Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1996
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 1-3548
Minnesota Power & Light Company
A Minnesota Corporation
IRS Employer Identification No. 41-0418150
30 West Superior Street
Duluth, Minnesota 55802
Telephone - (218) 722-2641
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Common Stock, no par value,
31,935,547 shares outstanding
as of July 31, 1996
Minnesota Power & Light Company
Index
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet -
June 30, 1996 and December 31, 1995 1
Consolidated Statement of Income -
Quarter and Six Months Ended June 30, 1996
and 1995 2
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 1996 and 1995 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security
Holders 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Definitions
The following abbreviations or acronyms are used in the text.
Abbreviation
or Acronym Term
- ----------------- --------------------------------------------------------
1995 Form 10-K Minnesota Power's Annual Report on Form 10-K for the
Year Ended December 31, 1995
ADESA ADESA Corporation
Capital Re Capital Re Corporation
Company Minnesota Power & Light Company and its Subsidiaries
CPI Consolidated Papers, Inc.
DRIP Dividend Reinvestment and Stock Purchase Plan
ESOP Employee Stock Ownership Plan
FERC Federal Energy Regulatory Commission
FPSC Florida Public Service Commission
Lehigh Lehigh Acquisition Corporation
Minnesota Power Minnesota Power & Light Company and its Subsidiaries
MPUC Minnesota Public Utilities Commission
MW Megawatt(s)
OOU Orange Osceola Utilities
QUIPS Quarterly Income Preferred Securities
Seabrook Heater of Seabrook, Inc.
Square Butte Square Butte Electric Cooperative
SSU Southern States Utilities, Inc.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Minnesota Power
Consolidated Balance Sheet
In Thousands
June 30, December 31,
1996 1995
Unaudited Audited
- -------------------------------------------------------------------------------------------------------------------
Assets
Plant and Other Assets
Electric operations $ 799,091 $ 800,477
Water operations 319,331 323,182
Automobile auctions 140,257 123,632
Investments 227,056 201,360
----------- -----------
Total plant and other assets 1,485,735 1,448,651
----------- -----------
Current Assets
Cash and cash equivalents 63,432 31,577
Trading securities 76,319 40,007
Trade accounts receivable (less reserve of $4,088 and $3,325) 171,700 128,072
Notes and other accounts receivable 22,309 12,220
Fuel, material and supplies 25,911 26,383
Prepayments and other 16,910 13,706
----------- -----------
Total current assets 376,581 251,965
----------- -----------
Deferred Charges
Regulatory 82,178 88,631
Other 26,703 25,037
----------- -----------
Total deferred charges 108,881 113,668
----------- -----------
Intangible Assets
Goodwill 124,122 120,245
Other 12,712 13,096
----------- -----------
Total intangible assets 136,834 133,341
----------- -----------
Total Assets $ 2,108,031 $ 1,947,625
- -------------------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
Capitalization
Common stock without par value, 65,000,000 shares authorized
31,917,569 and 31,467,650 shares outstanding $ 384,286 $ 377,684
Unearned ESOP shares (71,047) (72,882)
Net unrealized gain on securities investments 1,165 3,206
Cumulative translation adjustment (401) (177)
Retained earnings 277,744 276,241
----------- -----------
Total common stock equity 591,747 584,072
Cumulative preferred stock 11,492 28,547
Redeemable serial preferred stock 20,000 20,000
Company obligated mandatorily redeemable preferred securities of
MP&L Capital I 75,000 -
Long-term debt 653,039 639,548
----------- -----------
Total capitalization 1,351,278 1,272,167
----------- -----------
Current Liabilities
Accounts payable 92,366 68,083
Accrued taxes 39,386 40,999
Accrued interest and dividends 16,136 14,471
Notes payable 89,330 96,218
Long-term debt due within one year 70,060 9,743
Other 27,155 27,292
----------- -----------
Total current liabilities 334,433 256,806
----------- -----------
Deferred Credits
Accumulated deferred income taxes 164,994 164,737
Contributions in aid of construction 97,468 98,167
Regulatory 56,491 57,950
Other 103,367 97,798
----------- -----------
Total deferred credits 422,320 418,652
----------- -----------
Total Capitalization and Liabilities $ 2,108,031 $ 1,947,625
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
-1-
Minnesota Power
Consolidated Statement of Income
In Thousands Except Per Share Amounts - Unaudited
Quarter Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Operating Revenue and Income
Electric operations $ 129,219 $ 119,694 $ 260,718 $ 240,448
Water operations 23,050 17,814 42,277 33,416
Automobile auctions 45,215 - 84,908 -
Investments 11,019 9,828 23,275 20,160
--------- ---------- --------- ---------
Total operating revenue and income 208,503 147,336 411,178 294,024
--------- ---------- --------- ---------
Operating Expenses
Fuel and purchased power 48,291 44,113 91,934 84,422
Operations 87,034 60,975 173,063 123,117
Administrative and general 40,559 16,790 74,350 35,252
Interest expense 14,357 11,388 28,517 22,489
--------- ---------- --------- ---------
Total operating expenses 190,241 133,266 367,864 265,280
--------- ---------- --------- ---------
Income (Loss) from Equity Investments 2,832 2,361 6,609 (3,909)
--------- ---------- --------- ---------
Operating Income from Continuing Operations 21,094 16,431 49,923 24,835
Income Tax Expense (Benefit) 4,753 5,508 15,077 (9,893)
--------- ---------- --------- ---------
Income from Continuing Operations 16,341 10,923 34,846 34,728
Income from Discontinued Operations - 1,190 - 2,842
--------- ---------- --------- ---------
Net Income 16,341 12,113 34,846 37,570
Dividends on Preferred Stock 634 800 1,434 1,600
Distributions on Company Obligated Mandatorily
Redeemable Preferred Securities of MP&L Capital I 1,509 - 1,711 -
--------- ---------- --------- ---------
Earnings Available for Common Stock $ 14,198 $ 11,313 $ 31,701 $ 35,970
========= ========== ========= =========
Average Shares of Common Stock 29,053 28,446 28,919 28,409
Earnings Per Share of Common Stock
Continuing operations $ .49 $ .35 $ 1.10 $1.17
Discontinued operations - .05 - .10
----- ----- ------ -----
Total $ .49 $ .40 $ 1.10 $1.27
===== ===== ====== =====
Dividends Per Share of Common Stock $ .51 $ .51 $ 1.02 $1.02
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
-2-
Minnesota Power
Consolidated Statement of Cash Flows
In Thousands - Unaudited
Six Months Ended
June 30,
1996 1995
- -------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 34,846 $ 37,570
Depreciation and amortization 32,511 27,575
Deferred income taxes (1,515) (29,101)
Deferred investment tax credits (839) (1,024)
Pre-tax gain on sale of plant (1,073) -
Pre-tax loss on disposal of discontinued operations - 1,793
Changes in operating assets and liabilities
excluding the effects of discontinued operations
Trading securities (36,312) 18,013
Notes and accounts receivable (53,488) 8,646
Fuel, material and supplies 531 (2,090)
Accounts payable 24,201 (1,325)
Other current assets and liabilities (4,970) 8,221
Other - net 12,429 (2,514)
---------- ---------
Cash from operating activities 6,321 65,764
---------- ---------
Investing Activities
Proceeds from sale of investments in securities 14,640 94,162
Proceeds from sale of plant 5,311 -
Proceeds from sale of discontinued operations - 106,115
Funds held by trustee for ADESA acquisition - (161,810)
Additions to investments (51,921) (65,996)
Additions to plant (45,427) (40,906)
Changes to other assets - net 6,443 2,777
---------- ---------
Cash for investing activities (70,954) (65,658)
---------- ---------
Financing Activities
Issuance of long-term debt 190,134 9,000
Issuance of Company obligated mandatorily
redeemable preferred securities of MP&L Capital I - net 72,270 -
Issuance of common stock 9,015 1,467
Changes in notes payable (9,588) 124,372
Reductions of long-term debt (116,455) (2,217)
Redemption of preferred stock (17,568) -
Dividends on preferred and common stock (31,320) (30,846)
---------- ---------
Cash from financing activities 96,488 101,776
---------- ---------
Change in Cash and Cash Equivalents 31,855 101,882
Cash and Cash Equivalents at Beginning of Period 31,577 27,001
---------- ---------
Cash and Cash Equivalents at End of Period $ 63,432 $ 128,883
========== =========
Supplemental Cash Flow Information
Cash paid during the period for
Interest (net of capitalized) $ 24,930 $ 22,481
Income taxes $ 17,182 $ 11,893
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
-3-
Notes to Consolidated Financial Statements
The accompanying unaudited consolidated financial statements and notes should be
read in conjunction with the Company's 1995 Form 10-K. In the opinion of the
Company, all adjustments necessary for a fair statement of the results for the
interim periods have been included. The results of operations for an interim
period may not give a true indication of results for the year. The income
statement information for prior periods has been reclassified to reflect the way
in which the Company currently reports information regarding its businesses.
Financial statement information may not be comparable between periods due to the
purchase of ADESA on July 1, 1995.
Note 1. Business Segments
In Thousands
Investments
--------------------- Corporate
Electric Water Automobile Portfolio & Real Charges
Consolidated Operations Operations Auctions<F1> Reinsurance Estate & Other
------------ ---------- ---------- ------------ ----------- -------- ---------
Quarter Ended June 30, 1996
- ---------------------------
Operating revenue and income $208,503 $129,219 $ 23,050 $ 45,215 $4,736 $ 6,605 $ (322)
Operation and other expense 159,589 102,218 13,926 37,026 731 3,845 1,843
Depreciation and amortization
expense 16,295 10,512 3,070 2,705 - 8 -
Interest expense 14,357 5,537 3,057 2,017 - 486 3,260
Income from equity investments 2,832 - - - 2,832 - -
-------- -------- -------- -------- ------ -------- -------
Operating income (loss) 21,094 10,952 2,997 3,467 6,837 2,266 (5,425)
Income tax expense (benefit) 4,753 3,593 1,010 2,002 928 (782) (1,998)
-------- -------- -------- -------- ------ -------- -------
Net income $ 16,341 $ 7,359 $ 1,987 $ 1,465 $5,909 $ 3,048 $(3,427)
======== ======== ======== ======== ====== ======== =======
Quarter Ended June 30, 1995
- ---------------------------
Operating revenue and income $147,336 $119,694 $ 17,814 - $6,223 $ 4,438 $ (833)
Operation and other expense 109,152 91,128 11,692 - 1,322 3,492 1,518
Depreciation and amortization
expense 12,726 10,115 2,551 - - 60 -
Interest expense 11,388 5,573 2,534 - 1 - 3,280
Income from equity investments 2,361 - - - 2,361 - -
-------- -------- -------- ------ -------- -------
Operating income (loss)
from continuing operations 16,431 12,878 1,037 - 7,261 886 (5,631)
Income tax expense (benefit) 5,508 5,014 348 - 488 592 (934)
-------- -------- -------- ------ -------- -------
Income (loss) from
continuing operations 10,923 $ 7,864 $ 689 - $6,773 $ 294 $(4,697)
======== ======== ====== ======== =======
Income from
discontinued operations 1,190
--------
Net income $ 12,113
========
- ------------------------------
<FN>
<F1> Purchased July 1, 1995.
</FN>
-4-
Note 1. Business Segments (Continued)
In Thousands
Investments
---------------------- Corporate
Electric Water Automobile Portfolio & Real Charges
Consolidated Operations Operations Auctions <F1> Reinsurance Estate & Other
------------ ---------- ---------- ------------ ----------- -------- ---------
Six Months Ended June 30, 1996
- ------------------------------
Operating revenue and income $ 411,178 $ 260,718 $ 42,277 $ 84,908 $ 8,605 $ 15,281 $ (611)
Operation and other expense 306,836 197,523 25,444 71,228 1,254 7,058 4,329
Depreciation and amortization
expense 32,511 21,011 6,207 5,255 - 38 -
Interest expense 28,517 11,212 6,344 3,308 1 488 7,164
Income from equity investments 6,609 - - - 6,609 - -
---------- --------- --------- -------- --------- -------- --------
Operating income (loss) 49,923 30,972 4,282 5,117 13,959 7,697 (12,104)
Income tax expense (benefit) 15,077 11,367 1,459 2,664 2,897 1,581 (4,891)
---------- --------- --------- -------- --------- -------- --------
Net income $ 34,846 $ 19,605 $ 2,823 $ 2,453 $ 11,062 $ 6,116 $ (7,213)
========== ========= ========= ======== ========= ======== ========
Total assets $2,108,031 $ 983,971 $ 341,792 $453,561 $ 244,526 $ 82,516 $ 1,665
Accumulated depreciation $ 646,609 $ 527,425 $ 115,162 $ 4,022 - - -
Accumulated amortization $ 5,819 - - $ 4,949 - $ 870 -
Construction work in progress $ 55,559 $ 13,769 $ 17,816 $ 23,974 - - -
Six Months Ended June 30, 1995
- ------------------------------
Operating revenue and income $ 294,024 $ 240,448 $ 33,416 - $ 12,962 $ 8,703 $ (1,505)
Operation and other expense 217,464 178,165 22,749 - 2,257 10,626<F2> 3,667
Depreciation and amortization
expense 25,327 20,136 5,071 - - 120 -
Interest expense 22,489 11,070 4,986 - 4 2 6,427
Income (loss) from
equity investments (3,909) - - - 4,619 - (8,528)<F3>
---------- --------- --------- --------- -------- --------
Operating income (loss)
from continuing operations 24,835 31,077 610 - 15,320 (2,045) (20,127)
Income tax expense (benefit) (9,893) 12,833 (47) - 1,950 (17,423)<F4> (7,206)
---------- --------- --------- --------- -------- --------
Income (loss) from
continuing operations 34,728 $ 18,244 $ 657 - $ 13,370 $ 15,378 $(12,921)
========= ========= ========= ======== ========
Income from
discontinued operations 2,842
----------
Net income $ 37,570
==========
Total assets $1,872,156 $ 993,127 $ 325,348 - $ 518,702 $ 34,181 $ 798
Accumulated depreciation $ 604,884 $ 510,170 $ 94,714 - - - -
Accumulated amortization $ 580 - - - - $ 580 -
Construction work in progress $ 22,672 $ 9,943 $ 12,729 - - - -
- -------------------------------
<FN>
<F1> Purchased July 1, 1995.
<F2> Includes $3.7 million of minority interest relating to the recognition of tax benefits. (See Note 3.)
<F3> Includes an $8.5 million pre-tax provision for exiting the equipment manufacturing business.
<F4> Includes $18.4 million of tax benefits. (See Note 3.)
</FN>
-5-
Note 2. Regulatory Matters
FPSC Refund Order in Connection with 1993 Rate Case. On June 11, 1996 the FPSC
voted 3-2 to require SSU to refund about $10 million, including interest, to
certain customers who had paid more to SSU under a uniform rate structure than
they would have paid under a stand-alone rate structure during the period
September 1993 to January 1996. In so ruling, the majority of the FPSC
determined that a February 1996 decision of the Florida Supreme Court in GTE
Florida v. FPSC did not render a refund requirement unlawful independent of an
offsetting surcharge. SSU believes that the GTE Florida decision substantiates
SSU's claim that it would be unlawful for the FPSC to order a refund to certain
customers who paid more under uniform rates without also permitting SSU to
recover the refund amount from remaining customers who paid less. SSU has
recorded no provision for refund. SSU intends to appeal the FPSC's order to the
First District Court of Appeal.
SSU's 1995 Rate Case. On July 31, 1996 the FPSC voted to allow SSU approximately
61 percent of the $18.1 million rate increase requested in June 1995. The FPSC
is expected to issue its final order on SSU's request on September 4, 1996.
Note 3. Income Tax Expense
Quarter Ended Six Months Ended
June 30, June 30,
Schedule of Income Tax Expense (Benefit) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------
In Thousands
Charged to continuing operations
Current tax
Federal $ 4,030 $ 1,040 $ 12,888 $ 3,866
Foreign 551 - 450 -
State 1,162 493 4,093 1,620
--------- --------- -------- ---------
5,743 1,533 17,431 5,486
--------- --------- -------- ---------
Deferred tax
Federal 1,143 3,598 1,131 3,524
State 84 781 (646) 521
--------- --------- -------- ---------
1,227 4,379 485 4,045
--------- --------- -------- ---------
Change in valuation allowance (2,000) - (2,000) (18,400)
--------- --------- -------- ---------
Deferred tax credits (217) (404) (839) (1,024)
--------- --------- -------- ---------
Income tax - continuing operations 4,753 5,508 15,077 (9,893)
--------- --------- -------- ---------
Charged to discontinued operations
Current tax
Federal - 13,502 - 13,396
State - 4,209 - 4,192
--------- --------- -------- ---------
- 17,711 - 17,588
--------- --------- -------- ---------
Deferred tax
Federal - (12,870) - (11,851)
State - (3,195) - (2,895)
--------- --------- -------- ---------
- (16,065) - (14,746)
--------- --------- -------- ---------
Income tax - discontinued operations - 1,646 - 2,842
--------- --------- -------- ---------
Total income tax expense (benefit) $ 4,753 $ 7,154 $ 15,077 $ (7,051)
========= ========= ======== =========
In March 1995 based on the results of a project which analyzed the economic
feasibility of realizing future tax benefits available to the Company, the board
of directors of Lehigh directed the management of Lehigh to dispose of Lehigh's
assets in a manner that would maximize utilization of tax benefits. Based on
this directive, Lehigh recognized $18.4 million of income in the first quarter
of 1995 by reducing the valuation reserve which offsets deferred tax assets. In
May 1996 an additional $2 million of income was recognized based on a management
review of the appropriateness of the valuation reserve. Additional unrealized
net deferred tax assets of $6.2 million resulting from the original purchase of
Lehigh are included on the Company's balance sheet. These assets are fully
offset by the deferred tax asset valuation allowance because under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," it is
currently "more likely than not" that the value of these assets will not be
realized. Management reviews the appropriateness of the valuation allowance
quarterly.
-6-
Note 4. Square Butte Purchased Power Contract
The Company has a contract to purchase power and energy from Square Butte. Under
the terms of the contract which extends through 2007, the Company is purchasing
71 percent of the output from a generating plant which is capable of generating
up to 470 MW. Reductions to about 49 percent of the output are provided for in
the contract and, at the option of Square Butte, could begin after a five-year
advance notice to the Company.
The cost of the power and energy is a proportionate share of Square Butte's
fixed obligations and variable operating costs, based on the percentage of the
total output purchased by the Company. The annual fixed obligations of the
Company to Square Butte are $19.4 million from 1996 through 2000. The variable
operating costs are not incurred unless production takes place. The Company is
responsible for paying all costs and expenses of Square Butte if not paid by
Square Butte when due. These obligations and responsibilities of the Company are
absolute and unconditional whether or not any power is actually delivered to the
Company.
Note 5. Preferred Stock
On May 13, 1996 Minnesota Power redeemed all of the 170,000 outstanding shares
of its Serial Preferred Stock, $7.36 Series. The redemption price was $103.34
plus $.86 accrued dividends. Proceeds from the QUIPS financing in March 1996
were used to redeem the shares.
Note 6. Mandatorily Redeemable Preferred Securities of MP&L Capital I
MP&L Capital I (Trust) was established as a wholly owned business trust of the
Company for the purpose of issuing common and preferred securities (Trust
Securities). On March 20, 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, indirectly resulting in
net proceeds to the Company of $72.6 million. Holders of the QUIPS are entitled
to receive quarterly distributions at an annual rate of 8.05 percent of the
liquidation preference value of $25 per security. The Company is the owner of
all the common trust securities, which constitute approximately 3 percent of the
aggregate liquidation amount of all the Trust Securities. The sole asset of the
Trust is $77.5 million of 8.05% Junior Subordinated Debentures, Series A, Due
2015 (Subordinated Debentures) issued by the Company, interest on which is
deductible by the Company 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. The Company has the option at any
time on or after March 20, 2001, to redeem the Subordinated Debentures, in whole
or in part. The Company also has the option, upon the occurrence of certain
events, (i) to redeem at any time the Subordinated Debentures, in whole but not
in part, which would result in the redemption of all the Trust Securities, or
(ii) to terminate the Trust and cause the pro rata distribution of the
Subordinated Debentures to the holders of the Trust Securities.
In addition to the Company's obligations under the Subordinated Debentures, the
Company has guaranteed, on a subordinated basis, payment of distributions on the
Trust Securities, to the extent the Trust has funds available to pay such
distributions, and has agreed to pay all of the expenses of the Trust (such
additional obligations collectively, the Back-up Undertakings). Considered
together, the Back-up Undertakings constitute a full and unconditional guarantee
by the Company of the Trust's obligations under the QUIPS.
Note 7. Long-Term Debt
On May 30, 1996 ADESA issued $90 million of 7.70% Senior Notes, Series A, Due
2006 in a private placement offering. Proceeds were used by ADESA to repay
existing indebtedness, including borrowings under ADESA's revolving bank credit
agreement, floating rate option notes and certain borrowings from Minnesota
Power. In June 1996 Lehigh obtained a $20 million adjustable rate revolving line
of credit due in 2003. The proceeds were used to partially finance the
acquisition of real estate near Palm Coast, Florida.
-7-
Note 8. Common Stock
Shareholder Rights Plan. On July 24, 1996 the Board of Directors of the Company
adopted a rights plan (Rights Plan) pursuant to which it declared a dividend
distribution of one preferred share purchase right (Right) for each outstanding
share of Common Stock of the Company (Common Stock) to shareholders of record at
the close of business on July 24, 1996 (the Record Date) and authorized the
issuance of one Right with respect to each share of Common Stock that becomes
outstanding between the Record Date and July 23, 2006, or such earlier time as
the Rights are redeemed.
Each Right will be exercisable to purchase one one-hundredth of a share of
Junior Serial Preferred Stock A, without par value, at an exercise price of $90,
subject to adjustment, following a distribution date which shall be the earlier
to occur of (i) 10 days following a public announcement that a person or group
(Acquiring Person) has acquired, or obtained the right to acquire, beneficial
ownership of 15 percent or more of the outstanding shares of Common Stock (Stock
Acquisition Date) or (ii) 15 business days (or such later date as may be
determined by the Board of Directors prior to the time that any person becomes
an Acquiring Person) following the commencement of, or a public announcement of
an intention to make, a tender or exchange offer if, upon consummation thereof,
such person would meet the 15 percent threshold.
Subject to certain exempt transactions, in the event that the 15 percent
threshold is met, each holder of a Right (other than the Acquiring Person) will
thereafter have the right to receive, upon exercise at the then current exercise
price of the Right, Common Stock (or, in certain circumstances, cash, property
or other securities of the Company) having a value equal to two times the
exercise price of the Right. If, at any time following the Stock Acquisition
Date, the Company is acquired in a merger or other business combination
transaction or 50 percent or more of the Company's assets or earning power are
sold, each Right will entitle the holder (other than the Acquiring Person) to
receive, upon exercise at the then current exercise price of the Right, common
stock of the acquiring or surviving company having a value equal to two times
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 Common Stock.
The Rights are nonvoting and expire on July 23, 2006, unless redeemed by the
Company at a price of $.01 per Right at any time prior to the time a person
becomes an Acquiring Person. The Board of Directors has authorized the
reservation of one million shares of Junior Serial Preferred Stock A for
issuance under the Rights Plan in the event of excercise of the Rights.
Stock Option and Award Plans. In May 1996 Company shareholders approved an
Executive Long-Term Incentive Compensation Plan (the Executive Plan) and a
Director Long-Term Stock Incentive Plan (the Director Plan), effective January
1, 1996.
The Executive Plan allows for the grant of up to 2.1 million shares of Common
Stock to key employees of the Company. Such grants may be in the form of stock
options and other awards, including stock appreciation rights, restrictive
stock, performance units and performance shares. In January 1996 the Company
granted non-qualified stock options to purchase 132,542 shares of Common
Stock and granted 176,616 performance shares. Additionally, 24,000 restrictive
shares of Common Stock were granted, with the restriction expiring over a three-
year period. Pursuant to the Director Plan each nonemployee director receives an
annual grant of 725 stock options and a biennial grant of performance shares
equal to $10,000 in value of Common Stock on the date of grant. The Director
Plan provides for the grant of up to 150,000 shares of Common Stock.
The exercise price for stock options is equal to the market value of the Common
Stock on the date of a grant. Stock options may be excercised 50 percent on the
first anniversary date of the grant and the remaining 50 percent on the second
anniversary and expire on the tenth anniversary. Grants of performance shares
are earned over multi-year time periods upon the achievement of performance
objectives.
The Company has elected to recognize compensation cost for its stock-based
compensation plans in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." Generally, no compensation
expense is recognized for stock options with exercise prices equal to the market
value of the underlying shares of stock at the date of the grant. Compensation
cost is recognized over the vesting periods for performance share awards based
on the market value of the underlying shares of stock.
-8-
Note 9. Discontinued Operations
On June 30, 1995 Minnesota Power sold its interest in the paper and pulp
business. The financial results of the paper and pulp business, including the
loss on disposition, have been accounted for as discontinued operations.
Quarter Ended Six Months Ended
June 30, June 30,
Summary of Discontinued Operations 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------
In Thousands
Operating revenue and income - $ 22,285 - $ 44,324
========= ========
Equity in earnings - $ 5,675 - $ 7,496
========= ========
Income from operations - $ 4,629 - $ 7,477
Income tax expense - 1,921 - 3,117
--------- --------
- 2,708 - 4,360
--------- --------
Loss on disposal - (1,793) - (1,793)
Income tax benefit - 275 - 275
--------- --------
- (1,518) - (1,518)
--------- --------
Income from discontinued operations - $ 1,190 - $ 2,842
========= ========
The Company is still committed to a maximum guaranty of $95 million to ensure a
portion of a $33.4 million annual lease obligation for paper mill equipment
under an operating lease extending to 2012. The purchaser of the Company's paper
and pulp business, CPI, has agreed to indemnify the Company for any payments the
Company may make as a result of the Company's obligation relating to this
operating lease.
-9-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Minnesota Power has operations in four business segments: (1) electric
operations, which include electric and gas services, and coal mining; (2) water
operations, which include water and wastewater services; (3) automobile
auctions, which also include a finance company and an auto transport company;
and (4) investments, which include real estate operations in Florida, a 21
percent equity investment in a financial guaranty reinsurance company, and a
securities portfolio.
Earnings per share of common stock for the quarter ended June 30, 1996 were 49
cents compared to 40 cents for the quarter ended June 30, 1995. All four
business segments were profitable for the second quarter ended June 30, 1996.
Although earnings from electric operations decreased, water operations and
investments significantly improved over second quarter results in 1995. The sale
of the Company's paper and pulp business was included in the results for the
quarter ended June 30, 1995 as discontinued operations.
Earnings per share of common stock for the six months ended June 30, 1996 were
$1.10 compared to $1.27 for the six months ended June 30, 1995. Factors
contributing to 1996 earnings include increased electric and water revenue, a
gain resulting from the sale of certain water operations, the inclusion of
automobile auctions and improvement in real estate operations (excluding the
recognition of tax benefits in 1995).
Higher earnings in 1995 were attributed to the 52 cent per share recognition of
tax benefits associated with real estate operations. Earnings in 1995 also
reflect an 18 cent per share provision associated with exiting the truck-mounted
lifting equipment business. The sale of the Company's paper and pulp business
was included in 1995 as discontinued operations.
Quarter Ended Six Months Ended
June 30, June 30,
Earnings Per Share 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Continuing Operations
Electric Operations $.23 $ .26 $ .64 $ .61
Water Operations .07 .02 .10 .02
Automobile Auctions .05 - .08 -
Investments
Portfolio and reinsurance .20 .24 .38 .47
Real estate .10 .01 .21 .54
---- ----- ------ -----
.30 .25 .59 1.01
Corporate Charges and Other (.16) (.17) (.31) (.47)
---- ---- ------ -----
Total Continuing Operations .49 .36 1.10 1.17
Discontinued Operations - .04 - .10
---- ---- ------ -----
Total Earnings Per Share $.49 $.40 $ 1.10 $1.27
==== ==== ====== =====
Results of Operations
Comparison of the Quarter Ended June 30, 1996 and 1995.
Electric Operations. Operating revenue and income from electric operations were
higher in 1996 compared to 1995 due to a 30 percent increase in total
kilowatthour sales. The increase in sales is attributed primarily to the
Company's ability to market energy to other power suppliers.
Revenue from electric sales to taconite customers accounted for 33 percent of
electric operating revenue in 1996 compared to 36 percent in 1995. Electric
sales to paper and other wood-products companies accounted for 11 percent of
electric operating revenue in 1996 and 13 percent in 1995. Sales to other
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power suppliers accounted for 15 percent of electric operating revenue in 1996
compared to 8 percent in 1995.
Although revenue from electric operations was higher, earnings for the quarter
ended June 30, 1996 were lower reflecting efforts in preparing for and meeting
the more competitive challenges of today's electric industry. New industrial
rates were lower on average while expenses associated with marketing new
products and improving customer service were higher. Additionally, the costs
associated with the early retirement plan offered in mid-1995 are being expensed
over three years and are included in 1996 expenses. Scheduled maintenance
expenses were also higher in 1996.
Water Operations. Operating revenue and income from water operations were higher
in 1996 due to the addition of 17,000 new water and wastewater customers as a
result of the December 1995 purchase of the assets of Orange Osceola Utilities
(OOU) in Florida, and SSU's implementation of a $7.9 million interim rate
increase effective January 23, 1996. Operating costs also increased in 1996
because of the purchase of OOU.
Automobile Auctions. ADESA sold 160,000 cars during the quarter ended June 30,
1996, the best quarterly sales since Minnesota Power purchased the business in
July 1995. One additional auction site was purchased during the quarter.
Operating expenses include significant start-up costs at two other new locations
added in 1996 and relocation costs for two existing auction operations.
Consolidated operating expenses in 1996 were significantly higher due to the
inclusion of ADESA's operations following its purchase by the Company in July
1995.
Investments.
- Securities Portfolio and Reinsurance. The Company's securities portfolio
and reinsurance performed well in 1996, however earnings were less
because the portfolio balance was smaller. A portion of the portfolio
was sold in 1995 to fund the purchase of ADESA.
- Real Estate Operations. Increased land sales, combined with the
recognition of $2 million of tax benefits at Lehigh, resulted in a more
profitable quarter for the Company's real estate business in 1996.
Discontinued Operations. Income from discontinued operations in 1995 reflects
the sale and operating results of the paper and pulp business which was sold in
June 1995.
Comparison of the Six Months Ended June 30, 1996 and 1995.
Electric Operations. Operating revenue and income from electric operations were
higher in 1996 compared to 1995 due to a 22 percent increase in total
kilowatthour sales. The increase in sales is attributed primarily to the
Company's ability to market energy to other power suppliers as well as extreme
winter weather in 1996 compared to the milder winter in 1995.
Revenue from electric sales to taconite customers accounted for 32 percent of
electric operating revenue in 1996 compared to 36 percent in 1995. Electric
sales to paper and other wood-products companies accounted for 11 percent of
electric operating revenue in 1996 and 13 percent in 1995. Sales to other power
suppliers accounted for 12 percent of electric operating revenue in 1996
compared to 6 percent in 1995.
Purchased power and other expenses for electric operations were considerably
higher in 1996 than in 1995. Increased purchased power costs were incurred in
1996 to meet higher demand. However, the average cost per kilowatthour was lower
than in 1995. Square Butte, one of Minnesota Power's low priced sources of
energy, produced 64 percent more energy in 1996, while in 1995 it was down for
scheduled maintenance. Costs associated with the early retirement offering in
mid-1995 are being expensed over three years and are reflected in 1996 expenses.
Scheduled maintenance expenses were higher in 1996.
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Water Operations. Operating revenue and income from water operations were higher
in 1996 due to the $1.1 million pre-tax gain from the sale of Seabrook's assets
in South Carolina, the addition of 17,000 new water and wastewater customers as
a result of the December 1995 purchase of the assets of OOU in Florida, and
SSU's implementation of a $7.9 million interim rate increase effective January
23, 1996. Operating costs also increased in 1996 because of the purchase of OOU.
Automobile Auctions. Automobile auction operations were profitable despite
severe winter weather on the east coast which limited auction sales in January
1996. New auctions began operations at Jacksonville, Florida and Newark, New
Jersey during the first half of 1996. Start-up costs associated with these new
sites have had a negative impact on profitability of this segment and are
expected to continue having such an impact on results through 1997. All
other auction sites including, ADESA's acquisition of an auto auction
facility in Portage, Wisconsin, have performed well in 1996.
Consolidated operating expenses in 1996 are significantly higher due to the
inclusion of ADESA's operations following its purchase by the Company in July
1995.
Investments.
- Securities Portfolio and Reinsurance. The Company's securities portfolio
and reinsurance performed well in 1996. The portfolio produced less
earnings in 1996 because its balance was smaller as a result of the sale
of a portion of the portfolio to fund the purchase of ADESA.
- Real Estate Operations. Revenue in 1996 includes $3.7 million from the
sale of Lehigh's joint venture in a resort and golf course. In 1995 $18.4
million of tax benefits were recognized by Lehigh. The Company's portion
of the tax benefits reflected as net income was $14.7 million, or 52
cents per share. In 1996 an additional $2 million of tax benefits were
recognized.
Corporate Charges and Other. In March 1995 the Company recorded a $5 million
provision, lowering earnings per share by 18 cents, in anticipation of exiting
the truck-mounted lifting equipment business.
Discontinued Operations. Income from discontinued operations in 1995 reflects
the operating results of the paper and pulp business which was sold in June
1995.
Liquidity and Financial Position
Reference is made to the Consolidated Statement of Cash Flows for the six months
ended June 30, 1996 and 1995, for purposes of the following discussion.
Automobile auction operations, which were acquired July 1, 1995, are included in
the six months ended June 30, 1996.
Cash Flow Activities. Cash from operating activities was affected by a number of
factors representative of normal operations.
Working capital, if and when needed, generally is provided by the sale of
commercial paper. In addition, securities investments can be liquidated to
provide funds for reinvestment in existing businesses or acquisition of new
businesses, and approximately 5,268,000 original issue shares of common stock
are available for issuance through the DRIP.
MP&L Capital I (Trust) was established as a wholly owned business trust of the
Company for the purpose of issuing common and preferred securities. On March 20,
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, indirectly resulting in net proceeds to the Company of
$72.6 million. The net proceeds to the Company were used to retire approximately
$56 million of commercial paper and approximately $17 million were used to
redeem all of the outstanding shares of the Company's Serial Preferred Stock,
$7.36 Series, on May 13, 1996.
On May 30, 1996 ADESA issued $90 million of 7.70% Senior Notes, Series A, Due
2006 in a private placement offering. Proceeds were used by ADESA to repay
existing indebtedness, including borrowings
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under ADESA's revolving bank credit agreement, floating rate option notes and
certain borrowings from Minnesota Power. In June 1996 Lehigh obtained a $20
million adjustable rate revolving line of credit due in 2003. The proceeds were
used to partially finance the acquisition of real estate near Palm Coast,
Florida.
On June 24, 1996 the Company's registration with the Securities and Exchange
Commission became effective with respect to 5 million additional shares of
common stock for offer and sale pursuant to the DRIP. Previously available to
registered holders and electric utility customers, the DRIP has been amended,
effective July 2, 1996, to, among other things, expand the customer feature and
allow any interested investor to enroll in the plan with an initial investment
of $250. Capital raised through the sale of new issue shares under the DRIP is
expected to be used for general corporate purposes.
Capital Requirements. Consolidated capital expenditures for the six months ended
June 30, 1996 totaled $53 million. These expenditures include $19 million for
electric operations, $8 million for water operations and $26 million for
automobile auction operations. Internally generated funds were the primary
source for funding electric and water operation expenditures. ADESA issued
long-term debt to finance its construction expenditures.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Shareholders on May 14, 1996.
(b) The election of directors, appointment of independent accountants and
approval of the Minnesota Power Executive Long-Term Incentive
Compensation Plan and the Minnesota Power Director Long-Term Stock
Incentive Plan were voted on at the Annual Meeting of Shareholders.
The results were as follows:
Votes
Withheld or Broker
Directors Votes For Against Abstentions Nonvotes
- --------- --------- ------- ----------- --------
Merrill K. Cragun 26,353,001 705,930 - -
Dennis E. Evans 26,282,462 776,469 - -
D. Michael Hockett 26,229,993 828,938 - -
Peter J. Johnson 26,385,179 673,752 - -
Jack R. Kelly, Jr. 26,322,548 736,383 - -
George L. Mayer 26,364,365 694,566 - -
Paula F. McQueen 26,371,643 687,288 - -
Robert S. Nickoloff 26,292,136 766,795 - -
Jack I. Rajala 26,379,143 679,788 - -
Edwin L. Russell 26,363,621 695,310 - -
Arend J. Sandbulte 26,325,841 733,090 - -
Nick Smith 26,327,260 731,671 - -
Bruce W. Stender 26,369,095 689,836 - -
Donald C. Wegmiller 26,338,697 720,234 - -
Independent Accountants
- -----------------------
Price Waterhouse LLP 26,375,793 234,701 448,438 -
Minnesota Power Executive Long-Term Incentive Compensation Plan
- ---------------------------------------------------------------
17,096,568 3,999,538 1,743,484 4,219,341
Minnesota Power Director Long-Term Stock Incentive Plan
- -------------------------------------------------------
17,025,492 4,084,573 1,729,524 4,219,342
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Item 5. Other Information
Reference is made to the Company's 1995 Form 10-K for background information on
the following updates. Unless otherwise indicated, cited references are to the
Company's 1995 Form 10-K.
Ref. Page 8. - Third Full Paragraph
On June 19, 1996 the FERC approved the proposed wholesale rates as filed. The
new rates have an effective date of January 1, 1996.
Ref. Page 9. - Second Full Paragraph and Page 13. - Fourth Paragraph
Ref. 10-Q for the quarter ended March 31, 1996, Page 10. - Second Paragraph
On June 27, 1996 the Company filed in the U.S. Court of Appeals for the District
of Columbia Circuit a petition for review of the order issued by the FERC
granting a new license for the Company's St. Louis River Project. On June 28,
1996 separate petitions for review were filed in the same court by the U.S.
Department of the Interior and the Fond du Lac Band of Lake Superior Chippewa,
two intervenors in the licensing proceedings. The issues to be resolved
concern the terms and conditions of the license which will govern the Company's
operation and maintenance of the project.
Ref. Page 10. - Fourth Paragraph
Ref. 10-Q for the quarter ended March 31, 1996, Page 10. - Fifth Paragraph
The wholesale transmission tariff filed on April 16, 1996, in anticipation of
new rules governing open access transmission for wholesale service became
effective on June 16, 1996 subject to refund pending a hearing before an
Administrative Law Judge and final FERC approval. The hearing is scheduled to
begin on January 14, 1997. As required by Order No. 888, the Company filed with
the FERC on July 9, 1996, a tariff for open access transmission service
incorporating the terms and conditions of the FERC's pro forma tariff with
appropriate modifications. A decision on the filing is pending.
In order to comply with the FERC's regulations and policies governing open
access to electric transmission systems, the Company has initiated procedures
which will result in the functional separation of the Company's operation of its
transmission system from other aspects of its business as required by the FERC's
Standards of Conduct implemented by Order No. 889. Compliance with Order No. 889
is required by November 1, 1996.
On July 15, 1996, the FERC accepted for filing and made effective a tariff
allowing the Comapny to sell power at market-based rates. The tariff will permit
the Company to respond more quickly and in a more competitive manner to requests
for power from wholesale customers.
Ref. Page 13. - Table- Summary of National Pollutant Discharge Elimination
System Permits
Facility Issue Date Expiration Date
- -------- ---------- ---------------
Arrowhead DC Terminal June 17, 1996 March 31, 2001
Ref. Page 15. - Seventh Paragraph
On July 31, 1996 the FPSC voted to allow SSU approximately 61 percent of the
$18.1 million rate increase requested in June 1995. The FPSC is expected to
issue its final order on SSU's request on September 4, 1996.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 (a) Minnesota Power Executive Long-Term Incentive Compensation Plan
10 (b) Minnesota Power Director Long-Term Stock Incentive Plan
27 Financial Data Schedule
* 99 The consolidated financial statements of ADESA Corporation
for the quarter ended June 30, 1995 (filed as Item 7(a) to
Form 8-K/A dated September 8 ,1995, File No. 1-3548).
- ----------------
* Incorporated herein by reference as indicated.
(b) Reports on Form 8-K.
Report on Form 8-K dated and filed June 18, 1996 with respect to Item 5.
Other Events.
Report on Form 8-K dated and filed August 2, 1996 with respect to Item 5.
Other Events and Item 7. Financial Statements and Exhibits.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Minnesota Power & Light Company
-------------------------------
(Registrant)
August 9, 1996 D. G. Gartzke
------------------------------
D. G. Gartzke
Senior Vice President - Finance
and Chief Financial Officer
August 9, 1996 Mark A. Schober
-----------------------------
Mark A. Schober
Corporate Controller
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