Securities and Exchange Commission
Washington, D.C. 20549
FORM 11- K
(Mark One)
/X/ Annual Report Pursuant to Section 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1996
or
/_/ Transition Report Pursuant to Section 15(d) of the Securities Exchange Act
of 1934
For the transition period from to
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Commission File No. 1-3548
Minnesota Power and Affiliated Companies
Employee Stock Ownership Plan
and Trust
(Full Title of the Plan)
----------------------------
Minnesota Power & Light Company
30 West Superior Street
Duluth, Minnesota 55802
(Name of issuer of securities
held pursuant to the Plan and
the address of its principal
executive office)
----------------------------
3100 Multifoods Tower Telephone 612 332 7000
33 South Sixth Street Facsimile 612 332 6711
Minneapolis, MN 55402-3795
Price Waterhouse LLP [LOGO]
Report of Independent Accountants
To the Participants and Administrator
of the Minnesota Power and Affiliated
Companies Employee Stock Ownership
Plan and Trust
In our opinion, the accompanying statements of net assets available for plan
benefits and the related statements of changes in net assets available for plan
benefits present fairly, in all material respects, the net assets available for
plan benefits of the Minnesota Power and Affiliated Companies Employee Stock
Ownership Plan and Trust at December 31, 1996, and 1995, and the changes in net
assets available for plan benefits for the years then ended, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Plan'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 generally accepted auditing
standards 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.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The additional information included in Schedules I
and II is presented for purposes of additional analysis and is not a required
part of the basic financial statements but is additional information required by
the Employee Retirement Income Security Act of 1974. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
PRICE WATERHOUSE LLP
Price Waterhouse LLP
Minneapolis, Minnesota
June 6, 1997
1
Minnesota Power and Affiliated Companies
Employee Stock Ownership Plan and Trust
Statement of Net Assets Available for Plan Benefits
December 31,
1996 1995
---- ----
Assets, at fair value
Investment in Minnesota Power & Light Company Common Stock
(4,436,475 and 4,576,793 shares at cost of $105,404,651 and
$107,928,141, respectively) $122,003,063 $129,866,501
Contributions receivable from Company 1,116,091 1,141,852
Interest receivable 1,740 2,235
Cash and cash equivalents 18,587 4,386,592
------------ ------------
Total Assets 123,139,481 135,397,180
------------ ------------
Liabilities
Accounts payable and accrued
administrative expenses 39 2,391,680
Accrued interest expense 1,116,091 3,120,287
Long-term debt 82,098,375 84,310,584
------------ ------------
Total Liabilities 83,214,505 89,822,551
------------ ------------
Net assets available for plan benefits $ 39,924,976 $ 45,574,629
============ ============
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
2
Minnesota Power and Affiliated Companies
Employee Stock Ownership Plan and Trust
Statement of Changes in Net Assets Available for Plan Benefits
Year Ended December 31,
1996 1995
---- ----
Sources of net assets
Dividend income $ 9,160,641 $ 9,480,708
Company contributions 2,917,515 3,086,836
Interest income 30,864 36,276
----------- ------------
12,109,020 12,603,820
Application of net assets
Participants' withdrawals (4,815,948) (3,445,829)
Transfers to pension plan (573,251) (852,334)
Interest expense (8,495,473) (8,731,887)
Net unrealized appreciation (depreciation) of investments (3,871,204) 14,140,572
Net realized gain (loss) on sales of securities (302) 2,788
Administrative expenses (2,495) (5,558)
----------- ------------
Increase (decrease) in net assets (5,649,653) 13,711,572
Net assets available for plan benefits
Beginning of year 45,574,629 31,863,057
----------- ------------
End of year $ 39,924,976 $ 45,574,629
============ ============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
3
Minnesota Power and Affiliated Companies
Employee Stock Ownership Plan and Trust
Notes to Financial Statements
Note 1 - Description of the Plan
The Minnesota Power and Affiliated Companies Employee Stock Ownership
Plan and Trust (ESOP) provides eligible employees of Minnesota Power & Light
Company (Minnesota Power); Superior Water, Light and Power Company; and MP Water
Resources Group, Inc., formerly Topeka Group Incorporated, (collectively, the
Companies) with Minnesota Power common stock (Common Stock) ownership benefits.
The ESOP is a defined contribution plan that is subject to the provisions of the
Employee Retirement Income Security Act of 1974 (ERISA). At December 31, 1996
there were 1,666 participants in the ESOP.
Basic Account
Participants' Basic Accounts received shares of Common Stock purchased
with incremental investment credit contributions and payroll-based tax credit
contributions. Contributions to the participant's Basic Accounts ceased after
1986.
All participants' Basic Accounts are fully vested. These shares can be
withdrawn at any time. Every December participants are required to make an
election to receive dividends on their shares either in cash or reinvest them in
Common Stock held in the ESOP.
Special Account
For the years 1985 through 1989, the Companies received a tax deduction
for cash dividends paid to participants on ESOP shares in their Basic Account.
The Companies contributed to the ESOP an amount equal to the estimated income
tax benefit of the dividend deduction associated with shares in the Basic
Account. Shares of Common Stock purchased with these contributions were
allocated to the participants' Special Account. All participants are fully
vested in these shares which can be withdrawn when the participants terminate
employment. Dividends on these shares are automatically reinvested in Common
Stock held in the ESOP.
First Suspense Account
In 1989 the ESOP was amended to enable the ESOP Trustee (as defined
below) to establish a leveraged First Suspense Account. Employees become
eligible to participate after one year of service with the Companies. The First
Suspense Account originally consisted of 633,849 shares of Common Stock
purchased for the benefit of eligible ESOP participants with proceeds from a 15
year $16.5 million loan (First Loan) bearing interest at 9.125%. This loan was
obtained by the ESOP Trustee on December 29, 1989, and guaranteed by Minnesota
Power. The First Suspense Account provides that as the First Loan is repaid,
shares of Common Stock in the First Suspense Account are allocated to each
participant's account based on the ratio of a participant's annual compensation
to the annual compensation of all participants. In any year that the value of
the shares credited to a participant's account is less than 2% of the
participant's annual compensation, the Companies will contribute additional
shares to make up the difference. Shares of Common Stock are also allocated to
participants' accounts for reinvested dividends paid on the shares in the First
Suspense Account. All participants are fully vested after 5 years of continuous
service with the Companies.
4
Second Suspense Account
Minnesota Power amended the ESOP again in 1990 to enable the ESOP
Trustee to establish a leveraged Second Suspense Account and borrow an
additional $75 million (Second Loan) for the purpose of acquiring 2,830,188
newly issued shares of Common Stock from Minnesota Power for the benefit of
active ESOP participants with a basic account. Under this amendment active
participants with a Basic Account are allocated shares to their Special Account
with a value at least equal to: (a) dividends payable on shares held by those
participants in the ESOP who do not elect to receive dividends in cash, and (b)
tax savings generated from the deductibility of dividends paid on all shares
held in the ESOP as of August 4, 1989. Pursuant to this amendment, the ESOP
Trustee issued a promissory note to Minnesota Power for $75 million at a 10.25%
interest rate with a term not to exceed 25 years.
Administration
The ESOP is administered for the Companies by the Employee Benefit
Plans Committee (the Committee). The mailing address of the Committee is 30 West
Superior Street, Duluth, Minnesota 55802. The Committee is authorized to make
rules and regulations as it may deem necessary to carry out the provisions of
the ESOP and to employ investment managers (as defined by ERISA), attorneys,
accountants, and such other persons as it shall deem necessary or desirable in
the administration of the ESOP. The Committee consists of 10 members who were
appointed by the Board of Directors of Minnesota Power. The Board of Directors
has the power to remove members of the Committee from office. Members of the
Committee receive no compensation for their services with respect to the ESOP.
As of June 1, 1997, the Committee members, all employees of Minnesota
Power, and their respective titles are as follows:
Name Title
---- -----
Robert D. Edwards Executive Vice President
President - Minnesota Power Electric (1)
David G. Gartzke Senior Vice President - Finance
Chief Financial Officer
Roger P. Engle Vice President Minnesota Power Electric
President and Chief Operating Officer - Superior
Water, Light and Power Company
Philip R. Halverson Vice President, General Counsel and Secretary
Donald J. Shippar Vice President - Minnesota Power Electric -
Transmission and Distribution
Claudia S. Welty Vice President - Minnesota Power Electric -
Support Services
Mark A. Schober Controller
Lori A. Collard Director - Minnesota Power Services Group, Inc.
Brenda J. Flayton Director - Minnesota Power Electric - Human
Resources
Jeweleon W. Tuominen Manager Employee Benefits
- ----------------------
(1) Committee Chairman
Mellon Bank N.A. (Mellon Bank) acts as trustee (ESOP Trustee) for the
ESOP. The ESOP Trustee's main office is located at One Mellon Bank Center,
Pittsburgh, Pennsylvania 15258-0001. The ESOP Trustee carries blanket bond
insurance in the amount of $200,000,000. Minnesota Power maintains the
participants' records and issues quarterly reports to each participant showing
the status of individual accounts.
5
ESOP Termination
The Companies reserve the right to reduce, suspend or discontinue their
contributions to the ESOP or to terminate the ESOP in its entirety subject to
the provisions of ERISA. In the event that the ESOP is terminated, the Committee
may require that the accounts of all participants and beneficiaries be
distributed as soon after the termination date as the Committee deems
practicable, regardless of the length of time Common Stock has been allocated to
any account.
Contributions
The Companies' contribution for each year shall be paid to the ESOP
Trustee either in cash or in Common Stock. Subject to a statutory maximum, the
expenses incidental to establishing and administering the ESOP may be deducted
from the Companies' contributions to the ESOP or income earned by the shares
held in the ESOP. Expenses not attributable to such sources are payable by the
Companies. No fees or charges will be payable by any ESOP participant.
Transfers
Upon retirement, participants may elect to transfer the vested amount
of their ESOP account balances to the Minnesota Power and Affiliated Companies
Retirement Plan A or Plan B.
Note 2 - Summary of Accounting Policies
The ESOP uses the accrual basis of accounting and accordingly reflects
income in the year earned and expenses when incurred. Investments are reported
at their fair value based on quoted market price.
Note 3 - Federal Income Tax Status
A favorable determination letter dated January 30, 1996 was obtained
from the Internal Revenue Service stating that the ESOP, as amended and restated
effective January 1, 1992, qualifies as an employee stock ownership plan under
Section 401(a) of the Internal Revenue Code of 1986.
Note 4 - Investments
The ESOP's investments, at December 31, are presented in the following
table:
1996 1995
Minnesota Power ------------------------------ ---------------------------
Common Stock Allocated Unallocated Allocated Unallocated
- ------------------- ----------- ----------- ----------- -----------
Number of Shares 1,821,668 2,614,807 1,819,415 2,757,378
Cost $36,280,954 $69,123,697 $35,045,896 $72,882,245
Market $50,095,870 $71,907,193 $51,625,900 $78,240,601
6
Note 5 - Repayment of Loans
The ESOP Trustee will repay principal and interest on the First Loan
and Second Loan with dividends paid on the shares of Common Stock in each
suspense account and with certain employer contributions to the ESOP. The shares
of Common Stock acquired by the ESOP Trustee will be held in the First Suspense
Account and Second Suspense Account and allocated to the accounts of ESOP
participants as the First Loan and Second Loan are repaid. Under current tax
law, the Companies expect to realize tax savings from the two transactions.
The First Loan was obtained from a third party lender and is guaranteed
by the Companies with 360,233 unallocated shares of Common Stock pledged as
collateral at December 31, 1996. Principal payments for the First Loan are
scheduled as follows:
$16.5 Million 9.125% Loan
-----------------------------
1997 $ 897,865
1998 1,069,203
1999 1,259,977
2000 1,472,119
2001 1,707,749
2002-2004 5,768,023
------------
$ 12,174,936
============
The Second Loan was obtained from Minnesota Power. There are 2,254,574
unallocated shares of Common Stock pledged as collateral at December 31, 1996.
Principal payments for the Second Loan are scheduled as follows; however,
prepayments can be made without penalty.
$75 Million 10.25% Loan
---------------------------------
2011 $ 9,923,439
2012 15,000,000
2013 15,000,000
2014 15,000,000
2015 15,000,000
---------------
$ 69,923,439
===============
7
Schedule I
Minnesota Power and Affiliated Companies
Employee Stock Ownership Plan and Trust
Schedule of Investments Held
December 31, 1996
Description Cost Fair Value
Minnesota Power & Light Company Common Stock * $105,404,651 $122,003,063
- ----------------------
* Party-in-interest
The above data was prepared from information certified as complete and accurate
by Mellon Bank N.A., the ESOP Trustee.
Schedule II
Minnesota Power and Affiliated Companies
Employee Stock Ownership Plan and Trust
Schedule of Transactions in Excess of
5% of Fair Value of Plan Assets
for the Year Ended December 31, 1996
Aggregate Purchase
Price and Market
Value on Number of
Description of Purchases Transaction Dates Transactions
Mellon Bank Temporary Investment Fund $4,133,430 336
Aggregate
------------------------------------
Net
Cost of Gain/ Number of
Description of Sales Asset Sales Price (Loss) Transactions
Mellon Bank Temporary
Investment Fund $6,555,376 $6,555,376 0 53
- ----------------
The above data was prepared from information certified as complete and accurate
by Mellon Bank N.A., the ESOP Trustee.
8
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Employee Benefit Plans Committee has duly caused this annual report to be
signed on its behalf by the undersigned hereunto duly authorized.
Minnesota Power and Affiliated Companies
Employee Stock Ownership Plan
and Trust
-----------------------------------------
(Name of Plan)
June 24, 1997 By R.D. Edwards
-----------------------------------------
R.D. Edwards
Chairman,
Employee Benefit Plans Committee
9