<PAGE>
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 September 30, 1995
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,
31,314,718 shares outstanding
as of September 30, 1995
<PAGE>
Minnesota Power & Light Company
Index
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet -
September 30, 1995 and December 31, 1994 1
Consolidated Statement of Income -
Quarter and Nine Months ended September 30, 1995 and 1994 2
Consolidated Statement of Cash Flows -
Nine Months ended September 30, 1995 and 1994 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 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE>
Definitions
The following abbreviations or acronyms are used in the text.
Abbreviation
or Acronym Term
- -------------- ----------------------------------------------------------
1994 Form 10-K Minnesota Power's Annual Report on Form 10-K for the Year
Ended December 31, 1994
ADESA ADESA Corporation
Capital Re Capital Re Corporation
Company Minnesota Power & Light Company and its Subsidiaries
CPI Consolidated Papers, Inc.
DRIP Automatic Dividend Reinvestment and Stock Purchase Plan
EPA Environmental Protection Agency
ESOP Employee Stock Ownership Plan
FERC Federal Energy Regulatory Commission
FPSC Florida Public Service Commission
Lehigh Lehigh Acquisition Corporation
LSPI Lake Superior Paper Industries
Minnesota Power Minnesota Power & Light Company and its Subsidiaries
MPUC Minnesota Public Utilities Commission
MW Megawatt(s)
Reach All Reach All Partnership
Square Butte Square Butte Electric Cooperative
SSU Southern States Utilities, Inc.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Minnesota Power
Consolidated Balance Sheet
In Thousands
<CAPTION>
September 30, December 31,
1995 1994
Unaudited Audited
- -------------------------------------------------------------------------------
<S> <C> <C>
Assets
Plant and Other Assets
Electric utility operations $ 784,588 $ 784,931
Water utility operations 313,727 295,451
Auto redistribution operations 100,575 -
Investments and corporate services 212,350 360,121
---------- ----------
Total plant and other assets 1,411,240 1,440,503
---------- ----------
Current Assets
Cash and cash equivalents 42,467 27,001
Trading securities 53,919 74,046
Trade accounts receivable (less
reserve of $2,804 and $1,041) 125,716 51,105
Notes and other accounts receivable 8,053 61,654
Fuel, material and supplies 24,168 26,405
Prepayments and other 23,289 25,927
---------- ----------
Total current assets 277,612 266,138
---------- ----------
Deferred Charges
Regulatory 84,423 74,919
Other 26,652 24,353
---------- ----------
Total deferred charges 111,075 99,272
---------- ----------
Intangible Assets
Goodwill 120,590 1,885
Other 12,305 -
---------- ----------
Total intangible assets 132,895 1,885
---------- ----------
Total Assets $1,932,822 $1,807,798
- -------------------------------------------------------------------------------
Capitalization and Liabilities
Capitalization
Common stock without par value,
65,000,000 shares authorized
31,314,718 and 31,246,557
shares outstanding $ 373,369 $ 371,178
Unearned ESOP shares (73,394) (76,727)
Net unrealized gain (loss) on
securities investments 802 (5,410)
Cumulative translation adjustment 10 -
Retained earnings 279,960 272,646
---------- ----------
Total common stock equity 580,747 561,687
Cumulative preferred stock 28,547 28,547
Redeemable serial preferred stock 20,000 20,000
Long-term debt 622,417 601,317
---------- ----------
Total capitalization 1,251,711 1,211,551
---------- ----------
Current Liabilities
Accounts payable 94,341 36,792
Accrued taxes 42,284 41,133
Accrued interest and dividends 11,683 14,157
Notes payable 89,450 54,098
Long-term debt due within one year 10,703 12,814
Other 35,905 23,799
---------- ----------
Total current liabilities 284,366 182,793
---------- ----------
Deferred Credits
Accumulated deferred income taxes 165,106 192,441
Contributions in aid of construction 91,898 87,036
Regulatory 53,772 55,996
Other 85,969 77,981
---------- ----------
Total deferred credits 396,745 413,454
---------- ----------
Total Capitalization and Liabilities $1,932,822 $1,807,798
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
- 1 -
<PAGE>
<TABLE>
Minnesota Power
Consolidated Statement of Income
In Thousands Except Per Share Amounts - Unaudited
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenue and Income
Electric utility operations $129,712 $110,683 $367,579 $338,030
Water utility operations 17,606 17,289 52,422 54,822
Auto redistribution operations 30,381 - 30,381 -
Investments and corporate services 8,422 12,783 29,762 27,304
-------- -------- -------- --------
Total operating revenue and
income 186,121 140,755 480,144 420,156
-------- -------- -------- --------
Operating Expenses
Fuel and purchased power 46,087 38,250 130,510 118,372
Operations 75,696 58,901 198,812 174,392
Administrative and general 29,768 14,776 65,017 50,200
Interest expense 13,246 11,439 35,735 33,434
-------- -------- -------- --------
Total operating expenses 164,797 123,366 430,074 376,398
-------- -------- -------- --------
Income (Loss) from Equity Investments 2,339 1,247 (1,570) 4,296
-------- -------- -------- --------
Operating Income from Continuing Operations 23,663 18,636 48,500 48,054
Income Tax Expense (Benefit) 7,978 4,336 (1,915) 11,500
-------- -------- -------- --------
Income from Continuing Operations 15,685 14,300 50,415 36,554
Income from Discontinued Operations 33 899 2,874 983
-------- -------- -------- --------
Net Income 15,718 15,199 53,289 37,537
Dividends on Preferred Stock 800 800 2,400 2,400
-------- -------- -------- --------
Earnings Available for Common Stock $ 14,918 $ 14,399 $ 50,889 $ 35,137
======== ======== ======== ========
Average Shares of Common Stock 28,512 28,258 28,443 28,216
Earnings Per Share of Common Stock
Continuing operations $.52 $.48 $1.69 $ 1.22
Discontinued operations .00 .03 .10 .03
---- ---- ----- ------
Total $.52 $.51 $1.79 $ 1.25
==== ==== ===== ======
Dividends Per Share of Common Stock $.51 $.505 $1.53 $1.515
- --------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
- 2 -
<PAGE>
<TABLE>
Minnesota Power
Consolidated Statement of Cash Flows
In Thousands - Unaudited
<CAPTION>
Nine Months Ended
September 30,
1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 53,289 $37,537
Depreciation and amortization 40,269 34,393
Amortization of coal contract termination costs - 3,920
Deferred income taxes (28,491) 4,584
Deferred investment tax credits (1,437) (1,811)
Pretax loss on disposal of discontinued
operations 1,760 -
Changes in operating assets and liabilities
net of the effects of discontinued
operations and subsidiary acquisitions
Notes and accounts receivable (6,748) 9,130
Fuel, material and supplies (1,015) (4,770)
Accounts payable 16,560 (9,577)
Other current assets and liabilities 34,104 13,485
Other - net (8,388) 3,302
-------- -------
Cash from operating activities 99,903 90,193
-------- -------
Investing Activities
Proceeds from sale of investments in securities 77,997 33,331
Cash from sale of discontinued operations -
net of cash sold 107,633 -
Additions to investments (43,405) (63,110)
Additions to plant (73,053) (46,845)
Acquisition of subsidiaries - net of cash acquired (129,083) -
Changes to other assets - net (447) (16,776)
-------- -------
Cash for investing activities (60,358) (93,400)
-------- -------
Financing Activities
Issuance of common stock 2,158 818
Issuance of long-term debt 18,805 20,632
Changes in notes payable 10,006 23,980
Reductions of long-term debt (9,074) (7,221)
Dividends on preferred and common stock (45,974) (45,120)
-------- -------
Cash for financing activities (24,079) (6,911)
-------- -------
Change in Cash and Cash Equivalents 15,466 (10,118)
Cash and Cash Equivalents at Beginning of Period 27,001 31,674
-------- -------
Cash and Cash Equivalents at End of Period $ 42,467 $21,556
======== =======
Supplemental Cash Flow Information
Cash paid during the period for
Interest (net of capitalized) $ 40,249 $40,408
Income taxes $ 20,534 $16,248
- -------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
- 3 -
<PAGE>
Notes to Consolidated Financial Statements
The accompanying unaudited consolidated financial statements and notes should
be read in conjunction with the Company's 1994 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
discontinuance of the paper and pulp business. Financial statement information
may not be comparable between periods due to the purchase of ADESA on July 1,
1995.
<TABLE>
Note 1. Business Segments
Thousands
<CAPTION>
Electric Water
Utility Utility
Consolidated Operations Operations
------------ ---------- ----------
Electric Coal
-------- ----
Quarter Ended September 30, 1995
- --------------------------------
<S> <C> <C> <C> <C>
Operating revenue and income $186,121 $122,032 $7,680 $17,606
Operation and other expense 136,609 86,523 5,687 12,273
Depreciation and amortization
expense 14,942 9,581 382 2,594
Interest expense 13,246 5,027 342 2,735
Income from equity investments 2,339 - - -
-------- -------- ------ -------
Operating income (loss)
from continuing operations 23,663 20,901 1,269 4
Income tax expense (benefit) 7,978 8,809 318 (161)
-------- -------- ------ -------
Income from
continuing operations 15,685 $ 12,092 $ 951 $ 165
======== ====== =======
Income from
discontinued operations 33
--------
Net income $ 15,718
========
Quarter Ended September 30, 1994
- --------------------------------
Operating revenue and income $140,755 $104,032 $6,651 $17,289
Operation and other expense 100,325 75,228 4,888 11,833
Depreciation and amortization
expense 11,602 8,858 318 2,348
Interest expense 11,439 4,912 265 3,150
Income from equity investments 1,247 - - -
-------- -------- ------ -------
Operating income (loss)
from continuing operations 18,636 15,034 1,180 (42)
Income tax expense (benefit) 4,336 6,169 326 2
-------- -------- ------ -------
Income (loss) from
continuing operations 14,300 $ 8,865 $ 854 $ (44)
======== ====== =======
Income from
discontinued operations 899
--------
Net income $ 15,199
========
<CAPTION>
Auto
Redistribution Investments and
Operations Corporate Services
-------------- ----------------------
Portfolio,
Reinsurance Real
& Other Estate
----------- ------
Quarter Ended September 30, 1995
- --------------------------------
<S> <C> <C> <C>
Operating revenue and income $30,381 $4,049 $4,373
Operation and other expense 25,650 2,755 3,721
Depreciation and amortization
expense 2,291 34 60
Interest expense 907 4,234 1
Income from equity investments - 2,339 -
------- ------ ------
Operating income (loss)
from continuing operations 1,533 (635) 591
Income tax expense (benefit) 856 (2,136) 292
------- ------ ------
Income from
continuing operations $ 677 $1,501 $ 299
======= ====== ======
Income from
discontinued operations
Net income
Quarter Ended September 30, 1994
- --------------------------------
Operating revenue and income $ - $4,903 $7,880
Operation and other expense - 2,621 5,755
Depreciation and amortization
expense - 42 36
Interest expense - 3,108 4
Income from equity investments - 1,247 -
------- ------ ------
Operating income (loss)
from continuing operations - 379 2,085
Income tax expense (benefit) - (1,830) (331)
------- ------ ------
Income (loss) from
continuing operations $ - $2,209 $2,416
======= ====== ======
Income from
discontinued operations
Net income
</TABLE>
- 4 -
<PAGE>
<TABLE>
Note 1. Business Segments (Continued)
Thousands
<CAPTION>
Electric Water
Utility Utility
Consolidated Operations Operations
------------ ---------- ----------
Electric Coal
-------- ----
Nine Months Ended September 30, 1995
- ------------------------------------
<S> <C> <C> <C> <C>
Operating revenue and income $ 480,144 $346,802 $20,777 $ 52,422
Operation and other expense 354,070 254,626 15,642 36,248
Depreciation and amortization
expense 40,269 28,734 1,115 7,846
Interest expense 35,735 15,284 900 7,919
Loss from equity investments (1,570) - - -
---------- -------- ------- --------
Operating income (loss)
from continuing operations 48,500 48,158 3,120 409
Income tax expense (benefit) (1,915) 20,431 776 (101)
---------- -------- ------- --------
Income from
continuing operations 50,415 $ 27,727 $ 2,344 $ 510
======== ======= ========
Income from
discontinued operations 2,874
----------
Net income $ 53,289
==========
Total assets $1,932,822 $933,749 $33,435 $326,177
Accumulated depreciation $ 617,532 $497,125 $18,340 $100,904
Accumulated amortization $ 1,949 $ - $ - $ -
Construction work in progress $ 69,135 $ 12,488 $ - $ 20,258
Nine Months Ended September 30, 1994
- ------------------------------------
Operating revenue and income $ 420,156 $318,111 $19,919 $ 54,822
Operation and other expense 308,571 233,307 15,163 35,269
Depreciation and amortization
expense 34,393 26,173 979 7,071
Interest expense 33,434 15,181 762 8,913
Income from equity investments 4,296 - - -
---------- -------- ------- --------
Operating income (loss)
from continuing operations 48,054 43,450 3,015 3,569
Income tax expense (benefit) 11,500 18,421 817 1,357
---------- -------- ------- --------
Income (loss) from
continuing operations 36,554 $ 25,029 $ 2,198 $ 2,212
======== ======= ========
Income from
discontinued operations 983
----------
Net income $ 37,537
==========
Total assets $1,786,356 <F7> $908,798 $27,816 $354,365
Accumulated depreciation $ 584,505 <F8> $467,426 $17,300 $ 95,968
Accumulated amortization $ 362 $ - $ - $ -
Construction work in progress $ 44,229 $ 29,269 $ - $ 14,960
<CAPTION>
Auto
Redistribution Investments and
Operations <F1> Corporate Services
-------------- ----------------------
Portfolio,
Reinsurance Real
& Other Estate
----------- ------
Nine Months Ended September 30, 1995
- ------------------------------------
<S> <C> <C> <C>
Operating revenue and income $30,381 $ 16,686 $ 13,076
Operation and other expense 25,650 7,557 14,347 <F3>
Depreciation and amortization
expense 2,291 103 180
Interest expense 907 10,722 3
Loss from equity investments - (1,570) <F2> -
------- -------- --------
Operating income (loss)
from continuing operations 1,533 (3,266) (1,454)
Income tax expense (benefit) 856 (6,746) (17,131) <F4>
------- -------- --------
Income from
continuing operations $ 677 $ 3,480 $ 15,677
======= ======== ========
Income from
discontinued operations
Net income
Total assets $343,267 $244,595 $ 51,599
Accumulated depreciation $ 957 $ 206 $ -
Accumulated amortization $ 1,297 $ - $ 652
Construction work in progress $ 36,389 $ - $ -
Nine Months Ended September 30, 1994
- ------------------------------------
Operating revenue and income $ - $ 1,078 <F5> $ 26,226 <F6>
Operation and other expense - 7,994 16,838
Depreciation and amortization
expense - 44 126
Interest expense - 8,569 9
Income from equity investments - 4,296 -
------- -------- --------
Operating income (loss)
from continuing operations - (11,233) 9,253
Income tax expense (benefit) - (9,095) -
------- -------- --------
Income (loss) from
continuing operations $ - $ (2,138) $ 9,253
======= ======== ========
Income from
discontinued operations
Net income
Total assets $ - $302,659 $ 35,036
Accumulated depreciation $ - $ 42 $ -
Accumulated amortization $ - $ - $ 362
Construction work in progress $ - $ - $ -
<FN>
<F1> Purchased July 1, 1995.
<F2> Includes an $8.5 million pre-tax provision for exiting the equipment manufacturing business.
<F3> Includes $3.7 million of minority interest relating to the recognition of tax benefits. (See Note
4.)
<F4> Includes $18.4 million of tax benefits. (See Note 4.)
<F5> Includes a $10.1 million pre-tax loss from the write-off of an investment.
<F6> Includes $3.6 million of income related to escrow funds.
<F7> Includes $157.7 million related to operations which were discontinued in 1995.
<F8> Includes $3.8 million related to operations which were discontinued in 1995.
</FN>
</TABLE>
- 5 -
<PAGE>
Note 2. Securities Investments
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------------------------- ---------------------------------------
Gross Unrealized Gross Unrealized
Summary of ---------------- Fair ---------------- Fair
Securities Cost Gain (Loss) Value Cost Gain (Loss) Value
- -----------------------------------------------------------------------------------------------------
In Thousands
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Trading $ 53,919 $ 74,046
Available-for-sale
Common stock $ 2,599 $ - $ (597) 2,002 $ 10,636 $ 86 $(1,748) 8,974
Preferred stock 74,356 2,706 (1,901) 75,161 117,860 2,747 (3,893) 116,714
------- ------ ------- -------- -------- ------ ------- --------
$76,955 $2,706 $(2,498) 77,163 $128,496 $2,833 $(5,641) 125,688
Held-to-maturity
Leveraged
preferred
stock $ 2,130 2,130 $ 2,013 2,013
-------- --------
Total securities
investments $133,212 $201,747
======== ========
</TABLE>
The net unrealized gain (loss) on securities investments on the balance sheet
includes the Company's share of Capital Re's unrealized holding gains of
$680,000 at September 30, 1995, and $3.8 million of unrealized holding losses
at December 31, 1994.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trading securities
Change in net unrealized holding gain
included in earnings $ 70 $ 941 $ 850 $ 1,007
Available-for-sale securities
Proceeds from sales $18,978 $15,908 $77,997 $33,331
Gross realized gains $ 557 $ 337 $ 2,131 $ 580
Gross realized (losses) $ (949) $ (616) $(2,554) $(1,299)
</TABLE>
Note 3. 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 1995 through 1999. 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.
- 6 -
<PAGE>
Note 4. Income Tax Expense
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
Schedule of Income Tax Expense (Benefit) 1995 1994 1995 1994
- -------------------------------------------------------------------------------------------
In Thousands
<S> <C> <C> <C> <C>
Charged to continuing operations
Current tax
Federal $ 5,206 $ 3,976 $ 9,072 $ 10,153
State 2,574 1,543 4,195 3,729
------- ------- ------- --------
7,780 5,519 13,267 13,882
------- ------- ------- --------
Deferred tax
Federal 1,200 (21) (11,100) 259
State (590) (253) (2,645) (830)
------- ------- ------- --------
610 (274) (13,745) (571)
------- ------- ------- --------
Deferred tax credits (412) (909) (1,437) (1,811)
------- ------- ------- --------
Income tax - continuing operations 7,978 4,336 (1,915) 11,500
------- ------- ------- --------
Charged to discontinued operations
Current tax
Federal - (760) 13,396 (3,398)
State - (220) 4,192 (1,006)
------- ------- ------- --------
- (980) 17,588 (4,404)
------- ------- ------- --------
Deferred tax
Federal - 1,269 (11,851) 3,969
State - 378 (2,895) 1,186
------- ------- ------- --------
- 1,647 (14,746) 5,155
------- ------- ------- --------
Income tax - discontinued operations - 667 2,842 751
------- ------- ------- --------
Total income tax expense $ 7,978 $ 5,003 $ 927 $ 12,251
======= ======= ======= ========
</TABLE>
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.
With this new directive in place, Lehigh recognized $18.4 million of income in
the first quarter of 1995 by reducing a portion of the valuation reserve that
offsets the deferred tax assets. The Company's portion of that income is $14.7
million, or 52 cents per share.
- 7 -
<PAGE>
Note 5. Discontinued Operations
On June 30, 1995, Minnesota Power sold its interest in the paper and pulp
business to CPI for $118 million in cash, plus CPI's assumption of certain debt
and lease obligations. The Company is still committed to a maximum guaranty of
$90 million to ensure a portion of LSPI's $33.4 million annual lease obligation
for equipment under an operating lease extending to 2012. However, CPI has
agreed to indemnify the Company for any payments the Company may make as a
result of the Company's existing obligation relating to the LSPI operating
lease.
The financial results of the paper and pulp business including the loss on
disposition have been accounted for as discontinued operations.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
Summary of Discontinued Operations 1995 1994 1995 1994
- ------------------------------------------------------------------------------------
In Thousands
<S> <C> <C> <C> <C>
Operating revenue and income $15,068 $44,324 $38,541
======= ======= =======
Equity in earnings $ 897 $ 7,496 $ 1,731
======= ======= =======
Income from operations $ 1,566 $ 7,476 $ 1,734
Income tax expense 667 3,117 751
------- ------- -------
899 4,359 983
------- ------- -------
Loss on disposal $33 - (1,760) -
Income tax benefit - - 275 -
--- ------- ------- -------
33 - (1,485) -
--- ------- ------- -------
Income from discontinued operations $33 $ 899 $ 2,874 $ 983
=== ======= ======= =======
</TABLE>
- 8 -
<PAGE>
Note 6. Acquisition of ADESA
On July 1, 1995, Minnesota Power became an 80 percent owner of ADESA for $167
million in cash. The Company accounted for the acquisition as a purchase. The
transaction resulted in additional goodwill of approximately $115 million,
which will be amortized over a 40 year period. The Company has included ADESA
in its consolidated financial statements since the date of acquisition.
Put and call agreements with ADESA's four top managers provide ADESA management
the right to sell to Minnesota Power, and Minnesota Power the right to
purchase, ADESA management's 20 percent retained ownership interest in ADESA,
in increments during the years 1997, 1998 and 1999, at a price based on ADESA's
financial performance.
The following unaudited pro forma summary presents the consolidated results of
operations of the Company for the nine months ended September 30, 1995 and
1994, as if the acquisition of ADESA had occurred on January 1 of the
respective periods. The information is not necessarily indicative of the
financial position or operating results that would have occurred had the
acquisition been consummated at the beginning of the respective periods, nor is
it necessarily indicative of future operating results. It has been prepared
from, and should be read in conjunction with, the historical consolidated
financial statements and related notes thereto of Minnesota Power and ADESA. To
prepare the pro forma data, certain adjustments have been made which include:
(i) the reduction of investment income resulting from utilization of the
Company's cash and investments to finance the acquisition; (ii) the
amortization of goodwill and other intangible assets; (iii) the change in
depreciation expense resulting from purchase accounting; and (iv) the tax
effects of the adjustments.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
Summary Pro Forma Financial Information 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C>
In Thousands
Operating revenue and income $536,972 $487,461
======== ========
Income from continuing operations $ 49,721 $ 37,274
======== ========
Net income $ 52,595 $ 38,257
======== ========
Earnings per share of common stock
from continuing operations $ 1.66 $ 1.24
======== ========
Total earnings per share of common stock $ 1.76 $ 1.27
======== ========
</TABLE>
- 9 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Minnesota Power has operations in four business areas: (1) electric utility
operations, which include electric, gas and coal mining operations; (2) water
utility operations, which include water and wastewater; (3) an auto
redistribution business acquired on July 1, 1995; and (4) investments and
corporate services, which include a financial guaranty reinsurance company, a
real estate company and investments in securities.
Earnings per share of common stock for the quarter ended September 30, 1995,
were 52 cents compared to 51 cents for the same period in 1994. Higher earnings
in 1995 are primarily attributed to increased sales from the electric utility.
Earnings from the securities portfolio and reinsurance business, combined with
the addition of the auto redistribution business, also made positive
contributions to 1995 earnings. Earnings in 1994 included the operations of the
paper and pulp business which was sold on June 30, 1995.
Earnings per share of common stock for the nine months ended September 30,
1995, were $1.79 compared to $1.25 for the same period in 1994. The most
significant factor contributing to the higher earnings in 1995 was the
recognition of tax benefits associated with real estate which contributed 52
cents to earnings per share. Earnings in 1995 also reflect the improved
performance of the Company's securities portfolio, the addition of the auto
redistribution business as of July 1, 1995, increased electric sales to
industrial customers and other power suppliers, and higher paper and pulp
prices before the paper and pulp business was sold. These earnings were offset
in part by lower water consumption levels in Florida and an 18 cent per share
provision associated with exiting the truck-mounted lifting equipment business.
Earnings in 1994 include 13 cents per share from the recognition of escrow
funds associated with real estate and a 21 cent per share write-off of an
investment.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
Earnings Per Share 1995 1994 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Continuing Operations
Electric Utility Operations
Electric $.40 $.30 $ .92 $ .84
Coal .03 .03 .08 .08
---- ---- ----- -----
.43 .33 1.00 .92
---- ---- ----- -----
Water Utility Operations .01 .00 .02 .08
---- ---- ----- -----
Auto Redistribution Operations .03 - .03 -
---- ---- ----- -----
Investments and Corporate Services
Portfolio and reinsurance .07 .10 .33 (.02)
Real estate .01 .09 .55 .33
Other operations (.03) (.04) (.24) (.09)
---- ---- ----- -----
.05 .15 .64 .22
---- ---- ----- -----
Total Continuing Operations .52 .48 1.69 1.22
---- ---- ----- -----
Discontinued Operations - .03 .10 .03
---- ---- ----- -----
Total Earnings Per Share $.52 $.51 $1.79 $1.25
==== ==== ===== =====
</TABLE>
- 10 -
<PAGE>
Results of Operations
Comparison of the Quarter Ended September 30, 1995 and 1994.
Electric utility operations. Operating revenue and income from electric utility
operations were higher in 1995 compared to 1994 primarily because of a 25
percent increase in kilowatt-hour sales. Although sales to all retail customers
were higher, sales for resale were up 62 percent due to warm summer weather and
increased demand from other power suppliers. Fuel and purchased power expenses
were higher in 1995 due to increased demand for electricity. Operations
expenses included higher scheduled maintenance costs and customer service
expenses tempered by lower payroll costs associated with an early retirement
offering to certain electric utility employees. Coal operations contributed net
income of $951,000 in 1995 and $854,000 in 1994 to electric utility operations.
Revenue from electric sales to taconite customers accounted for 34 percent of
operating revenue and income from electric utility operations in 1995 compared
to 35 percent in 1994. Revenue from electric sales to paper and other wood
products companies accounted for 12 percent of operating revenue and income
from electric utility operations in 1995 compared to 14 percent in 1994.
Water utility operations. Operating revenue and income from water utility
operations were up slightly in 1995 due to increased water sales in the
Carolinas and Wisconsin. Sales in Florida were down in 1995 due in part to the
December 1994 sale of SSU's Venice Gardens assets, abnormally high rainfall
which reduced irrigation demand, and customer water conservation efforts. It is
expected that the loss of customers as a result of the Venice Gardens sale will
be offset when the purchase of Orange Osceola Utilities, Inc. is completed. The
purchase, which was approved by the FPSC on October 10, 1995, is expected to
close in late 1995.
In June 1995 SSU filed a request with the FPSC for an $18.6 million annual
increase in water and wastewater treatment rates. SSU requested interim rates
of $12.4 million (annualized) to be effective in October 1995. On October 6,
1995, the FPSC denied SSU's request for interim rates. Reasons for denial
included the fact the FPSC was unable to determine interim rates based on
stand-alone rates since SSU filed its request based on uniform rates, as well
as concerns over projected financial information on which the request was
based. However, the FPSC recognized the unfairness of denying interim rates
based upon this reason when, at the time SSU filed its rate case, SSU was
unaware of the need for inclusion in its filing of a stand-alone rate
structure. On October 23, 1995, SSU filed an appeal with the Florida First
District Court of Appeals of the FPSC's October 6, 1995, denial of SSU's
request for interim rates based on uniform rates. SSU's appeal requests
expedited consideration by the court. SSU also intends to refile in early
November 1995 information which would permit an $8 million to $12 million
(annualized) interim rate increase. The interim rates, if approved by the FPSC,
would become effective within sixty days of the filing, subject to refund with
interest.
Auto redistribution operations. The Company purchased an 80 percent interest in
ADESA on July 1, 1995. Results from ADESA's auto redistribution operations are
included for the first time in the Company's consolidated financial statements
for the period ended September 30, 1995. Approximately 119,000 cars, in total,
were sold at ADESA's 17 auction sites in the United States and Canada, which
represents a 14 percent increase from the approximately 104,000 cars sold in
the third quarter of 1994.
Investments and corporate services. In 1995 improved market conditions enhanced
the securities portfolio and reinsurance business results. Securities
investments totaling $60 million
- 11 -
<PAGE>
were sold to partially fund the July 1, 1995, purchase of ADESA. The lower
income from real estate is due primarily to the timing of commercial real
estate sales in Florida.
Discontinued operations. Operating results of the paper and pulp business as
well as the disposition of that business have been included in discontinued
operations.
Comparison of the Nine Months Ended September 30, 1995 and 1994.
Electric utility operations. Operating revenue and income from electric utility
operations were higher in 1995 compared to 1994 due to an 11 percent increase
in kilowatt-hour sales and to new rates in effect since June 1, 1995. Coal
operations contributed $2.3 million and $2.2 million of net income in 1995 and
1994, respectively, to electric utility operations.
Revenue from electric sales to taconite customers accounted for 36 percent of
operating revenue and income from electric utility operations in 1995 compared
to 33 percent in 1994. During 1995 taconite customers purchased 22 percent more
electricity from Minnesota Power than in 1994. Revenue from electric sales to
paper and other wood products companies accounted for 13 percent of operating
revenue and income from electric utility operations in 1995 compared to 14
percent in 1994.
Water utility operations. Operating revenue and income from water utility
operations were down in 1995 due in part to the December 1994 sale of SSU's
Venice Gardens assets, abnormally high rainfall which reduced irrigation demand
and customer water conservation efforts. It is expected that the loss of
customers as a result of the Venice Gardens sale will be offset when the
purchase of Orange Osceola Utilities, Inc. is completed. The purchase, which
was approved by the FPSC on October 10, 1995, is expected to close in late
1995.
Auto redistribution operations. Financial results from the auto redistribution
operations reflect the three months of operations since the Company acquired
ADESA on July 1, 1995.
Investments and corporate services. Earnings from investments and corporate
services were higher in 1995 primarily due to the recognition of $18.4 million
of tax benefits by Lehigh, the Company's real estate business. 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. The Company's portion
of the tax benefits reflected in income is $14.7 million. Earnings in 1994
include 13 cents per share from the recognition of escrow funds associated with
Lehigh.
The performance of the Company's securities portfolio improved significantly
over 1994 due to improved market conditions. Securities investments totaling
$60 million were sold to partially fund the July 1, 1995, purchase of ADESA. In
the first quarter of 1994 the Company wrote off a $10.1 million securities
investment. In March 1995, the Company recorded a $5 million after-tax
provision in anticipation of exiting Reach All. The provision lowered 1995
earnings per share by 18 cents. It is expected that the liquidation of Reach
All will be completed in late 1995.
Discontinued operations. Operating results of the paper and pulp business as
well as the disposition of that business have been included in discontinued
operations. Significantly higher paper and pulp prices increased earnings in
1995.
- 12 -
<PAGE>
Liquidity and Financial Condition
Reference is made to the Consolidated Statement of Cash Flows for the nine
months ended September 30, 1995 and 1994, for purposes of the following
discussion.
Cash flow activities. Cash from operating activities was affected by a number
of factors representative of normal operations and three months of auto
distribution operations since the July 1, 1995, acquisition of ADESA.
Cash from investing activities included proceeds from the sale of the paper and
pulp business and proceeds from the sale of a portion of the securities
portfolio that were used to fund the purchase of ADESA on July 1, 1995.
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 900,000 original issue shares of common stock are
available for issuance through the DRIP.
A substantial amount of ADESA's working capital is generated internally because
payments made by vehicle purchasers are generally available to satisfy ADESA's
payment obligations to vehicle sellers. ADESA pays the seller and deposits the
purchaser's check only at the time title is delivered. A consequence of this
sequence of events is that the ADESA check issued to the seller sometimes
clears before the bank into which ADESA deposits the purchaser's check makes
available the funds represented by that check. ADESA has an $18 million line of
credit to meet the short-term working capital requirements incident to this
timing difference. ADESA also utilizes the line of credit in connection with
factory sales. In factory sales, ADESA auctions vehicles provided by automobile
manufacturers. ADESA generally is required to pay the manufacturers for the
auctioned vehicles with electronic fund transfers before the checks received by
ADESA from the purchasers clear.
ADESA, through its wholly-owned subsidiary, Automotive Finance Corporation
(AFC), also offers short-term on-site financing for dealers to purchase
automobiles at auctions in exchange for a security interest in those
automobiles. The financing is provided through the earlier of the date the
dealer sells the automobile or a general borrowing term of 30-60 days. As a
result, AFC has a $40 million revolving line of credit to meet its operational
requirements.
Capital requirements. Consolidated capital expenditures for the nine months
ended September 30, 1995, totaled $73 million. These expenditures include $32
million for electric utility operations, of which $6.3 million was for coal
operations, $22 million for water utility operations, $18 million for auto
auction site relocation and development, and $700,000 for the discontinued
operations. Internally generated funds were the primary source for funding
these expenditures.
PART II. OTHER INFORMATION
Item 5. Other Information
Reference is made to the Company's 1994 Form 10-K for background information on
the following updates. Unless otherwise indicated, cited references are to the
Company's 1994 Form 10-K.
- 13 -
<PAGE>
Ref. Pages 3 and 4. - Table-Contract Status for Minnesota Power Firm Large
Power Customers
Ref. 10-Q for the quarter ended March 31, 1995, Page 10.
Ref. 10-Q for the quarter ended June 30, 1995, Page 12.
Blandin Paper - On September 14, 1995, the MPUC approved an amendment for
contract demand of between 39.8 MW and 43.7 MW and incremental demand of
between 13.2 MW and 15.2 MW for the period April 1995 through October 1995.
Ref. Page 8. - First Paragraph and Ref. Page 12. - Fifth Paragraph
Ref. 10-Q for the quarter ended March 31, 1995, Page 11. - First Paragraph
Ref. 10-Q for the quarter ended June 30, 1995, Page 14. - Fourth Paragraph
FERC operating licenses for two of the Company's hydroelectric facilities are
currently undergoing relicensing at the FERC. A final application to relicense
the Pillager Project was filed with the FERC on May 12, 1995, and was
officially accepted by the FERC on October 2, 1995. The FERC will next perform
an environmental analysis of the Pillager Project, which will define the scope
of further review and relicensing activity. On July 13, 1995, the FERC issued a
thirty (30) year license to the Company for the St. Louis River Project, which
license, if implemented, would reduce the economic benefits of the Project to
the Company. The Company and other interested parties filed motions for
rehearing on certain aspects of the licensing order. On October 5, 1995, the
Company filed a motion for clarification of the status of the license and, in
the alternative, for stay of the license conditions until a final,
nonappealable order is issued by the FERC.
Ref. Page 8. - Fourth and Fifth Paragraphs
Ref. 10-Q for the quarter ended June 30, 1995, Page 14. - Second Paragraph
On August 24, 1995, the Firm Large Power Customers filed with the Minnesota
Court of Appeals an appeal of the MPUC's May 1995 decision. On September 8,
1995, the Company requested that the MPUC order a partial stay of refunding
until the legal proceedings are concluded. On October 26, 1995, the MPUC denied
the Company's request. The Company expects to refund approximately $5 million,
including interest, in December 1995 to customers based on interim rate revenue
collected during the period March 1, 1994 through May 31, 1995.
Ref. 10-Q for the quarter ended March 31, 1995, Page 12. - Second Paragraph
Ref. 10-Q for the quarter ended June 30, 1995, Page 14. - Last Paragraph
Of the 215 electric utility employees eligible for the early retirement plan,
178 employees accepted the early retirement offer representing a 12 percent
reduction of the electric business workforce. The plan which has a cost of
approximately $15 million will be amortized over 3 years.
Ref. Page 12. - Fourth Paragraph
On August 30, 1995, Minnesota Power submitted a request to the Minnesota
Pollution Control Agency (MPCA) to delete permit language requiring additional
work that was scheduled to begin during the second quarter of 1995. A response
to this request is expected from the MPCA in November 1995.
Ref. Page 14. - First Paragraph
On October 10, 1995, the FPSC approved the purchase by SSU of Orange Osceola
Utilities, Inc. The purchase is expected to close in late 1995.
- 14 -
<PAGE>
Ref. Page 14. - Last Paragraph
Ref. 8-K dated October 6, 1995, Page 1. - First and Second Paragraph
On October 19, 1995, the FPSC ordered SSU to refund, within 90 days of the date
of the order, approximately $10 million to customers who paid more since
October 1993 under uniform rates than they would have paid under stand-alone
rates. This action by the FPSC is in response to a decision by the Florida
First District Court of Appeals issued on April 6, 1995, that the FPSC lacked
statutory authority to approve the implementation of uniform rates in its 1993
Order absent a finding that the localities subject to the uniform rates were
served by a functionally related system. The FPSC order does not permit SSU to
collect $10 million from customers who paid less under uniform rates. SSU
believes that it is improper for the FPSC to order a refund to one group of
customers without permitting SSU to recover the refund from the remaining
customers because the First District Court of Appeals only addressed the issue
of alleged over-payment by some service areas under the uniform rate design and
not SSU's total revenue requirement. SSU intends to request FPSC
reconsideration of the order, and if unsuccessful, believes it probable SSU
will prevail on appeal.
Ref. Page 15. - Third Full Paragraph
Ref. 8-K dated July 12, 1995, Page 1. - Fourth Paragraph
Ref. 8-K dated October 6, 1995, Page 1. - Third Paragraph
On October 23, 1995, SSU filed an appeal with the Florida First District Court
of Appeals of the FPSC's October 6, 1995, denial of SSU's request for interim
rates based on uniform rates. SSU's appeal requests expedited consideration by
the court. SSU also intends to refile in early November 1995 information which
would permit an $8 million to $12 million interim rate increase on an annual
basis based on stand-alone rates. If approved by the FPSC, the interim rates
would become effective within sixty days of the filing, subject to refund with
interest.
Ref. Page 15. - Last Paragraph
On July 31, 1995, the Circuit Court of South Carolina issued an order affirming
the South Carolina Public Service Commission's (SCPSC) July 1994 order which
denied Heater of Seabrook's request for an annual rate increase. An appeal to
the South Carolina Supreme Court is expected to be filed in November 1995.
Ref. Page 16. - First Full Paragraph
On July 31, 1995, the Circuit Court of South Carolina issued an order vacating
the SCPSC's December 1994 order which denied Upstate Heater Utilities'
(Upstate) request for an annual rate increase. The case was remanded to the
SCPSC for the establishment of rates which are fair and reasonable.
On September 6, 1995, the SCPSC issued a second final order granting an annual
increase of $8,000. Upstate filed a motion for reconsideration on October 2,
1995.
Ref. Page 16. - Second Full Paragraph
Ref. 10-Q for the quarter ended June 30, 1995, Page 15. - Fourth Full Paragraph
On August 1, 1995, the North Carolina Utilities Commission (NCUC) issued an
order granting Heater Utilities interim rates of $262,000 annually. A final
order is anticipated in November 1995.
On August 29, 1995, Heater Utilities filed with the NCUC for approval of a
surcharge that would allow Heater Utilities to recover $297,000 in additional
testing costs required by the EPA in
- 15 -
<PAGE>
excess of costs included in the current rate structure. A final order is
anticipated in December 1995.
Ref. Page 16. - Third Full Paragraph
On October 12, 1995, the NCUC issued a final order granting Brookwood Water
Corporation an $85,000 annual increase.
Ref. Page 17. - Third Full Paragraph
SSU has determined that the toxicity test failures at the Woodmere facilities
in Duval County, Florida are presumably due to inappropriate salt water test
species. A request was filed with the EPA in February 1995 to change testing
requirements to fresh water species for consistency with the Florida Department
of Environmental Protection (FDEP) wastewater permit for the Woodmere
facilities, since the body of water affected is a fresh water body. A permit
renewal application will be filed with the FDEP in November 1995 since the
permitting authority was delegated by the EPA to the FDEP in May 1995. It is
expected that the FDEP will allow fresh water test species and that the EPA
Administrative Order will no longer be applicable.
Ref. Page 17. - Fifth Full Paragraph
Two consent orders have resulted in total penalties of $4,000 to date in 1995.
One additional consent order with a proposed penalty of approximately $9,500 is
being negotiated with the FDEP.
Ref. Page 18. - Insert after First Paragraph
Auto Redistribution Operations
The grand opening of ADESA's new Boston auction site, the world's largest
indoor auto-auction facility, was held on September 29, 1995. The site has 12
auction lanes and expects to sell 4,000 vehicles a week and eventually will
employ about 500 full and part time employees.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
Report on Form 8-K/A dated and filed September 8, 1995, with respect to
Item 7. Financial Statements and Exhibits.
Report on Form 8-K dated and filed October 6, 1995, with respect to Item
5. Other Information.
- 16 -
<PAGE>
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)
October 30, 1995 D. G. Gartzke
-------------------------------
D. G. Gartzke
Senior Vice President - Finance
and Chief Financial Officer
October 30, 1995 Mark A. Schober
-------------------------------
Mark A. Schober
Corporate Controller
- 17 -
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MINNESOTA
POWER'S CONSOLIDATED BALANCE SHEET, STATEMENT OF INCOME, AND STATEMENT OF CASH
FLOW FOR THE PERIOD ENDED SEPTEMBER 30, 1995, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,098,315
<OTHER-PROPERTY-AND-INVEST> 312,925
<TOTAL-CURRENT-ASSETS> 277,612
<TOTAL-DEFERRED-CHARGES> 111,075
<OTHER-ASSETS> 132,895
<TOTAL-ASSETS> 1,932,822
<COMMON> 373,369
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 279,960
<TOTAL-COMMON-STOCKHOLDERS-EQ> 580,747
0
48,547
<LONG-TERM-DEBT-NET> 622,417
<SHORT-TERM-NOTES> 89,450
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 10,703
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 508,376
<TOT-CAPITALIZATION-AND-LIAB> 1,932,822
<GROSS-OPERATING-REVENUE> 480,144
<INCOME-TAX-EXPENSE> (1,915)<F1>
<OTHER-OPERATING-EXPENSES> 394,339
<TOTAL-OPERATING-EXPENSES> 430,074
<OPERATING-INCOME-LOSS> 48,500
<OTHER-INCOME-NET> 1,304<F2>
<INCOME-BEFORE-INTEREST-EXPEN> 89,024
<TOTAL-INTEREST-EXPENSE> 35,735
<NET-INCOME> 53,289
2,400
<EARNINGS-AVAILABLE-FOR-COMM> 50,889
<COMMON-STOCK-DIVIDENDS> 43,574
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 99,903
<EPS-PRIMARY> 1.79
<EPS-DILUTED> 1.79
<FN>
<F1>Includes tax benefits related to Lehigh Acquisition Corporation, Minnesota
Power's real estate company.
<F2>Includes loss from equity investment and income from discontinued operations.
</FN>
</TABLE>
