and recycle total loss vehicles. ADESA Impact provides total loss
vehicle claim services such as vehicle appraisals, inspections, evaluations,
titling and settlement administration to its clients. Auto imaging, Internet
bidding and vehicle enhancement services are provided through an array of total
loss management programs. ADESA Impact has 25 total loss auction facilities in
the United States and Canada. United States operations are headquartered in
Indianapolis, Indiana, and Canadian operations are headquartered in Toronto,
Ontario.
COMSEARCH provides professional claim outsourcing services to the property
and casualty insurance industry and is the nation's largest automobile recycled
part locating service, processing over 100,000 part searches a month. Our
locating service has over 2,300 customers. ComSearch's services complement ADESA
Impact's business. ComSearch is headquartered in Warren, Rhode Island.
AFC provides inventory financing for automobile dealers who purchase vehicles
from ADESA auctions, independent auctions, other auction chains and outside
sources. AFC is headquartered in Indianapolis, Indiana, and, as of February 1,
2003, has 81 loan production offices at or near auto auctions across North
America. These offices provide qualified dealers credit to purchase vehicles at
any of the 500 plus auctions and other outside sources approved by AFC. AFC's
computer-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 17,000 registered dealers.
PAR, which is doing business as PAR North America, provides customized
vehicle remarketing services to various companies such as banks, non-prime
finance companies, captive finance, leasing companies, commercial fleets and
rental car companies throughout the United States. PAR's services include
nationwide repossessions, remarketing, pre- and post-term lease-end management,
50-state titling services and Canadian registrations turned to U.S. titles. PAR
offers its telemarketing service through its affiliate company, EndTrust. PAR
has its headquarters in Carmel, Indiana.
AUTOVIN provides technology-enabled vehicle inspection services and inventory
auditing to the automotive industry and the industry's secured lenders.
AutoVIN's services include vehicle condition reporting, inventory verification
auditing, program compliance auditing and facility inspection.
COMPETITION
In the wholesale vehicle market, ADESA competes with Manheim Auctions, a
subsidiary of Cox Enterprises, Inc., as well as several smaller chains of
auctions, and independent auctions some of which are affiliated through their
membership in an industry organization named ServNet(R). Due to ADESA's national
presence, competition is strongest with Manheim for the supply of vehicles from
the national level accounts such as manufacturers, fleet/lease companies, banks
and finance companies. Although the supply of these vehicles is dispersed among
all of the auctions in the wholesale vehicle market, ADESA competes most heavily
with the independent auctions (as well as Manheim and all others in the market)
for the supply of vehicles from both the franchised used car dealers and the
independent used car dealers. Due to the increased acceptance of e-business as a
standard business practice, new competition has arisen over the years from
Internet-based companies and our own customers who supply vehicles for auction.
ADESA
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YEAR NUMBER OF
STATE/ OPERATIONS AUCTION
ADESA AUCTIONS <F1> CITY PROVINCE COMMENCED LANES
=======================================================================================================================
United States
ADESA Birmingham Moody Alabama 1987 10
ADESA Phoenix Chandler Arizona 1988 12
ADESA Little Rock <F2> North 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 <F2> Tracy California 2002 12
ADESA Colorado Springs Colorado Springs Colorado 1982 5
ADESA Clearwater <F2> Clearwater Florida 1972 4
ADESA Jacksonville Jacksonville Florida 1996 6
ADESA Ocala <F3> Ocala Florida 1996 5
ADESA Orlando-Sanford Sanford Florida 1987 8
ADESA Tampa Tampa Florida 1989 8
ADESA Atlanta Newnan Georgia 1986 6
ADESA Southern Indiana Edinburgh Indiana 1997 3
ADESA Indianapolis Plainfield Indiana 1983 10
ADESA Des Moines Grimes Iowa 1967 5
ADESA Lexington Lexington Kentucky 1982 6
ADESA Ark-La-Tex Shreveport Louisiana 1979 5
ADESA Concord Acton Massachusetts 1947 5
ADESA Boston <F2> Framingham Massachusetts 1995 11
ADESA Lansing Dimondale Michigan 1976 5
ADESA St. Louis Barnhart Missouri 1987 3
ADESA Kansas City Lee's Summit Missouri 1963 7
ADESA New Jersey Manville New Jersey 1996 8
ADESA Buffalo Akron New York 1992 10
ADESA Charlotte <F2> Charlotte North Carolina 1994 10
ADESA Cincinnati/Dayton Franklin Ohio 1986 8
ADESA Cleveland <F2> Northfield Ohio 1994 8
ADESA Tulsa Tulsa Oklahoma 1987 6
ADESA Pittsburgh Mercer Pennsylvania 1971 8
ADESA Knoxville <F2> Lenoir City Tennessee 1984 6
ADESA Memphis Memphis Tennessee 1990 6
ADESA Austin <F2> 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 Auburn Washington 1984 4
ADESA Wisconsin Portage Wisconsin 1984 5
Canada
ADESA Calgary Airdrie Alberta 2000 4
ADESA Edmonton <F2> Edmonton Alberta 1988 3
ADESA Vancouver <F2> Richmond British Columbia 2002 7
CAG Vancouver <F2> Surrey British Columbia 1986 2
ADESA Winnipeg Winnipeg Manitoba 1987 4
ADESA Moncton Moncton New Brunswick 1987 2
ADESA St. John's <F2> St. John's Newfoundland 1994 1
ADESA Halifax Enfield Nova Scotia 1993 5
ADESA Kitchener Ayr Ontario 1988 4
ADESA Toronto Brampton Ontario 1987 8
ADESA Ottawa Vars Ontario 1990 5
ADESA Montreal St. Eustache Quebec 1974 12
ADESA Saskatoon <F2> Saskatoon Saskatchewan 1980 2
=======================================================================================================================
<FN>
<F1> INITIATED IN 2002, ADESA HOLDS AUCTIONS IN MEXICO CITY, MEXICO IN PARTNERSHIP WITH FORD MOTOR COMPANY AT FORD'S
FACILITIES.
<F2> LEASED AUCTION FACILITIES. (SEE NOTE 13.)
<F3> ADESA OWNS 51% OF THIS AUCTION BUSINESS.
</FN>
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PART I
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 is also competitive by providing a full range of
automotive services, including dealer inventory financing, reconditioning
services that prepare vehicles for auction and processing of sales transactions.
Other factors affect the competition for supply of vehicles sold at auction.
The rental car market has yet to re-fleet up to levels prior to September 11,
2001, and manufacturer incentives on new vehicles temporarily, but
significantly, disrupted the price spreads between new and used vehicles. During
most of 2002 and into 2003 aggressive financing incentives offered by vehicle
manufacturers have lowered the cost of owning a new vehicle, which, in turn, has
depressed prices for late-model used vehicles. This reduced the number of
vehicles sold at auctions because car dealers restocked their inventories from
the increased volume of late-model vehicles traded in for new vehicles, and
sellers at auction tended to hold their vehicles rather than immediately accept
the lower prices. Vehicle manufacturers have also begun to offer their
end-of-term lease vehicles and other program vehicles for sale online
electronically prior to the vehicles being offered for sale at a physical
auction location. As a result, there has been a negative effect on the value and
quantity of the vehicles that are offered for sale at ADESA auction facilities.
ADESA utilizes e-commerce as another component in its array of services.
Dealers are provided training on how to use online products, including the
purchase of vehicles online. 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 online 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.
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. PAR offers an interactive website, electronically connecting customers
with its services and includes 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.
In the total loss vehicle market, ADESA Impact competes against Copart, Inc.,
Insurance Auto Auctions, Inc., independent auctions, some of which are
affiliated through their membership in an industry organization named
SADISCO(R), and wholesale vehicle auctions that regularly remarket total loss
vehicles in certain locations. Additionally, the dismantlers of total loss
vehicles and internet based companies have entered the market thus providing
alternate avenues for the suppliers to remarket their total loss vehicles. We
believe through strategic acquisitions, shared facilities with ADESA, and
greenfield expansion that ADESA Impact can become a prominent total loss
services provider to the insurance industry in the United States. We believe
further consolidation of the total loss vehicle auction industry will occur and
are evaluating various means by which we can continue our growth plan. In
Canada, ADESA Impact is the largest provider of total loss vehicle services. Its
competitors include auto recyclers and dismantlers, independent auto auctions,
brokers and Internet auction companies. ADESA Impact believes it is
strategically positioned in this niche market in providing a full array of
value-added services to its insurance clients including auctions, Internet
programs, data analyses, consultation, the services of ComSearch and other total
loss vehicle services throughout North America.
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.
- --------------------------------------------------------------------------------
PAGE 30
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
PART I
INVESTMENTS AND CORPORATE CHARGES
Our Investments and Corporate Charges segment consists of real estate
operations, investments in emerging technologies related to the electric utility
industry and corporate charges. Corporate Charges represent general corporate
expenses, including interest, not specifically related to any one business
segment. The trading securities portfolio, previously a significant part of this
segment, was liquidated during the third quarter of 2002. The discussion below
summarizes the major components of the Investments and Corporate Charges
segment. Statistical information is presented as of December 31, 2002 unless
otherwise noted. All subsidiaries are wholly owned unless otherwise specifically
indicated.
REAL ESTATE OPERATIONS. Our real estate operations include CAPE CORAL
HOLDINGS, INC.; PALM COAST LAND, LLC; PALM COAST FOREST, LLC; TOMOKA HOLDINGS,
LLC; WINTER HAVEN CITI CENTRE, LLC; and an 80% ownership in LEHIGH. Through
subsidiaries, we own Florida real estate operations in six different locations:
- Lehigh Acres with 1,000 acres of residential and commercial land, east of
Fort Myers, Florida;
- Cape Coral, located west of Fort Myers, Florida, with 185 acres of mostly
commercially zoned land;
- Palm Coast, a planned community between St. Augustine and Daytona Beach,
Florida, with 16,000 acres of residential,commercial and industrial land;
- Tomoka, located near Ormand Beach, Florida with 6,200 acres of property;
- Winter Haven, located in central Florida, with a retail shopping center and
several parcels of land adjacent to the shopping center that are available
for sale; and
- Sugarmill Woods with 330 home sites and some commercially and residentially
zoned acreage in Citrus County, Florida.
Our real estate operations may, from time to time, acquire packages of
diversified properties at low cost, then add value through entitlements and
infrastructure enhancements, and sell the properties at current market prices.
EMERGING TECHNOLOGY INVESTMENTS. From 1985 through 2002 we have invested
$49.9 million in start-up companies which are developing technologies that may
be utilized by the electric utility industry. We are committed to invest an
additional $7.7 million through 2007. The investments were first made through
emerging technology funds (Funds) initiated by other electric utilities and us.
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. Many of these
direct investments are also investments in the Funds' portfolios.
The Funds have also made investments in companies that develop advanced
technologies to be used by the utility industry, including electrotechnologies,
renewable energy technologies, and software and communications technologies
related to utility customer support systems.
Several of the companies in the Funds' portfolios completed initial public
offerings (IPOs) in 2000. Subsequent to the public trading of the IPO companies,
the Funds will, in some instances, distribute publicly tradable shares to us.
Some restrictions on sale may apply, including, but not limited to, underwriter
lock-up periods that typically extend for 180 days following an IPO. As
companies included in our emerging technology investments are sold, we will
recognize a gain or loss.
Since going public, the market value of the publicly traded investments has
experienced significant volatility. Our direct investment in the companies that
have gone public had a cost basis of approximately $10 million at December 31,
2002 ($7 million at December 31, 2001). The aggregate market value of these
investments at December 31, 2002 was approximately $6 million ($12 million at
December 31, 2001).
We also have several minority investments in the Funds and privately-held
start-up companies. These investments are accounted for under the cost method
and included with Investments on our consolidated balance sheet. The total
carrying value of these investments was $38.7 million at December 31, 2002
($40.6 million at December 31, 2001).
Our policy is to periodically review these investments for impairment by
assessing such factors as continued commercial viability of products, cash flow
and earnings. Any impairment would reduce the carrying value of the investment.
ENVIRONMENTAL MATTERS
Certain businesses included in our Investments and Corporate Charges 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.
- --------------------------------------------------------------------------------
PAGE 31
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS INITIAL EFFECTIVE DATE
=========================================================================================================================
DAVID G. GARTZKE, AGE 59
Chairman, President and Chief Executive Officer January 23, 2002
President August 28, 2001
Senior Vice President - Finance and Chief Financial Officer December 1, 1994
DONNIE R. CRANDELL, AGE 59
Executive Vice President - ALLETE;
President - ALLETE Water Services, Inc.; and September 6, 2001
President and Chief Executive Officer - Florida Water
Executive Vice President - ALLETE and President - ALLETE Properties, Inc. January 15, 1999
Senior Vice President - ALLETE and President - ALLETE Properties, Inc. January 1, 1996
ROBERT D. EDWARDS, AGE 58
Executive Vice President - ALLETE and
Chief Executive Officer - Minnesota Power December 19, 2001
Executive Vice President - ALLETE and President - Minnesota Power July 26, 1995
BRENDA J. FLAYTON, AGE 47
Vice President - Human Resources July 22, 1998
JAMES P. HALLETT, AGE 49
Executive Vice President - ALLETE and
President and Chief Executive Officer - ALLETE Automotive Services, Inc. November 5, 2001
Executive Vice President - ALLETE and Chief Executive Officer - ADESA October 1, 2001
Executive Vice President - ALLETE and President and Chief Executive Officer - ADESA April 23, 1997
PHILIP R. HALVERSON, AGE 54
Vice President, General Counsel and Secretary January 1, 1996
MARK A. SCHOBER, AGE 47
Vice President and Controller April 18, 2001
Controller March 1, 1993
DONALD J. SHIPPAR, AGE 53
President and Chief Operating Officer - Minnesota Power January 1, 2001
TIMOTHY J. THORP, AGE 48
Vice President - Investor Relations and Corporate Communications November 16, 2001
JAMES K. VIZANKO, AGE 49
Vice President, Chief Financial Officer and Treasurer August 28, 2001
Vice President and Treasurer April 18, 2001
Treasurer March 1, 1993
- --------------------------------------------------------------------------------
PAGE 32
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
PART I
All of the executive officers have been employed by us for more than five
years in executive or management positions. In the five years prior to election
to the positions shown on the previous page, Ms. Flayton was director of human
resources, Mr. Shippar was Minnesota Power's chief operating officer, senior
vice president and vice president of transmission and distribution, and Mr.
Thorp was director of investor relations.
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 executive officers listed on the previous
page extends to the first meeting of our Board of Directors after the next
annual meeting of shareholders. Both meetings are scheduled for May 13, 2003.
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 2002.
- --------------------------------------------------------------------------------
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 $0.2825 per share on our common stock will be paid on
March 1, 2003 to the holders of record on February 15, 2003. 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 New York Stock Exchange on its NYSEnet website, are
in the accompanying chart.
The amount and timing of dividends payable on our common stock are within the
sole discretion of our Board of Directors. In 2002 we paid out 66% 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, 2002 no retained earnings were
restricted as a result of these provisions. At January 31, 2003 there were
approximately 38,000 common stock shareholders of record.
PRICE RANGE
------------------------- DIVIDENDS
QUARTER HIGH LOW PAID
================================================================================
2002 - First $29.43 $24.25 $0.275
Second 31.10 27.09 0.275
Third 27.62 18.50 0.275
Fourth 23.80 18.65 0.275
- --------------------------------------------------------------------------------
Annual Total $1.10
- --------------------------------------------------------------------------------
2001 - First $26.00 $20.19 $0.2675
Second 26.13 22.04 0.2675
Third 26.89 21.50 0.2675
Fourth 25.85 21.14 0.2675
- --------------------------------------------------------------------------------
Annual Total $1.07
================================================================================
- --------------------------------------------------------------------------------
PAGE 33
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
PART II
ITEM 6. SELECTED FINANCIAL DATA
Operating results of our Water Services businesses, our auto transport
business and our retail store are included in discontinued operations and,
accordingly, amounts have been adjusted for all periods presented. Common share
and per share amounts have also been adjusted for all periods to reflect our
March 2, 1999 two-for-one common stock split.
2002 2001 2000 1999 1998 1997
================================================================================================================================
MILLIONS
BALANCE SHEET
Assets
Current Assets $ 631.1 $ 853.3 $ 677.2 $ 506.0 $ 444.6 $ 354.9
Discontinued Operations - Current 27.3 42.2 41.5 43.7 29.1 21.9
Property, Plant and Equipment 1,364.9 1,323.3 1,201.1 1,003.4 955.5 948.1
Investments 170.9 155.4 128.7 212.0 277.3 261.4
Goodwill 499.8 494.4 472.8 181.0 169.8 158.9
Other Assets 107.3 103.6 87.3 82.4 91.2 98.2
Discontinued Operations - Other 345.9 310.3 305.4 284.1 241.4 242.9
- --------------------------------------------------------------------------------------------------------------------------------
$3,147.2 $3,282.5 $2,914.0 $2,312.6 $2,208.9 $2,086.3
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities $ 708.8 $ 658.6 $ 661.9 $ 366.1 $ 326.3 $ 317.7
Discontinued Operations - Current 29.4 45.9 45.1 32.2 19.7 24.9
Long-Term Debt 661.3 933.8 817.2 577.9 540.6 553.0
Other Liabilities 277.4 270.5 257.5 265.3 286.1 288.6
Discontinued Operations - Other 162.9 154.9 156.5 158.8 144.1 145.6
Mandatorily Redeemable Preferred
Securities of ALLETE Capital I 75.0 75.0 75.0 75.0 75.0 75.0
Redeemable Preferred Stock - - - 20.0 20.0 20.0
Shareholders' Equity 1,232.4 1,143.8 900.8 817.3 797.1 661.5
- --------------------------------------------------------------------------------------------------------------------------------
$3,147.2 $3,282.5 $2,914.0 $2,312.6 $2,208.9 $2,086.3
- --------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
Operating Revenue
Energy Services $ 630.3 $ 618.7 $ 586.4 $ 553.1 $ 558.9 $ 541.2
Automotive Services 844.1 832.1 522.6 383.2 305.5 242.4
Investments 32.5 74.8 77.4 57.8 55.5 60.7
- --------------------------------------------------------------------------------------------------------------------------------
1,506.9 1,525.6 1,186.4 994.1 919.9 844.3
- --------------------------------------------------------------------------------------------------------------------------------
Expenses
Fuel and Purchased Power 239.1 233.1 229.0 200.2 205.7 194.1
Operations 1,008.0 1,007.3 725.3 595.8 538.7 492.8
Interest Expense 62.2 74.7 58.8 49.5 54.6 53.2
- --------------------------------------------------------------------------------------------------------------------------------
1,309.3 1,315.1 1,013.1 845.5 799.0 740.1
- --------------------------------------------------------------------------------------------------------------------------------
Operating Income Before Capital Re and ACE 197.6 210.5 173.3 148.6 120.9 104.2
Income (Loss) from Investment in Capital Re
and Related Disposition of ACE - - 48.0 (34.5) 15.2 14.8
- --------------------------------------------------------------------------------------------------------------------------------
Operating Income from Continuing Operations 197.6 210.5 221.3 114.1 136.1 119.0
Distributions on Redeemable Preferred
Securities of ALLETE Capital I 6.0 6.0 6.0 6.0 6.0 6.0
Income Tax Expense 72.6 74.2 77.0 50.9 49.1 42.7
- --------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 119.0 130.3 138.3 57.2 81.0 70.3
Income from Discontinued Operations 18.2 8.4 10.3 10.8 7.5 7.3
- --------------------------------------------------------------------------------------------------------------------------------
Net Income 137.2 138.7 148.6 68.0 88.5 77.6
Preferred Dividends - - 0.9 2.0 2.0 2.0
- --------------------------------------------------------------------------------------------------------------------------------
Earnings Available for Common Stock 137.2 138.7 147.7 66.0 86.5 75.6
Common Stock Dividends 89.2 81.8 74.5 73.0 65.0 62.5
- --------------------------------------------------------------------------------------------------------------------------------
Retained (Deficit) in the Business $ 48.0 $ 56.9 $ 73.2 $ (7.0) $ 21.5 $ 13.1
================================================================================================================================
- --------------------------------------------------------------------------------
PAGE 34
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
PART II
2002 2001 2000 1999 1998 1997
================================================================================================================================
Shares Outstanding - Millions
Year-End 85.6 83.9 74.7 73.5 72.3 67.1
Average <F1>
Basic 81.1 75.8 69.8 68.4 64.0 61.2
Diluted 81.7 76.5 70.1 68.6 64.2 61.2
Diluted Earnings Per Share
Continuing Operations $1.46 <F2> $1.70 $1.96 $0.81 $1.23 $1.12
Discontinued Operations 0.22 <F3> 0.11 <F4> 0.15 0.16 0.12 0.12
- --------------------------------------------------------------------------------------------------------------------------------
$1.68 $1.81 $2.11 <F5> $0.97 <F5> $1.35 $1.24
- --------------------------------------------------------------------------------------------------------------------------------
Return on Common Equity 11.4% 13.3% 17.1% <F5> 8.3% <F5> 12.4% 12.1%
Common Equity Ratio 51.7% 49.9% 46.3% 49.3% 49.9% 44.9%
Dividends Paid Per Share $1.10 $1.07 $1.07 $1.07 $1.02 $1.02
Dividend Payout 66% 59% 51% <F5> 110% <F5> 76% 83%
Book Value Per Share at Year-End $14.39 $13.63 $12.06 $10.97 $10.86 $9.69
Market Price Per Share
High $31.10 $26.89 $25.50 $22.09 $23.13 $22.00
Low $18.50 $20.19 $14.75 $16.00 $19.03 $13.50
Close $22.68 $25.20 $24.81 $16.94 $22.00 $21.78
Market/Book at Year-End 1.58 1.85 2.06 1.54 2.03 2.25
Price Earnings Ratio at Year-End 13.5 13.9 11.8 <F5> 17.5 <F5> 16.3 17.6
Dividend Yield at Year-End 4.9% 4.2% 4.3% 6.3% 4.6% 4.7%
Employees 14,181 13,763 12,633 8,246 7,003 6,817
Net Income
Energy Services $ 41.8 <F2> $ 51.7 $ 44.5 $ 46.0 $ 48.3 $ 44.2
Automotive Services 92.9 74.8 49.9 40.3 24.6 13.8
Investments and Corporate Charges (15.7) 3.8 43.9 <F5> (29.1) <F5> 8.1 12.3
- --------------------------------------------------------------------------------------------------------------------------------
119.0 130.3 138.3 57.2 81.0 70.3
Discontinued Operations 18.2 <F3> 8.4 <F4> 10.3 10.8 7.5 7.3
- --------------------------------------------------------------------------------------------------------------------------------
$137.2 $138.7 $148.6 $68.0 $88.5 $77.6
- --------------------------------------------------------------------------------------------------------------------------------
Electric Customers - Thousands 147.0 145.0 144.0 139.7 138.1 135.8
Electric Sales - Millions of MWh
Utility 11.1 10.9 11.7 11.3 12.0 12.4
Nonregulated 1.2 0.2 0.2 - - -
Regulated Power Supply - Millions of MWh
Steam Generation 7.2 6.9 6.4 6.2 6.3 6.1
Hydro Generation 0.5 0.5 0.5 0.7 0.6 0.6
Long-Term Purchase - Square Butte 2.3 1.9 2.4 2.3 2.1 2.3
Purchased Power 1.8 2.3 3.1 2.6 3.2 3.8
- --------------------------------------------------------------------------------------------------------------------------------
11.8 11.6 12.4 11.8 12.2 12.8
- --------------------------------------------------------------------------------------------------------------------------------
Coal Sold - Millions of Tons 4.6 4.1 4.4 4.5 4.2 4.2
Vehicles Sold - Thousands
Wholesale 1,741 1,761 1,287 1,037 897 769
Total Loss 175 148 33 - - -
Vehicles Financed - Thousands 946 904 795 695 531 323
Capital Expenditures - Millions $205.8 $153.0 $168.7 $99.7 $80.8 $72.2
================================================================================================================================
<FN>
<F1> EXCLUDES UNALLOCATED ESOP SHARES.
<F2> INCLUDED A $5.5 MILLION, OR $0.07 PER SHARE, CHARGE RELATED TO THE INDEFINITE DELAY OF A GENERATION PROJECT IN SUPERIOR,
WISCONSIN.
<F3> INCLUDES $3.9 MILLION, OR $0.05 PER SHARE, IN CHARGES TO COMPLETE THE EXIT FROM THE AUTO TRANSPORT BUSINESS AND THE RETAIL
STORE.
<F4> INCLUDED A $4.4 MILLION, OR $0.06 PER SHARE, ESTIMATED CHARGE TO EXIT THE AUTO TRANSPORT BUSINESS.
<F5> IN 2000 WE RECORDED A $30.4 MILLION, OR $0.44 PER SHARE, GAIN ON THE SALE OF 4.7 MILLION SHARES OF ACE THAT WE RECEIVED IN
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,
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% IN 2000 (72% IN 1999), THE PRICE
EARNINGS RATIO WAS 14.9 IN 2000 (11.4 IN 1999) AND NET INCOME FROM INVESTMENTS AND CORPORATE CHARGES WAS $29.3 MILLION IN
2000 ($26.8 MILLION IN 1999).
</FN>
- --------------------------------------------------------------------------------
PAGE 35
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CONSOLIDATED OVERVIEW
2002 2001 2000
===================================================================================================
MILLIONS EXCEPT
PER SHARE AMOUNTS
Operating Revenue
Energy Services $ 630.3 $ 618.7 $ 586.4
Automotive Services 844.1 832.1 522.6
Investments 32.5 74.8 77.4
- ---------------------------------------------------------------------------------------------------
$1,506.9 $1,525.6 $1,186.4
- ---------------------------------------------------------------------------------------------------
Operating Expenses
Energy Services $ 562.4 $ 532.2 $ 510.7
Automotive Services 691.8 713.1 438.6
Investments and
Corporate Charges 55.1 69.8 63.8
- ---------------------------------------------------------------------------------------------------
$1,309.3 $1,315.1 $1,013.1
- ---------------------------------------------------------------------------------------------------
Net Income
Energy Services $ 41.8 $ 51.7 $ 44.5
Automotive Services 92.9 74.8 49.9
Investments and
Corporate Charges (15.7) 3.8 43.9
- ---------------------------------------------------------------------------------------------------
Continuing Operations 119.0 130.3 138.3
Discontinued Operations 18.2 8.4 10.3
- ---------------------------------------------------------------------------------------------------
Net Income $137.2 $138.7 $148.6
- ---------------------------------------------------------------------------------------------------
ADJUSTMENTS <F1> 9.4 4.4 (30.4)
- ---------------------------------------------------------------------------------------------------
PRO FORMA $146.6 $143.1 $118.2
- ---------------------------------------------------------------------------------------------------
Diluted Average Shares
of Common Stock 81.7 76.5 70.1
- ---------------------------------------------------------------------------------------------------
Diluted Earnings Per Share
of Common Stock
Continuing Operations $1.46 $1.70 $1.96
Discontinued Operations 0.22 0.11 0.15
- ---------------------------------------------------------------------------------------------------
Diluted Earnings Per Share $1.68 $1.81 $2.11
- ---------------------------------------------------------------------------------------------------
ADJUSTMENTS <F1> 0.12 0.06 (0.44)
- ---------------------------------------------------------------------------------------------------
PRO FORMA $1.80 $1.87 $1.67
- ---------------------------------------------------------------------------------------------------
Return on Common Equity 11.4% 13.3% 17.1% <F1>
===================================================================================================
<FN>
<F1> INCLUDED INCOME AND EXPENSE ITEMS RELATED TO SIGNIFICANT EXIT AND DISPOSAL ACTIVITIES.
2002 ENERGY SERVICES INCLUDED A $5.5 MILLION, OR $0.07 PER SHARE, CHARGE RELATED TO THE
INDEFINITE DELAY OF A GENERATION PROJECT IN SUPERIOR, WISCONSIN. DISCONTINUED OPERATIONS
INCLUDED $3.9 MILLION, OR $0.05 PER SHARE, OF CHARGES TO EXIT THE AUTO TRANSPORT BUSINESS
AND THE RETAIL STORE.
2001 DISCONTINUED OPERATIONS INCLUDED A $4.4 MILLION, OR $0.06 PER SHARE, CHARGE TO EXIT THE
AUTO TRANSPORT BUSINESS.
2000 INVESTMENTS AND CORPORATE CHARGES INCLUDED A $30.4 MILLION, OR $0.44 PER SHARE, GAIN ON
THE SALE OF ACE COMMONSTOCK. EXCLUDING THIS GAIN, 2000 NET INCOME FROM INVESTMENTS AND
CORPORATE CHARGES WAS $13.5 MILLION AND THE RETURN ON EQUITY WAS 13.6%. (SEE NOTE 6.)
</FN>
During 2002 we accomplished several important goals. We began simplifying our
Company by exiting non-strategic businesses and liquidating the trading
securities portfolio. In doing so we will strengthen our balance sheet. We also
made progress on the sale of our Water Services businesses and continued our
efforts to communicate to investors our focus on our two core businesses, Energy
Services and Automotive Services.
Net income and earnings per share for 2002 decreased 1% and 7%, respectively,
from the same period in 2001. Factors reflected in the comparison of 2002 with
2001 include:
- CHARGES. Net income for 2002 included $9.4 million of charges related to
our exit from non-strategic businesses and the indefinite delay of a
generation project in Superior, Wisconsin ($4.4 million in 2001).
- GOODWILL. Earnings for 2001 included $11.3 million, or $0.15 per share,
of goodwill amortization expense. As required by SFAS 142, goodwill
amortization was discontinued in 2002.
- REAL ESTATE TRANSACTION. Earnings for 2001 included an $11.1 million, or
$0.15 per share, gain associated with our largest ever single real estate
transaction.
- COMMON STOCK ISSUANCE. The decrease in earnings per share was in part due
to the issuance of 6.6 million shares of our common stock in the second
quarter of 2001.
We measure performance of our operations through careful budgeting and
monitoring of contributions to consolidated net income by each business segment.
NET INCOME
ENERGY SERVICES. Net income was down $9.9 million, or 19%, in 2002. Excluding
a charge related to the indefinite delay of a generation project in Superior,
Wisconsin, net income was down $4.4 million, or 8%. The decrease was primarily
due to weak wholesale power prices which negatively impacted wholesale power
marketing activities. In 2001 our wholesale power marketing activities were more
profitable due to warmer summer weather and overall market conditions. Weak
wholesale power prices in 2002 more than offset the positive impact of an 11%
increase in megawatthour sales. Total megawatthour sales were 12.3 million in
2002 (11.1 million in 2001; 11.9 million in 2000). The megawatthour increase was
mainly attributable to about 500 MW of nonregulated wholesale generation that
came online in 2002; 1.2 million megawatthours of nonregulated generation were
sold in 2002 (0.2 million in both 2001 and 2000). Megawatthour sales in 2001
reflected decreased sales to our taconite customers because of planned shutdowns
and reduced taconite production. Net income in 2001 also included the recovery
of $2.6 million for 1998 CIP lost margins.
AUTOMOTIVE SERVICES. Net income in 2002 increased $18.1 million, or 24%, over
2001. The continued growth in net income during 2002 was due to a mandated
goodwill amortization accounting change, lower interest expense and
- --------------------------------------------------------------------------------
PAGE 36
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
PART II
improved operating efficiencies, while during 2001 and 2000 acquisitions and
increased sales at both ADESA and AFC were the contributing factors. During 2001
ADESA acquired or opened 13 auction facilities (10 in 2000) that provide total
loss vehicle services to insurance companies, and added one wholesale vehicle
auction facility (28 in 2000).
At ADESA wholesale auction facilities 1.7 million vehicles were sold in 2002
(1.8 million in 2001; 1.3 million in 2000). Volumes were lower in 2002 because
the rental car market has yet to re-fleet up to levels prior to the events of
September 11, 2001, and manufacturer incentives on new vehicles temporarily, but
significantly, disrupted the price spreads between new and used vehicles.
Aggressive financing incentives offered by vehicle manufacturers lowered the
cost of owning a new vehicle, which, in turn, depressed prices for late-model
used vehicles. This reduced the number of vehicles sold at auctions because car
dealers restocked their inventories from the increased volume of late-model
vehicles traded in for new vehicles, and sellers at auction tended to hold their
vehicles rather than immediately accept the lower prices. In 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 2001 we
estimated that the impact of the events of September 11 resulted in a $3.5
million decrease to net income. Costs of assimilating the 28 wholesale vehicle
auction facilities acquired or opened in 2000 also impacted 2001 results.
Conversion rates are the percentage of vehicles sold from those that were run
through auction lanes. We achieved a 59% conversion rate related to our
wholesale vehicles sold for 2002 (58% for 2001; 59% for 2000).
Despite unseasonably dry weather conditions in 2002 which usually means fewer
total loss vehicles, the number of vehicles sold at our total loss vehicle
auction facilities was higher in 2002 reflecting expansion into new markets,
which included adding total loss auctions at some of our wholesale vehicle
auction facilities. At our total loss vehicle auctions 175,000 vehicles were
sold in 2002 (148,000 in 2001; 33,000 in 2000).
AFC contributed 38% of the net income from Automotive Services in 2002 (40%
in 2001; 47% in 2000). AFC has 81 loan production offices (82 in 2001; 86 in
2000). The growth of AFC's dealer/customer base from 15,000 in 2000 to 17,000 in
2002 has enabled AFC to finance more vehicles; 946,000 vehicles in 2002 (904,000
in 2001; 795,000 in 2000). AFC managed total receivables of $495 million at
December 31, 2002 ($500 million at December 31, 2001; $436 million at December
31, 2000).
INVESTMENTS AND CORPORATE CHARGES reported $19.5 million less net income in
2002 due to smaller real estate transactions in 2002 and the liquidation of the
trading securities portfolio in the second half of 2002. In 2001 our real estate
operations reported stronger sales including an $11.1 million gain on its
largest single sale ever. Our trading securities portfolio earned a negative
1.5% after-tax annualized return prior to liquidation in 2002 compared to a
positive 5.6% in 2001 (7.0% in 2000). The 2001 return on our trading securities
portfolio reflected earnings on a lower average balance. During 2000 we reduced
the size of our trading securities portfolio to partially fund significant
acquisitions made by Automotive Services. Net income in 2000 reflected 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 1999 when Capital Re merged with ACE.
Corporate charges in 2002 and 2001 reflected higher interest expense as a
result of debt issued to fund strategic initiatives in early 2001. Incentive
compensation expenses, however, were lower in 2002. The decrease was attributed
in part to lower 2002 earnings. Also, 2001 included additional expenses for
severance packages. In 2000 financial results reflected the resolution of
various federal and state tax issues which increased net income.
DISCONTINUED OPERATIONS included the operating results of our Water Services
businesses, which are currently held for sale, our auto transport business and
our retail store.
Income from discontinued operations was up $9.8 million from 2001 primarily
due to the suspension of depreciation on our Water Services assets. Income from
discontinued operations included $7.5 million of depreciation expense after tax
in 2001 ($8.1 million in 2000).
Our Water Services businesses reported an 8% increase in water consumption
during 2002 as a result of drier weather conditions and increased customers.
Organic customer growth was 4.5% in 2002. Strategic acquisitions and customer
growth since 1999 within our Water Services businesses helped temper the
negative financial impact of above-average rainfall in Florida and North
Carolina during the majority of 2001 and conservation efforts in Florida. In
addition, operating results for Water Services reflected gains related to the
disposal of certain assets in 2001, an October 2000 rate increase implemented by
Heater Utilities, Inc. and regulatory relief granted in Florida in 2000.
Income from discontinued operations also reflected $3.9 million of exit
charges associated with the auto transport business and the retail store in 2002
and a $4.4 million charge to exit the auto transport business in 2001.
2002 COMPARED TO 2001
ENERGY SERVICES
Utility operations include retail and wholesale rate regulated activities
under the jurisdiction of state and federal regulatory authorities.
Nonregulated/nonutility operations consist of nonregulated electric generation
(non-rate base generation sold at wholesale at market-based rates), coal mining
and telecommunications activities. Nonregulated generation operations consist
primarily of Taconite Harbor in northern Minnesota and generation secured
through the
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Kendall County power purchase agreement, a 15-year agreement with NRG Energy at
a facility near Chicago, Illinois.
OPERATING REVENUE in total was up $11.6 million, or 2%, in 2002 as increased
revenue from nonregulated/nonutility operations was partially offset by a
decrease in utility revenue. Despite a slight increase in utility megawatthour
sales, utility revenue decreased $33.1 million, or 6%, due to lower wholesale
prices and fuel clause recoveries. Fuel clause recoveries decreased due to lower
purchased power costs in 2002. Total utility megawatthour sales were up 2% over
the prior year reflecting increased retail sales to taconite customers. In
addition, utility revenue in 2001 included the recovery of $4.5 million for 1998
CIP lost margins. Nonregulated/nonutility revenue increased $44.7 million, or
56%, in 2002 primarily as a result of about 500 MW of nonregulated generation
that came online in 2002. There were 1.2 million megawatthours of nonregulated
generation sold in 2002.
OPERATING EXPENSES in total increased $30.2 million, or 6%, in 2002.
Excluding the charge related to the indefinite delay of a generation project in
Superior, Wisconsin, total operating expenses increased $20.7 million, or 4%,
over 2001. The increase was attributable to additional expenses for nonregulated
generation that came online in 2002 which were partially offset by lower utility
operating expenses. Utility operating expenses were down $36.3 million, or 8%,
in 2002 primarily due to lower purchased power costs. Lower purchased power
costs resulted from both lower wholesale prices and a reduction in the quantity
of power purchased. Extended planned maintenance outages in 2001 necessitated
higher quantities of purchased power last year. Nonregulated/ nonutility
operating expenses increased $66.5 million, or 88%, over the prior year mainly
due to expenses for nonregulated generation that came online in 2002. The
increase in nonregulated/nonutility operating expenses also included the $9.5
million charge related to the indefinite delay of the generation project in
Superior, Wisconsin.
AUTOMOTIVE SERVICES
OPERATING REVENUE was up $12.0 million, or 1%, in 2002. At ADESA wholesale
auction facilities the number of vehicles sold in 2002 were similar to 2001
because the rental car market has yet to re-fleet up to levels prior to the
events of September 11, 2001, and manufacturer incentives on new vehicles
temporarily, but significantly, disrupted the price spreads between new and used
vehicles.
Despite unseasonably dry weather conditions in 2002 which usually means fewer
total loss vehicles, vehicles sold at our total loss vehicle auction facilities
were up 18% reflecting expansion into new markets, which included adding total
loss auctions at some of our wholesale vehicle auction facilities. Operating
revenue from AFC was higher in 2002 due to a 5% increase in vehicles financed
through our loan production offices.
OPERATING EXPENSES were down $21.3 million, or 3%, in 2002 due to reduced
interest expense ($14.1 million) as a result of lower interest rates and a lower
debt balance, the discontinuance of goodwill amortization ($13.7 million) and
improved operating efficiencies. These decreases were partially offset by an
increase in operating expenses incurred to standardize operations at all our
total loss auction facilities and expenditures for information technology
initiatives.
INVESTMENTS AND CORPORATE CHARGES
OPERATING REVENUE was down $42.3 million, or 57%, in 2002 primarily due to a
large real estate transaction recorded in 2001. Five large real estate sales in
2002 contributed $8.5 million to revenue, while in 2001 six large real estate
sales contributed $37.5 million to revenue, one of which was our real estate
operations' largest single transaction ever. Operating revenue in 2002 also
reflected less income from our trading securities portfolio which was
substantially liquidated during the second half of the year and had
significantly lower returns during the year.
OPERATING EXPENSES were down $14.7 million, or 21%, in 2002 because of
expenses associated with larger real estate sales in 2001. Also, in 2001
additional expenses were incurred for incentive compensation.
2001 COMPARED TO 2000
ENERGY SERVICES
OPERATING REVENUE in total was up $32.3 million, or 6%, in 2001 reflecting
increased revenue from nonregulated/ nonutility operations, as well as a small
increase in utility revenue. Despite a decrease in utility megawatthour sales,
utility revenue increased $6.6 million, or 1%, due to improved wholesale market
conditions and higher fuel clause recoveries, as well as more demand revenue
from Large Power Customers. Total utility megawatthour sales decreased 7% from
the prior year mainly due to planned shutdowns and reduced production by
taconite customers. In addition, utility revenue in 2001 included the recovery
of $4.5 million for 1998 CIP lost margins. Nonregulated/nonutility revenue
increased $25.7 million, or 47%, in 2001 primarily due to the acquisition of
Enventis, Inc. which was acquired in July 2001 and accounted for as a pooling of
interests.
OPERATING EXPENSES in total increased $21.5 million, or 4%, in 2001 mainly
due to additional nonregulated/nonutility expenses. Nonregulated/nonutility
operating expenses increased $22.9 million, or 43%, over 2000 primarily due to
the inclusion of Enventis, Inc.
AUTOMOTIVE SERVICES
Both operating revenue and expenses for Automotive Services were up in 2001
due to significant acquisitions made in 2000 and early 2001. Financial results
for 2001 included 12 full months of operations from 28 wholesale and 10 total
loss vehicle auction facilities acquired or opened primarily in the
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second half of 2000 and results from acquisitions made in January and May 2001.
OPERATING REVENUE was up $309.5 million, or 59%, in 2001 reflecting a 37%
increase in vehicles sold at ADESA wholesale auction facilities, the inclusion
of revenue related to total loss vehicle services and a 14% increase in vehicles
financed at AFC's loan production offices. Sales volumes in 2001, however, were
negatively impacted by the events of September 11 and the impact of aggressive
new vehicle financing incentives offered by vehicle manufacturers. Also,
inclement weather earlier in the year resulted in both low attendance at and
canceled auctions.
OPERATING EXPENSES were up $274.5 million, or 63%, in 2001 reflecting
additional expenses associated with increased vehicle sales and financing
activity. Expenses in 2001 included increased direct costs associated with
processing vehicles multiple times that did not sell as a result of depressed
wholesale prices resulting from the events of September 11 and aggressive new
vehicle financing incentives offered by vehicle manufacturers. 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.
INVESTMENTS AND CORPORATE CHARGES
OPERATING REVENUE was down $2.6 million, or 3%, in 2001 reflecting less
revenue from our trading securities portfolio, partially due to a lower average
balance for most of the year. 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, however,
reported stronger sales in 2001, including its largest sale ever. Six large real
estate sales in 2001 contributed $37.5 million to revenue, while in 2000 seven
large real estate sales contributed $31.9 million to revenue.
OPERATING EXPENSES in 2001 were up $6.0 million, or 9%, as a result of
increased interest expense and additional expenses for incentive compensation.
These increases were tempered by lower expenses at our real estate operations.
CRITICAL ACCOUNTING POLICIES
Certain accounting measurements under applicable generally accepted
accounting principles involve management's judgment about subjective factors and
estimates, the effects of which are inherently uncertain. The following
summarizes those accounting measurements we believe are most critical to our
reported results of operations and financial condition.
ACCOUNTING JUDGMENTS/UNCERTAINTIES SEE ADDITIONAL
POLICY AFFECTING APPLICATION DISCUSSION
================================================================================
Uncollectible - Economic conditions Liquidity and
Receivables and affecting customers, Capital
Allowance for suppliers and market prices Resources -
Doubtful - Outcome of negotiations, Off-Balance
Accounts ligigation and bankruptcy Sheet
proceedings Arrangements on
page 42
- Current sales, payment and
write off histories
- --------------------------------------------------------------------------------
Impairment of - Economic conditions Note 2. on
Goodwill and affecting market valuations page 63 and
Long-Lived - Changes in business strategy Note 3. on
Assets - Forecast of future operating page 65
cash flows and earnings
- --------------------------------------------------------------------------------
Pension and - Expected long-term rates of Note 18.
Postretirement return on assets on page 74
Health and Life - Discount rates
Actuarial
Assumptions
- --------------------------------------------------------------------------------
Valuation of - Continued commercial Market Risk
Investments viability of products on page 44
- Projected earnings and cash flow
================================================================================
The allowance for doubtful accounts and related bad debt expense is primarily
attributable to the financing activities of AFC. In establishing a proper
allowance for doubtful accounts, AFC's evaluation includes consideration of
historical charge-off experience and current economic conditions. Changes to
historical charge-off experience or existing economic conditions would
necessitate a corresponding increase or decrease in the allowance for doubtful
accounts. The credit quality of AFC's finance receivable portfolio has remained
strong and the total amount of the allowance for doubtful accounts has not
changed materially over the last three years. A 10% increase in AFC's current
allowance for doubtful accounts would increase bad debt expense by approximately
$1 million after tax; likewise, a 10% decrease in the current allowance for
doubtful accounts would decrease expense by aproximately $1 million after tax.
An important actuarial assumption for pension and other postretirement
benefit plans is the expected long-term rate of return on plan assets. In
establishing this assumption, we consider the allocation and diversification of
our plan assets, current economic conditions, actual historical investment
performance, the historical performance of equity and debt securities in
general, and our performance versus similar sized plans. Our pension asset
allocation is approximately 70% equity and 30% fixed-rate securities. Equity
securities consist of a mix of market capitalization sizes and also include
investments in real estate and venture capital. In response to changing market
conditions, we have lowered our actuarial assumption for the expected long-term
rate of return and used
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9.5% in the September 30, 2002 pension actuarial study (10% at September 30,
2001; 10.25% at September 30, 2000). We annually review our expected long-term
rate of return assumption, and will continue to adjust it to respond to any
changing market conditions. A 1% decrease in the expected long-term rate of
return would increase the annual expense for pension and other postretirement
benefits by approximately $2 million after tax; likewise, a 1% increase in the
expected long-term rate of return would decrease expense by approximately $2
million after tax.
OUTLOOK
CORPORATE. Our operations in 42 states, nine Canadian provinces and Mexico
employ approximately 14,000 employees. Since 1980 our annual total shareholder
return averaged 16%. Approximately 50% of this average was attributed to
dividends. By comparison, the Standard & Poor's 500 Index averaged 12% for the
same period, of which approximately 25% of the average was attributed to
dividends.
We remain focused on continuously improving the performance of our two core
businesses, Energy and Automotive Services, and monetizing those businesses that
are non-strategic or non-core. Our two core businesses remain strong and are
poised for earnings growth in their respective markets as economic conditions
improve.
Once we have sold our Water Services businesses in Florida, North Carolina
and Georgia, we will have further simplified our Company. The pending sale of
Florida Water for $492.5 million has been delayed by legal challenges. Cash
proceeds to ALLETE after taxes and repayment of existing debt are expected to be
approximately $180 million in 2003, and $250 million for the entire transaction.
The gain on the transaction is estimated at $100 million after taxes and related
costs. While the majority of the cash will be received at closing, the gain is
expected to be recognized in future years as required by accounting rules. The
proceeds from the sale will give us the ability to reduce debt, which will
further strengthen our balance sheet. We anticipate selling our Water Services
businesses in North Carolina and Georgia in 2003. (See Item 1.)
Our Board of Directors and management remain committed to unlocking the value
of ALLETE. In 2002 we undertook an examination of the benefits of separating our
Energy and Automotive businesses into separate companies. At that time we chose
not to separate because all of the businesses of our Company benefited from the
cash flow and credit position of the consolidated company. We are again
reviewing this issue both internally and with outside advisors.
ENERGY SERVICES continues to generate strong cash flow from operations. We
anticipate, however, net income for 2003 from Energy Services to decrease
slightly from 2002 levels. If wholesale power prices improve, so too will our
profitability from Energy Services. To combat continuing depressed prices in
wholesale energy markets, minimal growth in our service area and uncertain state
and national economies, we will focus on cost reductions while seeking new ways
to maintain or enhance revenue.
Our access to and ownership of low-cost power are Energy Services' greatest
strengths. We have adequate generation to serve our native load. Power over and
above our customers' requirements is and will continue to be marketed primarily
through Split Rock Energy.
Over one-half of Minnesota Power's utility power sales are made to taconite
mines, paper producers and oil pipeline operators. Minnesota Power's paper and
taconite customers supply industries that are undergoing significant structural
change in the face of continued globalization and consolidation. For taconite
producers, the ongoing consolidation of the domestic integrated steel industry
has both positive and negative implications. As steel companies divest
themselves of raw material operations and address decades of legacy cost
accumulation, they will use acquisitions to position themselves for future
successes in a worldwide steel market that rewards low-cost, efficient
producers.
Unfortunately, the process of rationalizing steel production capacity may
lead to a reduction in the number of iron ore mines required to supply United
States and Canadian blast furnaces. The near term impacts of a taconite plant
closure would be significant for Minnesota Power and northeastern Minnesota. In
the long term, however, improving the cost competitiveness of the domestic
integrated steelmakers is critical to assuring a stable production base for
Minnesota iron ore once steel import tariff protections are lifted. The annual
taconite production in Minnesota was 39 million tons in 2002 (33 million tons in
2001; 47 million tons in 2000). Based on our research of the taconite industry,
Minnesota taconite production for 2003 is anticipated to be about 37 million
tons. As a result of continuing consolidation in the integrated steel business
and its resulting impact on taconite producers, Minnesota Power is unable to
predict taconite production levels for the next two to five years. Minnesota
Power believes it is positioned to mitigate the impacts of reduced load, if
necessary, by selling any excess low-cost generation in the wholesale power
marketplace.
The paper manufacturing business is also weathering significant structural
change as international consolidation continues and North American producers
aggressively cut costs and look for an end to the current down cycle in paper
pricing. Three of Minnesota Power's four major pulp and paper producing
customers are now owned by international firms. As these firms seek to
rationalize world production capacity with demand, they are removing older paper
machines from their asset portfolios and focusing on improving efficiency and
cost competitiveness at their newer and larger machines. Actions by Potlatch
Corporation and UPM-Kymmene Corporation (the owner of Blandin Paper Company) to
stop producing paper from their oldest and
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ALLETE FORM 10-K 2002
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smallest machines in 2002 and 2003 reflect this trend. We believe that the
papermaking assets that remain in our service area have the ability to be cost
competitive in the region or global markets they serve. Minnesota Power's
ongoing focus has been and will continue to be on providing energy at prices
that enable these mills to maintain or improve their competitive positions.
Nonregulated generation operations, which began in 2002 at Taconite Harbor in
northern Minnesota and generation obtained through a 15-year agreement with NRG
Energy at the Kendall County facility near Chicago, Illinois, help position
Minnesota Power to generate more electricity, move it more readily, manage more
transactions with less risk and benefit system reliability.
Plans to construct a 220-mile, 345-kV Duluth-to-Wausau electric transmission
line proposed by Minnesota Power, American Transmission Company and Wisconsin
Public Service Corporation continue to be developed. The new line addresses the
pressing need for more dependable electricity in Wisconsin and the Upper
Midwest. (See Item 1. - Energy Services - Regulatory Issues.)
Our telecommunications business, Enventis Telecom, grew its revenue in 2002
by approximately 19% despite the challenging economy and drop in overall
information technology spending. Enventis Telecom is well recognized in the
Upper Midwest as one of the leading integrated data services providers offering
a mix of transport, complex network integration, and related application
development services. Our plan is to continue to leverage our excellent
reputation and key industry partners to further our success in the marketplace.
AUTOMOTIVE SERVICES continues to be our largest contributor to net income. We
anticipate earnings from Automotive Services to increase by about 15% in 2003.
While we believe that the volume of used vehicles sold within the auto auction
industry will rise at a rate of 2% compounded annually through 2007, we
anticipate vehicles sold through our wholesale and total loss auction facilities
combined will increase by 4% to 7% in 2003, and vehicles financed through AFC
will increase by about 11% in 2003. Automotive Services continues to focus on
growth in the volume of vehicles sold and financed, increased ancillary
services, and operating and technological efficiencies. Selective fee increases
will also be considered.
By offering an expanding circle of customers new levels of service in the
vehicle remarketing industry, Automotive Services expects to expand its presence
in the North American auto industry. In 2002 we opened ADESA Golden Gate, the
largest vehicle auction facility in California, and ADESA Vancouver in Richmond,
British Columbia. Both were built to replace aging facilities that were too
small to efficiently serve our growing customer demand. New wholesale auction
facilities in Long Island, New York; Atlanta, Georgia; and Edmonton, Alberta,
are also under construction and slated to open in 2003. The new facility in Long
Island is a greenfield (a newly constructed facility in a new market), while the
new facilities in Atlanta and Edmonton will replace aging facilities. In
addition to internally growing our existing auctions and dealer floorplan
financing business, we will continue to consider accretive acquisitions in both
the wholesale and total loss vehicle auction businesses. We will also consider
greenfield sites as appropriate and the integration of total loss vehicle
services at certain wholesale vehicle auction facilities. We believe further
consolidation of the total loss vehicle auction industry will occur and are
evaluating various means by which we can continue our growth plan.
ADESA's leadership expects to adapt to changing used vehicle markets by
better serving used vehicle dealers, who are the bread and butter of wholesale
vehicle auctions and the backbone of AFC's customer base. The number of vehicles
coming off lease is expected to slow down in mid-2003, which will place an even
higher premium on catering to individual dealers seeking to replenish inventory
at auctions.
The vehicle remarketing industry has been challenged by the events of
September 11, 2001, by a softening economy and by lower wholesale prices
resulting from high used vehicle inventories and zero-percent financing on new
vehicles. The rental car market has yet to re-fleet up to levels prior to
September 11, and manufacturer incentives on new vehicles temporarily, but
significantly, disrupted the price spreads between new and used vehicles.
Aggressive financing incentives offered by vehicle manufacturers lowered the
cost of owning a new vehicle, which, in turn, depressed prices for late-model
used vehicles. This reduced the number of vehicles sold at auctions because car
dealers restocked their inventories from the increased volume of late-model
vehicles traded in for new vehicles, and sellers at auction tended to hold their
vehicles rather than immediately accept the lower prices.
If the economy improves, retail demand should improve as well, and this will
allow a welcome resumption of the used vehicle sales growth we saw earlier in
2002.
INVESTMENTS AND CORPORATE CHARGES. We anticipate net income from our real
estate operations to remain stable in 2003, while corporate charges are expected
to reflect less unallocated interest expense as a result of lower debt
obligations.
Revenue from property sales by real estate operations continues to be three
to four times more than the acquisition cost, creating strong cash generation
and profitability. Our real estate operations may, from time to time, acquire
packages of diversified properties at low cost, add value through entitlements
and infrastructure enhancements, and sell the properties at current market
prices.
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LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW ACTIVITIES
A primary goal of our strategic plan is to improve cash flow from operations.
Our strategy includes growing the businesses both internally with expanded
facilities, services and operations (see Capital Requirements), and externally
through acquisitions.
During 2002 strong cash flow from operating activities reflected operating
results and continued focus on working capital management. Cash flow from
operating activities was higher in 2002 due to the substantial liquidation of
the trading securities portfolio and the timing of the collection of certain
finance receivables outstanding at December 31, 2001. Also, in 2001 additional
trading securities were purchased with a portion of the proceeds from a common
stock issuance. Cash flow from operations was also affected by a number of
factors representative of normal operations.
WORKING CAPITAL. At December 31, 2002 working capital needs included $275
million of long-term debt due in 2003. Additional working capital, if and when
needed, generally is provided by the sale of commercial paper. During 2002 we
liquidated our trading securities portfolio and used the proceeds to reduce our
short-term debt. Approximately 4.6 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 $175 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 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. ADESA, however, 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.
OFF-BALANCE SHEET ARRANGEMENTS
In July 2001 ADESA entered into a lease agreement for the ADESA Golden Gate
facility in Tracy, California, which was completed in the third quarter of 2002.
The term of the lease is through July 2006 with no renewal options. The cost to
the lessor of the facility was approximately $45 million. ADESA has guaranteed
up to $38 million of any deficiency in sales proceeds that the lessor realizes
in disposing of the leased property. ADESA will receive any sales proceeds in
excess of cost.
ADESA has guaranteed the payment of principal and interest up to $38 million
on the lessor's indebtedness. Terms of the mortgage notes payable require, among
other things, that ADESA maintain certain minimum financial ratios. It is not
practical to estimate the fair value of the guarantee; however, ADESA does not
anticipate that it will incur losses as a result of this guarantee. We have
guaranteed ADESA's obligation under this lease.
In April 2000 leases for three ADESA auction facilities (Boston, Charlotte
and Knoxville) were refinanced in a $28.4 million lease transaction. The new
lease is treated as an operating lease for financial reporting purposes and
expires in April 2010 with no renewal options. ADESA has guaranteed up to $23
million of any deficiency in sales proceeds that the lessor realizes in
disposing of the leased properties. ADESA is entitled to receive any sales
proceeds in excess of $29.3 million.
ADESA has guaranteed the payment of principal and interest up to $23 million
on the lessor's indebtedness, which consists of $28.4 million mortgage notes
payable, due April 1, 2020. Terms of the mortgage notes payable require, among
other things, that ADESA maintain certain minimum financial ratios. Interest on
the notes varies and is payable monthly. It is not practical to estimate the
fair value of the guarantee; however, ADESA does not anticipate that it will
incur losses as a result of this guarantee. We have guaranteed ADESA's
obligations under this lease.
AFC offers short-term on-site financing for dealers to purchase vehicles
mostly at auctions in exchange for a security interest in each vehicle. 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 has arrangements to
use proceeds from the sale of commercial paper issued by ALLETE to meet its
short-term working capital requirements.
AFC, through a wholly owned subsidiary, sells certain finance receivables
through a revolving private securitization structure. In May 2002 AFC and its
subsidiary entered into a revised securitization agreement that allows for the
revolving sale by the subsidiary to third parties of up to $500 million in
undivided interests in eligible finance receivables. The revised agreement
expires in 2005. The securitization agreement in place prior to May 31, 2002
limited the sale of undivided interests to $325 million. In accordance with SFAS
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which became applicable to AFC upon amendment
of the securitization agreement, AFC, for accounting purposes, began
consolidating the subsidiary used in the securitization structure on June 1,
2002. Previously, AFC's interest in this subsidiary was recorded by ALLETE as
residual interest in other current assets ($103 million at December 31, 2001)
net of the subsidiary's allowance for doubtful accounts. The residual interest
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ALLETE FORM 10-K 2002
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previously reflected in prior periods has been reclassified by ALLETE to
accounts receivable to conform to current year presentations.
AFC managed total receivables of $495.1 million at December 31, 2002 ($500.2
million at December 31, 2001); $191.3 million represent receivables which were
included in accounts receivable on our consolidated balance sheet ($233.2
million at December 31, 2001) and $303.8 million represent receivables sold in
undivided interests through the securitization agreement ($267.0 million at
December 31, 2001) which are off-balance sheet. AFC's proceeds from the sale of
the receivables to third parties were used to repay borrowings from ALLETE and
fund new loans to AFC's customers. AFC and the subsidiary must each maintain
certain financial covenants such as minimum tangible net worth to comply with
the terms of the securitization agreement. AFC has historically performed better
than the covenant thresholds set forth in the securitization agreement. We are
not currently aware of any changing circumstances that would put AFC in
noncompliance with the covenants.
SECURITIES
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 of a remaining aggregate amount of
$387 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. ALLETE also previously filed a registration
statement, which has been declared effective by the SEC, relating to the
possible issuance 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.
INVESTMENTS
As investments in emerging technology companies are sold, we recognize a gain
or loss. Our direct investment in the companies that have gone public, which we
account for as available-for-sale securities, had a cost basis of approximately
$10 million at December 31, 2002 ($7 million at December 31, 2001). The
aggregate market value of our investment in these companies at December 31, 2002
was $6 million ($12 million at December 31, 2001). We believe the decline in
market value that has occurred since second quarter 2002 is temporary. We have
the ability and intent to hold these investments until the market recovers.
These investments provide us with access to developing technologies before their
commercial debut, as well as potential financial returns. We view these
investments as a source of capital for redeployment in existing businesses.
- --------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1 YEAR 1 TO 3 YEARS 4 TO 5 YEARS AFTER 5 YEARS
==============================================================================================================================
MILLIONS
Long-Term Debt $ 945.0 $283.7 $108.9 $344.6 $207.8
Quarterly Income Preferred Securities 75.0 - - - 75.0
Operating Lease Obligations 120.0 17.5 34.5 15.6 52.4
Unconditional Purchase Obligations 772.6 75.1 128.5 77.2 491.8
- ------------------------------------------------------------------------------------------------------------------------------
$1,912.6 $376.3 $271.9 $437.4 $827.0
==============================================================================================================================
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Our long-term debt obligations, including long-term debt due within one year,
represent the principal amount of bonds, notes and loans which are recorded on
our consolidated balance sheet.
Quarterly Income Preferred Securities represent all of the preferred trust
securities issued by ALLETE Capital I, a wholly owned statutory trust of the
Company. ALLETE owns all of the common trust securities issued by ALLETE Capital
I. (See Note 14.)
Unconditional purchase obligations represent our Square Butte and Kendall
County power purchase agreements, and minimum purchase commitments under coal
and rail contracts.
Under our power purchase agreement with Square Butte that extends through
2026, we are obligated to pay our pro rata share of Square Butte's costs based
on our entitlement to the output of Square Butte's 455 MW coal-fired generating
unit near Center, North Dakota. Our 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. The
table above reflects our share of future debt service based on our current
output entitlement of 71%. After 2005 Minnkota Power has the option to reduce
our entitlement by 5% annually, to a minimum of 50%. (See Note 13.)
Under the Kendall County agreement, we pay a fixed capacity charge for the
right, but not the obligation, to utilize one 275 MW generating unit near
Chicago, Illinois. We are responsible for arranging the natural gas fuel supply
and are entitled to the electricity produced. (See Note 13.)
- --------------------------------------------------------------------------------
PAGE 43
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
PART II
SPLIT ROCK ENERGY. We provide up to $50.0 million in credit support, in the
form of letters of credit and financial guarantees, to facilitate the power
marketing activities of Split Rock Energy. At December 31, 2002 $10.5 million
was used to support actual obligations ($3.4 million at December 31, 2001). The
credit support generally expires within one year from the date of issuance.
EMERGING TECHNOLOGY INVESTMENTS. We have investments in emerging technologies
through the minority ownership of preferred stock, common stock and equity
interests in limited liability companies. The investments are in both
privately-held and publicly-held entities. We have committed to make additional
investments in certain emerging technology holdings. The total future commitment
was $7.7 million at December 31, 2002 ($11.0 million at December 31, 2001). We
expect approximately $1 million of the future commitment to be invested in 2003,
with the balance to be invested at various times through 2007.
CREDIT RATINGS
Our securities have been rated by Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. (Standard & Poor's) and by Moody's
Investors Service, Inc. (Moody's). On January 27, 2003 Standard & Poor's placed
our BBB+ corporate credit rating on CREDITWATCH DEVELOPING following our public
acknowledgement that we are considering a major corporate restructuring that
could ultimately result in a separation of our two core businesses. We are
unable to predict if such a separation would have a significant effect on our
credit quality.
STANDARD &
CREDIT RATINGS POOR'S MOODY'S
=================================================================
Issuer Credit Rating BBB+ Baa2
Commercial Paper A-2 P-2
Senior Secured
First Mortgage Bonds A Baa1
Pollution Control Bonds A Baa1
Senior Unsecured
Senior Notes BBB Baa2
Unsecured Debt BBB Baa2
Quarterly Income Preferred
Securities BBB- Baa3
=================================================================
Rating agencies use both quantitative and qualitative measures in determining
a company's credit rating. These measures include business risk, liquidity risk,
competitive position, capital mix, financial condition, predictability of cash
flows, management strength and future direction. Some of the quantitative
measures can be analyzed through a few key financial ratios, while the
qualitative ones are more subjective. The disclosure of these credit ratings is
not a recommendation to buy, sell or hold our securities. Ratings are subject to
revision or withdrawal at any time by the assigning rating organization. Each
rating should be evaluated independently of any other rating.
PAYOUT RATIO
In 2002 we paid out 66% (59% in 2001; 51% in 2000) 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.
CAPITAL REQUIREMENTS
Consolidated capital expenditures totaled $205.8 million in 2002 ($153.0
million in 2001; $168.7 million in 2000). Expenditures for 2002 included $80.9
million for Energy Services, $71.1 million for Automotive Services and $5.7
million for Investments and Corporate Charges. Expenditures for 2002 also
included $48.1 million related to Discontinued Operations ($44.2 million to
maintain our Water Services businesses while they are in the process of being
sold; $3.9 million to buy previously leased auto transport trucks). Internally
generated funds were the primary source of funding for these expenditures.
Capital expenditures are expected to be $134 million in 2003 and total about
$400 million for 2004 through 2007. Capital expenditures through 2007 are lower
than in the past because we anticipate no new major construction of facilities.
The 2003 amount includes $74 million for Energy Services and $55 million for
Automotive Services. Energy Services' expenditures are for system component
replacement and upgrades, telecommunication fiber and coal handling equipment.
Automotive Services' expenditures are for new auctions currently under
construction, expansions and on-going improvements at existing vehicle auction
facilities and associated computer systems. The 2003 amount also includes $5
million to maintain our Water Services businesses until they are sold in 2003.
We expect to finance a $33 million investment in new coal handling equipment
with an existing long-term line of credit and use internally generated funds to
fund all other capital expenditures.
MARKET RISK
SECURITIES INVESTMENTS
Our securities investments include certain securities held for an indefinite
period of time which are accounted for as available-for-sale securities and
recorded at fair value. At December 31, 2002 our available-for-sale securities
portfolio consisted of minority interests in the common stock of publicly-traded
corporations held in our Emerging Technology portfolio, and securities in a
grantor trust established to fund certain employee benefits. Our
available-for-sale securities portfolio had a fair value of $20.9 million at
December 31, 2002 ($26.5 million at December 31, 2001).
As part of our Emerging Technology portfolio, we also have several minority
investments in venture capital funds and privately-held start-up companies.
These investments are accounted for under the cost method and included with
Investments on our consolidated balance sheet. The total carrying value of these
investments was $38.7 million at
- --------------------------------------------------------------------------------
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ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
PART II
INTEREST RATE SENSITIVE PRINCIPAL CASH FLOW BY EXPECTED MATURITY DATE
FINANCIAL INSTRUMENTS ---------------------------------------------------------------------------------
FAIR
DECEMBER 31, 2002 2003 2004 2005 2006 2007 THEREAFTER TOTAL VALUE
===============================================================================================================================
DOLLARS IN MILLIONS
Long-Term Debt
Fixed Rate $28.1 $5.1 $0.7 $91.4 $165.7 $336.0 $627.0 $673.4
Average Interest Rate - % 6.5 6.5 7.8 7.7 7.3 7.1 7.2 -
Variable Rate $255.6 $10.5 $0.7 $0.5 $3.0 $47.7 $318.0 $318.2
Average Interest Rate - % <F1> 4.1 3.5 3.2 3.2 2.0 1.9 3.7 -
Mandatorily Redeemable Preferred
Securities of Subsidiary - - - - - $75.0 $75.0 $75.5
Average Distribution Rate - % - - - - - 8.05 8.05 -
===============================================================================================================================
<FN>
<F1> ASSUMES RATE IN EFFECT AT DECEMBER 31, 2002 REMAINS CONSTANT THROUGH REMAINING TERM.
</FN>
December 31, 2002 ($40.6 million at December 31, 2001). Our policy is to
periodically review these investments for impairment by assessing such factors
as continued commercial viability of products, cash flow and earnings. Any
impairment would reduce the carrying value of the investment.
INTEREST RATE SWAP
In October 2001 we entered into an interest rate swap agreement with a
notional amount of $250 million to hedge $250 million of floating rate debt
issued in October 2000. Under the 15-month swap agreement, we made fixed
quarterly payments based on a fixed rate of 3.2% and received payments at a
floating rate based on LIBOR (1.8% at December 31, 2002). The swap expired in
January 2003 and the Company did not enter into any new interest rate swap
agreements.
FOREIGN CURRENCY
Our foreign currency exposure is limited to the conversion of operating
results of our Canadian and Mexican subsidiaries. We have not entered into any
foreign exchange contracts to hedge the conversion of our Canadian or Mexican
operating results into United States dollars. Mexican operations which began in
2002 were not material.
POWER MARKETING
Minnesota Power purchases power for retail sales in our electric utility
service territory and sells excess generation in the wholesale market. We have
about 500 MW of nonregulated generation available for sale to the wholesale
market. Our nonregulated generation includes about 225 MW from Taconite Harbor
in northern Minnesota that was acquired in October 2001. It also includes 275 MW
of generation obtained through a 15-year agreement, which commenced in May 2002,
with NRG Energy at the Kendall County facility near Chicago, Illinois. Under the
Kendall County agreement, we pay a fixed capacity charge for the right, but not
the obligation, to utilize one 275 MW generating unit. We are responsible for
arranging the natural gas fuel supply and are entitled to the electricity
produced. Our strategy is to sell a significant portion of nonregulated
generation through long-term contracts of various durations. The balance will be
sold in the spot market through short-term agreements. We currently have two
long-term forward capacity and energy contracts related to generation obtained
through the Kendall County agreement. Each is for 50 MW, with one having a
10-year term and the other a 15-year term.
The services of Split Rock Energy are used to fulfill purchase requirements
for retail load and to market excess generation. We own 50% of Split Rock Energy
which was formed in 2000 with Great River Energy to provide us with least cost
supply, maximize the value of our generation assets and maximize power marketing
revenue within prescribed limits. Split Rock Energy operates in the wholesale
energy markets, and engages in marketing activities by entering into forward and
option contracts for the purchase and sale of electricity. These contracts are
primarily short-term in nature with maturities of less than one year. Although
Split Rock Energy generally attempts to balance its purchase and sale positions,
commodity price risk sometimes exists or is created. This risk is actively
managed through a risk management program that includes policies, procedures and
limits established by the Split Rock Energy Board of Governors. Minnesota Power
holds two seats on this four member Board.
NEW ACCOUNTING STANDARDS
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. Currently, decommissioning
amounts collected in Minnesota Power's rates are reported in accumulated
depreciation, which upon adoption of SFAS 143
- --------------------------------------------------------------------------------
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ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
PART II
by the Company will require a reclassification to a liability. We are reviewing
what additional assets, if any, may have associated retirement costs as defined
by SFAS 143 and anticipate no material impact on our financial position and
results of operations.
In November 2002 the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The Interpretation expands disclosure
requirements for certain guarantees and requires the recognition of a liability
for the fair value of an obligation assumed under a guarantee. The liability
recognition provisions apply on a prospective basis to guarantees issued or
modified after December 31, 2002, and the disclosure provisions apply to fiscal
years ending after December 15, 2002. We do not believe the adoption of this
Interpretation will have a material impact on our financial position or results
of operations.
In January 2003 the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." In general, a variable interest entity is one with
equity investors that do not have voting rights or do not provide sufficient
financial resources for the entity to support its activities. Under the new
rules, variable interest entities will be consolidated by the party that is
subject to the majority of the risk of loss or entitled to the majority of the
residual returns. The new rules are effective immediately for variable interest
entities created after January 31, 2003 and in the third quarter of 2003 for
previously existing variable interest entities. We are reviewing certain auction
facility lease agreements entered into by ADESA prior to January 2003 to
determine (1) if the lessor is a variable interest entity, and (2) if we should
consolidate the lessor. If it is ultimately determined that the lessor is a
variable interest entity that should be included in our consolidated financial
statements, we estimate that we will record approximately $73 million in
property, plant and equipment, and $73 million in long-term debt. Any
recognition of these amounts would first occur in the third quarter of 2003.
In October 2002 the FASB's Emerging Issues Task Force rescinded EITF Issue
98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management
Activities." The ruling took effect January 1, 2003 for existing contracts and
immediately for contracts entered into after October 25, 2002. Early adoption is
permitted. In general, EITF 98-10 required energy trading contracts to be
marked-to-market with resulting gains and losses recognized in income. Any gains
or losses recognized under the provisions of EITF 98-10 through the end of 2002
will be reversed under the transitional provisions contained in the rescission.
We were required to account for the Kendall County agreement under EITF 98-10
which resulted in the recognition of $4.7 million of mark-to-market pre-tax
income in the second quarter of 2002 ($0 in 2001). We adopted the rescission of
EITF 98-10 in the fourth quarter of 2002 and reversed the mark-to-market income
recognized earlier in the year. The Kendall County agreement is not a derivative
under SFAS 133, "Accounting for Derivative Investments and Hedging Activities."
------------------------------
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 18 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, 2002 and 2001
and for each of the three years in the period ended December 31, 2002, and
supplementary data, also included, which are indexed in Item 15(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
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 2003 Annual Meeting of Shareholders, except for information
with respect to executive officers which is set forth in Part I hereof. The 2003
Proxy Statement will be filed with the SEC within 120 days after the end of our
2002 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 2003 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required for this Item is incorporated by reference herein
from the "Security of Ownership of Beneficial Owners and Management" and the
"Equity Compensation Plan Information" sections in our Proxy Statement for the
2003 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. CONTROLS AND PROCEDURES
We maintain a system of controls and procedures designed to provide
reasonable assurance as to the reliability of the financial statements and other
disclosures included in this report, as well as to safeguard assets from
unauthorized use or disposition. We evaluated the effectiveness of the design
and operation of our disclosure controls and procedures under the supervision
and with the participation of management, including our chief executive officer
and chief financial officer, within 90 days prior to the filing date of this
report. Based upon that evaluation, our chief executive officer and chief
financial officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information required to be
included in our periodic SEC filings. No significant changes were made to our
internal controls or other factors that could significantly affect these
controls subsequent to the date of their evaluation.
- --------------------------------------------------------------------------------
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Certain Documents Filed as Part of this Form 10-K.
(1) Financial Statements PAGE
ALLETE
Report of Independent Accountants.....................................56
Consolidated Balance Sheet at
December 31, 2002 and 2001...........................................57
For the Three Years Ended December 31, 2002
Consolidated Statement of Income.....................................58
Consolidated Statement of Cash Flows.................................59
Consolidated Statement of Shareholders' Equity.......................60
Notes to Consolidated Financial Statements.........................61-77
(2) Financial Statement Schedules
Report of Independent Accountants on
Financial Statement Schedule.........................................78
Schedule II - ALLETE Valuation and
Qualifying Accounts and Reserves.....................................78
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
- --------------------------------------------------------------------------------
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ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
PART IV
EXHIBIT NUMBER
- --------------------------------------------------------------------------------
*2 - Amendment and Restatement of Asset Purchase Agreement by and between
Florida Water Services Corporation and Florida Water Services
Authority dated as of December 20, 2002 (filed as Exhibit 2 to the
December 20, 2002 Form 8-K, File No. 1-3548).
*3(a)1 - Articles of Incorporation, amended and restated as of May 8, 2001
(filed as Exhibit 3(b) to the March 31, 2001 Form 10-Q, File No.
1-3548).
*3(a)2 - Amendment to Certificate of Assumed Name, filed with the Minnesota
Secretary of State on May 8, 2001 (filed as Exhibit 3(a) to the March
31, 2001 Form 10-Q, File No. 1-3548).
*3(b) - Bylaws, as amended effective May 8, 2001 (filed as Exhibit 3(c) to
the March 31, 2001 Form 10-Q, File No. 1-3548).
*4(a)1 - Mortgage and Deed of Trust, dated as of September 1, 1945, between
Minnesota Power & Light Company (now ALLETE) and The Bank of New York
(formerly Irving Trust Company) and Douglas J. MacInnes (successor to
Richard H. West), Trustees (filed as Exhibit 7(c), File No. 2-5865).
*4(a)2 - Supplemental Indentures to ALLETE's Mortgage and Deed of Trust:
NUMBER DATED AS OF REFERENCE FILE EXHIBIT
- --------------------------------------------------------------------------------
First March 1, 1949 2-7826 7(b)
Second July 1, 1951 2-9036 7(c)
Third March 1, 1957 2-13075 2(c)
Fourth January 1, 1968 2-27794 2(c)
Fifth April 1, 1971 2-39537 2(c)
Sixth August 1, 1975 2-54116 2(c)
Seventh September 1, 1976 2-57014 2(c)
Eighth September 1, 1977 2-59690 2(c)
Ninth April 1, 1978 2-60866 2(c)
Tenth August 1, 1978 2-62852 2(d)2
Eleventh December 1, 1982 2-56649 4(a)3
Twelfth April 1, 1987 33-30224 4(a)3
Thirteenth March 1, 1992 33-47438 4(b)
Fourteenth June 1, 1992 33-55240 4(b)
Fifteenth July 1, 1992 33-55240 4(c)
Sixteenth July 1, 1992 33-55240 4(d)
Seventeenth February 1, 1993 33-50143 4(b)
Eighteenth July 1, 1993 33-50143 4(c)
Nineteenth February 1, 1997 1-3548
(1996 Form 10-K) 4(a)3
Twentieth November 1, 1997 1-3548
(1997 Form 10-K) 4(a)3
Twenty-first October 1, 2000 333-54330 4(c)3
*4(b)1 - Indenture (for Unsecured Debt Securities), dated as of February 1,
2001, between ALLETE and LaSalle Bank National Association, as
Trustee (filed as Exhibit 4(d)1, File Nos. 333-57104, 333-57104-01
and 333-57104-02).
*4(b)2 - Officer's Certificate, dated February 21, 2001, establishing the
terms of the 7.80% Senior Notes, due February 15, 2008, of ALLETE
(filed as Exhibit 4(d)2, File Nos. 333-57104, 333-57104-01 and
333-57104-02).
*4(c)1 - Mortgage and Deed of Trust, dated as of March 1, 1943, between
Superior Water, Light and Power Company and Chemical Bank & Trust
Company and Howard B. Smith, as Trustees, both succeeded by U.S. Bank
Trust N.A., as Trustee (filed as Exhibit 7(c), File No. 2-8668).
*4(c)2 - Supplemental Indentures to Superior Water, Light and Power Company's
Mortgage and Deed of Trust:
NUMBER DATED AS OF REFERENCE FILE EXHIBIT
- --------------------------------------------------------------------------------
First March 1, 1951 2-59690 2(d)(1)
Second March 1, 1962 2-27794 2(d)1
Third July 1, 1976 2-57478 2(e)1
Fourth March 1, 1985 2-78641 4(b)
Fifth December 1, 1992 1-3548
(1992 Form 10-K) 4(b)1
Sixth March 24, 1994 1-3548
(1996 Form 10-K) 4(b)1
Seventh November 1, 1994 1-3548
(1996 Form 10-K) 4(b)2
Eighth January 1, 1997 1-3548
(1996 Form 10-K) 4(b)3
*4(d)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(d)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
- --------------------------------------------------------------------------------
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ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
PART IV
EXHIBIT NUMBER
- --------------------------------------------------------------------------------
*4(e) - 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(f) - Indenture, dated as of March 1, 1996, relating to Minnesota Power &
Light Company's (now ALLETE) 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(g) - 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 Minnesota Power & Light Company (now ALLETE), 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(h) - 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 Minnesota Power & Light Company
(now ALLETE) 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(i) - 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(j) - Rights Agreement, dated as of July 24, 1996, between Minnesota Power
& Light Company (now ALLETE) 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).
*4(k) - 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(l) - 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(m) - 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(n) - Guarantee of Minnesota Power, Inc.(now ALLETE), 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(o) - 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).
- --------------------------------------------------------------------------------
PAGE 49
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
PART IV
EXHIBIT NUMBER
- --------------------------------------------------------------------------------
*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 Minnesota Power, Inc. (now ALLETE), 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) - Master Agreement (without Exhibits), dated as of July 30, 2001, among
ADESA Corporation, as a Guarantor, ADESA California, Inc. and certain
subsidiaries of ADESA Corporation that may hereafter become party
hereto, as Lessees, Atlantic Financial Group, Ltd., as Lessor,
certain financial institutions parties hereto, as Lenders, and
SunTrust Bank, as Agent (filed as Exhibit 10(g) to the 2001 Form
10-K, File No. 1-3548).
*10(h) - Master Lease Agreement (without Exhibits), dated as of July 30, 2001,
between Atlantic Financial Group, Ltd., as Lessor, and ADESA
California, Inc. and certain other subsidiaries of ADESA Corporation,
as Lessees (filed as Exhibit 10(h) to the 2001 Form 10-K, File No.
1-3548).
*10(i) - Loan Agreement, dated as of July 30, 2001, among Atlantic Financial
Group, Ltd., as Lessor and Borrower, the financial institutions party
hereto, as Lenders, and SunTrust Bank, as Agent (filed as Exhibit
10(i) to the 2001 Form 10-K, File No. 1-3548).
*10(j) - Guaranty Agreement from ALLETE, dated as of July 30, 2001, relating
to the Master Agreement, dated as of July 30, 2001 (filed as Exhibit
10(j) to the 2001 Form 10-K, File No. 1-3548).
10(k) - Trust Indenture (without Exhibits) between Development Authority of
Fulton County and SunTrust Bank, as Trustee, dated as of December 1,
2002.
10(l) - Bond Purchase Agreement (without Exhibits), dated December 1, 2002,
for the Development Authority of Fulton County Taxable Economic
Development Revenue Bonds (ADESA Atlanta, LLC Project) Series 2002.
10(m) - Lease Agreement (without Exhibits) between Development Authority of
Fulton County and ADESA Atlanta, LLC, dated as of December 1, 2002.
*10(n) - Receivables Purchase Agreement dated as of May 31, 2002, among AFC
Funding Corporation, as Seller, Automotive Finance Corporation, as
Servicer, Fairway Finance Corporation, as initial Purchaser, BMO
Nesbitt Burns Corp., as initial Agent and as Purchaser Agent for
Fairway Finance Corporation and XL Capital Assurance Inc., as Insurer
(filed as Exhibit 10(a) to the June 30, 2002 Form 10-Q, File No.
1-3548).
*10(o) - Amended and Restated Purchase and Sale Agreement dated as of May 31,
2002, between AFC Funding Corporation and Automotive Finance
Corporation (filed as Exhibit 10(b) to the June 30, 2002 Form 10-Q,
File No. 1-3548).
*10(p) - Wholesale Power Coordination and Dispatch Operating Agreement, dated
April 14, 2000, between Minnesota Power, Inc. (now ALLETE) and Split
Rock Energy LLC (filed as Exhibit 10(a) to the June 30, 2000 Form
10-Q, File No. 1-3548).
*10(q) - Letter addressed to the Federal Energy Regulatory Commission, dated
April 21, 2000, amending the Wholesale Power Coordination and
Dispatch Operating Agreement, dated April 14, 2000, between Minnesota
Power, Inc. (now ALLETE) and Split Rock Energy LLC (filed as Exhibit
10(b) to the June 30, 2000 Form 10-Q, File No. 1-3548).
*10(r) - Guarantee Agreement, dated August 16, 2000, made by and among
Minnesota Power, Inc. (now ALLETE), 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(s) - Power Purchase and Sale Agreement, dated as of May 29, 1998, between
Minnesota Power, Inc. (now ALLETE) and Square Butte Electric
Cooperative (filed as Exhibit 10 to the June 30, 1998 Form 10-Q, File
No. 1-3548).
10(t) - Second Amended and Restated Committed Facility Letter (without
Exhibits), dated December 24, 2002, to ALLETE from LaSalle Bank
National Association, as Agent.
+*10(u)1 - 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(u)2 - Amendments through January 2003 to the Minnesota Power (now ALLETE)
Executive Annual Incentive Plan.
- --------------------------------------------------------------------------------
PAGE 50
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
PART IV
EXHIBIT NUMBER
- --------------------------------------------------------------------------------
+*10(v) - 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(w) - 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(x) - 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(y) - 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(z)1 - 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(z)2 - Amendments through January 2003 to the Minnesota Power (now ALLETE)
Executive Long-Term Incentive Compensation Plan.
+*10(aa)- 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(ab) - 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).
+10(ac) - Minnesota Power (now ALLETE) Director Compensation Deferral Plan
Amended and Restated, effective January 1, 1990.
12 - Computation of Ratios of Earnings to Fixed Charges and Supplemental
Ratios of Earnings to Fixed Charges. (Included as page 79 of this
document.)
*21 - Subsidiaries of the Registrant (reference is made to ALLETE's Form
U-3A-2 for the year ended December 31, 2002, File No. 69-78).
23(a) - Consent of Independent Accountants.
23(b) - Consent of General Counsel.
99(a) - Certification of Annual Report dated February 14, 2003, signed by
David G. Gartzke.
99(b) - Certification of Annual Report dated February 14, 2003, signed by
James K. Vizanko.
- ------------------------------------------------
* INCORPORATED HEREIN BY REFERENCE AS INDICATED.
+ MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED
AS AN EXHIBIT TO THIS REPORT PURSUANT TO ITEM 15(C) OF FORM 10-K.
(b) Reports on Form 8-K.
Report on Form 8-K filed October 18, 2002 with respect to Item 7. Financial
Statements and Exhibits.
Report on Form 8-K filed December 10, 2002 with respect to Item 5. Other
Events and Regulation FD Disclosure.
Report on Form 8-K filed December 20, 2002 with respect to Item 5. Other
Events and Regulation FD Disclosure, and Item 7. Financial Statements, Pro
Forma Financial Information and Exhibits.
Report on Form 8-K filed December 30, 2002 with respect to Item 5. Other
Events and Regulation FD Disclosure.
Report on Form 8-K filed January 24, 2003 with respect to Item 7. Financial
Statements, Pro Forma Financial Information and Exhibits.
- --------------------------------------------------------------------------------
PAGE 51
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
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, INC.
Dated: February 14, 2003 By David G. Gartzke
-----------------------------------------------
David G. Gartzke
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
- -----------------------------------------------------------------------------------------------------------------------
David G. Gartzke Chairman, President, February 14, 2003
- ----------------------------------------------
David G. Gartzke Chief Executive Officer and Director
James K. Vizanko Vice President, February 14, 2003
- ----------------------------------------------
James K. Vizanko Chief Financial Officer and Treasurer
Mark A. Schober Vice President and Controller February 14, 2003
- ----------------------------------------------
Mark A. Schober
Kathleen A. Brekken Director February 14, 2003
- ----------------------------------------------
Kathleen A. Brekken
Wynn V. Bussmann Director February 14, 2003
- ----------------------------------------------
Wynn V. Bussmann
Dennis E. Evans Director February 14, 2003
- ----------------------------------------------
Dennis E. Evans
Peter J. Johnson Director February 14, 2003
- ----------------------------------------------
Peter J. Johnson
George L. Mayer Director February 14, 2003
- ----------------------------------------------
George L. Mayer
Jack I. Rajala Director February 14, 2003
- ----------------------------------------------
Jack I. Rajala
Nick Smith Director February 14, 2003
- ----------------------------------------------
Nick Smith
Bruce W. Stender Director February 14, 2003
- ----------------------------------------------
Bruce W. Stender
Donald C. Wegmiller Director February 14, 2003
- ----------------------------------------------
Donald C. Wegmiller
- --------------------------------------------------------------------------------
PAGE 52
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
CERTIFICATIONS
I, David G. Gartzke, certify that:
1. I have reviewed this annual report on Form 10-K of ALLETE, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 14, 2003 David G. Gartzke
------------------------------------------------
David G. Gartzke
Chairman, President and Chief Executive Officer
- --------------------------------------------------------------------------------
PAGE 53
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
CERTIFICATIONS
I, James K. Vizanko, certify that:
1. I have reviewed this annual report on Form 10-K of ALLETE, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 14, 2003 James K. Vizanko
-------------------------------
James K. Vizanko
Vice President, Chief Financial
Officer and Treasurer
- --------------------------------------------------------------------------------
PAGE 54
ALLETE FORM 10-K 2002
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2002, 2001 AND 2000
WITH REPORT OF INDEPENDENT ACCOUNTANTS
AND REPORT OF MANAGEMENT
PAGE 55
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
REPORTS
INDEPENDENT ACCOUNTANTS
[PRICEWATERHOUSECOOPERS LLP LOGO OMITTED]
To the Shareholders and
Board of Directors of ALLETE, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of shareholders' equity
present fairly, in all material respects, the financial position of ALLETE, Inc.
and its subsidiaries at December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of ALLETE, Inc.'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.
As discussed in Notes 2 and 3 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards, No. 142, "Goodwill
and Other Intangible Assets" on January 1, 2002.
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 20, 2003
- --------------------------------------------------------------------------------
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.
David G. Gartzke
David G. Gartzke
Chairman, President and Chief Executive Officer
James Vizanko
James K. Vizanko
Chief Financial Officer
- --------------------------------------------------------------------------------
PAGE 56
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
ALLETE CONSOLIDATED BALANCE SHEET
DECEMBER 31 2002 2001
==============================================================================================================================
MILLIONS
Assets
Current Assets
Cash and Cash Equivalents $ 194.0 $ 220.2
Trading Securities 1.8 155.6
Accounts Receivable 384.4 431.2
Inventories 36.8 32.0
Prepayments and Other 14.1 14.3
Discontinued Operations 27.3 42.2
- ------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 658.4 895.5
Property, Plant and Equipment 1,364.9 1,323.3
Investments 170.9 155.4
Goodwill 499.8 494.4
Other Intangible Assets 39.8 34.8
Other Assets 67.5 68.8
Discontinued Operations 345.9 310.3
- ------------------------------------------------------------------------------------------------------------------------------
Total Assets $3,147.2 $3,282.5
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Liabilities
Current Liabilities
Accounts Payable $ 202.6 $ 239.8
Accrued Taxes, Interest and Dividends 36.4 38.1
Notes Payable 74.5 267.4
Long-Term Debt Due Within One Year 283.7 6.9
Other 111.6 106.4
Discontinued Operations 29.4 45.9
- ------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 738.2 704.5
Long-Term Debt 661.3 933.8
Accumulated Deferred Income Taxes 139.8 107.0
Other Liabilities 137.6 163.5
Discontinued Operations 162.9 154.9
Commitments and Contingencies
- ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 1,839.8 2,063.7
- ------------------------------------------------------------------------------------------------------------------------------
Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary ALLETE Capital I Which Holds Solely Company Junior
Subordinated Debentures 75.0 75.0
- ------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common Stock Without Par Value, 130.0 Shares Authorized
85.6 and 83.9 Shares Outstanding 814.9 770.3
Unearned ESOP Shares (49.0) (52.7)
Accumulated Other Comprehensive Loss (22.2) (14.5)
Retained Earnings 488.7 440.7
- ------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,232.4 1,143.8
- ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $3,147.2 $3,282.5
==============================================================================================================================
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
PAGE 57
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
ALLETE CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31 2002 2001 2000
==============================================================================================================================
MILLIONS EXCEPT PER SHARE AMOUNTS
Operating Revenue
Energy Services
Utility $ 505.6 $ 538.7 $ 532.1
Nonregulated/Nonutility 124.7 80.0 54.3
Automotive Services 844.1 832.1 522.6
Investments 32.5 74.8 77.4
- ------------------------------------------------------------------------------------------------------------------------------
Total Operating Revenue 1,506.9 1,525.6 1,186.4
- ------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel and Purchased Power
Utility 205.0 233.1 229.0
Nonregulated/Nonutility 34.1 - -
Operations
Utility 197.0 204.1 208.9
Nonregulated/Nonutility 107.5 74.9 51.7
Automotive and Investments 703.5 728.3 464.7
Interest 62.2 74.7 58.8
- ------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 1,309.3 1,315.1 1,013.1
- ------------------------------------------------------------------------------------------------------------------------------
Operating Income Before ACE 197.6 210.5 173.3
Income from Disposition of Investment in ACE - - 48.0
- ------------------------------------------------------------------------------------------------------------------------------
Operating Income from Continuing Operations 197.6 210.5 221.3
Distributions on Redeemable
Preferred Securities of ALLETE Capital I 6.0 6.0 6.0
Income Tax Expense 72.6 74.2 77.0
- ------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 119.0 130.3 138.3
Income from Discontinued Operations 18.2 8.4 10.3
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 137.2 $ 138.7 $ 148.6
- ------------------------------------------------------------------------------------------------------------------------------
Average Shares of Common Stock
Basic 81.1 75.8 69.8
Diluted 81.7 76.5 70.1
- ------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share of Common Stock
Basic
Continuing Operations $1.47 $1.72 $1.97
Discontinued Operations 0.22 0.11 0.15
- ------------------------------------------------------------------------------------------------------------------------------
$1.69 $1.83 $2.12
- ------------------------------------------------------------------------------------------------------------------------------
Diluted
Continuing Operations $1.46 $1.70 $1.96
Discontinued Operations 0.22 0.11 0.15
- ------------------------------------------------------------------------------------------------------------------------------
$1.68 $1.81 $2.11
- ------------------------------------------------------------------------------------------------------------------------------
Dividends Per Share of Common Stock $1.10 $1.07 $1.07
==============================================================================================================================
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
PAGE 58
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
ALLETE CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31 2002 2001 2000
==============================================================================================================================
MILLIONS
Operating Activities
Net Income $ 137.2 $ 138.7 $ 148.6
Gain from Disposition of Investment in ACE - - (48.0)
Depreciation and Amortization 82.1 101.6 86.7
Deferred Income Taxes 26.9 10.3 (6.6)
Changes in Operating Assets and Liabilities - Net of the
Effects of Acquisitions
Trading Securities 153.8 (64.8) 88.9
Accounts Receivable 74.9 (82.4) (77.7)
Inventories (3.8) (3.0) (2.2)
Prepayments and Other Current Assets 2.0 (9.2) 3.5
Accounts Payable (38.0) (23.9) 92.7
Other Current Liabilities (7.8) 16.4 (30.0)
Other - Net 25.7 19.9 19.6
- ------------------------------------------------------------------------------------------------------------------------------
Cash from Operating Activities 453.0 103.6 275.5
- ------------------------------------------------------------------------------------------------------------------------------
Investing Activities
Proceeds from Sale of Investments 1.9 2.6 146.0
Additions to Investments (24.5) (11.2) (42.5)
Additions to Property, Plant and Equipment (205.8) (153.0) (168.7)
Acquisitions - Net of Cash Acquired (32.7) (157.1) (453.0)
Other - Net 16.7 21.3 24.4
- ------------------------------------------------------------------------------------------------------------------------------
Cash for Investing Activities (244.4) (297.4) (493.8)
- ------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Issuance of Long-Term Debt 18.4 125.2 306.3
Issuance of Common Stock 43.2 189.2 23.6
Changes in Notes Payable - Net (200.5) 5.5 177.8
Reductions of Long-Term Debt (14.5) (18.1) (58.8)
Redemption of Preferred Stock - - (31.5)
Dividends on Preferred and Common Stock (89.2) (81.8) (75.4)
- ------------------------------------------------------------------------------------------------------------------------------
Cash from (for) Financing Activities (242.6) 220.0 342.0
- ------------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash 2.7 (11.3) (5.9)
- ------------------------------------------------------------------------------------------------------------------------------
Change in Cash and Cash Equivalents (31.3) 14.9 117.8
Cash and Cash Equivalents at Beginning of Period <F1> 234.2 219.3 101.5
- ------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period <F1> $ 202.9 $ 234.2 $ 219.3
- ------------------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information
Cash Paid During the Period for
Interest - Net of Capitalized $71.9 $84.2 $66.3
Income Taxes $49.2 $60.5 $107.1
==============================================================================================================================
<FN>
<F1> INCLUDED $8.9 MILLION OF CASH FROM DISCONTINUED OPERATIONS AT DECEMBER 31, 2002 ($14.0 MILLION AT DECEMBER 31, 2001).
</FN>
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
PAGE 59
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
ALLETE CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
ACCUMULATED
TOTAL OTHER UNEARNED CUMULATIVE
SHAREHOLDERS' RETAINED COMPREHENSIVE ESOP COMMON PREFERRED
EQUITY EARNINGS INCOME (LOSS) SHARES STOCK STOCK
====================================================================================================================================
MILLIONS
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 -
Comprehensive Income
Net Income 138.7 138.7
Other Comprehensive Income - Net of Tax
Unrealized Gains on Securities - Net 2.5 2.5
Interest Rate Swap (1.5) (1.5)
Foreign Currency Translation Adjustments (11.3) (11.3)
--------
Total Comprehensive Income 128.4
Common Stock Issued - Net 193.4 193.4
Dividends Declared (81.8) (81.8)
ESOP Shares Earned 3.0 3.0
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 1,143.8 440.7 (14.5) (52.7) 770.3 -
Comprehensive Income
Net Income 137.2 137.2
Other Comprehensive Income - Net of Tax
Unrealized Losses on Securities - Net (8.1) (8.1)
Interest Rate Swap 1.3 1.3
Foreign Currency Translation Adjustments 2.6 2.6
Additional Pension Liability (3.5) (3.5)
--------
Total Comprehensive Income 129.5
Common Stock Issued - Net 44.6 44.6
Dividends Declared (89.2) (89.2)
ESOP Shares Earned 3.7 3.7
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $1,232.4 $ 488.7 $(22.2) $(49.0) $814.9 $ -
====================================================================================================================================
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
PAGE 60
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1 BUSINESS SEGMENTS
MILLIONS INVESTMENTS
AND
ENERGY AUTOMOTIVE CORPORATE
FOR THE YEAR ENDED DECEMBER 31 CONSOLIDATED SERVICES SERVICES CHARGES
==============================================================================================================================
2002
Operating Revenue $1,506.9 $630.3 $844.1 <F1> $ 32.5
Operation and Other Expense 1,137.9 491.6 613.5 32.8
Depreciation and Amortization Expense 81.7 48.8 32.8 0.1
Lease Expense 27.5 3.2 24.3 -
Interest Expense 62.2 18.8 21.2 22.2
- ------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 197.6 67.9 152.3 (22.6)
Distributions on Redeemable
Preferred Securities of Subsidiary 6.0 2.4 - 3.6
Income Tax Expense (Benefit) 72.6 23.7 59.4 (10.5)
- ------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 119.0 $ 41.8 $ 92.9 $(15.7)
------------------------------------------------
Income from Discontinued Operations 18.2
- --------------------------------------------------------------
Net Income $ 137.2
EBITDAL from Continuing Operations $369.0 $138.7 $230.6 $(0.3)
Total Assets $3,147.2 <F3> $1,150.9 $1,472.8 <F2> $150.3
Property, Plant and Equipment $1,364.9 $876.4 $484.4 $4.1
Accumulated Depreciation and Amortization $879.8 $727.6 $150.0 $2.2
Capital Expenditures $205.8 <F3> $80.9 $71.1 $5.7
- ------------------------------------------------------------------------------------------------------------------------------
2001
Operating Revenue $1,525.6 $618.7 $832.1 <F1> $74.8
Operation and Other Expense 1,124.6 463.5 610.9 50.2
Depreciation and Amortization Expense 88.9 45.9 42.7 0.3
Lease Expense 26.9 2.7 24.2 -
Interest Expense 74.7 20.1 35.3 19.3
- ------------------------------------------------------------------------------------------------------------------------------
Operating Income 210.5 86.5 119.0 5.0
Distributions on Redeemable
Preferred Securities of Subsidiary 6.0 2.4 - 3.6
Income Tax Expense (Benefit) 74.2 32.4 44.2 (2.4)
- ------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 130.3 $ 51.7 $ 74.8 $ 3.8
------------------------------------------------
Income from Discontinued Operations 8.4
- --------------------------------------------------------------
Net Income $ 138.7
EBITDAL from Continuing Operations $401.0 $155.2 $221.2 $24.6
Total Assets $3,282.5 <F3> $1,049.1 $1,515.4 <F2> $365.5
Property, Plant and Equipment $1,323.3 $872.4 $446.7 $4.2
Accumulated Depreciation and Amortization $828.7 $693.0 $133.4 $2.3
Capital Expenditures $153.0 <F3> $59.9 $61.0 -
- ------------------------------------------------------------------------------------------------------------------------------
2000
Operating Revenue $1,186.4 $586.4 $522.6 <F1> $77.4
Operation and Other Expense 860.3 440.6 370.8 48.9
Depreciation and Amortization Expense 72.9 46.2 26.2 0.5
Lease Expense 21.1 2.8 18.3 -
Interest Expense 58.8 21.1 23.3 14.4
- ------------------------------------------------------------------------------------------------------------------------------
Operating Income Before ACE 173.3 75.7 84.0 13.6
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 77.0 29.2 34.1 13.7
- ------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 138.3 $ 44.5 $ 49.9 $43.9
------------------------------------------------
Income from Discontinued Operations 10.3
- --------------------------------------------------------------
Net Income $ 148.6
EBITDAL from Continuing Operations $326.1 $145.8 $151.8 $28.5
Total Assets $2,914.0 <F3> $942.8 $1,339.0 <F2> $285.3
Property, Plant and Equipment $1,201.1 $787.3 $409.4 $4.4
Accumulated Depreciation and Amortization $745.6 $661.5 $81.9 $2.2
Capital Expenditures $168.7 <F3> $63.9 $74.2 $0.2
==============================================================================================================================
<FN>
<F1> INCLUDED $141.9 MILLION OF CANADIAN OPERATING REVENUE IN 2002 ($139.4 MILLION IN 2001; $107.4 MILLION IN 2000).
<F2> INCLUDED $184.7 MILLION OF CANADIAN ASSETS IN 2002 ($187.6 MILLION IN 2001; $215.6 MILLION IN 2000).
<F3> DISCONTINUED OPERATIONS REPRESENTED $373.2 MILLION OF TOTAL ASSETS IN 2002 ($352.5 MILLION IN 2001; $346.9 MILLION IN 2000) AND
$48.1 MILLION OF CAPITAL EXPENDITURES IN 2002 ($32.1 MILLION IN 2001; $30.4 MILLION IN 2000).
</FN>
- --------------------------------------------------------------------------------
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ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
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. Energy Services and Automotive Services segments were
determined based on products and services provided. The Investment and Corporate
Charges 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
each business segment. Discontinued operations included operating results of our
Water Services businesses, our auto transport business and our retail store.
ENERGY SERVICES. Through Minnesota Power, an operating division of ALLETE,
Energy Services is engaged in the generation, transmission, distribution and
marketing of electricity. In addition, nonregulated/nonutility operations are
conducted through BNI Coal, Enventis Telecom and Rainy River Energy, all wholly
owned subsidiaries.
Utility electric service is provided to 147,000 retail customers in
northeastern Minnesota and northwestern Wisconsin. Approximately 50% of utility
electric sales are to large power customers (which consists of five taconite
producers, five paper and pulp mills, two pipeline companies and one
manufacturer) under all-requirements contracts with expiration dates extending
from September 2004 through December 2008. Utility 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. Utility 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 that bill retail customers for the recovery of CIP
expenditures not collected in base rates.
Minnesota Power, along with Rainy River Energy, also engages in nonregulated
electric generation and power marketing. Nonregulated generation is non-rate
base generation sold at market-based rates to the wholesale market.
Split Rock Energy is a joint venture of Minnesota Power and Great River
Energy which combines the two companies' power supply capabilities and customer
loads for power pool operations and generation outage protection. We account for
our 50% ownership interest in Split Rock Energy under the equity method of
accounting. For the year ended December 31, 2002 our equity income from Split
Rock Energy was $7.3 million ($3.6 million in 2001; $0 million in 2000). We
received $2.6 million in cash distributions from Split Rock Energy in 2002 ($2.1
million in 2001; $0 million in 2000). We purchase power from Split Rock Energy
to serve native load requirements and sell generation to Split Rock Energy.
Purchases and sales are at market rates. In 2002 we made power purchases from
Split Rock Energy of $34.3 million ($56.1 million in 2001; $25.1 million in
2000) and power sales to Split Rock Energy of $14.5 million ($13.3 million in
2001; $11.7 million in 2000).
BNI Coal mines and sells lignite coal to two North Dakota mine-mouth
generating units, one of which is Square Butte. Square Butte supplies
approximately 71% (323 MW) of its output to Minnesota Power under a long-term
contract. (See Note 13.)
Enventis Telecom is our telecommunications business which is an integrated
data services provider offering fiber optic-based communication and advanced
data services to businesses and communities in Minnesota, Wisconsin and
Missouri.
AUTOMOTIVE SERVICES. Automotive Services include several wholly owned
subsidiaries operating as integral parts of the vehicle redistribution business.
ADESA is the second largest wholesale vehicle auction network in North
America. ADESA owns or leases, and operates 52 wholesale vehicle auctions 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 Impact has
25 auction facilities in the United States and Canada that provide total loss
vehicle services to insurance, vehicle leasing and rental car companies. AFC
provides inventory financing for wholesale and retail automobile dealers who
purchase vehicles at auctions. AFC has 81 loan production offices located across
the United States and Canada. These offices provide qualified dealers credit to
purchase vehicles at any of the 500 plus auctions and other outside sources
approved by AFC. PAR provides customized vehicle remarketing services, including
nationwide repossessions and the liquidation of off-lease vehicles, to various
businesses with fleet operations. AutoVIN provides technology-enabled vehicle
inspection services and inventory auditing to the automotive industry. ADESA,
ADESA Impact, PAR and AutoVIN recognize revenue when services are performed.
AFC's revenue is comprised of gains on sales
- --------------------------------------------------------------------------------
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ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
of receivables, and interest, fee and servicer income. As is customary for
finance companies, AFC's revenue is reported net of interest expense of $1.3
million in 2002 ($3.4 million in 2001; $2.7 million in 2000). 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. AFC also retains the right to service receivables sold through
securitization and receives a fee for doing so.
INVESTMENTS AND CORPORATE CHARGES. Investments and Corporate Charges include
real estate operations, investments in emerging technologies related to the
electric utility industry and general corporate expenses, including interest,
not specifically related to any one business segment. Our real estate operations
include several wholly owned subsidiaries and an 80% ownership in Lehigh. All
are Florida companies, which through their subsidiaries, own real estate in
Florida. Real estate revenue is recognized on the accrual basis. Also included
in Investments and Corporate Charges was our trading securities portfolio which
was liquidated during the second half of 2002.
DEPRECIATION. Property, plant and equipment are recorded at original cost and
are reported on the balance sheet net of accumulated depreciation. 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 nonutility
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.
Depreciation is computed using the estimated useful lives of the various
classes of plant. In 2002 average depreciation rates for the energy and
automotive services segments were 3.1% and 4.3% (3.0% and 4.0% in 2001; 3.3% and
3.7% in 2000).
ASSET IMPAIRMENTS. We periodically review our long-lived assets whenever
events indicate the carrying amount of the assets may not be recoverable. As of
December 31, 2002 and 2001 no write-downs were required.
ACCOUNTS RECEIVABLE. Accounts receivable are 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, through a wholly owned subsidiary, sells certain finance receivables
through a revolving private securitization structure. On May 31, 2002 AFC and
its subsidiary entered into a revised securitization agreement that allows for
the revolving sale by the subsidiary to third parties of up to $500 million in
undivided interests in eligible finance receivables. The revised agreement
expires in 2005. The securitization agreement in place prior to May 31, 2002
limited the sale of undivided interests to $325 million. In accordance with SFAS
140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which became applicable to AFC upon amendment
of the securitization agreement, AFC, for accounting purposes, began
consolidating the subsidiary used in the securitization structure on June 1,
2002. Previously, AFC's interest in this subsidiary was recorded by ALLETE as
residual interest in other current assets ($103 million at December 31, 2001)
net of the subsidiary's allowance for doubtful accounts. The residual interest
previously reflected in prior periods has been reclassified by ALLETE to
accounts receivable to conform to current year presentations.
AFC managed total receivables of $495.1 million at December 31, 2002 ($500.2
million at December 31, 2001); $191.3 million represent receivables which were
included in accounts receivable on our consolidated balance sheet ($233.2
million at December 31, 2001) and $303.8 million represent receivables sold in
undivided interests through the securitization agreement ($267.0 million at
December 31, 2001) which are off-balance sheet. AFC's proceeds from the sale of
the receivables to third parties were used to repay borrowings from ALLETE and
fund new loans to AFC's customers. AFC and the subsidiary must each maintain
certain financial covenants such as minimum tangible net worth to comply with
the terms of the securitization agreement. AFC has historically performed better
than the covenant thresholds set forth in the securitization agreement. We are
not currently aware of any changing circumstances that would put AFC in
noncompliance with the covenants.
ACCOUNTS RECEIVABLE
DECEMBER 31 2002 2001
================================================================================
MILLIONS
Trade Accounts Receivable $215.2 $216.8
Less: Allowance for Doubtful Accounts 8.8 6.1
- --------------------------------------------------------------------------------
206.4 210.7
- --------------------------------------------------------------------------------
Finance Receivables 199.7 243.7
Less: Allowance for Doubtful Accounts 21.7 23.2
- --------------------------------------------------------------------------------
178.0 220.5
- --------------------------------------------------------------------------------
Total Accounts Receivable $384.4 $431.2
================================================================================
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. All goodwill relates to the Automotive Services segment and
represents the excess of cost over identifiable tangible and intangible net
assets of businesses acquired. As
- --------------------------------------------------------------------------------
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ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
required by SFAS 142, "Goodwill and Other Intangible Assets," goodwill is no
longer amortized after 2001. Prior to 2002 we amortized goodwill on a
straight-line basis over 40 years.
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.
ACCOUNTING FOR STOCK-BASED COMPENSATION. We have elected to account for
stock-based compensation in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, no expense is recognized for employee
stock options granted. Had we applied the fair value recognition provisions of
SFAS 123, "Accounting for Stock-Based Compensation," in 2002 we estimate that
stock-based compensation expense would have increased $1.5 million after-tax,
and basic and diluted earnings per share would have decreased $0.02 (basic and
diluted earnings per share would have been impacted by approximately $0.01 in
2001 and 2000); these amounts were calculated using the Black-Scholes option
pricing model. Expense is recognized for performance share awards, and amounted
to approximately $4 million after-tax in 2002 ($5 million in 2001; $3 million in
2000).
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.
Resulting translation adjustments are recorded in the Accumulated Other
Comprehensive Loss section of Shareholders' Equity on our consolidated balance
sheet.
INCOME TAXES. ALLETE and its subsidiaries file a consolidated federal income
tax return. Income taxes are allocated to each subsidiary based on their taxable
income. We account for income taxes using the liability method as prescribed by
SFAS 109, "Accounting for Income Taxes." Under the liability method, deferred
income tax liabilities are established for all temporary differences in the book
and tax basis of assets and liabilities based upon enacted tax laws and rates
applicable to the periods in which the taxes become payable.
NEW ACCOUNTING STANDARDS. 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.
Currently, decommissioning amounts collected in Minnesota Power's rates are
reported in accumulated depreciation, which upon adoption of SFAS 143 by the
Company will require a reclassification to a liability. We are reviewing what
additional assets, if any, may have associated retirement costs as defined by
SFAS 143 and anticipate no material impact on our financial position and results
of operations.
In November 2002 the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The Interpretation expands disclosure
requirements for certain guarantees, and requires the recognition of a liability
for the fair value of an obligation assumed under a guarantee. The liability
recognition provisions apply on a prospective basis to guarantees issued or
modified after December 31, 2002, and the disclosure provisions apply to fiscal
years ending after December 15, 2002. We do not believe the adoption of this
Interpretation will have a material impact on our financial position or results
of operations.
In January 2003 the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." In general, a variable interest entity is one with
equity investors that do not have voting rights or do not provide sufficient
financial resources for the entity to support its activities. Under the new
rules, variable interest entities will be consolidated by the party that is
subject to the majority of the risk of loss or entitled to the majority of the
residual returns. The new rules are effective immediately for variable interest
entities created after January 31, 2003 and in the third quarter of 2003 for
previously existing variable interest entities. We are reviewing certain auction
facility lease agreements entered into by ADESA prior to January 2003 to
determine (1) if the lessor is a variable interest entity, and (2) if we should
consolidate the lessor. If it is ultimately determined that the lessor is a
variable interest entity that should be included in our consolidated financial
statements, we estimate that we will record approximately $73 million in
property, plant and equipment, and $73 million in long-term debt. Any
recognition of these amounts would first occur in the third quarter of 2003.
In October 2002 the FASB's Emerging Issues Task Force rescinded EITF Issue
98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management
Activities." The ruling took effect January 1, 2003 for existing contracts and
immediately for contracts entered into after October 25, 2002. Early adoption is
permitted. In general, EITF 98-10 required energy trading contracts to be
marked-to-market with resulting gains and losses recognized in income. Any gains
or losses recognized under the provisions of EITF 98-10 through the end of 2002
will be reversed under the transitional provisions contained in the rescission.
We were required to account for the Kendall County agreement under EITF 98-10
which resulted in the recognition of $4.7 million of mark-to-market pre-tax
income in the second quarter of 2002 ($0 in 2001). We adopted the rescission of
EITF 98-10 in the fourth quarter of 2002 and reversed the mark-to-market income
recognized earlier in the year. The Kendall County agreement is not a derivative
under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities."
- --------------------------------------------------------------------------------
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ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
3 GOODWILL AND OTHER INTANGIBLES
The table below sets forth what reported net income and earnings per share
would have been in all periods presented, exclusive of amortization expense
recognized in those periods related to goodwill or other intangible assets that
are no longer being amortized. All goodwill amortization related to continuing
operations.
2002 2001 2000
================================================================================
MILLIONS EXCEPT PER SHARE AMOUNTS
Net Income
Reported $137.2 $138.7 $148.6
Goodwill Amortization - 11.3 7.2
- --------------------------------------------------------------------------------
Adjusted $137.2 $150.0 $155.8
- --------------------------------------------------------------------------------
Earnings Per Share
Basic
Reported $1.69 $1.83 $2.12
Goodwill Amortization - 0.15 0.10
- --------------------------------------------------------------------------------
Adjusted $1.69 $1.98 $2.22
- --------------------------------------------------------------------------------
Diluted
Reported $1.68 $1.81 $2.11
Goodwill Amortization - 0.15 0.10
- --------------------------------------------------------------------------------
Adjusted $1.68 $1.96 $2.21
================================================================================
We completed the required goodwill impairment testing in the first quarter of
2002 with no resulting impairment. No event or change has occurred that would
indicate the carrying amount has been impaired since our annual test.
GOODWILL
================================================================================
MILLIONS
Carrying Value, January 1, 2000 $472.8
Acquired During Year 35.9
Amortization (14.3)
- --------------------------------------------------------------------------------
Carrying Value, December 31, 2001 494.4
Acquired During Year 5.4
- --------------------------------------------------------------------------------
Carrying Value, December 31, 2002 $499.8
================================================================================
OTHER INTANGIBLE ASSETS
DECEMBER 31 2002 2001
================================================================================
MILLIONS
Customer Relationships $29.6 $22.4
Computer Software 32.6 25.1
Other 6.8 7.5
Accumulated Amortization (29.2) (20.2)
- --------------------------------------------------------------------------------
Total $39.8 $34.8
================================================================================
Other Intangible Assets are amortized using the straight-line method over
periods of two to forty years. Amortization expense for Other Intangible Assets
was $10.2 million in 2002 ($8.5 million in 2001; $4.7 million in 2000) and is
expected to be about $10 million per year until fully amortized.
4 ACQUISITIONS
ADESA AUCTION FACILITIES. 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. In May 2001 ADESA purchased the assets
of the I-44 Auto Auction in Tulsa, Oklahoma. ADESA Impact and ADESA Tulsa were
accounted for using the purchase method and financial results have been included
in our consolidated financial statements since the date of purchase. Pro forma
financial results were not material. ComSearch was accounted for as a pooling of
interests. Financial results for prior periods have not been restated to reflect
this pooling due to immateriality.
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. In June 2000 ADESA acquired all of the
outstanding common shares of Auction Finance Group, Inc. (AFG). AFG owned CAAG
Auto Auction Holdings Ltd., which was doing business as Canadian Auction Group.
In August 2000 ADESA acquired Beebe Auto Exchange, Inc. and 51% of Interstate
Auto Auction. In October 2000 ADESA purchased nine auction facilities from
Manheim Auctions, Inc. These transactions had a combined purchase price of
approximately $438 million and resulted in goodwill of $298 million. We used the
purchase method of accounting for these transactions. Financial results have
been included in our consolidated financial statements since the date of each
purchase. Pro forma financial results were not material.
ACQUISITION OF ENVENTIS, INC. In July 2001 we acquired Enventis, Inc., a data
network systems provider headquartered in the Minneapolis-St. Paul area. In
connection with this acquisition, we issued 310,878 shares of ALLETE common
stock. Enventis was accounted for as a pooling of interests. Financial results
for prior periods have not been restated to reflect this pooling due to
immateriality.
ACQUISITION OF GENERATING FACILITY. In October 2001 we acquired certain
non-mining properties from LTV and Cleveland-Cliffs Inc. for $75 million. The
non-mining properties included a 225 MW nonregulated electric generating
facility.
REAL ESTATE ACQUISITIONS. In December 2002 our real estate subsidiary
purchased additional land near Palm Coast, Florida. The transaction was
accounted for using the purchase method.
In September 2001 our real estate subsidiary purchased Winter Haven Citi
Centre, a retail shopping center. In December 2001 and January 2002 real estate
subsidiaries purchased additional land in Palm Coast, Florida. These
transactions had a combined purchase price of approximately $31 million and were
accounted for using the purchase method.
- --------------------------------------------------------------------------------
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ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
5 FINANCIAL INSTRUMENTS
SECURITIES INVESTMENTS. During the second half of 2002 we substantially
liquidated our trading securities portfolio and used the proceeds to reduce
short-term debt. Prior to liquidation, the trading securities portfolio
consisted primarily of the common stock of various publicly traded companies and
was included in current assets at fair value. Changes in fair value were
recognized in earnings, and the net unrealized gain included in 2001 income was
$0.9 million ($2.3 million loss in 2000).
Investments includes certain securities held for an indefinite period of time
and accounted for as available-for-sale. Available-for-sale securities are
recorded at fair value with unrealized gains and losses included in accumulated
other comprehensive income, net of tax. Unrealized losses that are other than
temporary are recognized in earnings. Available-for-sale securities consist of
minority interests in the common stock of publicly-traded corporations held in
our Emerging Technology portfolio, and securities in a grantor trust established
to fund certain employee benefits. In 2000, we sold 4.7 million shares of ACE
Limited which we had accounted for as available-for-sale.
AVAILABLE-FOR-SALE SECURITIES
================================================================================
MILLIONS
GROSS
UNREALIZED FAIR
AT DECEMBER 31 COST GAIN (LOSS) VALUE
- --------------------------------------------------------------------------------
2002 $25.4 $0.7 $(5.2) $20.9
2001 $18.1 $10.3 $(1.9) $26.5
2000 $10.8 $14.5 - $25.3
- --------------------------------------------------------------------------------
NET
UNREALIZED
GAIN (LOSS)
GROSS IN OTHER
YEAR ENDED SALES REALIZED COMPREHENSIVE
DECEMBER 31 PROCEEDS GAIN (LOSS) INCOME
- --------------------------------------------------------------------------------
2002 $12.1 $1.0 - $(11.8)
2001 - - - $3.6
2000 $129.9 $49.1 - $(0.5)
================================================================================
As part of our Emerging Technology portfolio, we also have several minority
investments in venture capital funds and privately-held start-up companies.
These investments are accounted for under the cost method and included with
Investments on our consolidated balance sheet. The total carrying value of these
investments was $38.7 million at December 31, 2002 ($40.6 million at December
31, 2001). Our policy is to periodically review these investments for impairment
by assessing such factors as continued commercial viability of products, cash
flow and earnings. Any impairment would reduce the carrying value of the
investment.
FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET RISKS. In October 2001 we entered
into an interest rate swap agreement with a notional amount of $250 million to
hedge $250 million of floating rate debt issued in October 2000. Under the
15-month swap agreement, we made fixed quarterly payments based on a fixed rate
of 3.2% and received payments at a floating rate based on LIBOR (1.8% at
December 31, 2002). The swap was recorded on the balance sheet at fair value and
treated as a cash flow hedge with unrealized gains and losses included in
accumulated other comprehensive income. The swap expired in January 2003 and the
Company did not enter into any new interest rate swap agreements.
Prior to liquidating the trading securities portfolio, we sold common stock
short in strategies designed to reduce market risk. Unrealized gains and losses
on short sales were recognized in earnings.
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 RISKS
================================================================================
MILLIONS
FAIR VALUE
CONTRACT RECEIVABLE
DECEMBER 31 AMOUNT (PAYABLE)
- --------------------------------------------------------------------------------
2002
Interest Rate Swap $250.0 $(0.2)
- --------------------------------------------------------------------------------
2001
Short Stock Sales Outstanding $19.8 $(0.8)
Interest Rate Swap $250.0 $(2.5)
================================================================================
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
2002 $945.0 $991.6
2001 $940.7 $966.9
Quarterly Income Preferred
Securities
2002 $75.0 $75.5
2001 $75.0 $74.7
================================================================================
- --------------------------------------------------------------------------------
PAGE 66
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
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 $10 million at December 31, 2002 ($9 million at
December 31, 2001). Minnesota Power does not obtain collateral to support
utility receivables, but monitors the credit standing of major customers.
Due to the nature of our Automotive Services' business, substantially all
trade and finance receivables are due from automobile dealers and insurance
companies. We have possession of automobiles or automobile titles
collateralizing a significant portion of the trade and finance receivables.
6 INVESTMENT IN 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.
7 JOINTLY OWNED ELECTRIC FACILITY
We own 80% of the 531-MW 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, 2002 was $310 million ($309 million at December
31, 2001). The corresponding accumulated depreciation balance was $170 million
at December 31, 2002 ($163 million at December 31, 2001).
8 REGULATORY MATTERS
We file for periodic rate revisions with the Minnesota Public Utilities
Commission (MPUC), the Federal Energy Regulatory Commission and other state
regulatory authorities. Interim rates in Minnesota are placed into effect,
subject to refund with interest, pending a final decision by the appropriate
commission. In 2002 31% of our consolidated operating revenue (31% in 2001; 41%
in 2000) was under regulatory authority. The MPUC had regulatory authority over
approximately 25% in 2002 (25% in 2001; 33% in 2000) of our consolidated
operating revenue.
ELECTRIC RATES. New federal legislation and FERC regulations have been
proposed that aim to maintain reliability, assure adequate energy supply, and
address wholesale price volatility while encouraging wholesale competition.
Legislation or regulation that initiates a process which may lead to retail
customer choice of their electric service provider currently lacks momentum in
both Minnesota and Wisconsin. Legislative and regulatory activity as well as the
actions of competitors affect the way Minnesota Power strategically plans for
its future. We cannot predict the timing or substance of any future legislation
or regulation.
DEFERRED REGULATORY CHARGES AND CREDITS. 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. Deferred
regulatory charges and credits are included in other assets and other
liabilities on our consolidated balance sheet.
DEFERRED REGULATORY CHARGES AND CREDITS
DECEMBER 31 2002 2001
================================================================================
MILLIONS
Deferred Charges
Income Taxes $ 11.8 $ 12.8
Conservation Improvement Programs 0.1 0.3
Premium on Reacquired Debt 3.9 4.5
Other 4.2 0.4
- --------------------------------------------------------------------------------
20.0 18.0
Deferred Credits
Income Taxes 39.5 63.2
- --------------------------------------------------------------------------------
Net Deferred Regulatory Liabilities $(19.5) $(45.2)
================================================================================
- --------------------------------------------------------------------------------
PAGE 67
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
9 DISCONTINUED OPERATIONS
In September 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. As a result, our management and Board of Directors committed
to a plan to sell our Water Services businesses. Water Services includes water
and wastewater services operated by several wholly owned subsidiaries in
Florida, North Carolina and Georgia. During the first half of 2002 we exited our
nonregulated water subsidiaries, our auto transport business and our retail
store. The financial results for all of these businesses have been accounted for
as discontinued operations. Accordingly, we ceased depreciation of assets
related to these businesses in the fourth quarter of 2001. Depreciation expense
in 2001 was $7.5 million after tax ($8.1 million after tax for 2000).
In September 2002 Florida Water entered into an agreement to sell its
assets to FWSA, a governmental authority that was established by an interlocal
agreement between the cities of Gulf Breeze and Milton, Florida. On December 20,
2002 Florida Water signed an amended asset purchase agreement adjusting the
sales price for the sale of substantially all of its assets to the FWSA. The
sales price was adjusted to $456.5 million from $471 million. This adjustment
was made to reflect primarily higher interest rates on bonds to be issued by the
FWSA to finance the transaction.
Florida Water anticipates receiving approximately $420 million at closing and
an additional $36.5 million three years after closing once certain contingencies
have been satisfied. In addition, Florida Water expects to receive up to $36
million of future customer hookup fees to be paid over the next six years. The
revised purchase price, combined with the additional payments, brings the total
amount expected to be received in the transaction to $492.5 million. Cash
proceeds to ALLETE after taxes and repayment of existing debt are expected to be
approximately $180 million in 2003, and $250 million for the entire transaction.
The gain on the transaction is estimated at $100 million after taxes and related
costs. While the majority of the cash will be received at closing, the gain is
hoped to be recognized in future years as required by accounting rules.
Eleven lawsuits seeking to halt the sale of Florida Water assets to the FWSA
have been filed, primarily by local governments which had hoped to purchase
Florida Water's assets through a competing buyer. Pursuant to notice given on
January 28, 2003, the FPSC held an agenda conference on February 4, 2003 in
which it ordered Florida Water to file, in advance of closing the transaction,
an application requesting approval of the transfer of its assets to the FWSA,
and further ordered Florida Water to refrain from closing the transaction before
FPSC approval. Florida Water is asking a court to determine that the FPSC may
not delay closing of the sale and is required by law to approve this transfer as
a matter of right. Florida Water considers the lawsuits to be without merit and
is vigorously contesting these lawsuits. Litigation challenging this transaction
continues to delay its closing.
We are using an investment banking firm to facilitate the sale of Heater
Utilities, Inc. and Georgia Water Services Corporation and discussions with
prospective buyers are in process. We expect to sell these businesses in 2003.
SUMMARY OF DISCONTINUED OPERATIONS
================================================================================
MILLIONS
INCOME STATEMENT
YEAR ENDED DECEMBER 31 2002 2001 2000
- --------------------------------------------------------------------------------
Operating Revenue $123.9 $149.3 $145.5
Pre-Tax Income
from Operations $36.4 $21.5 $17.8
Income Tax Expense 14.3 8.7 7.5
- --------------------------------------------------------------------------------
22.1 12.8 10.3
- --------------------------------------------------------------------------------
Loss on Disposal (5.8) (6.8) -
Income Tax Benefit (1.9) (2.4) -
- --------------------------------------------------------------------------------
(3.9) (4.4) -
- --------------------------------------------------------------------------------
Income from
Discontinued Operations $18.2 $ 8.4 $10.3
- --------------------------------------------------------------------------------
BALANCE SHEET INFORMATION
DECEMBER 31 2002 2001
- --------------------------------------------------------------------------------
Assets of Discontinued Operations
Cash and Cash Equivalents $ 8.9 $ 14.0
Other Current Assets 18.4 28.2
Property, Plant and Equipment 311.4 280.8
Other Assets 34.5 29.5
- --------------------------------------------------------------------------------
$373.2 $352.5
- --------------------------------------------------------------------------------
Liabilities of Discontinued Operations
Current Liabilities $ 29.4 $ 45.9
Long-Term Debt 125.8 128.7
Other Liabilities 37.1 26.2
- --------------------------------------------------------------------------------
$192.3 $200.8
================================================================================
- --------------------------------------------------------------------------------
PAGE 68
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10 LONG-TERM DEBT
LONG-TERM DEBT
DECEMBER 31 2002 2001
=================================================================================================
MILLIONS
First Mortgage Bonds
Floating Rate Due 2003 $250.0 $250.0
6 1/4% Series Due 2003 25.0 25.0
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 50.0 50.0
7% Series Due 2008 50.0 50.0
6% Pollution Control Series E Due 2022 111.0 111.0
Senior Notes
7.70% Series A Due 2006 90.0 90.0
7.80% Due 2008 125.0 125.0
8.10% Series B Due 2010 35.0 35.0
Variable Demand Revenue Refunding
Bonds Series 1997 A, B, C and D
Due 2007 - 2020 39.0 39.0
Other Long-Term Debt, 2.5 - 9.0%
Due 2003 - 2026 55.0 50.7
- -------------------------------------------------------------------------------------------------
Total Long-Term Debt 945.0 940.7
Less Due Within One Year (283.7) (6.9)
- -------------------------------------------------------------------------------------------------
Net Long-Term Debt $661.3 $933.8
=================================================================================================
The aggregate amount of long-term debt maturing during 2003 is $283.7 million
($15.6 million in 2004; $1.4 million in 2005; $91.9 million in 2006; $168.7
million in 2007; and $383.7 million thereafter). Substantially all of our
electric plant is subject to the lien of the mortgages securing various first
mortgage bonds.
At December 31, 2002 we had long-term bank lines of credit aggregating $39.7
million ($5.0 million at December 31, 2001). Drawn portions on these lines of
credit were $5.5 million in 2002 ($0 million in 2001).
The 6.68% Series Due 2007 and the 7% Series Due 2007 cannot be redeemed prior
to maturity. The 7 1/2% Series Due 2007 are redeemable after August 1, 2005 and
the 7% Series Due 2008 are redeemable after March 1, 2006. The remaining bonds
may be redeemed in whole or in part at our option according to the terms of the
obligations.
11 SHORT-TERM BORROWINGS AND COMPENSATING BALANCES
We have bank lines of credit aggregating $217.0 million ($264.5 million at
December 31, 2001), which make financing available through short-term bank loans
and provide credit support for commercial paper. At December 31, 2002, $210.3
million was available for use ($234 million at December 31, 2001). At December
31, 2002 we had issued commercial paper with a face value of $74.0 million
($238.2 million in 2001), with support provided by bank lines of credit.
Certain lines of credit require a commitment fee of 0.0150%. Interest rates
on commercial paper and borrowings under the lines of credit ranged from 1.75%
to 1.85% at December 31, 2002 (2.75% to 3.10% at December 31, 2001). The
weighted average interest rate on short-term borrowings at December 31, 2002 was
1.79% (2.96% at December 31, 2001). The total amount of compensating balances at
December 31, 2002 and 2001, was immaterial.
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 were redeemed
in April 2000 for an aggregate of $10 million. All 100,000 shares of Serial
Preferred Stock A, $6.70 Series were redeemed in July 2000 for an aggregate of
$10 million. All 113,358 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.
- --------------------------------------------------------------------------------
PAGE 69
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
13 COMMITMENTS, GUARANTEES AND CONTINGENCIES
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-MW coal-fired
generating unit (Unit) near Center, North Dakota. The Unit is adjacent to a
generating unit owned by Minnkota Power, a North Dakota cooperative corporation
whose Class A members are also members of Square Butte. Minnkota Power 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, 2002 Square Butte had total debt outstanding of $281.9 million. Total annual
debt service for Square Butte is expected to be $23.6 million in 2003 through
2007. 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 2002 was
$60.9 million ($63.3 million in 2001 and $58.7 million in 2000). This reflects
Minnesota Power's pro rata share of total Square Butte costs based on the 71%
output entitlement in 2002, 2001 and 2000. Included in this amount was Minnesota
Power's pro rata share of interest expense of $13.7 million in 2002 ($14.2
million in 2001; $14.8 million in 2000). Minnesota Power's payments to Square
Butte are approved as purchased power expense for ratemaking purposes by both
the MPUC and FERC.
LEASING AGREEMENTS. In July 2001 ADESA entered into a lease agreement for the
ADESA Golden Gate facility in Tracy, California, which was completed in the
third quarter of 2002. The term of the lease is through July 2006 with no
renewal options. The cost to the lessor of the facility was approximately $45
million. ADESA has guaranteed up to $38 million of any deficiency in sales
proceeds that the lessor realizes in disposing of the leased property. ADESA
will receive any sales proceeds in excess of cost.
ADESA has guaranteed the payment of principal and interest up to $38 million
on the lessor's indebtedness. Terms of the mortgage notes payable require, among
other things, that ADESA maintain certain minimum financial ratios. It is not
practical to estimate the fair value of the guarantee; however, ADESA does not
anticipate that it will incur losses as a result of this guarantee. We have
guaranteed ADESA's obligation under this lease.
In April 2000 leases for three ADESA auction facilities (Boston, Charlotte
and Knoxville) were refinanced in a $28.4 million lease transaction. The new
lease is treated as an operating lease for financial reporting purposes and
expires in April 2010 with no renewal options. ADESA has guaranteed up to $23
million of any deficiency in sales proceeds that the lessor realizes in
disposing of the leased properties. ADESA is entitled to receive any sales
proceeds in excess of $29.3 million.
ADESA has guaranteed the payment of principal and interest up to $23 million
on the lessor's indebtedness, which consists of $28.4 million in mortgage notes
payable, due April 1, 2020. Terms of the mortgage notes payable require, among
other things, that ADESA maintain certain minimum financial ratios. Interest on
the notes varies and is payable monthly. It is not practical to estimate the
fair value of the guarantee; however, ADESA does not anticipate that it will
incur losses as a result of this guarantee. We have guaranteed ADESA's
obligations under this lease.
We lease other properties and equipment in addition to those listed above
under operating lease agreements with terms expiring through 2010. The aggregate
amount of future minimum lease payments for operating leases during 2003 is
$17.5 million ($13.9 million in 2004; $11.2 million in 2005; $9.4 million in
2006; $9.0 million in 2007; and $59.0 million thereafter). Total rent expense
was $27.5 million in 2002 ($26.9 million in 2001; $21.1 million in 2000).
SPLIT ROCK ENERGY. We provide up to $50.0 million of credit support, in the
form of letters of credit and financial guarantees, to facilitate the power
marketing activities of Split Rock Energy. At December 31, 2002 $10.5 million
was used to support actual obligations ($3.4 million at December 31, 2001). The
credit support generally expires within one year from the date of issuance.
- --------------------------------------------------------------------------------
PAGE 70
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
KENDALL COUNTY POWER PURCHASE AGREEMENT. We have secured 275 MW of
nonregulated generation (non rate-base generation sold at market-based rates to
the wholesale market) through a tolling agreement with NRG Energy that extends
through September 2017. Under the agreement we pay a fixed capacity charge for
the right, but not the obligation, to utilize one 275 MW generating unit at NRG
Energy's Kendall County facility near Chicago, Illinois. The annual fixed
capacity charge is $21.8 million. We are also responsible for arranging the
natural gas fuel supply.
Our strategy is to enter into long-term contracts to sell a significant
portion of the 275 MW from the Kendall County facility; the balance will be sold
in the spot market through short-term agreements. We currently have two 50 MW
long-term forward capacity and energy sales contracts for the Kendall County
generation, with one expiring in April 2012 and the other in September 2017.
Neither the Kendall County agreement nor the related sales contracts are
derivatives under SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities."
EMERGING TECHNOLOGY INVESTMENTS. We have investments in emerging technologies
through the minority ownership of preferred stock, common stock and equity
interests in limited liability companies. The investments are in both
privately-held and publicly-traded entities. We have committed to make
additional investments in certain emerging technology holdings. The total future
commitment was $7.7 million at December 31, 2002 ($11.0 million at December 31,
2001). We expect approximately $1 million of the future commitment to be
invested in 2003, with the balance to be invested at various times through 2007.
ENVIRONMENTAL MATTERS. Some of our businesses are subject to regulation by
various federal, state and local authorities concerning environmental matters.
We do not currently anticipate that potential expenditures for environmental
matters will be material.
14 MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
ALLETE Capital I (Trust) was established as a wholly owned statutory 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 of 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 the 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 at any time.
We have guaranteed, on a subordinated basis, payment of the Trust's
obligations.
- --------------------------------------------------------------------------------
PAGE 71
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
15 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, 2002 no retained earnings were restricted as a result of these
provisions.
SUMMARY OF COMMON STOCK SHARES EQUITY
================================================================================
MILLIONS
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
2001 Public Offering 6.6 150.0
Employee Stock Purchase Plan 0.1 1.4
Invest Direct <F1> 0.8 18.9
Other 1.7 23.1
- --------------------------------------------------------------------------------
Balance at December 31, 2001 83.9 770.3
2002 Employee Stock Purchase Plan 0.1 1.4
Invest Direct <F1> 0.8 19.6
Other 0.8 23.6
- --------------------------------------------------------------------------------
Balance at December 31, 2002 85.6 $814.9
================================================================================
<FN>
<F1> INVEST DIRECT IS ALLETE'S DIRECT STOCK PURCHASE AND DIVIDEND REINVESTMENT
PLAN.
</FN>
COMMON STOCK ISSUANCE. In May and June 2001 we sold 6.6 million shares of our
common stock in a public offering at $23.68 per share. Total net proceeds of
approximately $150 million were used to repay a portion of our short-term
borrowings with the remainder invested in short-term instruments.
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 $0.005 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
================================================================================
2002
Income from
Continuing Operations $119.0 - $119.0
Common Shares 81.1 0.6 81.7
Per Share from
Continuing Operations $1.47 - $1.46
- --------------------------------------------------------------------------------
2001
Income from
Continuing Operations $130.3 - $130.3
Common Shares 75.8 0.7 76.5
Per Share from
Continuing Operations $1.72 - $1.70
- --------------------------------------------------------------------------------
2000
Income from
Continuing Operations $138.3 - $138.3
Less: Dividends on
Preferred Stock 0.9 - 0.9
- --------------------------------------------------------------------------------
$137.4 - $137.4
Common Shares 69.8 0.3 70.1
Per Share from
Continuing Operations $1.97 - $1.96
================================================================================
- --------------------------------------------------------------------------------
PAGE 72
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
16 INCOME TAX EXPENSE
INCOME TAX EXPENSE
YEAR ENDED DECEMBER 31 2002 2001 2000
================================================================================
MILLIONS
Current Tax Expense
Federal $36.7 $52.2 $69.9
Foreign 12.6 7.6 8.0
State 7.2 7.8 6.5
- --------------------------------------------------------------------------------
56.5 67.6 84.4
Deferred Tax Expense (Benefit)
Federal 14.8 6.9 (6.0)
Foreign 0.1 0.2 0.9
State 0.7 (0.1) (2.7)
- --------------------------------------------------------------------------------
15.6 7.0 (7.8)
Change in Valuation Allowance 1.9 1.0 1.8
- --------------------------------------------------------------------------------
Deferred Tax Credits (1.4) (1.4) (1.4)
- --------------------------------------------------------------------------------
Income Taxes on
Continuing Operations 72.6 74.2 77.0
Income Taxes on
Discontinued Operations 12.4 6.3 7.5
- --------------------------------------------------------------------------------
Total Income Tax Expense $85.0 $80.5 $84.5
================================================================================
RECONCILIATION OF TAXES
FROM FEDERAL STATUTORY
RATE TO TOTAL INCOME
TAX EXPENSE
YEAR ENDED DECEMBER 31 2002 2001 2000
================================================================================
MILLIONS
Tax Computed at Federal
Statutory Rate $77.8 $76.7 $81.6
Increase (Decrease) in Tax
State Income Taxes -- Net of
Federal Income Tax Benefit 9.8 8.6 4.4
Foreign Taxes 3.0 1.9 2.1
Other (5.6) (6.7) (3.6)
- --------------------------------------------------------------------------------
Total Income Tax Expense $85.0 $80.5 $84.5
================================================================================
INCOME BEFORE INCOME TAXES
YEAR ENDED DECEMBER 31 2002 2001 2000
================================================================================
MILLIONS
United States $191.4 $197.3 $213.6
Canadian 30.8 21.9 19.5
- --------------------------------------------------------------------------------
Total $222.2 $219.2 $233.1
================================================================================
DEFERRED TAX ASSETS AND LIABILITIES
DECEMBER 31 2002 2001
================================================================================
MILLIONS
Deferred Tax Assets
Employee Benefits and Compensation $45.2 $41.9
Property Related 22.0 30.9
Investment Tax Credits 15.8 16.8
Allowance for Bad Debts 11.5 11.3
State NOL Carryover 8.6 7.2
Other 30.2 18.7
- --------------------------------------------------------------------------------
Gross Deferred Tax Assets 133.3 126.8
Deferred Tax Asset Valuation Allowance (7.8) (6.0)
- --------------------------------------------------------------------------------
Total Deferred Tax Assets 125.5 120.8
- --------------------------------------------------------------------------------
Deferred Tax Liabilities
Property Related 222.8 192.4
Investment Tax Credits 22.4 23.7
Employee Benefits and Compensation 9.0 6.1
Other 11.1 5.6
- --------------------------------------------------------------------------------
Total Deferred Tax Liabilities 265.3 227.8
- --------------------------------------------------------------------------------
Accumulated Deferred Income Taxes $139.8 $107.0
================================================================================
The Deferred Tax Asset Valuation Allowance is for state net operating losses
that the Company believes more likely than not will expire before they are
utilized. These state net operating losses expire between 2003 and 2021.
UNDISTRIBUTED EARNINGS. Undistributed earnings of our foreign subsidiaries
were approximately $28.8 million at December 31, 2002 ($36.3 million at December
31, 2001). Since this amount has been or will be reinvested in property, plant
and working capital, the Company has not recorded the deferred taxes associated
with the remittance of these investments.
- --------------------------------------------------------------------------------
PAGE 73
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
17 OTHER COMPREHENSIVE INCOME
OTHER COMPREHENSIVE INCOME
PRE-TAX TAX EXPENSE NET-OF-TAX
YEAR ENDED DECEMBER 31 AMOUNT (BENEFIT) AMOUNT
============================================================================================================
MILLIONS
2002
Unrealized Gain (Loss) on Securities
Loss During the Year $(11.8) $(4.3) $(7.5)
Less: Gain Included in Net Income 1.0 0.4 0.6
- ------------------------------------------------------------------------------------------------------------
Net Unrealized Loss on Securities (12.8) (4.7) (8.1)
Interest Rate Swap 2.3 1.0 1.3
Foreign Currency Translation Adjustments 2.6 - 2.6
Additional Pension Liability (6.0) (2.5) (3.5)
- ------------------------------------------------------------------------------------------------------------
Other Comprehensive Loss $(13.9) $(6.2) $(7.7)
- ------------------------------------------------------------------------------------------------------------
2001
Unrealized Gain (Loss) on Securities
Gain During the Year $ 3.6 $ 1.1 $ 2.5
Less: Gain Included in Net Income - - -
- ------------------------------------------------------------------------------------------------------------
Net Unrealized Gain on Securities 3.6 1.1 2.5
Interest Rate Swap (2.5) (1.0) (1.5)
Foreign Currency Translation Adjustments (11.3) - (11.3)
- ------------------------------------------------------------------------------------------------------------
Other Comprehensive Loss $(10.2) $ 0.1 $(10.3)
- ------------------------------------------------------------------------------------------------------------
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)
============================================================================================================
ACCUMULATED OTHER COMPREHENSIVE INCOME
DECEMBER 31 2002 2001
============================================================================================================
MILLIONS
Unrealized Gain (Loss) on Securities $ (2.8) $ 5.3
Interest Rate Swap Loss (0.2) (1.5)
Foreign Currency Translation Loss (15.7) (18.3)
Additional Pension Liability (3.5) -
- ------------------------------------------------------------------------------------------------------------
$(22.2) $(14.5)
============================================================================================================
18 PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Certain eligible employees of ALLETE are covered by noncontributory defined
benefit pension plans. At December 31, 2002 approximately 8% 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 $8.0 million in 2002 ($7.1 million in 2001; $5.7 million in
2000). We provide certain health care and life insurance benefits for eligible
retired employees.
The assumed health care cost trend rate declines gradually to an ultimate
rate of 5% by 2008. For postretirement health and life benefits, a 1% increase
in the assumed health care cost trend rate would result in a $13.4 million and a
$1.3 million increase in the benefit obligation and total service and interest
costs, respectively; a 1% decrease would result in a $11.0 million and $1.1
million decrease in the benefit obligation and total service and interest costs,
respectively.
- --------------------------------------------------------------------------------
PAGE 74
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
PENSION
=========================================================================================================
MILLIONS
PLAN STATUS
AT SEPTEMBER 30 2002 2001
- ---------------------------------------------------------------------------------------------------------
Change in Benefit Obligation
Obligation, Beginning of Year $249.2 $228.5
Service Cost 5.3 4.2
Interest Cost 18.7 17.7
Actuarial Loss 30.8 13.6
Benefits Paid (15.2) (14.8)
- ---------------------------------------------------------------------------------------------------------
Obligation, End of Year 288.8 249.2
Change in Plan Assets
Fair Value, Beginning of Year 281.9 309.8
Actual Return on Assets (3.3) (14.7)
Benefits Paid (15.2) (14.8)
Other 2.3 1.6
- ---------------------------------------------------------------------------------------------------------
Fair Value, End of Year 265.7 281.9
Funded Status (23.1) 32.7
Unrecognized Amounts
Net (Gain) Loss 42.2 (19.5)
Prior Service Cost 6.5 5.2
Transition Obligation 0.4 0.7
- ---------------------------------------------------------------------------------------------------------
Net Asset Recognized $ 26.0 $ 19.1
- ---------------------------------------------------------------------------------------------------------
Amounts Recognized in Consolidated
Balance Sheet Consist of:
Prepaid Pension Cost $ 27.8 $ 19.1
Accrued Benefit Liability (11.2) -
Intangible Asset 3.4 -
Accumulated Other
Comprehensive Income 6.0 -
- ---------------------------------------------------------------------------------------------------------
Net Asset Recognized $ 26.0 $ 19.1
- ---------------------------------------------------------------------------------------------------------
BENEFIT EXPENSE (INCOME)
YEAR ENDED DECEMBER 31 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
Service Cost $ 5.3 $ 4.2 $ 4.1
Interest Cost 18.7 17.6 16.5
Expected Return on Assets (30.4) (29.6) (27.5)
Amortized Amounts
Unrecognized Gain (1.4) (2.5) (2.3)
Prior Service Cost 0.6 0.5 0.5
Transition Obligation 0.2 0.2 0.2
- ---------------------------------------------------------------------------------------------------------
Net Pension Income $ (7.0) $ (9.6) $ (8.5)
- ---------------------------------------------------------------------------------------------------------
ACTUARIAL ASSUMPTIONS
AT SEPTEMBER 30 2002 2001
- ---------------------------------------------------------------------------------------------------------
Discount Rate 6.75% 7.75%
Expected Return on Plan Assets 9.5% 10.0%
Rate of Compensation Increase 3.5 - 4.5% 3.5 - 4.5%
- ---------------------------------------------------------------------------------------------------------
The aggregate projected benefit obligation, accumulated benefit obligation and fair value of plan
assets for a pension plan with accumulated benefit obligations in excess of plan assets were as follows:
AT SEPTEMBER 30 2002 2001
- ---------------------------------------------------------------------------------------------------------
Projected Benefit Obligation $114.1 $97.8
Accumulated Benefit Obligation $99.8 $85.7
Fair Value of Plan Assets $88.6 $94.4
=========================================================================================================
HEALTH AND LIFE
=========================================================================================================
MILLIONS
PLAN STATUS
AT SEPTEMBER 30 2002 2001
- ---------------------------------------------------------------------------------------------------------
Change in Benefit Obligation
Obligation, Beginning of Year $ 78.5 $ 67.6
Service Cost 2.9 2.7
Interest Cost 5.9 5.3
Actuarial Loss 15.0 5.8
Participant Contributions 1.1 0.9
Benefits Paid (3.9) (3.8)
- ---------------------------------------------------------------------------------------------------------
Obligation, End of Year 99.5 78.5
Change in Plan Assets
Fair Value, Beginning of Year 38.7 41.8
Actual Return on Assets (1.5) (2.0)
Employer Contribution 5.1 1.8
Participant Contributions 1.1 0.9
Benefits Paid (3.9) (3.8)
- ---------------------------------------------------------------------------------------------------------
Fair Value, End of Year 39.5 38.7
Funded Status (60.0) (39.8)
Unrecognized Amounts
Net (Gain) Loss 15.1 (5.7)
Transition Obligation 25.0 27.4
- ---------------------------------------------------------------------------------------------------------
Accrued Cost $(19.9) $(18.1)
- ---------------------------------------------------------------------------------------------------------
BENEFIT EXPENSE (INCOME)
YEAR ENDED DECEMBER 31 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
Service Cost $ 2.9 $ 2.7 $ 2.7
Interest Cost 5.9 5.3 4.8
Expected Return on Assets (3.9) (3.5) (2.8)
Amortized Amounts
Unrecognized Gain (0.2) (0.9) (0.9)
Transition Obligation 2.4 2.4 2.4
- ---------------------------------------------------------------------------------------------------------
Net Expense $ 7.1 $ 6.0 $ 6.2
- ---------------------------------------------------------------------------------------------------------
ACTUARIAL ASSUMPTIONS
AT SEPTEMBER 30 2002 2001
- ---------------------------------------------------------------------------------------------------------
Discount Rate 6.75% 7.75%
Expected Return on Plan Assets 7.6 - 9.5% 8.0 - 10.0%
Rate of Compensation Increase 3.5 - 4.5% 3.5 - 4.5%
Health Care Cost Trend Rate 10% 10%
=========================================================================================================
- --------------------------------------------------------------------------------
PAGE 75
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
19 EMPLOYEE STOCK AND INCENTIVE PLANS
EMPLOYEE STOCK OWNERSHIP PLAN. We sponsor a leveraged employee stock
ownership plan (ESOP) within the Retirement Savings and Stock Ownership Plan
that covers certain eligible employees. In 1989 the ESOP used the proceeds from
a $16.5 million third-party loan guaranteed by us, to purchase 1.2 million
shares of our common stock on the open market. The remaining principal balance
on the loan was refinanced in 2002. The refinanced loan has a variable interest
rate based on LIBOR and matures on December 31, 2004. 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. The Company makes
annual contributions to the ESOP equal to the ESOP's debt service less available
dividends received by the ESOP. The majority of dividends received by the ESOP
are used to pay debt service, with the balance distributed to certain
participants. The ESOP shares were initially pledged as collateral for its debt.
As the debt is repaid, shares are released from collateral and allocated to
participants, based on the proportion of debt service paid in the year. The
third-party debt of the ESOP is recorded as long-term debt and the shares
pledged as collateral are reported as unearned ESOP shares in the Balance Sheet.
As shares are released from collateral, the Company reports compensation expense
equal to the current market price of the shares, and the shares become
outstanding for earnings-per-share computations. Dividends on allocated ESOP
shares are recorded as a reduction of retained earnings; available dividends on
unallocated ESOP shares are recorded as a reduction of debt and accrued
interest. ESOP compensation expense was $3.9 million in 2002 ($2.6 million in
2001; $2.3 million in 2000).
YEAR ENDED DECEMBER 31 2002 2001 2000
================================================================================
MILLIONS
Shares
Allocated Shares 3.8 3.9 3.9
Unreleased Shares 3.7 4.0 4.2
- --------------------------------------------------------------------------------
Total ESOP Shares 7.5 7.9 8.1
- --------------------------------------------------------------------------------
Fair Value of Unreleased Shares $84.0 $100.3 $104.6
================================================================================
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 9.7 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. At
December 31, 2002 4.3 million and 0.2 million shares were held in reserve for
future issuance under the Executive Plan and Director Plan, respectively.
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 $6 million in 2002 ($9
million in 2001; $5 million in 2000).
AVERAGE
EXERCISE
STOCK OPTION ACTIVITY OPTIONS PRICE
================================================================================
OPTIONS IN MILLIONS
2002
Outstanding, Beginning of Year 2.3 $20.18
Granted 0.8 $25.92
Exercised (0.7) $18.70
Canceled (0.1) $23.77
- --------------------------------------------------------------------------------
Outstanding, End of Year 2.3 $22.48
- --------------------------------------------------------------------------------
Exercisable, End of Year 1.3 $20.23
Fair Value of Options Granted
During the Year $4.55
- --------------------------------------------------------------------------------
2001
Outstanding, Beginning of Year 2.4 $18.52
Granted 0.8 $23.63
Exercised (0.8) $18.39
Canceled (0.1) $21.05
- --------------------------------------------------------------------------------
Outstanding, End of Year 2.3 $20.18
- --------------------------------------------------------------------------------
Exercisable, End of Year 1.2 $19.55
Fair Value of Options Granted
During the Year $3.89
- --------------------------------------------------------------------------------
2000
Outstanding, Beginning of Year 1.6 $19.77
Granted 1.0 $16.33
Exercised (0.1) $14.91
Canceled (0.1) $18.85
- --------------------------------------------------------------------------------
Outstanding, End of Year 2.4 $18.52
- --------------------------------------------------------------------------------
Exercisable, End of Year 1.1 $19.42
Fair Value of Options Granted
During the Year $1.81
================================================================================
- --------------------------------------------------------------------------------
PAGE 76
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
At December 31, 2002 options outstanding consisted of 0.4 million with an
exercise price of $13.69 to $16.25, and 1.9 million with an exercise price of
$21.63 to $25.68. The options with an exercise price of $13.69 to $16.25 have an
average remaining contractual life of 6.3 years with 0.4 million exercisable on
December 31, 2002 at an average price of $15.73. The options with an exercise
price of $21.63 to $25.68 have an average remaining contractual life of 7.7
years with 0.9 million exercisable on December 31, 2002 at an average price of
$22.45.
A total of 0.3 million performance share grants were awarded in 2002 for the
performance period ending December 31, 2003. The ultimate issuance is contingent
upon the attainment of certain future performance goals of ALLETE during the
performance period. The grant date fair value of the performance share awards
was $7.8 million.
A total of 0.6 million performance share grants were awarded in 2000 and 2001
for the performance period ended December 31, 2001. The grant date fair value of
the share awards was $9.9 million. At December 31, 2002 50% of the shares had
been issued, with the balance to be issued in early 2003.
In January 2003 we granted stock options to purchase approximately 0.7
million shares of common stock (exercise price of $20.51 per share).
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, 2002, 1.3 million shares had been
issued under the plan and 38,143 shares were held in reserve for future
issuance.
20 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 the first
quarter of 2002 included charges of $1.6 million, or $0.02 per share and the
second quarter of 2002 included $2.3 million, or $0.03 per share, of charges
related to exiting our auto transport business and retail store. Financial
results for the fourth quarter of 2002 included a $5.5 million, or $0.07 per
share, charge related to the indefinite delay of a generation project in
Superior, Wisconsin. Financial results for the fourth quarter of 2001 included a
$4.4 million, or $0.06 per share, charge to exit the auto transport business.
QUARTER ENDED MAR. 31 JUN. 30 SEPT. 30 DEC. 31
=====================================================================================================
MILLIONS EXCEPT
EARNINGS PER SHARE
2002
Operating Revenue $373.0 $377.6 $390.0 $366.3
Operating Income from
Continuing Operations $56.4 $57.7 $62.1 $21.4
Net Income
Continuing Operations $33.4 $34.0 $38.3 $13.3
Discontinued Operations 1.8 4.8 6.8 4.8
- -----------------------------------------------------------------------------------------------------
$35.2 $38.8 $45.1 $18.1
Earnings Available for
Common Stock $35.2 $38.8 $45.1 $18.1
Earnings Per Share of
Common Stock
Basic
Continuing Operations $0.42 $0.42 $0.47 $0.16
Discontinued Operations 0.02 0.06 0.08 0.06
- -----------------------------------------------------------------------------------------------------
$0.44 $0.48 $0.55 $0.22
Diluted
Continuing Operations $0.42 $0.41 $0.47 $0.16
Discontinued Operations 0.02 0.06 0.08 0.06
- -----------------------------------------------------------------------------------------------------
$0.44 $0.47 $0.55 $0.22
2001
Operating Revenue $376.9 $405.1 $383.1 $360.5
Operating Income from
Continuing Operations $52.4 $67.3 $53.3 $37.5
Net Income
Continuing Operations $30.7 $39.5 $35.3 $24.8
Discontinued Operations 2.2 3.0 2.5 0.7
- -----------------------------------------------------------------------------------------------------
$32.9 $42.5 $37.8 $25.5
Earnings Available for
Common Stock $32.9 $42.5 $37.8 $25.5
Earnings Per Share of
Common Stock
Basic
Continuing Operations $0.43 $0.54 $0.45 $0.30
Discontinued Operations 0.03 0.04 0.03 0.01
- -----------------------------------------------------------------------------------------------------
$0.46 $0.58 $0.48 $0.31
Diluted
Continuing Operations $0.43 $0.53 $0.44 $0.30
Discontinued Operations 0.03 0.04 0.03 0.01
- -----------------------------------------------------------------------------------------------------
$0.46 $0.57 $0.47 $0.31
=====================================================================================================
- --------------------------------------------------------------------------------
PAGE 77
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
[PRICEWATERHOUSECOOPERS LLP LOGO OMITTED]
To the Board of Directors
of ALLETE, Inc.
Our audits of the consolidated financial statements referred to in our
report dated January 20, 2003 appearing on page 56 of this Form 10-K also
included an audit of the Financial Statement Schedule listed in Item 15(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.
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 20, 2003
- --------------------------------------------------------------------------------
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
2002 Trade Accounts Receivable $6.1 $5.7 - $3.0 $8.8
Finance Receivables 23.2 17.6 - 19.1 21.7
2001 Trade Accounts Receivable 5.1 4.4 - 3.4 6.1
Finance Receivables 22.4 3.8 - 3.0 23.2
2000 Trade Accounts Receivable 7.2 2.4 - 4.5 5.1
Finance Receivables 18.6 4.4 - 0.6 22.4
Deferred Asset Valuation Allowance
2002 Deferred Tax Assets 6.0 1.8 - - 7.8
2001 Deferred Tax Assets 5.0 1.0 - - 6.0
2000 Deferred Tax Assets 3.2 1.8 - - 5.0
==============================================================================================================================
<FN>
<F1> RESERVE FOR UNCOLLECTIBLE ACCOUNTS INCLUDES BAD DEBTS WRITTEN OFF.
</FN>
- --------------------------------------------------------------------------------
PAGE 78
ALLETE FORM 10-K 2002
- --------------------------------------------------------------------------------
EXHIBIT INDEX
EXHIBIT
NUMBER
- --------------------------------------------------------------------------------
10(k) - Trust Indenture (without Exhibits) between Development Authority
of Fulton County and SunTrust Bank, as Trustee, dated as of
December 1, 2002.
10(l) - Bond Purchase Agreement (without Exhibits), dated December 1,
2002, for the Development Authority of Fulton County Taxable
Economic Development Revenue Bonds (ADESA Atlanta, LLC Project)
Series 2002.
10(m) - Lease Agreement (without Exhibits) between Development Authority
of Fulton County and ADESA Atlanta, LLC, dated as of December 1,
2002.
10(t) - Second Amended and Restated Committed Facility Letter (without
Exhibits), dated December 24, 2002, to ALLETE from LaSalle Bank
National Association, as Agent.
+10(u)2 - Amendments through January 2003 to the Minnesota Power (now
ALLETE) Executive Annual Incentive Plan.
+10(z)2 - Amendments through January 2003 to the Minnesota Power (now
ALLETE) Executive Long-Term Incentive Compensation Plan.
+10(ac) - Minnesota Power (now ALLETE) Director Compensation Deferral Plan
Amended and Restated, effective January 1, 1990.
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.
99(a) - Certification of Annual Report dated February 14, 2003, signed
by David G. Gartzke.
99(b) - Certification of Annual Report dated February 14, 2003, signed
by James K. Vizanko.