SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended SEPTEMBER 30, 1998
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 1-3548
MINNESOTA POWER, INC.
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,
36,062,521 shares outstanding
as of October 31, 1998
MINNESOTA POWER, INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet -
September 30, 1998 and December 31, 1997 1
Consolidated Statement of Income -
Quarter Ended and Nine Months Ended
September 30, 1998 and 1997 2
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II. Other Information
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
DEFINITIONS
The following abbreviations or acronyms are used in the text.
Abbreviation
or Acronym Term
- ---------------- -------------------------------------------------
1997 Form 10-K Minnesota Power's Annual Report on Form 10-K for
the Year Ended December 31, 1997
ADESA ADESA Corporation
AFC Automotive Finance Corporation
Boswell Boswell Energy Center
Common Stock Minnesota Power, Inc.'s common stock
Company Minnesota Power, Inc. and its subsidiaries
DRIP Dividend Reinvestment and Stock Purchase Plan
ESOP Employee Stock Ownership Plan
FERC Federal Energy Regulatory Commission
Heater Heater Utilities, Inc.
Florida Water Florida Water Services Corporation
FPSC Florida Public Service Commission
kWh Kilowatthour(s)
MAPP Mid-Continent Area Power Pool
Minnesota Power Minnesota Power, Inc. and its subsidiaries
MPUC Minnesota Public Utilities Commission
MW Megawatt(s)
NCUC North Carolina Utilities Commission
Palm Coast Palm Coast Holdings, Inc.
PSCW Public Service Commission of Wisconsin
Square Butte Square Butte Electric Cooperative
SWL&P Superior Water, Light and Power Company
SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (Reform Act), the Company is hereby filing
cautionary statements identifying important factors that could cause the
Company's actual results to differ materially from those projected in
forward-looking statements (as such term is defined in the Reform Act) made by
or on behalf of the Company in this quarterly report on Form 10-Q, in
presentations, in response to questions or otherwise. Any statements that
express, or involve discussions as to expectations, beliefs, plans, objectives,
assumptions or future events or performance (often, but not always, through the
use of words or phrases such as "anticipates", "believes", "estimates",
"expects", "intends", "plans", "predicts", "projects", "will likely result",
"will continue", or similar expressions) are not statements of historical facts
and may be forward-looking.
Forward-looking statements involve estimates, assumptions, and uncertainties
and are qualified in their entirety by reference to, and are accompanied by, the
following important factors, which are difficult to predict, contain
uncertainties, are beyond the control of the Company and may cause actual
results to differ materially from those contained in forward-looking
statements:
- prevailing governmental policies and regulatory actions, including
those of the FERC, the MPUC, the FPSC, the NCUC and the PSCW, with
respect to allowed rates of return, industry and rate structure,
acquisition and disposal of assets and facilities, operation and
construction of plant facilities, recovery of purchased power and
other capital investments, and present or prospective wholesale and
retail competition (including but not limited to retail wheeling
and transmission costs);
- economic and geographic factors including political and economic
risks;
- changes in and compliance with environmental and safety
laws and policies;
- weather conditions;
- population growth rates and demographic patterns;
- competition for retail and wholesale customers;
- Year 2000 issues;
- delays or changes in costs of Year 2000 compliance;
- failure of major suppliers, customers or others with whom the
Company does business to resolve their own Year 2000 issues on
a timely basis;
- pricing and transportation of commodities;
- market demand, including structural market changes;
- changes in tax rates or policies or in rates of inflation;
- changes in project costs;
- unanticipated changes in operating expenses and capital
expenditures;
- capital market conditions;
- competition for new energy development opportunities; and
- legal and administrative proceedings (whether civil or criminal)
and settlements that influence the business and profitability of
the Company.
Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
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 such factors, nor can it assess the impact of any such factor on
the business or the extent to which any factor, or combination of factors, may
cause results to differ materially from those contained in any forward-looking
statement.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MINNESOTA POWER
CONSOLIDATED BALANCE SHEET
Millions
SEPTEMBER 30, DECEMBER 31,
1998 1997
Unaudited Audited
- --------------------------------------------------------------------------------
ASSETS
PLANT AND INVESTMENTS
Electric operations $ 771.6 $ 783.5
Water services 321.9 322.2
Automotive services 181.9 167.1
Investments 264.0 252.9
--------- --------
Total plant and investments 1,539.4 1,525.7
--------- --------
CURRENT ASSETS
Cash and cash equivalents 116.8 41.8
Trading securities 137.0 123.5
Accounts receivable (less allowance of
$18.2 and $12.6) 249.7 158.5
Fuel, material and supplies 23.8 25.0
Prepayments and other 22.8 19.9
--------- --------
Total current assets 550.1 368.7
--------- --------
OTHER ASSETS
Goodwill 171.8 158.9
Deferred regulatory charges 59.9 64.4
Other 50.1 54.6
--------- --------
Total other assets 281.8 277.9
--------- --------
TOTAL ASSETS $ 2,371.3 $2,172.3
- --------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common stock without par value, 130.0
shares authorized;
36.0 and 33.6 shares outstanding $ 520.4 $ 416.0
Unearned ESOP shares (63.4) (65.9)
Net unrealized gain on securities investments 7.4 5.5
Foreign currency translation adjustment (5.6) (0.8)
Retained earnings 314.0 296.1
--------- --------
Total common stock equity 772.8 650.9
Cumulative preferred stock 11.5 11.5
Redeemable serial preferred stock 20.0 20.0
Company obligated mandatorily redeemable
preferred securities of subsidiary
MP&L Capital I which holds solely Company
Junior Subordinated Debentures 75.0 75.0
Long-term debt 678.2 685.4
--------- --------
Total capitalization 1,557.5 1,442.8
--------- --------
CURRENT LIABILITIES
Accounts payable 200.7 78.7
Accrued taxes, interest and dividends 66.8 67.3
Notes payable 82.5 129.1
Long-term debt due within one year 4.4 4.7
Other 55.9 45.3
--------- --------
Total current liabilities 410.3 325.1
--------- --------
OTHER LIABILITIES
Accumulated deferred income taxes 152.2 151.3
Contributions in aid of construction 106.6 102.6
Deferred regulatory credits 58.0 60.7
Other 86.7 89.8
--------- --------
Total other liabilities 403.5 404.4
--------- --------
TOTAL CAPITALIZATION AND LIABILITIES $ 2,371.3 $2,172.3
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
-1-
MINNESOTA POWER
CONSOLIDATED STATEMENT OF INCOME
Millions Except Per Share Amounts - Unaudited
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------------
OPERATING REVENUE AND INCOME
Electric operations $ 147.2 $ 140.3 $ 422.0 $ 401.4
Water services 24.2 21.9 70.0 65.0
Automotive services 83.9 65.4 245.4 190.3
Investments 11.0 18.6 44.8 42.0
------- -------- ------- -------
Total operating revenue
and income 266.3 246.2 782.2 698.7
------- -------- ------- -------
OPERATING EXPENSES
Fuel and purchased power 54.6 51.7 158.1 141.7
Operations 155.5 141.6 468.4 418.8
Interest expense 15.1 15.9 50.5 49.3
------- -------- ------- -------
Total operating expenses 225.2 209.2 677.0 609.8
------- -------- ------- -------
INCOME FROM EQUITY INVESTMENTS 3.8 3.3 11.7 10.6
------- -------- ------- -------
OPERATING INCOME 44.9 40.3 116.9 99.5
DISTRIBUTIONS ON REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY 1.5 1.5 4.5 4.5
INCOME TAX EXPENSE 17.6 15.6 45.3 37.0
------- -------- ------- -------
NET INCOME 25.8 23.2 67.1 58.0
DIVIDENDS ON PREFERRED STOCK 0.5 0.5 1.4 1.4
------- -------- ------- -------
EARNINGS AVAILABLE FOR COMMON STOCK $ 25.3 $ 22.7 $ 65.7 $ 56.6
======= ======== ======= =======
AVERAGE SHARES OF COMMON STOCK 32.0 30.8 31.5 30.5
BASIC AND DILUTED
EARNINGS PER SHARE OF COMMON STOCK $0.79 $0.73 $2.08 $1.85
DIVIDENDS PER SHARE OF COMMON STOCK $0.51 $0.51 $1.53 $1.53
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
-2-
MINNESOTA POWER
CONSOLIDATED STATEMENT OF CASH FLOWS
Millions - Unaudited
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 67.1 $ 58.0
Income from equity investments - net of
dividends received (11.2) (10.2)
Depreciation and amortization 56.0 53.1
Deferred income taxes (1.0) 0.9
Deferred investment tax credits (1.2) (1.4)
Pre-tax gain on sale of property (0.6) (4.4)
Changes in operating assets and liabilities
Trading securities (13.5) (27.4)
Notes and accounts receivable (91.2) (54.9)
Fuel, material and supplies 1.2 (3.1)
Accounts payable 122.0 50.9
Other current assets and liabilities 7.1 (1.0)
Other - net 8.4 7.3
------- ------
Cash from operating activities 143.1 67.8
------- ------
INVESTING ACTIVITIES
Proceeds from sale of investments
in securities 32.8 40.3
Proceeds from sale of property 1.4 6.4
Additions to investments (32.2) (42.9)
Additions to plant (51.3) (47.7)
Acquisition of subsidiaries - net of
cash acquired (23.8) -
Other - net 5.5 14.7
------- ------
Cash for investing activities (67.6) (29.2)
------- ------
FINANCING ACTIVITIES
Issuance of common stock 102.8 14.9
Issuance of long-term debt 9.1 145.7
Changes in notes payable - net (46.6) 35.2
Reductions of long-term debt (16.6) (155.6)
Dividends on preferred and common stock (49.2) (47.9)
------- ------
Cash for financing activities (0.5) (7.7)
------- ------
CHANGE IN CASH AND CASH EQUIVALENTS 75.0 30.9
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 41.8 40.1
------- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 116.8 $ 71.0
======= ======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for
Interest - net of capitalized $ 55.8 $ 48.6
Income taxes $ 41.4 $ 20.8
- --------------------------------------------------------------------------------
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 1997 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.
NOTE 1. BUSINESS SEGMENTS
Millions
Investments
--------------------
Electric Water Automotive Portfolio & Real Corporate
Consolidated Operations Services Services Reinsurance Estate Charges
- -------------------------------------------------------------------------------------------------------------------
For the Quarter Ended
September 30, 1998
Operating revenue and income $ 266.3 $147.2 $24.2 $83.9 $ 5.5 $ 5.3 $ 0.2
Operation and other expense 191.3 103.0 15.3 64.8 1.1 3.7<F1> 3.4
Depreciation and amortization
expense 18.8 11.8 3.0 4.0 - - -
Interest expense 15.1 5.5 2.6 2.4 - - 4.6
Income from equity investments 3.8 - - - 3.8 - -
------- ------ ----- ----- ----- ----- -----
Operating income (loss) 44.9 26.9 3.3 12.7 8.2 1.6 (7.8)
Distributions on redeemable
preferred securities of
subsidiary 1.5 0.4 - - - - 1.1
Income tax expense (benefit) 17.6 10.5 1.3 6.0 2.9 0.7 (3.8)
------- ------ ----- ----- ----- ----- -----
Net income (loss) $ 25.8 $ 16.0 $ 2.0 $ 6.7 $ 5.3 $ 0.9 $(5.1)
======= ====== ===== ===== ===== ===== =====
For the Quarter Ended
September 30, 1997
Operating revenue and income $ 246.2 $140.3 $21.9 $65.4 $ 5.1 $13.4 $ 0.1
Operation and other expense 176.0 100.8 13.6 50.9 0.5 6.6<F1> 3.6
Depreciation and amortization
expense 17.3 11.2 2.5 3.4 - 0.1 0.1
Interest expense 15.9 5.3 2.9 2.4 - 0.2 5.1
Income from equity investments 3.3 - - - 3.3 - -
------- ------ ----- ----- ----- ----- -----
Operating income (loss) 40.3 23.0 2.9 8.7 7.9 6.5 (8.7)
Distributions on redeemable
preferred securities of
subsidiary 1.5 0.4 - - - - 1.1
Income tax expense (benefit) 15.6 9.0 1.0 4.5 2.8 2.9 (4.6)
------- ------ ----- ----- ----- ----- -----
Net income (loss) $ 23.2 $ 13.6 $ 1.9 $ 4.2 $ 5.1 $ 3.6 $(5.2)
======= ====== ===== ===== ===== ===== =====
- -------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Includes $0.2 million of minority interest in 1998 ($0.9 million in 1997).
</FN>
-4-
NOTE 1. BUSINESS SEGMENTS (CONTINUED)
Millions
Investments
----------------------
Electric Water Automotive Portfolio & Real Corporate
Consolidated Operations Services Services Reinsurance Estate Charges
- -------------------------------------------------------------------------------------------------------------------
For the Nine Months Ended
September 30, 1998
Operating revenue and income $ 782.2 $422.0 $ 70.0 $ 245.4 $ 18.7 $26.0 $ 0.1
Operation and other expense 570.5 311.0 44.7 186.8 2.7 15.5<F1> 9.8
Depreciation and amortization
expense 56.0 35.5 8.7 11.5 - 0.1 0.2
Interest expense 50.5 16.6 7.7 7.2 - - 19.0
Income from equity investments 11.7 - - - 11.7 - -
--------- ------ ------ ------- ------- ----- -----
Operating income (loss) 116.9 58.9 8.9 39.9 27.7 10.4 (28.9)
Distributions on redeemable
preferred securities
of subsidiary 4.5 1.3 - - - - 3.2
Income tax expense (benefit) 45.3 22.4 3.4 19.3 11.3 4.7 (15.8)
--------- ------ ------ ------- ------- ----- ------
Net income (loss) $ 67.1 $ 35.2 $ 5.5 $ 20.6 $ 16.4 $ 5.7 $(16.3)
========= ====== ====== ======= ======= ===== ======
Total assets $ 2,371.3 $975.6 $391.8 $ 631.0 $ 298.1 $74.3 $ 0.5
Accumulated depreciation $ 744.3 $593.0 $133.0 $ 18.3 - - -
Accumulated amortization $ 21.1 - - $ 19.6 - $ 1.5 -
Construction work in progress $ 51.5 $ 16.2 $ 15.5 $ 19.8 - - -
For the Nine Months Ended
September 30, 1997
Operating revenue and income $ 698.7 $401.4 $ 65.0 $ 190.3 $ 14.3 $27.7 $ -
Operation and other expense 507.4 292.3 40.9 148.1 1.5 16.4<F1> 8.2
Depreciation and amortization
expense 53.1 33.6 8.9 10.3 - 0.1 0.2
Interest expense 49.3 16.0 8.3 7.4 - 0.8 16.8
Income from equity investments 10.6 - - - 10.6 - -
--------- ------ ------ ------- ------- ----- ------
Operating income (loss) 99.5 59.5 6.9 24.5 23.4 10.4 (25.2)
Distributions on redeemable
preferred securities
of subsidiary 4.5 1.2 - - - - 3.3
Income tax expense (benefit) 37.0 22.5 2.3 12.9 8.2 4.6 (13.5)
--------- ------ ------ ------- ------- ----- ------
Net income (loss) $ 58.0 $ 35.8 $ 4.6 $ 11.6 $ 15.2 $ 5.8 $(15.0)
========= ====== ====== ======= ======= ===== ======
Total assets $ 2,265.6 $998.4 $376.5 $ 522.5 $ 301.8 $65.8 $ 0.6
Accumulated depreciation $ 700.5 $560.4 $129.6 $ 10.5 - - -
Accumulated amortization $ 14.0 - - $ 12.8 - $ 1.2 -
Construction work in progress $ 35.7 $ 13.4 $ 15.1 $ 7.2 - - -
- -------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Includes $1.4 million of minority interest in 1998 and in 1997.
</FN>
-5-
NOTE 2. REGULATORY MATTERS
Florida Water 1991 Rate Case Refunds. In 1995 the Florida First District Court
of Appeals (Court of Appeals) reversed a 1993 FPSC order establishing uniform
rates for most of Florida Water's service areas. With "uniform rates," all
customers in each uniform rate area pay the same rates for water and wastewater
services. In response to the Court of Appeals' order, in August 1996 the FPSC
ordered Florida Water to issue refunds to those customers who paid more since
October 1993 under uniform rates than they would have paid under stand-alone
rates. This order did not permit a balancing surcharge to customers who paid
less under uniform rates. Florida Water appealed, and the Court of Appeals ruled
in June 1997 that the FPSC could not order refunds without balancing surcharges.
In response to the Court of Appeals' ruling, the FPSC issued an order on January
26, 1998 that did not require refunds. Florida Water's potential refund
liability at that time was about $12.5 million, which included interest, to
customers who paid more under uniform rates.
In the same January 26, 1998 order, the FPSC required Florida Water to refund
$2.5 million, the amount paid by customers in the Spring Hill service area from
January 1996 through June 1997 under uniform rates which exceeded the amount
these customers would have paid under a modified stand-alone rate structure. No
balancing surcharge was permitted. The FPSC ordered this refund because Spring
Hill customers continued to pay uniform rates after other customers began paying
modified stand-alone rates effective January 1996 pursuant to the FPSC's interim
rate order in Florida Water's 1995 Rate Case (see "Florida Water 1995 Rate Case"
below). The FPSC did not include Spring Hill in this interim rate order because
Hernando County had assumed jurisdiction over Spring Hill's rates. In June 1997
Florida Water reached an agreement with Hernando County to revert prospectively
to stand-alone rates for Spring Hill customers.
Customer groups which paid more under uniform rates have appealed the FPSC's
January 26, 1998 order, arguing that they are entitled to a refund because the
FPSC had no authority to order uniform rates. The Company has appealed the $2.5
million refund order. Initial briefs were filed by all parties on May 22, 1998.
Upon issuance of the June 10, 1998 opinion of the Court of Appeals with respect
to Florida Water's 1995 Rate Case (see next paragraph) in which the court
reversed its previous ruling that the FPSC was without authority to order
uniform rates, other customer groups supporting the FPSC's January 1998 order
filed a motion with the Court of Appeals seeking dismissal of the appeal by
customer groups seeking refunds. Customers seeking refunds have filed amended
briefs on September 14, 1998. No provision for refund has been recorded. The
Company is unable to predict the timing or outcome of the appeals process.
Florida Water 1995 Rate Case. Florida Water requested an $18.1 million rate
increase in June 1995 for all water and wastewater customers of Florida Water
regulated by the FPSC. In October 1996 the FPSC issued its final order approving
an $11.1 million annual increase. In November 1996 Florida Water filed with the
Court of Appeals an appeal of the FPSC's final order seeking judicial review of
issues relating to the amount of investment in utility facilities recoverable in
rates from current customers. Other parties to the rate case also filed appeals.
In the course of the appeals process, on its own initiative the FPSC
reconsidered an issue in its initial decision and, in June 1997, allowed Florida
Water to resume collecting approximately $1 million, on an annual basis, in new
customer fees. On June 10, 1998 the Court of Appeals ruled in Florida Water's
favor on all material issues appealed by Florida Water and remanded the matter
back to the FPSC for action consistent with the Court's order. The Court of
Appeals also overturned its decision in Florida Water's 1991 Rate Case which had
required a "functional relationship" between service areas as a precondition to
implementation of uniform rates. The Court of Appeals denied a rehearing request
filed by parties opposed to the Court of Appeals' reversal of its previous
decision regarding uniform rates. The Company is unable to predict the timing or
outcome of these proceedings.
Hillsborough County Rates. In July 1997 Florida Water filed with the
Hillsborough County Utilities Department a request for an annual interim revenue
increase of $0.8 million and a final increase of $0.9 million from customers
within Hillsborough County. Interim rates became effective in August 1997.
Hearings have concluded. The Hillsborough Board of County Commissioners (BOCC)
approved 100 percent of the increases requested for two of the Hillsborough
County facilities (approximately $0.2 million). With respect to the third
Hillsborough County facility, the BOCC voted on August 6, 1998 to
-6-
NOTE 2. REGULATORY MATTERS (CONTINUED)
grant the Company the water rate increase requested (additional revenue of
approximately $0.1 million), but denied any wastewater rate increase
(approximately $0.6 million). The BOCC also voted to require the Company to
refund interim wastewater rates to customers with interest. The Company filed a
complaint and a request for review with the Circuit Court in Hillsborough County
on September 28, 1998. The Company is challenging the wastewater rate denial and
refund on several grounds, including mistake of fact, violation of due process,
unlawful ex parte communications, and other violations of the law. No provision
for refund has been recorded. The Company is unable to predict the outcome of
this case.
NOTE 3. TOTAL COMPREHENSIVE INCOME
For the quarter ended September 30, 1998 total comprehensive income was $25.0
million ($25.3 million for the quarter ended September 30, 1997). For the nine
months ended September 30, 1998 total comprehensive income was $64.2 million
($60.7 million for the nine months ended September 30, 1997). Total
comprehensive income includes net income, unrealized gains and losses on
securities classified as available-for-sale, and foreign currency translation
adjustments.
NOTE 4. INCOME TAX EXPENSE
Quarter Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------------
Millions
Current tax
Federal $ 14.7 $ 13.0 $ 35.1 $29.2
Foreign 1.2 1.2 3.8 2.6
State 3.7 2.4 8.6 5.7
------ ------ ------ -----
19.6 16.6 47.5 37.5
------ ------ ------ -----
Deferred tax
Federal (0.7) (0.1) 0.5 1.9
State (0.7) (0.4) (1.5) (1.0)
------ ------ ------ -----
(1.4) (0.5) (1.0) 0.9
------ ------ ------ -----
Deferred tax credits (0.6) (0.5) (1.2) (1.4)
------ ------ ------ -----
Total income tax expense $ 17.6 $ 15.6 $ 45.3 $37.0
- --------------------------------------------------------------------------------
NOTE 5. ACQUISITIONS
ADESA acquired the assets of Greater Lansing Auto Auction in Lansing, Michigan
and I-55 Auto Auction in St. Louis, Missouri on April 30, 1998, and Ark-La-Tex
Auto Auction in Shreveport, Louisiana on May 27, 1998 for a combined purchase
price of $23.8 million. The acquisitions were accounted for using the purchase
method and resulted in goodwill of $16.3 million which will be amortized over a
40 year period. Financial results for these three auctions have been included in
the Company's consolidated financial statements since the dates of acquisition.
Pro forma financial results have not been presented due to immateriality. The
Company used internally generated funds and issued commercial paper to acquire
these assets. ADESA now owns and operates 28 vehicle auction facilities.
-7-
NOTE 6. SQUARE BUTTE PURCHASED POWER CONTRACT
The Company has had a power purchase agreement with Square Butte since 1977.
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 Cooperative, Inc. (Minnkota), a North
Dakota cooperative corporation whose Class A members are also members of Square
Butte. Minnkota serves as operator of the Unit and also purchases power from
Square Butte.
In May 1998 the Company and Square Butte entered into a new power purchase
agreement (1998 Agreement), replacing the 1977 agreement. The Company extended
by 20 years, through January 1, 2027, its access to Square Butte's low-cost
electricity and eliminated its unconditional obligation to pay all of Square
Butte's costs if not paid by Square Butte when due. The 1998 Agreement was
reached in conjunction with termination of Square Butte's previous leveraged
lease financing arrangement and refinancing of associated debt.
Similar to the 1977 agreement, the Company is initially entitled to
approximately 71 percent of the Unit's output under the 1998 Agreement. After
2005 and upon compliance with a two-year advance notice requirement, Minnkota
has the option to reduce the Company's entitlement by 5 percent annually, to a
minimum of 50 percent.
Under the 1998 Agreement, the Company is obligated to pay its pro rata share of
Square Butte's costs based upon Unit output entitlement. The Company's payment
obligation is suspended if Square Butte fails to deliver any power, whether
produced or purchased, for a period of one year. The Company's obligation under
the 1977 agreement was absolute and unconditional whether or not any power was
delivered. Square Butte's fixed costs consist primarily of debt service. At
September 30, 1998 Square Butte had total debt outstanding of $343.4 million.
Total annual debt service for Square Butte is expected to be approximately $36
million in 1999 through 2002 and $23 million in 2003. Variable operating costs
include the price of coal purchased from BNI Coal, a subsidiary of Minnesota
Power, under a long-term contract. The Company's payments to Square Butte are
approved as purchased power expenses for ratemaking purposes by both the MPUC
and FERC.
NOTE 7. COMMON STOCK
On September 24, 1998 the Company issued and sold in an underwritten public
offering 2.0 million shares of new common stock at $43.75 per share. In
addition, an over-allotment option for 93,000 shares at $43.75 per share was
exercised by the underwriters on October 9, 1998. Total net proceeds were
approximately $89 million.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MINNESOTA POWER is a broadly diversified service company with operations in four
business segments: (1) Electric Operations, which include electric and gas
services, and coal mining; (2) Water Services, which include water and
wastewater services; (3) Automotive Services, which include a network of vehicle
auctions, a finance company and an auto transport company; and (4) Investments,
which include a securities portfolio, a 21 percent equity investment in a
specialty insurance and reinsurance company, and real estate operations.
Corporate Charges represent general corporate expenses, including interest, not
specifically allocated to any one business segment.
CONSOLIDATED OVERVIEW
Earnings per share of common stock were $0.79 for the quarter ended September
30, 1998 ($0.73 for the quarter ended September 30, 1997) and $2.08 for the nine
months ended September 30, 1998 ($1.85 for the nine months ended September 30,
1997).
Quarter Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------------
Millions
Net Income
Electric Operations $ 16.0 $ 13.6 $ 35.2 $ 35.8
Water Services 2.0 1.9 5.5 4.6
Automotive Services 6.7 4.2 20.6 11.6
Investments 6.2 8.7 22.1 21.0
Corporate Charges (5.1) (5.2) (16.3) (15.0)
------ ------ ------ ------
$ 25.8 $ 23.2 $ 67.1 $ 58.0
====== ====== ====== ======
- --------------------------------------------------------------------------------
Basic and Diluted
Earnings Per Share of
Common Stock $ 0.79 $0.73 $2.08 $1.85
Average Shares of Common
Stock - Millions 32.0 30.8 31.5 30.5
- --------------------------------------------------------------------------------
The following summarizes significant events that led to the 11.2 percent and
15.7 percent increase in net income (8.2 percent and 12.4 percent increase in
earnings per share) for the quarter and nine months ended September 30, 1998,
respectively.
- Electric Operations. Net income from Electric Operations reflected strong
sales to other power suppliers and marketers at higher margins during the
quarter and nine months ended September 30, 1998. The scheduled maintenance
on generation plants in the second quarter positioned the Company to meet
anticipated strong electric demand during the rest of 1998. In 1997 the
Company recorded gains from the sale of certain land and other property.
- Water Services. Net income from Water Services was higher in 1998 due
primarily to customer growth, increased consumption and operating
efficiencies. Increased sales of water resulting from drought conditions in
Florida during the second and third quarters of 1998 helped to offset lower
sales in the first quarter of 1998 because of record rainfall.
- Automotive Services. The significant increase in net income from
Automotive Services was driven by more vehicle sales, and the expansion and
maturing of recently opened loan production offices in the floorplan
financing business. The Company has added three new auction facilities and
30 loan production offices in 1998.
- Investments. The increase in net income from Investments for the nine
months ended September 30, 1998 was attributable to dividend income
received from a venture capital investment. Net income from real estate
operations was lower in the third quarter of 1998 because several large
bulk land sales were recorded in the third quarter of 1997.
-9-
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997.
ELECTRIC OPERATIONS. Operating revenue and income from Electric Operations were
$6.9 million higher in 1998, even though kilowatthour sales remained at similar
levels. This increase was primarily attributable to a higher average sales price
for bulk power sold to other power suppliers and marketers, and more revenue
from fuel clause and conservation improvement program adjustments. Bulk sale
prices were higher partially because of storms and hot weather in the Midwest.
Revenue related to the fuel clause adjustment increased in 1998 to provide for
the recovery of the cost of replacement power needed during scheduled outages at
Square Butte and Boswell in the second quarter of 1998, and also for the
reduction in hydro generation due to dry winter and spring conditions. Demand
revenue from large power customers was lower in 1998 as a result of successful
renegotiation of contracts which extended the terms of the contracts, but in
turn reduced the demand charge component. Operating revenue and income in 1998
included $1.7 million more from recovery of lost margins attributable to sales
that did not occur due to implementation of state mandated conservation
improvement programs and in 1997 included a $0.9 million pre-tax gain from the
sale of rights to microwave frequencies in accordance with a federal mandate.
Total operating expenses were $3.0 million higher in 1998 due to a $2.9 million
increase in fuel and purchased power expense. Fuel expense was about $1.1
million higher because of more steam generation and purchased power expense
increased $1.8 million because of higher prices in the market.
Revenue from electric sales to taconite customers accounted for 30 percent of
electric operating revenue and income in 1998 (29 percent in 1997). Electric
sales to paper and pulp mills accounted for 11 percent of electric operating
revenue and income in both 1998 and 1997. Sales to other power suppliers and
marketers accounted for 18 percent of electric operating revenue and income in
1998 and 15 percent in 1997.
WATER SERVICES. Operating revenue and income from Water Services were $2.3
million higher in 1998 due to increased water sales and more revenue from
non-regulated water subsidiaries. Consumption, which was up 25 percent in 1998,
reflected a September 1997 acquisition of a water utility in North Carolina and
drought conditions in Florida. Total operating expenses were $1.9 million higher
in 1998 due to additional costs related to the expansion of non-regulated water
subsidiaries.
AUTOMOTIVE SERVICES. Operating revenue and income from Automotive Services were
$18.5 million higher in 1998 due to a 14 percent increase in vehicle sales, and
the expansion and maturing of AFC's floorplan financing business. At ADESA
auction facilities 232,000 vehicles were sold in 1998 (203,000 in 1997). ADESA
had 28 auction facilities at September 30, 1998 (24 at September 30, 1997). AFC
had 84 loan production offices at September 30, 1998 (54 at September 30, 1997).
Total operating expenses were up $14.5 million due to expenses associated with
increased vehicle sales and the expansion of the floorplan financing business.
INVESTMENTS.
- SECURITIES PORTFOLIO AND REINSURANCE. Operating revenue and income were
$0.4 million higher in 1998 due to improved performance by the securities
portfolio. Income from equity investments included $3.9 million in 1998
($3.3 million in 1997) from the Company's investment in Capital Re.
Together, the Company's securities portfolio and its equity investment in
Capital Re earned an annualized after-tax return of 7.7 percent in 1998
(7.1 percent in 1997).
- REAL ESTATE OPERATIONS. Operating revenue and income from Real Estate
Operations were $8.1 million lower in 1998 because in 1997 several large
bulk land sales were recorded. Total operating expenses (excluding minority
interest) were $2.5 million lower in 1998 because more selling expenses
were incurred in 1997.
-10-
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997.
ELECTRIC OPERATIONS. Operating revenue and income from Electric Operations were
$20.6 million higher in 1998, even though kilowatthour sales remained at similar
levels. This increase primarily was attributable to a higher average sales price
for bulk power sold to other power suppliers and marketers, and more revenue
from fuel clause and conservation improvement program adjustments. Bulk sale
prices were higher partially because of storms and hot weather in the Midwest.
Revenue related to the fuel clause adjustment increased in 1998 to provide for
the recovery of the cost of replacement power needed during scheduled outages at
Square Butte and Boswell in the second quarter of 1998, and also for the
reduction in hydro generation due to dry winter and spring conditions. Demand
revenue from large power customers was lower in 1998 as a result of successful
renegotiation of contracts which extended the term, but in turn reduced the
demand charge component. Revenue from residential and gas customers was lower in
1998 because of the unusually mild winter and warm spring. Operating revenue and
income in 1997 included $4.3 million in pre-tax gains from the sale of rights to
microwave frequencies in accordance with a federal mandate and the sale of
property along the St. Louis River to ensure the preservation of wilderness
lands. Total operating expenses were $21.2 million higher in 1998 due to a $16.4
million increase in fuel and purchased power expense and a $4.2 million increase
in operations expense. Fuel expense was about $2.9 million higher because of
more steam generation. Purchased power expense increased $13.5 million because
of higher prices in the market, more sales to other power suppliers, and less
hydro generation. Operations expense in 1998 reflected increased costs for
scheduled outages at Boswell, consulting services and the amortization of
deferred charges related to conservation improvement programs. Expenses in 1998
also reflected a reduction in employee pension and early retirement expenses,
and less property taxes due to the reform of the Minnesota property tax system.
Revenue from electric sales to taconite customers accounted for 31 percent of
electric operating revenue and income in both 1998 and 1997. Electric sales to
paper and pulp mills accounted for 11 percent of electric operating revenue and
income in 1998 (12 percent in 1997). Sales to other power suppliers and
marketers accounted for 16 percent of electric operating revenue and income in
1998 (12 percent in 1997).
WATER SERVICES. Operating revenue and income from Water Services were $5.0
million higher in 1998 due to increased water sales and more revenue from
non-regulated water subsidiaries. Consumption, which was up 11 percent in 1998,
reflected a September 1997 acquisition of a water utility in North Carolina.
Increased sales of water resulting from drought conditions in Florida during the
second and third quarters of 1998 helped to offset lower sales in the first
quarter of 1998 because of record rainfall. Total operating expenses were $3.0
million higher in 1998 because of additional costs related to the expansion of
non-regulated water subsidiaries.
AUTOMOTIVE SERVICES. Operating revenue and income from Automotive Services were
$55.1 million higher in 1998 due to a 15 percent increase in vehicle sales, and
the expansion and maturing of AFC's floorplan financing business. At ADESA
auction facilities 682,000 vehicles were sold in 1998 (594,000 in 1997). ADESA
had 28 auction facilities at September 30, 1998 (24 at September 30, 1997). AFC
had 84 loan production offices at September 30, 1998 (54 at September 30, 1997).
In 1997 operating revenue and income included a gain from the sale of an auction
facility. Total operating expenses were up $39.7 million due to expenses
associated with increased vehicle sales and the expansion of the floorplan
financing business. Income tax expense was $6.4 million higher in 1998 because
of increased operating income.
INVESTMENTS.
- SECURITIES PORTFOLIO AND REINSURANCE. Operating revenue and income were
$4.4 million higher in 1998 due to $3.9 million of dividend income received
from a venture capital investment. Income from equity investments included
$11.9 million in 1998 ($10.6 million in 1997) from the Company's investment
in Capital Re. Together, the Company's securities portfolio and its equity
investment in Capital Re earned an annualized after-tax return of 7.4
percent in 1998 (8.1 percent in 1997). Income tax expense was $3.1 million
higher in 1998 because of increased operating income.
-11-
- REAL ESTATE OPERATIONS. Operating revenue and income from Real Estate
Operations were $1.7 million lower in 1998 because in September 1997
several large bulk land sales were recorded. Operating revenue and income
in 1998 reflected four large sales at Palm Coast and the sale of a
partnership interest in a development at Lehigh. Combined, the five sales
contributed $11.5 million to revenue in 1998. Total operating expenses
(excluding minority interest) were $1.7 million lower in 1998.
LIQUIDITY AND FINANCIAL POSITION
CASH FLOW ACTIVITIES. Cash flow from operations improved during the nine months
ended September 30, 1998 due to the continued focus on the management of working
capital throughout the Company. Cash from operating activities was also 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 4 million original issue shares of Common Stock
are available for issuance through the DRIP.
A substantial amount of ADESA's working capital is generated internally from
payments made by vehicle purchasers. However, ADESA utilizes proceeds from the
sale of commercial paper issued by the Company to meet short-term working
capital requirements arising from the timing of payment obligations to vehicle
sellers and the availability of funds from vehicle purchasers. During the sales
process, ADESA does not typically take title to vehicles.
AFC also uses proceeds from the sale of commercial paper issued by the Company
to meet its operational requirements. AFC offers short-term on-site financing
for dealers to purchase vehicles at auctions in exchange for a security interest
in those vehicles. The financing is provided through the earlier of the date the
dealer sells the vehicle or a general borrowing term of 30 - 45 days. At
September 30, 1998 AFC had sold $149.0 million ($124.0 million at December 31,
1997) of receivables on a revolving basis to a third party purchaser. Under an
agreement, the purchaser agrees to purchase up to $225.0 million of receivables
on a revolving basis. Proceeds from the sale of the receivables are used to
repay borrowings from the Company and fund vehicle inventory purchases for AFC's
customers.
Significant changes in accounts receivable, accounts payable and notes payable
balances at September 30, 1998 compared to December 31, 1997 were due to
increased sales activity by Automotive Services. Typically auction volumes are
down during the winter months and in December because of the holidays. As a
result, both ADESA and AFC had lower receivables and fewer payables at year end.
Effective May 8, 1998 AFC executed an Administration Agreement with ADT
Automotive, Inc. (ADT) which has led to an arrangement whereby AFC is providing
floorplan financing services at 26 ADT auctions.
In May 1998 the Company filed a shelf registration statement with the Securities
and Exchange Commission (SEC) pursuant to Rule 415 under the Securities Act of
1933 with respect to 3.0 million original issue shares of Common Stock. On
September 24, 1998 the Company issued and sold in an underwritten public
offering 2.0 million of these shares at $43.75 per share. In addition, an
over-allotment option for 93,000 shares at $43.75 per share was exercised by the
underwriters on October 9, 1998. Total net proceeds of approximately $89 million
will be used to repay outstanding commercial paper, to fund acquisitions and for
other general corporate purposes, including capital expenditures. Net proceeds
not immediately used for the above purposes will be invested in the Company's
securities portfolio. The Company may sell the remaining shares registered in
May 1998 if warranted by market conditions and the Company's capital
requirements. The offer and sale of such shares shall be made only by means of a
prospectus. The increase in the number of shares of Common Stock outstanding as
of September 30, 1998 had an immaterial impact on earnings per share for the
1998 periods.
-12-
ADESA acquired the assets of Greater Lansing Auto Auction in Lansing, Michigan
and I-55 Auto Auction in St. Louis, Missouri on April 30, 1998, and Ark-La-Tex
Auto Auction in Shreveport, Louisiana on May 27, 1998 for a combined purchase
price of $23.8 million. The Company used internally generated funds and issued
commercial paper to acquire these assets.
CAPITAL REQUIREMENTS. Consolidated capital expenditures for the nine months
ended September 30, 1998 totaled $51.3 million ($47.7 million in 1997).
Expenditures for 1998 included $24.6 million for Electric Operations, $10.4
million for Water Services and $16.3 million for Automotive Services. Internally
generated funds were the primary source for funding these expenditures. Total
capital expenditures are expected to be $90 million for 1998.
YEAR 2000. The Year 2000 issue relates to computer systems that recognize the
year in a date field using only the last two digits. Unless corrected, the Year
2000 may be interpreted as 1900, causing errors or shutdowns in computer systems
which may, in turn, disrupt operations.
State of Readiness. The Company has been addressing the Year 2000 issue for five
years. In the ordinary course of business, it has replaced, or is in the process
of replacing, many of its major computer systems with new systems that have been
designed to be Year 2000 compliant. These updated systems handle critical
aspects of the Company's operations, including energy management and generation
control for Electric Operations, and customer information and financial
management Company-wide.
Each of the business segments has its own Year 2000 plan, which has been
reviewed and is being monitored by a corporate-level Year 2000 Risk Assessment
Team. The Company's plan for Year 2000 readiness involves four phases:
inventory, evaluation, remediation and contingency planning. Testing is an
ongoing and integral part of the evaluation, remediation and contingency
planning phases.
- Inventory. Each business segment has performed an extensive inventory of
its information technology systems and other systems that use embedded
microprocessors (collectively, "Systems"). The business processes supported
by each System have been prioritized based on the degree of impact business
operations would encounter if the System were disrupted.
The inventory phase also includes identifying third parties with whom the
Company has material relationships. The degree to which each business
segment depends on third party support varies. Water Services, Automotive
Services and Real Estate Operations have identified minimal risk in most
areas. Where a third party is critical to a business process, efforts to
obtain Year 2000 compliance information to identify the degree of risk
exposure the business may encounter have been initiated. Electric Operations
is working with its large power customers to share Year 2000 information and
determine their readiness. In addition, Electric Operations is working with
its fuel and transportation providers in an effort to ensure adequate
supplies of fuel.
The electric industry is unique in its reliance on the integrity of the
power pool grid to support and maintain reliable, efficient operations.
Preparation for the Year 2000 by Electric Operations is linked to the Year
2000 compliance efforts of other utilities as well as to those of its major
customers whose loads support the integrity of the power pool grid. Electric
Operations is coordinating its Year 2000 efforts with the plans established
by the North American Electric Reliability Council under the direction of
the U.S. Department of Energy and is also working with the MAPP Year 2000
Task Force and a utility industry consortium to obtain and share
utility-specific Year 2000 compliance information.
The internal inventory phase was substantially completed in June 1998.
Regular contact with third parties with whom the Company has material
relationships will continue throughout 1999.
- Evaluation. This phase involves computer program code review and testing,
vendor contacts, System testing, and fully-integrated System testing where
practical. The objective of this phase is to develop and update the
remediation plan. Some Systems, upon inspection, are determined to be
non-compliant and are immediately placed on the remediation schedule. Some
Systems require testing to determine compliance status. The evaluation phase
is expected to be substantially completed by June 30, 1999. The Company
estimates that as of November 6, 1998 the evaluation phase is approximately
45 percent complete.
-13-
- Remediation. In this phase each System is either fixed, replaced or
removed. Critical Systems fixed or replaced will be tested again for Year
2000 compliance. Remediation is expected to be substantially complete by
June 30, 1999. The Company estimates that as of November 6, 1998 the
remediation phase is approximately 15 percent complete.
- Contingency Planning. Each business segment is currently developing
contingency plans designed to continue critical processes in the event the
Company experiences Year 2000 disruptions despite remediation and testing.
Plans under development include establishment of internal communications
and securing adequate onsite supplies of critical materials. Contingency
plans also will be tested. Contingency plans are expected to be developed by
June 30, 1999.
Costs. In the ordinary course of business over the last five years, the Company
has replaced major business and operating computer systems. These systems should
require minimal remediation efforts because of their recent implementation.
Formal Year 2000 readiness plans were established in March 1998. Since that
time, the Company has incurred approximately $0.6 million in expenses primarily
for labor associated with inventory, evaluation and remediation efforts. The
Company estimates its cost to prepare for the Year 2000 will be $6 million to
$10 million over the next two years, the majority of which will be incurred in
1999. Funds to address Year 2000 issues have been provided for in the Company's
existing budgets. Most of these costs will be incurred for existing personnel
assigned to Year 2000 projects or capitalized. To date no critical projects have
been deferred because of Year 2000 issues. The Company does not anticipate that
its costs associated with Year 2000 readiness will materially impact the
Company's earnings in any year.
Risks. Based upon information to date, the Company believes that, in the most
reasonably likely worst-case scenario, Year 2000 issues could result in abnormal
operating conditions, such as short-term interruption of generation,
transmission and distribution functions within Electric Operations, as well as
Company-wide loss of system monitoring and control functions, and loss of voice
communications. These conditions, along with power outages due to possible
instability of the regional electric transmission grid, could result in
temporary interruption of service to customers. The Company does not believe the
overall impact of this scenario will have a material impact on its financial
condition or operations.
--------------------------
Readers are cautioned that forward-looking statements including those contained
above, should be read in conjunction with the Company's disclosures under the
heading: "SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995" located in the preface of this Form 10-Q.
NEW ACCOUNTING STANDARD. In June 1998 the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), effective for fiscal
years beginning after June 15, 1999. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded on
the balance sheet as either an asset or liability measured at fair value. SFAS
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset the related results on the hedged item. SFAS 133 is not expected to have
a material impact on the Company upon adoption.
-14-
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Reference is made to the Company's 1997 Form 10-K for background information on
the following updates. Unless otherwise indicated, cited references are to the
Company's 1997 Form 10-K.
Ref. Page 2. - Electric Sales - Last Partial Paragraph
The record level of steel imports into the United States is adversely affecting
the domestic steel industry. If the trend continues, lower demand for steel
produced in the United States will likely have an adverse effect on the taconite
producers and the economy as a whole in northern Minnesota. Representatives of
the United States steel industry have asserted that the imports are unfair and
illegal, and have filed anti-dumping trade suits with the U.S. Department of
Commerce. The Company is unable to predict the eventual impact of this issue on
the Company's Electric Operations.
Ref. Page 3. - Large Power Customer Contracts - Last Paragraph
Ref. Form 10-Q for the quarter ended June 30, 1998, Page 15. - First Paragraph
As of November 1, 1998 the minimum annual revenue the Company would collect
under contracts with these large power customers, assuming no electric energy
use by these customers, is estimated to be $109.2, $85.0, $71.2, $67.8 and $57.4
million during the years 1998, 1999, 2000, 2001 and 2002, respectively. Based on
past experiences and projected operating levels, the Company believes revenue
from these large power customers will be substantially in excess of the minimum
contract amounts.
Six of the seven taconite producers in Minnesota have collective bargaining
agreements with the United Steel Workers of America. These agreements expire in
August 1999. The Company is unable to predict whether or not any labor disputes
will arise in the course of union negotiations and, if such disputes occur, the
impact thereof on the Company's Electric Operations.
Ref. Page 11. - Table - National Pollutant Discharge Elimination System Permits
Ref. Form 10-Q for the quarter ended March 31, 1998, Page 10. - Third Paragraph
Ref. Form 10-Q for the quarter ended June 30, 1998, Page 15. - Fourth Paragraph
A renewal application permit for the Boswell Energy Center was submitted to the
Minnesota Pollution Control Agency (MPCA) on June 27, 1997. A new permit is
expected to be issued in the fourth quarter of 1998.
A renewal application permit for the Laskin Energy Center was submitted to the
MPCA on March 30, 1998. The permit is expected to be issued in the fourth
quarter of 1998.
Ref. Page 13. - Regulatory Issues - Florida Public Service Commission -
Hillsborough County Rates
In July 1997 Florida Water filed with the Hillsborough County Utilities
Department a request for an annual interim revenue increase of $0.8 million and
a final increase of $0.9 million from customers within Hillsborough County.
Interim rates became effective in August 1997. Hearings have concluded. The
Hillsborough Board of County Commissioners (BOCC) approved 100 percent of the
increases requested for two of the Hillsborough County facilities (approximately
$0.2 million). With respect to the third Hillsborough County facility, the BOCC
voted on August 6, 1998 to grant the Company the water rate increase requested
(additional revenue of approximately $0.1 million), but denied any wastewater
rate increase (approximately $0.6 million). The BOCC also voted to require the
Company to refund interim wastewater rates to customers with interest. The
Company filed a complaint and a request for review with the Circuit Court in
Hillsborough County on September 28, 1998. The Company is challenging the
wastewater rate denial and refund on several grounds, including mistake of fact,
violation of due process, unlawful ex parte communications, and other violations
of the law. No provision for refund has been recorded. The Company is unable to
predict the outcome of this case.
-15-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Financial Data Schedule
99 Underwriting Agreement, dated September 24, 1998, by and among
the Company and the several underwriters represented by
PaineWebber Incorporated, Robert W. Baird & Co. Incorporated and
Janney Montgomery Scott Inc., with respect to the issuance and
sale of 2,093,000 shares of Common Stock.
(b) Reports on Form 8-K.
None.
-16-
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, Inc.
--------------------------------
(Registrant)
November 6, 1998 D. G. Gartzke
--------------------------------
D. G. Gartzke
Senior Vice President - Finance
and Chief Financial Officer
November 6, 1998 Mark A. Schober
--------------------------------
Mark A. Schober
Controller
-17-
EXHIBIT INDEX
Exhibit Number
27 Financial Data Schedule
99 Underwriting Agreement, dated September 24, 1998, by and among
the Company and the several underwriters represented by
PaineWebber Incorporated, Robert W. Baird & Co. Incorporated
and Janney Montgomery Scott Inc., with respect to the issuance
and sale of 2,093,000 shares of Common Stock.