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Securities and Exchange Commission
Washington, DC 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) - February 16, 1996
Minnesota Power & Light Company
A Minnesota Corporation
Commission File No. 1-3548
IRS Employer Identification No. 41-0418150
30 West Superior Street
Duluth, Minnesota 55802
Telephone - (218) 722-2641
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Minnesota Power & Light Company
Index
Page
Item 7. Financial Statements and Exhibits
Financial Statements
Signatures 2
Management Discussion and Analysis of Financial Condition
and Results of Operations 3
Reports of Independent Accountants 10
Consolidated Balance Sheet -
December 31, 1995 and 1994 12
Consolidated Statement of Income -
For the year ended December 31, 1995, 1994 and 1993 13
Consolidated Statement of Retained Earnings -
For the year ended December 31, 1995, 1994 and 1993 13
Consolidated Statement of Cash Flows -
For the year ended December 31, 1995, 1994 and 1993 14
Notes to Consolidated Financial Statements 15
Exhibits
23(a) - Consent of Independent Accountants
23(b) - Consent of Independent Auditors
27 - Financial Data Schedule
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Minnesota Power & Light Company
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(Registrant)
February 16, 1996 D.G. Gartzke
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D.G. Gartzke
Senior Vice President - Finance
and Chief Financial Officer
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
Minnesota Power has operations in four business segments: (1) electric
operations, which include electric and gas services, and coal mining; (2) water
operations, which include water and wastewater services; (3) automobile
auctions, which also include a finance company and an auto transport company;
and (4) investments, which include real estate operations, a 22.1% equity
investment in a financial guaranty reinsurance company, and a securities
portfolio.
Earnings Per Share. Earnings per share of common stock were $2.16 in 1995
compared to $2.06 in 1994 and $2.20 in 1993. The most significant factor
contributing to the higher earnings in 1995 was the recognition of tax benefits
associated with real estate operations which contributed 52 cents to earnings
per share. Of the 52 cents recognized, 5 cents is attributed to normal
operations in 1995. Earnings in 1995 also reflect increased electric sales to
industrial customers and other power suppliers, and the improved performance of
the Company's securities portfolio. Earnings in 1995 were reduced by lower water
sales in Florida and a 14 cent per share loss associated with exiting Reach All,
the truck-mounted lifting equipment business. Automobile auctions did not
contribute to earnings per share for the six months ended Dec. 31, 1995.
Major factors contributing to 1994 earnings include 42 cents per share from
the sale of certain water plant assets and 13 cents per share from the
recognition of escrow funds associated with real estate operations. Poor
securities market conditions, in addition to a 21 cent per share write-off of a
securities investment and an 11 cent per share loss from the Company's
investment in Reach All, lowered earnings in 1994. In 1993 the recognition of
unbilled revenue and increased sales to other power suppliers helped offset lost
electric revenue from the idling of one of the Company's large power customers.
Discontinued operations include the paper and pulp business which was sold
in June 1995. The increase in income from discontinued operations reflect
higher paper and pulp prices in 1995 and 1994. A worldwide excess paper supply
depressed paper prices in 1993.
Earnings Per Share 1995 1994 1993
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Continuing Operations
Electric Operations
Electric $1.22 $1.18 $1.29
Coal .11 .11 .10
----- ----- -----
1.33 1.29 1.39
Water Operations (.05) .48 .08
Automobile Auctions .00 - -
Investments
Portfolio and reinsurance .47 .06 .64
Real estate operations .58 .36 .24
Other (.27) (.20) (.08)
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.78 .22 .80
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Total Continuing Operations 2.06 1.99 2.27
Discontinued Operations .10 .07 (.07)
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Total Earnings Per Share $2.16 $2.06 $2.20
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Average Shares of Common Stock - 000s 28,483 28,239 26,987
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Consolidated Financial Review
Operating Revenue and Income. Electric operations operating revenue was
higher in 1995 than 1994 because of record kWh sales. There were increased
retail sales, higher commercial and residential rates, and significantly more
sales to other power suppliers. 1994 was lower than 1993 because the Company
recognized $5.1 million of unbilled revenue and recovered $14.6 million more of
coal contract termination costs in 1993. Also, National, a taconite producer and
major electric customer of the Company, operated all year in 1995, only four
months in 1994 and seven months in 1993. The decrease in kWh sales in 1994 was
offset by $11.1 million of additional revenue from an interim rate increase.
Water operations operating revenue and income was lower in 1995 compared to
1994 due to 15,000 fewer customers following the December 1994 sale of Venice
Gardens' assets. The sale resulted in a $19.1 million gain in 1994. In addition,
1994 included 12 months of increased rates, while 1993 included only four
months. Abnormally high rainfall in Florida and customer water conservation
efforts also lowered operating revenue in 1995 and 1994.
Automobile auctions operating revenue is included as of July 1, 1995, the
purchase date of ADESA, the automobile auction business.
Investments operating revenue and income in 1995 reflects improved results
due to the record-setting securities market. 1994 includes a $10.1 million
write-off of a securities investment. Operating revenue and income from real
estate operations was lower in 1995 compared to 1994 and 1993 due to fewer
commercial land sales and Lehigh's maturing accounts receivable portfolio. In
1994 Lehigh recognized $4.5 million of escrow funds.
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Operating Expenses. Fuel and purchased power expenses were higher in 1995
than 1994 because of a 13% increase in kWh sold. Power purchases increased $17
million primarily because of the increased demand by industrial customers in
Minnesota and also by neighboring utilities. Expenses were lower in 1994
compared to 1993 because the monthly amortization of coal contract termination
costs was completed in March 1994. 1994 expenses included additional purchased
power to provide for unscheduled outages at Boswell and to meet unexpected
demand from three taconite customers.
Operations expenses were higher in 1995 than 1994 due to the inclusion of
ADESA, scheduled electric maintenance costs, and increased expenses related to
conservation improvement programs (CIP) and customer services. Expenses in 1994
were higher than 1993 because of increased expense related to CIP and
unscheduled outages at Boswell.
Administrative and general expenses were higher in 1995 than 1994 and 1993
due to the addition of ADESA and salary and benefit increases. Salary and
benefit increases were tempered by lower payroll costs associated with an early
retirement offering to electric utility employees that were age 53 or older with
10 or more years of service.
Interest expense was higher in 1995 than 1994 due to the addition of ADESA.
Expense was higher in 1994 than 1993 reflecting debt financing for capital
expenditures relating to water operations and more commercial paper outstanding.
Income from equity investments was higher in 1995 compared to 1994 because of
increased income from Capital Re. This increase was partially offset by a $6.4
million loss associated with exiting Reach All in 1995. 1994 was lower than 1993
due to a $5.2 million loss at Reach All.
Income tax expense in 1995 includes the recognition of $18.4 million of
tax benefits associated with real estate operations.
Income from discontinued operations includes the operating results and the
$1.5 million net loss on the sale of the paper and pulp business. Significantly
higher paper and pulp prices increased earnings in 1995 and 1994 compared to
1993. In June 1995 the Company sold the paper and pulp business for $118
million.
Electric Operations
Electric operations generate, transmit, distribute and sell electricity.
Minnesota Power provides electricity to 122,000 customers in northern Minnesota,
while the Company's wholly owned subsidiary, Superior Water, Light and Power
Company, sells electricity to 14,000 customers and natural gas to 11,000
customers, and provides water to 10,000 customers in northwestern Wisconsin.
Another wholly owned subsidiary, BNI Coal, owns and operates a lignite mine in
North Dakota. Two electric generating cooperatives, Minnkota Power Cooperative,
Inc. and Square Butte, consume virtually all of BNI Coal's production of lignite
coal under contracts extending to 2027.
Electric Retail Rates. Effective June 1, 1995, the MPUC authorized a final
rate increase of $19 million annually.
Summary of Changes in Electric Revenue 1995 1994
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(Change from previous year in millions)
Electric sales (including demand
and energy charges) $28.2 $(12.4)
Unbilled revenue - (5.1)
Rate increases 12.1 11.1
Conservation improvement programs 3.0 7.8
Fuel clause adjustments 2.6 (3.4)
Coal revenue 1.9 2.4
Other (2.7) (4.9)
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$45.1 $ (4.5)
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Electric Sales. Kilowatt-hour sales reached a new record level in 1995 due to
warm summer weather and increased demand from large industrial customers and
other power suppliers. The Company continues to explore opportunities to expand
services and assistance provided to its customers as well as increase sales
beyond the Company's traditional service territory.
The two major industries in Minnesota Power's service territory are taconite
production, and paper and wood products manufacturing. These two industries
contributed about half of the Company's electric operating revenue from 1993
through 1995. Taconite mining customers accounted for 35% of electric operating
revenue in 1995, and 34% in 1994 and in 1993. The paper and wood products
industries accounted for 12% of electric operating revenue in 1995, 13% in 1994
and 14% in 1993.
Taconite is an important raw material for the steel industry and is made from
low iron content ore mined in northern Minnesota. Taconite processing plants use
large quantities of electric power to grind the ore and concentrate the iron
particles into taconite pellets. Annual taconite production in Minnesota was 47
million tons in 1995 compared to 43 million tons in 1994 and 41 million tons in
1993. Minnesota's taconite production in 1996 is expected to be approximately 48
million tons. An 18% increase in kWh sold to taconite customers contributed to
higher electric sales in 1995.
While taconite production is expected to continue at near record setting
levels, the long-term future of this cyclical industry is less certain. Even
with the Company's commitment to help the taconite customers remain competitive,
it is possible that production will decline gradually some time after the year
2005.
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Large Power Customer Contracts. Electric service contracts with 11 large
power industrial customers require payment of minimum monthly demand charges
that cover most fixed costs associated with having capacity available to serve
them, including a return on common equity. The demand charge is paid by these
customers even if no electrical energy is taken. An energy charge is also paid
to cover the variable cost of energy actually used. A four-year cancellation
notice is required to terminate the contracts. The rates and corresponding
revenue associated with capacity and energy provided under these contracts are
subject to change through the regulatory process governing all retail electric
rates.
Summary of Revenue and Demand Under Contract as of February 1, 1996
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Minimum Annual Revenue Monthly Megawatts
1996 $100.5 million 619
1997 $90.9 million 572
1998 $79.0 million 493
1999 $61.8 million 388
2000 $48.1 million 309
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The Company believes revenue from these large power customers will be
substantially in excess of the minimum contract amounts.
These 11 large power customers each require 10 MW or more of power and have
contract termination dates ranging from April 1997 to December 2005. Five of
these customers are taconite producers, five are paper manufacturers and one is
a pipeline company. In addition to the minimum demand provisions, the contracts
with the taconite producers require these customers to purchase their entire
electric service requirements from the Company. Six of the large power customers
purchase a combined total of 200 MW of interruptible service pursuant to
contract amendments incorporating an interruptible rate schedule. Under this
schedule and pursuant to these amendments, the Company has the right to serve
100 MW of these customers' needs through Oct. 31, 2008, and an additional 100 MW
of these customers' needs through April 30, 2010. The Company has the right of
first refusal to serve an additional 200 MW during these same time periods
following the termination of any of these contracts. In total these six
customers will save about $12 million annually in reduced demand charges. These
savings are partially offset by the cost of interruptible energy being higher
than the cost of firm energy. The Company is able to market the 200 MW of
capacity to other power suppliers.
Fuel. The cost of coal is the Company's largest single operating expense in
generating electricity. Coal consumption at the Company's generating stations in
1995 was 3.6 million tons. Minnesota Power currently has two coal supply
agreements in place with Montana suppliers which terminate in May 1997 and
December 2000. Under these agreements the Company has the tonnage flexibility to
procure between 55% and 100% of its total coal requirements. The Company will
use this flexibility to purchase coal under spot-market agreements when
favorable market conditions exist. The Company continues to explore future
supply options and believes that adequate supplies of low-sulfur, sub-bituminous
coal will be available. The Company has contracts with Burlington Northern
Railroad to deliver coal from Montana and Wyoming to the Company's generating
facilities in Minnesota through December 2003.
Purchased Power Contract. Under an agreement extending through 2007 with
Square Butte, Minnesota Power purchases 71% (about 320 MW during the summer
months and 333 MW during the winter months) of the output of a mine-mouth
generating unit located near Center, North Dakota. The Square Butte unit is one
of two lignite-fired units at Minnkota Power Cooperative's Milton R. Young
Generating Station.
Square Butte has the option, upon five years advance notice, to reduce the
Company's share of the unit's output to 49%. Minnesota Power has the option,
though not the obligation, to continue to purchase 49% of the output at
market-based prices after 2007 to the end of the plant's economic life.
Minnesota Power must pay any Square Butte costs and expenses that have not been
paid by Square Butte when due, regardless of whether or not the Company received
any power from that unit.
Early Retirement Plan. In 1995 an early retirement offer was accepted by 178
of the 215 eligible electric utility employees, representing a 12% reduction of
the electric operations workforce. A cost of approximately $15 million will be
amortized over 3 years consistent with regulatory precedent. The plan was funded
through excess pension plan assets. The early retirement offer is part of
the Company's ongoing efforts to control costs and maintain low electric rates.
Competition. The competitive landscape of the electric utility industry is
changing at both the wholesale and retail levels, and is affecting the way the
Company strategically views the future.
Wholesale. In 1995 the FERC issued a Notice of Proposed Rulemaking (NOPR) on
Open Access Non-Discriminatory Transmission Services by Public Utilities and
Transmitting Utilities and a supplemental NOPR on Recovery of Stranded Costs.
The purpose of the proposed rules is to facilitate wholesale power competition,
remove undue discrimination in electric transmission and set standards for
recovery of stranded costs through FERC-approved rates for wholesale service.
These final FERC rules are expected to be published by mid-1996.
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Regional. The Company is a member of the Mid-Continent Area Power Pool
(MAPP). The MAPP power pool enhances electric service reliability, and provides
the opportunity for members to enter into various wholesale power transactions
and coordinate planning of new generation and transmission facilities. The MAPP
membership is in the process of reorganizing to establish (1) a regional
transmission group to provide comparable and efficient transmission service on a
regional basis, coordinate regional transmission planning and to resolve
transmission service disputes; (2) a power and energy market for market-based
wholesale transactions among interested participants; and (3) a generation
reserve sharing pool to maintain and share generation reserves for purposes of
further efficiencies. The reorganization must be approved by MAPP and will be
subject to FERC approval.
Retail. In 1995 the MPUC initiated an investigation into structural and
regulatory issues in the electric utility industry. To make certain that
delivery of electric service continues to be efficient following any
restructuring, the MPUC adopted 15 principles to guide a deliberate and orderly
approach to developing reasonable restructuring alternatives that ensure the
fairness of a competitive market and protect the public interest. In January
1996 the MPUC established a competition working group in which company
representatives will participate to initially address issues related to
wholesale competition and then to consider retail competition issues including
rate flexibility, innovative regulation, unbundling, safety and reliability.
Customers. Minnesota Power anticipates that its large power customers will
continue to aggressively seek lower energy costs through negotiations with the
Company and consideration of alternative suppliers. With electric rates among
the lowest in the United States and with its long-term wholesale and large power
contracts in place, Minnesota Power believes it is well positioned to address
competitive pressures. The Company remains opposed to retail wheeling because it
would benefit only a few large customers while potentially adversely impacting
smaller customers' rates and shareholder returns.
Conservation. Minnesota requires electric utilities to spend 1.5% of annual
electric revenue on conservation improvement programs (CIP) each year. State law
allows utilities to recover state-approved CIP costs through a customer billing
mechanism. Since January 1994 the Company has been recovering ongoing CIP
spending and $8.2 million of CIP spending from previous years. A billing
adjustment and retail base rates allow the Company to recover both costs of
energy-saving programs and "lost margins" associated with power saved as a
result of such programs.
The Company's largest conservation programs are targeted at taconite and
paper customers to promote their efficient use of energy. CIP also provides
demand-side management grants on a competitive basis to commercial and small
industrial customers, low-cost financing for energy-saving investments, and
promotes energy conservation for all residential and commercial customers. SWL&P
also offers electric and gas conservation programs to qualified customers as
approved by the Public Service Commission of Wisconsin.
Clean Air Act. While many utilities and their customers will face high costs
to comply with clean-air legislation, the Company expects to meet future
requirements without major spending. By burning low-sulfur fuels in units
equipped with pollution control equipment, the Company's power plants already
operate at or near the sulfur dioxide emission limits set for the year 2000 by
the Federal Clean Air Act Amendment of 1990. To meet newly proposed nitrogen
oxide emission limits for 2000, the Company expects to install new burner
technology that is currently estimated to cost $9 to $11 million in total, for
Boswell and Laskin. No limits have been proposed for Hibbard. Total clean-air
compliance costs cannot be accurately estimated yet, as regulations are not
final.
1995 to 1994 Comparison. 1995 was an excellent year for electric operations.
The Company set new records for electric sales, revenue and generation.
Operating revenue from electric operations was higher in 1995 compared to 1994,
due to a 13% increase in total kWh sales, increased retail rates in effect since
June 1, 1995, and collection of CIP expenditures. Warm summer weather and
increased demand from large industrial customers and other power suppliers
significantly increased sales over 1994. Electric operations earned a return of
13.3% on average common equity invested in electric utility plant in 1995,
compared with 12.8% in 1994.
1994 to 1993 Comparison. Total electric sales increased 4% primarily because
of increased sales to large industrial customers, wholesale customers and other
power suppliers. Operating revenue included $11.1 million from interim rates
collected after March 1, 1994, and $7.8 million from the recovery of CIP
expenses in 1994. Operating revenue was $12.4 million lower in 1994 because
of reduced demand revenue from National and lower rates associated with
interruptible service. The Company also completed recovery of the remaining
$3.9 million of coal contract buyout costs in March 1994, whereas 1993 included
$18.5 million, a full year recovery. Additionally the unbilled revenue
adjustment added $5.1 million to revenue in 1993. Electric operations earned
a return of 12.8% on average common equity invested in electric utility plant
in 1994, compared with 12.4% in 1993.
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Water Operations
Water operations include SSU and Heater. SSU provides water to 117,000
customers and wastewater treatment services to 53,000 customers in Florida.
Heater provides water to 26,000 customers and wastewater treatment services to
3,000 customers in North Carolina and South Carolina.
Water and Wastewater Rates. In April 1995 the Florida First District Court of
Appeals reversed the 1993 FPSC order which approved uniform rates for most of
SSU's service areas in Florida. Consequently, the FPSC ordered the Company to
refund about $10 million, including interest, to customers who paid more since
October 1993 under uniform rates than they would have paid under stand-alone
rates. The FPSC also indicated that it would not permit collection of the $10
million from customers who paid less under uniform rates. With "uniform rates,"
all customers in the uniform rate areas pay the same rates for water and
wastewater services. Uniform rates are an alternative to "stand-alone" rates
which are calculated based on the cost of serving each service area. In November
1995 SSU filed a request for FPSC reconsideration. The Company believes that it
would be improper for the FPSC to order a refund to one group of customers
without permitting recovery of a similar amount 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 the
Company's total revenue requirement for operations in Florida. If the FPSC does
not adopt SSU's position on reconsideration, SSU will vigorously pursue reversal
of the FPSC's decision in the courts. No provision for refund has been recorded.
In June 1995 SSU filed a request with the FPSC for an $18.6 million annual
increase in water and wastewater treatment rates. On Nov. 1, 1995, the FPSC
denied the Company's original $12 million interim rate request for two reasons:
(1) it was based on uniform rates which were deemed improper by a court order
subsequent to the Company's original filing, and (2) the FPSC had not yet
formulated a policy on allowable investments and expenses to be included in a
forward-looking interim test year. The Company submitted additional information
to support interim rate approval of $12 million based on a forward-looking test
year and $8.4 million based on a historical test year. On Jan. 4, 1996, the FPSC
permitted the Company to implement an interim rate increase (based on a
historical test year) of $7.9 million, on an annualized basis, over revenue
previously collected under a uniform rate structure. Interim rates went into
effect on Jan. 23, 1996. Final rates are anticipated to become effective in the
fourth quarter of 1996.
Florida law permits water and wastewater utilities to make an annual index
filing to recover inflationary increases in system operations and maintenance
expenses, thus delaying or avoiding the costs of full rate case filings.
Similarly, another Florida law allows water and wastewater utilities to file
annually to recover increased purchased water and wastewater treatment costs and
property tax increases. Since 1993 the Company was allowed $2.9 million of the
$3 million requested in annual rate increases under these laws.
Summary of Changes in Water Revenue and Income 1995 1994
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(Change from previous
year in millions)
Water sales $ (1.9) $ 1.4
Wastewater treatment services (2.0) 2.6
Rate increases 1.2 1.6
Gain on sale of water assets (19.1) 19.1
Other - 1.1
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$(21.8) $25.8
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Competition. The responsibility of providing the fast growing populations of
Florida, North Carolina and South Carolina with an adequate supply of clean
water requires the constant attention and foresight of the Company's water
operations.
The regulated water and wastewater services industry is experiencing a series
of transformations including privatization, consolidation and regionalization.
These new trends are a direct result of expanded environmental regulation and
increasingly limited water supply and wastewater disposal options. Consequently,
growth in the industry will be realized by those who make adequate capital
investment to achieve these transformations. Since economic regulation has not
kept pace with the investment demands placed on private utilities, regulatory
lag has delayed the recovery of private utilities' service costs.
Historically, competition and change have been minimal in the water and
wastewater industry. During the next five years, however, the Company believes
that the water and wastewater industry will become more competitive and
innovation-driven. The Company is focused on the application of technology to
reduce costs and increase efficiency, objectives that are critical in the
competitive pursuit of regulated, as well as unregulated, markets.
1995 and 1994 Comparison. Operating revenue and income from water operations
fell 24% in 1995 compared to 1994. The decrease is attributed to 15,000 fewer
customers following the sale of Venice Gardens' assets in December 1994 and
lower water consumption due to abnormally high rainfall and customer
conservation efforts. The sale of Venice Gardens' assets contributed $19.1
million to water operations in 1994. Customers lost in the Venice Gardens' sale
were replaced in December 1995 when the Company purchased the assets of Orange
Osceola Utilities, Inc. for $13 million. This purchase added 17,000 customers to
the Company's Florida customer base.
1994 and 1993 Comparison. Operating revenue and income from water operations
increased 39% in 1994 compared to 1993 due to the $19.1 million gain associated
with the December 1994 sale of Venice Gardens' assets. 1994 also included 12
months of increased rates, while 1993 included only four months. Abnormally high
rainfall in Florida and customer water conservation efforts offset the new rates
in 1994.
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Automobile Auctions
Minnesota Power has an 83% ownership interest in ADESA, the third largest
automobile auction business in the United States. ADESA, headquartered in
Indianapolis, Indiana, owns and operates 19 automobile auctions in the
United States and Canada, through which used cars and other vehicles are
sold to franchised automobile dealers and licensed used car dealers. Two
wholly owned subsidiaries of ADESA, Automotive Finance Corporation (AFC) and
ADESA Auto Transport, perform related services. Sellers at ADESA's auctions
include domestic and foreign auto manufacturers, car dealers, fleet/lease
companies, banks and finance companies.
The Company acquired 80% of ADESA on July 1, 1995, for $167 million in cash.
Proceeds from the sale of the paper and pulp business combined with proceeds
from the sale of securities investments were used to fund this acquisition.
Acquired goodwill and other intangible assets associated with this acquisition
are being amortized on a straight line basis over periods not exceeding 40
years. In January 1996 the Company provided an additional $15 million of capital
in exchange for 1,982,346 original issue common stock shares of ADESA. This
capital contribution increased the Company's ownership interest in ADESA to 83%.
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 17% retained ownership interest in ADESA, in increments
during the years 1997, 1998 and 1999, at a price based on ADESA's financial
performance.
For the six months ended Dec. 31, 1995, operating revenue was $61.3 million
with no net income contribution. Financial results are attributed to auction
cancellations because of severe weather conditions in the eastern United States
in December 1995, as well as start-up costs associated with major construction
projects. First quarter 1996 financial results will also be affected by severe
weather which continued in January 1996.
Competition. Within the automobile auction industry, ADESA's competition
includes independently owned auctions as well as major chains and associations
with auctions in geographic proximity to those of ADESA. ADESA competes with
other auctions for dealers, financial institutions and other sellers to provide
automobiles for auction at consignment sales and for the supply of rental
repurchase vehicles from the automobile manufacturers for auction at factory
sales. The automobile manufacturers often choose between auctions across
multi-state areas in distributing rental repurchase vehicles. ADESA competes for
sellers of automobiles by attempting to attract a large number of dealers to
purchase vehicles, which ensures competitive prices and supports the volume of
vehicles auctioned, and by providing a full range of services including
floorplan financing, reconditioning services which prepare automobiles for
auction, transporting automobiles to auction and the prompt handling of the
paperwork necessary to complete the sales.
Auto auction sales for the industry are predicted to rise at a rate of 6% to
8% annually. ADESA expects to participate in this industry's growth through
acquisitions, greenfield start-ups and expanded services. In September 1995
ADESA opened the world's largest indoor automobile auction facility in
Framingham, Massachusetts. Expansion projects at Manville, New Jersey and
Jacksonville, Florida and a relocation project in Indianapolis, Indiana are
nearing completion. These projects are expected to begin operations in the first
quarter of 1996.
Investments
Investments include an 80% interest in Lehigh, a Florida real estate company,
a 22.1% equity investment in Capital Re, a financial guaranty reinsurance
company, and a portfolio of securities managed by Minnesota Power which is
intended to provide funds for reinvestment and business acquisitions. The
Company ceased operations at Reach All, the truck-mounted lifting equipment
business, and sold its assets in 1995.
Portfolio. The performance of the securities portfolio improved significantly
over 1994 earning an after-tax return of 8.7% in 1995 compared to 1.7% in 1994
and 7.4% in 1993. Securities investments totaling $60 million were sold to
partially fund the purchase of ADESA. Poor market conditions and the write-off
of a $10.1 securities investment lowered earnings in 1994 compared to 1993. The
Company plans to continue to concentrate in market neutral strategies that
provide stable and acceptable returns without sacrificing needed liquidity.
Returns will continue to be partially dependent upon general market yields.
Reinsurance. The Company's equity investment in Capital Re continues to be a
major contributor to earnings. In 1995 Capital Re contributed $8.2 million to
earnings compared to $7 million in 1994 and $5.7 million in 1993. Capital Re
earned after-tax returns of 10.1% in 1995, 10.5% in 1994 and 10.1% in 1993.
Capital Re is the parent company of a group of specialty reinsurance companies.
Real Estate Operations. Income from real estate operations was higher in 1995
than 1994 primarily due to the recognition of $18.4 million of tax benefits. 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 net income is $14.7 million.
This tax benefit was partially offset by fewer commercial land sales and
Lehigh's maturing accounts receivable portfolio. Earnings were higher in 1994
compared to 1993 because the recognition of escrow funds contributed $3.6
million in 1994.
Lehigh currently owns 4,000 acres of land and approximately 8,000 homesites
near Fort Myers, Florida and 1,250 homesites in Citrus County, Florida. The
real estate strategy is to acquire large residential community properties at low
cost, adding value, and selling them at going market prices.
Other. Included are the financial results for Reach All and charges for
general corporate expenses. In 1995 Reach All's operating assets were sold
resulting in a 14 cent per share loss compared to an 11 cent per share loss in
1994. Pre-tax losses from Reach All were $6.4 million in 1995, $5.2 million in
1994 and $764,000 in 1993.
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Liquidity and Capital Resources
As detailed in the consolidated statement of cash flows, cash flows from
operating activities were affected by a number of factors representative of
normal operations. Automobile auction operations are included 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 was used to fund the purchase of ADESA.
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 700,000 original issue shares of common stock are
available for issuance through the DRIP. Minnesota Power's $77 million bank
lines of credit provide liquidity for the Company's commercial paper program.
The amount and timing of future sales of the Company's securities will depend
upon market conditions and the specific needs of the Company. The Company may
from time to time sell securities to meet capital requirements, to provide for
the early redemption of issues of long-term debt and/or preferred stock, to
reduce short-term debt and for other corporate purposes.
A substantial amount of ADESA's working capital is generated internally from
payments made by vehicle purchasers. However, ADESA utilizes an $18 million line
of credit 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 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.
In January 1996 SSU issued $35.1 million of 6.5% Industrial Development
Refunding Revenue Bonds Series 1996 due Oct. 1, 2025. The proceeds were used to
refund existing industrial development revenue bonds totaling $33.8 million.
Also in January 1996 the Company contributed an additional $15 million of
equity to ADESA in exchange for 1,982,346 shares of ADESA original issue common
stock. As a result, the Company's ownership interest increased from 80% to 83%.
Funds from the issuance of commercial paper were used to purchase the additional
shares. ADESA expects to use the funds to pay for capital expansion projects.
Minnesota Power's electric utility first mortgage bonds and secured pollution
control bonds are currently rated the following investment grades: A3 by Moody's
Investor Services, A- by Standard and Poor's, and A- by Duff & Phelps. The
disclosure of these security ratings is not a recommendation to buy, sell or
hold the Company's securities.
In 1995 the Company paid out 94% of its per-share earnings in dividends. Over
the longer term, Minnesota Power's goal is to reduce dividend payout to 75% to
80% of earnings. This is expected to be accomplished by increasing earnings
rather than reducing dividends.
Capital Requirements. Consolidated capital expenditures in 1995 totaled $115
million. These expenditures included $38 million for electric operations, of
which $7 million was for coal operations, $34 million for water operations and
$43 million for automobile auction site relocation and development. Internally
generated funds and long-term bank financing was used to fund these capital
expenditures.
Capital expenditures are expected to be $93 million in 1996 and total about
$325 for 1997 through 2000. The 1996 amount includes $34 for routine electric
capital expenditures, $25 million for upgrades, water reuse projects and new
water facilities, $28 for automobile auction site relocation and development,
and $6 million for coal mining equipment and other capital expenditures. The
Company expects to use internally generated funds, long-term bank financing and
original issue equity securities to fund these capital expenditures.
No new power plants or major changes to existing plants are expected in the
1996-2010 period. Future water utility capital expenditures include facility
upgrades to meet environmental standards and new water and wastewater treatment
facilities to accommodate customer growth. Capital expenditures for automobile
auctions will continue to be for auction site relocation and development.
New Accounting Standards. In March 1995 the FASB issued SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," effective for fiscal years beginning after Dec. 15, 1995. SFAS 121 requires
that long-lived assets and intangible assets be reviewed for impairment whenever
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS 121 also requires that a utility's deferred regulatory charges
must be probable of recovery in future rates. The adoption of SFAS 121 is
expected to be immaterial to the Company's financial position and results of
operations.
In October 1995 the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation," effective for fiscal years beginning after Dec. 15, 1995. SFAS
123 requires companies to either record or disclose pro forma information on the
fair value of certain stock-based employee compensation programs. In 1996 the
Company anticipates offering stock options to certain employees and, in
accordance with SFAS 123, will be required either to record compensation expense
for stock options based on their fair values or provide pro forma disclosures of
net income and earnings per share reflecting this information. The Company plans
to account for its stock-based employee compensation programs in accordance with
APB 25, "Accounting for Stock Issued to Employees," and will provide the pro
forma disclosures required by SFAS 123, if material.
-9-
<PAGE>
Reports
Independent Accountant
To the Shareholders and
Board of Directors of Minnesota Power Logo
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of income, of retained earnings and of cash flows present fairly, in all
material respects, the financial position of Minnesota Power and its
subsidiaries at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of ADESA Corporation, an
80% owned subsidiary acquired July 1, 1995, which statements reflect total
assets of $355,819,000 at December 31, 1995 and total revenues of $60,641,000
for the six month period ended December 31, 1995. Those statements were audited
by other auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for ADESA
Corporation, is based solely on the report of the other auditors. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
Minneapolis, Minnesota
January 22, 1996
Management
The consolidated financial statements and other financial information were
prepared by management, which is responsible for their integrity and
objectivity. The financial statements have been prepared in conformity with
generally accepted accounting principles as applied to regulated utilities and
necessarily include some amounts that are based on informed judgments and best
estimates of management.
To meet its responsibilities with respect to financial information,
management maintains and enforces a system of internal accounting controls
designed to provide assurance, on a cost effective basis, that transactions are
carried out in accordance with management's authorizations and that assets are
safeguarded against loss from unauthorized use or disposition. The system
includes an organizational structure which provides an appropriate segregation
of responsibilities, careful selection and training of personnel, written
policies and procedures, and periodic reviews by the internal audit department.
In addition, the Company has a personnel policy which requires all employees to
maintain a high standard of ethical conduct. Management believes the system is
effective and provides reasonable assurance that all transactions are properly
recorded and have been executed in accordance with management's authorization.
Management modifies and improves its system of internal accounting controls in
response to changes in business conditions. The Company's internal audit staff
is charged with the responsibility for determining compliance with Company
procedures.
Five directors of the Company, not members of management, serve as the Audit
Committee. The Board of Directors, through its Audit Committee, oversees
management's responsibilities for financial reporting. The Audit Committee meets
regularly with management, the internal auditors and the independent accountants
to discuss auditing and financial matters and to assure that each is carrying
out its responsibilities. The internal auditors and the independent accountants
have full and free access to the Audit Committee without management present.
Price Waterhouse LLP and Ernst & Young LLP, independent accountants, are
engaged to express an opinion on the financial statements. Their audits are
conducted in accordance with generally accepted auditing standards and include a
review of internal controls and test transactions to the extent necessary to
allow them to report on the fairness of the operating results and financial
condition of the Company.
Arend J. Sandbulte Edwin L. Russell David G. Gartzke
Arend J. Sandbulte Edwin L. Russell David G. Gartzke
Chairman President and Chief Chief Financial Officer
Executive Officer
-10-
<PAGE>
Logo Ernst & Young LLP One Indiana Square Phone: 317 681-7000
Suite 3400 Fax: 317 681-7216
Indianapolis, Indiana 46204-2094
Report of Independent Auditors
The Board of Directors and Shareholders
ADESA Corporation
We have audited the consolidated balance sheet of ADESA Corporation, an 80%
owned subsidiary of Minnesota Power & Light Company (MPL), as of December 31,
1995, and the related consolidated statements of income, shareholders' equity,
and cash flows for the period from July 1, 1995, (date of acquisition by MPL) to
December 31, 1995, (not presented separately herein). These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ADESA Corporation
at December 31, 1995, and the consolidated results of its operations and its
cash flows for the period from July 1, 1995, to December 31, 1995, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
January 17, 1996, except for
Note 13, as to which the date
is January 19, 1996
-11-
<PAGE>
Consolidated Financial Statements
Minnesota Power Consolidated Balance Sheet
December 31 1995 1994
- -------------------------------------------------------------------------------
In thousands
Assets
Plant and Other Assets
Electric operations $ 786,159 $ 789,789
Water operations 337,500 295,451
Automobile auctions 123,632 -
Investments 201,360 355,263
---------- ----------
Total plant and other assets 1,448,651 1,440,503
---------- ----------
Current Assets
Cash and cash equivalents 31,577 27,001
Trading securities 40,007 74,046
Trade accounts receivable (less reserve of
$3,325 and $1,041) 128,072 51,105
Notes and other accounts receivable 12,220 61,654
Fuel, material and supplies 26,383 26,405
Prepayments and other 13,706 25,927
---------- ----------
Total current assets 251,965 266,138
---------- ----------
Deferred Charges
Regulatory 88,631 74,919
Other 25,037 24,353
---------- ----------
Total deferred charges 113,668 99,272
---------- ----------
Intangible Assets
Goodwill 120,245 1,885
Other 13,096 -
---------- ----------
Total intangible assets 133,341 1,885
---------- ----------
Total Assets $1,947,625 $1,807,798
---------- ----------
Capitalization and Liabilities
Capitalization
Common stock, without par value,
65,000,000 shares authorized;
31,467,650 and 31,246,557 shares
outstanding $ 377,684 $ 371,178
Unearned ESOP shares (72,882) (76,727)
Net unrealized gain (loss) on securities
investments 3,206 (5,410)
Cumulative translation adjustment (177) -
Retained earnings 276,241 272,646
---------- ----------
Total common stock equity 584,072 561,687
Cumulative preferred stock 28,547 28,547
Redeemable serial preferred stock 20,000 20,000
Long-term debt 639,548 601,317
---------- ----------
Total capitalization 1,272,167 1,211,551
---------- ----------
Current Liabilities
Accounts payable 68,083 36,792
Accrued taxes 40,999 41,133
Accrued interest and dividends 14,471 14,157
Notes payable 96,218 54,098
Long-term debt due within one year 9,743 12,814
Other 27,292 23,799
---------- ----------
Total current liabilities 256,806 182,793
---------- ----------
Deferred Credits
Accumulated deferred income taxes 164,737 192,441
Contributions in aid of construction 98,167 87,036
Regulatory 57,950 55,996
Other 97,798 77,981
---------- ----------
Total deferred credits 418,652 413,454
---------- ----------
Commitments and Contingencies ---------- ----------
Total Capitalization and Liabilities $1,947,625 $1,807,798
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
-12-
<PAGE>
<TABLE>
Consolidated Statement of Income
<CAPTION>
For the year ended December 31 1995 1994 1993
- ----------------------------------------------------------------------------------------------
In thousands except per share amounts
<S> <C> <C> <C>
Operating Revenue and Income
Electric operations $ 498,352 $ 453,287 $ 457,719
Water operations 69,379 91,224 65,463
Automobile auctions 61,254 - -
Investments 43,932 37,656 59,313
--------- --------- ---------
Total operating revenue and income 672,917 582,167 582,495
--------- --------- ---------
Operating Expenses
Fuel and purchased power 176,960 157,687 170,277
Operations 286,204 232,280 218,890
Administrative and general 102,896 68,300 64,879
Interest expense 48,041 46,750 41,544
--------- --------- ---------
Total operating expenses 614,101 505,017 495,590
--------- --------- ---------
Income from Equity Investments 4,196 2,972 5,795
--------- --------- ---------
Operating Income from Continuing Operations 63,012 80,122 92,700
Income Tax Expense 1,155 20,657 28,326
--------- --------- ---------
Income from Continuing Operations 61,857 59,465 64,374
Income (Loss) from Discontinued Operations 2,848 1,868 (1,753)
--------- --------- ---------
Net Income 64,705 61,333 62,621
Dividends on Preferred Stock (3,200) (3,200) (3,342)
--------- --------- ---------
Earnings Available for Common Stock $ 61,505 $ 58,133 $ 59,279
--------- --------- ---------
Average Shares of Common Stock 28,483 28,239 26,987
Earnings Per Share of Common Stock
Continuing operations $ 2.06 $ 1.99 $ 2.27
Discontinued operations .10 .07 (.07)
--------- --------- ---------
Total $ 2.16 $ 2.06 $ 2.20
--------- --------- ---------
Dividends Per Share of Common Stock $ 2.04 $ 2.02 $ 1.98
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Consolidated Statement of Retained Earnings
<CAPTION>
For the year ended December 31 1995 1994 1993
- ----------------------------------------------------------------------------------------------
In thousands
<S> <C> <C> <C>
Balance at Beginning of Year $ 272,646 $ 271,177 $ 265,648
Net income 64,705 61,333 62,621
Redemption and retirement of stock -- -- (425)
--------- --------- ---------
Total 337,351 332,510 327,844
--------- --------- ---------
Dividends Declared
Preferred stock 3,200 3,200 3,342
Common stock 57,910 56,664 53,325
--------- --------- ---------
Total 61,110 59,864 56,667
--------- --------- ---------
Balance at End of Year $ 276,241 $ 272,646 $ 271,177
- ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
-13-
<PAGE>
<TABLE>
Consolidated Statement of Cash Flows
<CAPTION>
For the year ended December 31 1995 1994 1993
- ----------------------------------------------------------------------------------------------
In thousands
<S> <C> <C> <C>
Operating Activities
Net income $ 64,705 $ 61,333 $ 62,621
Depreciation and amortization 59,554 50,236 43,508
Amortization of coal contract termination costs - 3,920 18,460
Deferred income taxes (26,082) 6,201 5,517
Deferred investment tax credits (864) (2,478) (2,035)
Pre-tax (gain) loss on sale of plant 1,786 (19,147) (812)
Changes in operating assets and liabilities
net of the effects of discontinued operations
and subsidiary acquisitions
Trading securities 34,039 24,198 -
Notes and accounts receivable (12,989) (14,061) (11,999)
Fuel, material and supplies (3,164) (5,641) 4,226
Accounts payable (9,794) 1,112 (1,170)
Other current assets and liabilities 15,890 4,935 2,473
Other-- net 873 5,857 1,954
--------- --------- ---------
Cash from operating activities 123,954 116,465 122,743
--------- --------- ---------
Investing Activities
Proceeds from sale of investments in securities 103,189 59,339 242,950
Proceeds from sale of discontinued operations--
net of cash sold 107,606 - -
Proceeds from sale of plant - 37,361 6,584
Additions to investments (59,468) (97,620) (266,276)
Additions to plant (117,749) (80,161) (68,156)
Acquisition of subsidiaries --
net of cash acquired (129,531) - -
Changes to other assets-- net (2,645) (10,699) (54,763)
--------- --------- ---------
Cash for investing activities (98,598) (91,780) (139,661)
--------- --------- ---------
Financing Activities
Issuance of common stock 6,438 1,033 57,605
Issuance of long-term debt 28,070 21,982 171,571
Changes in notes payable 16,726 33,623 (33,496)
Reductions of long-term debt and
preferred stock (10,904) (26,132) (107,256)
Dividends on preferred and common stock (61,110) (59,864) (56,667)
--------- --------- ---------
Cash (for) from financing activities (20,780) (29,358) 31,757
--------- --------- ---------
Change in Cash and Cash Equivalents 4,576 (4,673) 14,839
Cash and Cash Equivalents at Beginning of Period 27,001 31,674 16,835
--------- --------- ---------
Cash and Cash Equivalents at End of Period $ 31,577 $ 27,001 $ 31,674
--------- --------- ---------
Supplemental Cash Flow Information
Cash paid during the period for
Interest (net of capitalized) $ 48,913 $ 48,385 $ 41,840
Income taxes $ 25,018 $ 20,584 $ 24,490
- ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
-14-
<PAGE>
Notes to Consolidated Financial Statements
1 Business Segments
<TABLE>
<CAPTION>
Electric Water Automobile
Consolidated Operations Operations Auctions<F1> Investments
------------ ---------- ---------- ------------ ----------------------------
Portfolio,
Reinsurance Real
For the year ended December 31 Electric Coal & Other Estate
- ------------------------------ -------- ---- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Thousands
1995
Operating revenue and income $ 672,917 $469,481 $28,871 $ 69,379 $ 61,254 $ 24,374 $ 19,558
Operation and other expense 508,753 350,184 21,840 48,365 55,314 12,808 20,242<F2>
Depreciation and amortization expense 57,307 38,361 1,506 12,796 4,367 -- 277
Interest expense 48,041 20,642 1,250 10,672 675 14,776 26
Income from equity investments 4,196 - - - - 4,196<F3> -
---------- -------- ------- -------- -------- -------- --------
Operating income (loss) from
continuing operations 63,012 60,294 4,275 (2,454) 898 986 (987)
Income tax expense (benefit) 1,155 23,504 1,197 (1,110) 1,116 (6,117) (17,435)<F4>
---------- -------- ------- -------- -------- -------- --------
Income (loss) from continuing operations $ 61,857 $ 36,790 $ 3,078 $(1,344) $ (218) $ 7,103 $(16,448)
-------- ------- -------- -------- -------- --------
Income from discontinued operations 2,848
----------
Net income $ 64,705
----------
Total assets $1,947,625 $936,260 $32,331 $354,294 $355,843 $219,076 $ 49,821
Accumulated depreciation $ 619,343 $485,353 $18,875 $113,125 $ 1,990 - -
Accumulated amortization $ 3,036 - - - $ 2,311 - $ 725
Construction work in progress $ 56,019 $ 5,386 - $ 12,314 $ 38,319 - -
- ------------------------------------------------------------------------------------------------------------------------------------
1994
Operating revenue and income $ 582,167 $426,288 $26,999 $ 91,224<F5> - $ 6,003<F6> $ 31,653<F7>
Operation and other expense 412,490 314,333 20,438 47,754 - 9,455 20,510
Depreciation and amortization expense 45,777 35,209 1,352 8,936 - 4 276
Interest expense 46,750 19,167 1,035 12,214 - 14,322 12
Income from equity investments 2,972 - - - - 2,972 -
---------- -------- ------- -------- -------- -------- --------
Operating income (loss) from
continuing operations 80,122 57,579 4,174 22,320 - (14,806) 10,855
Income tax expense (benefit) 20,657 22,150 1,114 8,733 - (12,031) 691
---------- -------- ------- -------- -------- -------- --------
Income (loss) from continuing
operations $ 59,465 $ 35,429 $ 3,060 $ 13,587 - $(2,775) $ 10,164
---------- -------- ------- -------- -------- -------- --------
Income from discontinued operations 1,868
----------
Net income $ 61,333
----------
Total assets $1,807,798<F8> $941,041 $28,353 $327,367 - $301,355 $ 34,549
Accumulated depreciation $ 582,075<F9> $471,141 $17,598 $ 88,650 - $ 5 -
Accumulated amortization $ 434 - - - - - $ 434
Construction work in progress $ 27,619 $ 21,736 - $ 5,883 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
1993
Operating revenue and income $ 582,495 $433,117 $24,602 $ 65,463 - $ 28,284 $ 31,029
Operation and other expense 410,141 319,513 18,609 42,550 - 6,946 22,523
Depreciation and amortization expense 43,905 32,782 1,095 9,792 - 6 230
Interest expense 41,544 18,943 1,024 9,997 - 11,565 15
Income from equity investments 5,795 - - - - 5,795 -
---------- -------- ------- -------- -------- -------- --------
Operating income from
continuing operations 92,700 61,879 3,874 3,124 - 15,562 8,261
Income tax expense (benefit) 28,326 24,696 1,150 1,054 - (435) 1,861
---------- -------- ------- -------- -------- -------- --------
Income from continuing operations 64,374 $ 37,183 $ 2,724 $ 2,070 - $ 15,997 $ 6,400
---------- -------- ------- -------- -------- -------- --------
Loss from discontinued operations (1,753)
----------
Net income $ 62,621
----------
Total assets $1,760,526<F10> $916,378 $27,998 $330,653 - $295,210 $30,726
Accumulated depreciation $ 546,706<F11> $443,407 $16,097 $ 86,495 - $ 17 -
Accumulated amortization $ 145 - - - - - $ 145
Construction work in progress $ 31,227 $ 18,019 - $ 13,208 - - -
- -------------------------
<FN>
<F1> Purchased July 1, 1995.
<F2> Includes $3.7 million of minority interest relating to the recognition
of tax benefits. (See Note 14.)
<F3> Includes a $6.4 million pre-tax write-off from exiting the equipment
manufacturing business.
<F4> Includes $18.4 million of tax benefits. (See Note 14.)
<F5> Includes a $19.1 million pre-tax gain from the sale of certain water plant assets.
<F6> Includes a $10.1 million pre-tax loss from the write-off of an investment.
<F7> Includes $3.6 million of income related to escrow funds.
<F8> Includes $175.1 million related to operations discontinued in 1995.
<F9> Includes $4.7 million related to operations discontinued in 1995.
<F10> Includes $159.6 million related to operations discontinued in 1995.
<F11> Includes $0.7 million related to operations discontinued in 1995.
</FN>
</TABLE>
-15-
<PAGE>
2 Operations and Significant Accounting Policies
Financial Statement Preparation. Minnesota Power prepares its financial
statements in conformity with generally accepted accounting principles. These
principles require management to make estimates and assumptions that (1) affect
the reported amounts of assets and liabilities, (2) disclose contingent assets
and liabilities at the date of the financial statements, and (3) report amounts
of revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and all of its majority owned subsidiary companies.
All material intercompany balances and transactions have been eliminated in
consolidation. Information for prior periods has been reclassified to present
comparable information for all periods.
Nature of Operations and Revenue Recognition. Minnesota Power is a
diversified utility that has operations in four principal business segments.
Electric Operations. Electric service is provided to 136,000 customers in
northern Minnesota and northwestern Wisconsin. Large industrial customers, which
include paper mills, Minnesota's taconite industry and a pipeline company,
purchase under contract about half of the electricity the Company generates. BNI
Coal, a subsidiary, mines and sells lignite coal to two North Dakota mine-mouth
generating units, one of which is Square Butte which supplies Minnesota Power
with 71% of its output under a long-term contract. (See Note 12.)
Electric rates are under the jurisdiction of various state and federal
regulatory authorities. Billings are rendered on a cycle basis. Revenue is
accrued for service provided but not yet billed. Electric rates include
adjustment clauses which bill or credit customers for fuel and purchased energy
costs above or below the base levels in rate schedules and bill retail customers
for the recovery of CIP expenditures not collected in base rates.
During 1995, 1994 and 1993, revenue derived from one major customer was
$60.4, $60.2 and $59.6 million, respectively. Revenue derived from another major
customer was $44.9, $45.3 and $45 million, respectively.
Water Operations. SSU, a wholly owned subsidiary, is the largest independent
supplier of water and wastewater utility service in Florida. Heater, another
subsidiary, provides water and wastewater services in North Carolina and South
Carolina. In total, 143,000 water and 56,000 wastewater treatment customers are
served. Water rates are under the jurisdiction of various state and county
regulatory authorities. Billings are rendered on a cycle basis. Revenue is
accrued for water sold but not billed.
Automobile Auctions. In July 1995, the Company purchased 80% of ADESA, an
automobile auction business that operates in 19 locations in the U.S. and
Canada. As discussed in Note 3, the Company's ownership interest increased to
83% in January 1996. ADESA acts as an agent in the sales process, receiving fees
from both buyers and sellers of automobiles. ADESA also provides a wide range of
related services such as floorplan financing, auto reconditioning, title
processing and vehicle transport. Revenue is recognized when services are
performed.
Investments. The Company's securities portfolio provides funds for
reinvestment and business acquisitions. The Company has a 22.1% ownership in
Capital Re, a financial guaranty reinsurance company, accounted for using the
equity method, and an 80% ownership in Lehigh, a Florida real estate business.
Real estate revenue is recognized on the accrual basis. Investment income is
discussed in Note 7.
Plant and Depreciation. Plant is recorded at original cost. The cost of
additions to plant and replacement of retirement units of property are
capitalized. Maintenance costs and replacements of minor items of property are
charged to expense as incurred. Costs of depreciable units of plant retired are
eliminated from the plant accounts. Such costs plus removal expenses less
salvage are charged to accumulated depreciation. Plant stated on the balance
sheet includes construction work in progress and is net of accumulated
depreciation. Various pollution abatement facilities are leased from
municipalities which have issued pollution control revenue bonds to finance the
cost of the facilities. The cost of the facilities and the related debt
obligation, which is guaranteed by the Company, has been recorded as electric
plant and long-term debt, respectively.
Depreciation of utility plant is computed using rates based on estimated
useful lives of the various classes of property. Provisions for depreciation of
the average original cost of depreciable property approximated 3.3% in 1995, 3%
in 1994 and 2.9% in 1993. Contributions in aid of construction (CIAC) relate to
water and wastewater plant contributed to the Company by developers and
customers. CIAC is amortized on a straight-line basis over the estimated life of
the asset to which it relates when placed in service. Amortization of CIAC
reduces depreciation expense.
Fuel, Material and Supplies. Fuel, material and supplies are stated at the
lower of cost or market. Cost is determined by the average cost method.
Goodwill. Goodwill represents the excess of cost over net assets of
businesses acquired and is amortized on a straight-line basis over forty years.
Deferred Regulatory Charges and Credits. The Company is subject to the
provisions of SFAS 71, "Accounting for the Effects of Certain Types of
Regulation." The Company capitalizes as deferred regulatory charges incurred
costs which are probable of recovery in future utility rates. Deferred
regulatory credits represent amounts expected to be credited to customers in
rates. (See Note 4.)
Unamortized Expense, Discount and Premium on Debt. Expense, discount and
premium on debt are deferred and amortized over the lives of the related issues.
Cash and Cash Equivalents. The Company considers all investments purchased
with maturities of three months or less to be cash equivalents.
-16-
<PAGE>
3 Acquisitions and Divestitures
Acquisition of ADESA. The Company acquired 80% of ADESA on July 1, 1995, for
$167 million in cash. The Company accounted for the acquisition as a purchase.
Acquired goodwill and other intangible assets associated with this acquisition
are being amortized on a straight line basis over periods not exceeding 40
years. In January 1996 the Company provided an additional $15 million of capital
in exchange for 1,982,346 original issue common stock shares of ADESA. This
capital contribution increased the Company's ownership interest in ADESA to 83%.
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 17% 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 summary presents unaudited pro forma consolidated results as if
ADESA was acquired on Jan. 1, 1994. The pro forma results are not necessarily
indicative of what actually would have occurred if the acquisition had been
completed as of the beginning of 1994, nor are they necessarily indicative of
future consolidated results. The pro forma results should be read in conjunction
with the historical consolidated financial statements and related notes of
Minnesota Power.
Summary Pro Forma Financial Information --
Year ended December 31-- Unaudited 1995 1994
- --------------------------------------------------------------------------------
In thousands
Operating revenue and income $729,674 $674,696
Income from continuing operations $61,422 $61,771
Net income $64,270 $63,639
Earnings per share of common stock
from continuing operations $2.04 $2.07
Total earnings per share of common stock $2.14 $2.14
- --------------------------------------------------------------------------------
Acquisition of Orange Osceola. On Dec. 1, 1995, SSU acquired the operating
assets of Orange Osceola Utilities for approximately $13 million. The
acquisition adds over 17,000 water customers.
Sale of Water Plant Assets. In December 1994 SSU sold all of the assets of
its Venice Gardens water and wastewater utilities to Sarasota County in Florida
(the County) for $37.6 million. The sale increased 1994 net income by $11.8
million and contributed 42 cents to 1994 earnings per share. Water operations on
the consolidated statement of income includes a pre-tax gain of $19.1 million
from the sale. This sale was negotiated in anticipation of an eminent domain
action by the County.
Discontinued Operations. On June 30, 1995, Minnesota Power sold its interest
in the paper and pulp business to Consolidated Papers, Inc. (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 a $33.4 million annual lease obligation for paper mill equipment
under an operating lease extending to 2012. CPI has agreed to indemnify the
Company for any payments the Company may make as a result of the Company's
obligation relating to this operating lease.
The financial results of the paper and pulp business, including the loss on
disposition, have been accounted for as discontinued operations.
Summary of Discontinued Operations --
Year ended December 31 1995 1994 1993
- --------------------------------------------------------------------------------
In thousands
Operating revenue and income $44,324 $55,615 $ 7,112
Income (loss) from equity investments $7,496 $2,327 $(1,865)
Income (loss) from operations $7,476 $2,677 $(3,132)
Income tax expense (benefit) 3,117 809 (1,379)
------- ------- -------
4,359 1,868 (1,753)
------- ------- -------
Loss on disposal (1,786) - -
Income tax benefit 275 - -
------- ------- -------
(1,511) - -
------- ------- -------
Income (loss) from discontinued operations $2,848 $1,868 $(1,753)
- --------------------------------------------------------------------------------
-17-
<PAGE>
4 Regulatory Matters
The Company files for periodic rate revisions with the Minnesota Public
Utilities Commission (MPUC), the Federal Energy Regulatory Commission (FERC),
the Florida Public Service Commission (FPSC) and other state and county
regulatory authorities. The MPUC had regulatory authority over approximately 76%
in 1995, 77% in 1994 and 76% in 1993 of the Company's total electric operating
revenue. Interim rates in Minnesota and Florida are placed into effect, subject
to refund with interest, pending a final decision by the appropriate commission.
Electric Rate Proceedings. In November 1994, the MPUC granted the Company an
increase in annual electric operating revenue of $19 million and an 11.6% return
on equity. Effective June 1, 1995, rates for large industrial customers
increased less than 4%, while the rate for smaller businesses increased 6.5%.
Rate increases for residential customers were approved to be phased in over
three years: 13.5% began in June 1995 and 3.75% in January 1996, another 3.75%
will begin in January 1997.
In January 1994 the Company began recovering ongoing CIP expenditures and
$8.2 million of deferred CIP expenditures incurred prior to Dec. 31, 1993,
through a customer billing adjustment and retail base rates approved by the
MPUC. The Company collected $10.8 million and $7.8 million of CIP related
revenue in 1995 and 1994.
Water Rate Proceedings. In April 1995 the Florida First District Court of
Appeals reversed the 1993 FPSC order which approved uniform rates for most of
SSU's service areas in Florida. Consequently, the FPSC ordered the Company to
refund about $10 million, including interest, to customers who paid more since
October 1993 under uniform rates than they would have paid under stand-alone
rates. The FPSC also indicated that it would not permit collection of the $10
million from customers who paid less under uniform rates. With "uniform rates,"
all customers in the uniform rate areas pay the same rates for water and
wastewater services. Uniform rates are an alternative to "stand-alone" rates
which are calculated based on the cost of serving each service area. In November
1995 SSU filed a request for FPSC reconsideration. The Company believes that it
would be improper for the FPSC to order a refund to one group of customers
without permitting recovery of a similar amount 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 the
Company's total revenue requirement for operations in Florida. If the FPSC does
not adopt SSU's position on reconsideration, SSU will vigorously pursue reversal
of the FPSC's decision in the courts. No provision for refund has been recorded.
In June 1995 SSU filed a request with the FPSC for an $18.6 million annual
increase in water and wastewater treatment rates. On Nov. 1, 1995, the FPSC
denied the Company's original $12 million interim rate request for two reasons:
(1) it was based on uniform rates which were deemed improper by a court order
subsequent to the Company's original filing, and (2) the FPSC had not yet
formulated a policy on allowable investments and expenses to be included in a
forward-looking interim test year. The Company submitted additional information
to support interim rate approval of $12 million based on a forward-looking test
year and $8.4 million based on a historical test year. On Jan. 4, 1996, the FPSC
permitted the Company to implement an interim rate increase (based on a
historical test year) of $7.9 million, on an annualized basis, over revenue
previously collected under a uniform rate structure. Interim rates went into
effect on Jan. 23, 1996. Final rates are anticipated to become effective in the
fourth quarter of 1996.
Florida law permits water and wastewater utilities to make an annual index
filing to recover inflationary increases in system operations and maintenance
expenses, thus delaying or avoiding the costs of full rate case filings.
Similarly, another Florida law allows water and wastewater utilities to file
annually to recover increased purchased water and wastewater treatment costs and
property tax increases. Since 1993 the Company was allowed $2.9 million of the
$3 million requested in annual rate increases under these laws.
Peabody Contract Buyout. In 1991 Minnesota Power and Peabody Coal Company
agreed to terminate the 1968 Coal Supply Contract between the parties (the Coal
Contract) two years ahead of the scheduled termination date. As approved by the
MPUC and FERC, the Company used the retail and resale fuel adjustment clauses to
pass through to electric customers the $35 million charge (plus a return on the
funds used to make the payment) paid by the Company in December 1991 to
terminate the Coal Contract. The consolidated income statement includes $3.9 and
$18.5 million in 1994 and 1993 of the Coal Contract termination costs as fuel
expense and the recovery of these costs in revenue through the fuel adjustment
clauses.
Deferred Regulatory Charges and Credits. Based on current rate treatment, the
Company believes all deferred regulatory charges are probable of recovery.
-18-
<PAGE>
Summary of Deferred Regulatory
Charges and Credits-- December 31 1995 1994
- --------------------------------------------------------------------------------
In thousands
Deferred Charges
Income taxes $22,726 $22,977
Conservation improvement programs 15,793 10,471
Early retirement plan 14,290 3,380
Postretirement benefits 10,801 12,834
Premium on reacquired debt 8,293 9,119
Other 16,728 16,138
------- -------
88,631 74,919
Deferred Credits
Income taxes 57,950 55,996
------- -------
Net deferred regulatory charges and credits $30,681 $18,923
- --------------------------------------------------------------------------------
5 Jointly Owned Electric Facility
The Company owns 80% of Boswell Unit 4. While the Company operates the plant,
certain decisions with respect to the operations of Boswell Unit 4 are subject
to the oversight of a committee on which the Company and Wisconsin Public Power,
Inc. SYSTEM (WPPI), the owner of the other 20% of Boswell Unit 4, have equal
representation and voting rights. Each owner must provide its own financing and
is obligated to pay its ownership share of operating costs. The Company's share
of direct operating expenses of Boswell Unit 4 is included in operating expense
on the consolidated statement of income. The Company's 80% share of the original
cost included in electric plant at Dec. 31, 1995 and 1994, was $303 and $306
million.
The corresponding provisions for accumulated depreciation were $123 and $119
million.
6 Investment in Capital Re
The Company has an equity investment in Capital Re, a company engaged in
financial guaranty reinsurance. During 1995 and 1994 the Company purchased an
additional 517,100 shares of Capital Re common stock for $11 million. At Dec.
31, 1995, the Company's equity investment was 22.1%. The Company uses the equity
method to account for this investment.
Summary of Capital Re
Financial Information--
Year ended December 31 1995 1994 1993
- --------------------------------------------------------------------------------
In thousands
Investment portfolio $771,767 $638,751 $552,405
Other assets $201,074 $171,289 $159,231
Liabilities $171,447 $134,610 $137,407
Deferred revenue $314,451 $274,916 $250,394
Net revenue $107,085 $101,462 $79,477
Net income $45,527 $39,806 $36,354
- --------------------------------------------------------------------------------
Summary of Minnesota Power's
Ownership in Capital Re--
December 31 1995 1994 1993
- --------------------------------------------------------------------------------
In thousands
Equity in earnings $9,811 $8,138 $6,559
Accumulated equity in undistributed
earnings $42,755 $33,683 $26,103
Equity investment $92,851 $72,054 $60,216
Fair value of equity investment $100,422 $86,662 $70,778
- --------------------------------------------------------------------------------
-19-
<PAGE>
7 Financial Instruments
Securities Investments. The majority of the Company's securities investments
are investment-grade stocks of other utility companies and are considered by the
Company to be conservative investments.
Investments in equity and debt securities are classified in two categories on
the balance sheet: Trading securities are those bought and held principally for
near-term sale. They are recorded at fair value as part of current assets, with
changes in fair value during the period included in earnings. Available-for-sale
securities, which are held for an indefinite period of time, are recorded at
fair value in investments. Changes in fair value during the period are recorded
net of tax as a separate component of common stock equity. If the fair value of
any available-for-sale securities declines below cost and the decline is
considered other than temporary, the securities are written down to fair value
and the losses charged to earnings. Realized gains and losses are computed on
each specific investment sold.
<TABLE>
<CAPTION>
Dec. 31, 1995 Dec. 31, 1994
--------------------------------------------------------------------------------------
Gross Unrealized Fair Gross Unrealized Fair
---------------- ----------------
Summary of Securities Cost Gain (Loss) Value Cost Gain (Loss) Value
- --------------------------------------------------------------------------------------------------------------------
In thousands
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Trading $40,007 $ 74,046
------- ---------
Available-for-sale
Common stock $ 2,599 $ - $ (451) $ 2,148 $ 10,636 $ 86 $(1,748) $ 8,974
Preferred stock 64,506 1,969 (3,090) 63,385 117,860 2,747 (3,893) 116,714
------- ------ ------- ------- -------- ------ ------- ---------
$67,105 $1,969 $(3,541) $65,533 $128,496 $2,833 $(5,641) $125,688
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The net unrealized gain (loss) on securities investments on the balance sheet
at Dec. 31, 1995 and 1994, also included $4.1 and ($3.8) million from the
Company's share of Capital Re's unrealized holding gains and losses.
<TABLE>
<CAPTION>
Year ended December 31 1995 1994
- --------------------------------------------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Trading securities
Change in net unrealized holding gains included in earnings $1,518 $253
Available-for-sale securities
Proceeds from sales $97,139 $53,559
Gross realized gains $2,974 $1,194
Gross realized (losses) $(3,313) $(2,902)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Off-Balance-Sheet Risks. In portfolio strategies designed to reduce market
risks, the Company sells common stock securities short and enters into short
sales of treasury futures contracts.
Selling common stock securities short is intended to reduce market price
risks associated with holding common stock securities in the Company's trading
securities portfolio. Transactions involving short sales of common stock are
completed on average within 90 days from when the transactions are entered into.
Realized and unrealized gains and losses from short sales of common stock
securities are included in investment income.
Treasury futures are used as a cross hedge to reduce interest rate risks
associated with holding fixed dividend preferred stocks included in the
Company's available-for-sale portfolio. Changes in market values of treasury
futures are recognized as an adjustment to the carrying amount of the underlying
hedged item. Gains and losses on treasury futures are deferred and recognized in
investment income concurrently with gains and losses arising from the underlying
hedged item. Generally, treasury futures contracts entered into have a maturity
date of 90 days.
The notional amounts summarized below do not represent amounts exchanged and
are not a measure of the Company's financial exposure. The amounts exchanged are
calculated on the basis of these notional amounts and other terms which relate
to the change in interest rates and securities prices. The Company continually
evaluates the credit standing of counterparties and market conditions with
respect to its off-balance-sheet financial instruments. The Company does not
expect any counterparties to fail to meet their obligations or any material
adverse impact to its financial position from these financial instruments.
-20-
<PAGE>
Summary of Off-Balance-Sheet
Financial Instruments-- December 31 1995 1994
- --------------------------------------------------------------------------------
In thousands
Short stock sales outstanding $30,253 $61,523
Treasury futures $12,700 $31,700
Interest rate swap - $20,000
- --------------------------------------------------------------------------------
Fair Value of Financial Instruments. The carrying amount of cash and cash
equivalents, trading securities, notes and other accounts receivable, and notes
payable approximates fair value because of the short maturity of those
instruments. The Company records its trading and available-for-sale securities
at fair value based on quoted market prices. The fair values for all other
financial instruments were based on quoted market prices for the same or similar
issues.
<TABLE>
<CAPTION>
Summary of Fair Values-- December 31 1995 1994
- ---------------------------------------------------------------------------------------------------------
In thousands
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term debt $(639,548) $(660,277) $(601,317) $(559,859)
Redeemable serial preferred stock $(20,000) $(21,050) $(20,000) $(19,550)
Short stock sales outstanding (trading) - $32,167 - $59,691
Treasury futures - $15,427 - $31,433
Interest rate swap - - - $(589)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Concentration of Credit Risk. Financial instruments that subject the Company
to concentrations of credit risk consist primarily of trade and other
receivables. The Company sells electricity to about 17 customers in northern
Minnesota's taconite and paper industries. At Dec. 31, 1995 and 1994,
receivables from these customers totaled $7.6 and $8.5 million. The Company does
not obtain collateral to support utility receivables, but monitors the credit
standing of major customers. The Company has not incurred and does not expect to
incur significant credit losses. Approximately $73 million of trade accounts
receivable are due from automobile dealers. ADESA has possession of car titles
collaterallizing a significant portion of these accounts.
8 Common Stock and Retained Earnings
The Articles of Incorporation, mortgage, and preferred stock purchase
agreements contain provisions that, under certain circumstances, would restrict
the payment of common stock dividends. As of Dec. 31, 1995, no retained earnings
were restricted as a result of these provisions.
Summary of Common Stock Shares Equity
- --------------------------------------------------------------------------------
In thousands
Balance Dec. 31, 1992 29,453 $308,090
1993 Public offering 1,000 34,570
ESPP 25 925
DRIP 588 20,805
Earned ESOP adjustment - 995
Other 141 5,296
------ ---------
Balance Dec. 31, 1993 31,207 370,681
1994 ESPP 40 1,033
Other - (536)
------ ---------
Balance Dec. 31, 1994 31,247 371,178
1995 ESPP 32 786
DRIP 189 5,653
Other - 67
------ ---------
Balance Dec. 31, 1995 31,468 $377,684
- --------------------------------------------------------------------------------
-21-
<PAGE>
9 Preferred Stock
<TABLE>
<CAPTION>
Summary of Cumulative
Preferred Stock-- December 31 1995 1994
- ------------------------------------------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Preferred stock, $100 par value, 116,000 shares authorized;
5% Series - 113,358 shares outstanding, callable at $102.50 per share $11,492 $11,492
Serial preferred stock, without par value,1,000,000 shares authorized;
$7.36 Series - 170,000 shares outstanding, callable at $103.34 per share 17,055 17,055
------- -------
Total cumulative preferred stock $28,547 $28,547
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Summary of Redeemable
Serial Preferred Stock-- December 31 1995 1994
- ------------------------------------------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Serial preferred stock A, without par value, 2,500,000 shares authorized;
$6.70 Series - 100,000 shares outstanding, noncallable,
redeemable in 2000 at $100 per share $10,000 $10,000
$7.125 Series - 100,000 shares outstanding, noncallable,
redeemable in 2000 at $100 per share 10,000 10,000
------- -------
Total redeemable serial preferred stock $20,000 $20,000
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
10 Long-Term Debt
<TABLE>
<CAPTION>
Schedule of Long-Term Debt-- December 31 1995 1994
- -----------------------------------------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Minnesota Power
First mortgage bonds
73/8% Series due 1997 $ 60,000 $ 60,000
61/2% Series due 1998 18,000 18,000
61/4% Series due 2003 25,000 25,000
71/2% Series due 2007 35,000 35,000
73/4% Series due 2007 55,000 55,000
7% Series due 2008 50,000 50,000
6% Pollution control Series E due 2022 111,000 111,000
Pollution control revenue bonds due 1996-2010 34,655 35,405
Leveraged ESOP loan due 1996-2004 13,039 13,786
Other long-term debt 17,194 17,054
Subsidiary companies
First mortgage bonds, 8.75% due 2013 45,000 45,000
Notes payable, variable, due 1998 38,000 -
Notes payable, 7.65% due 2003 - 41,864
Notes payable, 10.44% due 1999 30,000 30,000
Notes payable, variable, due 1999 19,926 -
Other long-term debt 97,477 77,022
Less due within one year (9,743) (12,814)
--------- ---------
Total long-term debt $639,548 $601,317
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Aggregate amounts of long-term debt maturing during each of the next five
years are $9.7, $74.4, $68.8, $63.9 and $8.2 million in 1996, 1997, 1998, 1999
and 2000.
Substantially all Company electric and water plant is subject to the lien of
the mortgages securing various first mortgage bonds. All automobile auction
plant is subject to liens securing various notes payable.
In January 1996 SSU issued $35.1 million of 6.5% Industrial Development
Refunding Revenue Bonds Series 1996 due Oct. 1, 2025. Proceeds were used to
refund four industrial development bond issues totaling $33.8 million that SSU
had outstanding at Dec. 31, 1995.
-22-
<PAGE>
11 Short-Term Borrowings and Compensating Balances
The Company had bank lines of credit, which make short-term financing
available through short-term bank loans and provide support for commercial
paper, aggregating $128 and $72 million at Dec. 31, 1995 and 1994. At Dec. 31,
1995 and 1994, the Company had issued commercial paper with face values of $63
and $54 million, respectively, with liquidity provided by bank lines of credit
and the Company's securities portfolio. Certain lines of credit require payment
of a 1/8 of 1% commitment fee and others require maintenance of a 5% or 10%
compensating balance. Interest rates on commercial paper and borrowings under
the lines of credit range from 6.0% to 9.5% at Dec. 31, 1995, and 5.5% to 9.5%
at Dec. 31, 1994. The weighted average interest rate on short-term borrowings at
Dec. 31, 1995 and 1994, was 6.1% and 5.7%. The total amount of compensating
balances at Dec. 31, 1995 and 1994, was immaterial.
12 Square Butte Purchased Power Contract
Under the terms of a 30-year contract with Square Butte that extends through
2007, the Company is purchasing 71% of the output from a mine-mouth,
lignite-fired generating plant capable of generating up to 470 MW. This
generating unit (Project) is located near Center, N.D. Reductions to about 49%
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 and continue
for the remaining economic life of the Project. The Company has the option but
not the obligation to continue to purchase 49% of the output after 2007.
The Project is leased to Square Butte through Dec. 31, 2007, by certain banks
and their affiliates which have beneficial ownership in the Project. Square
Butte has options to renew the lease after 2007 for essentially the entire
remaining economic life of the Project.
The Company is obligated to pay Square Butte all Square Butte's leasing,
operating and debt service costs (less any amounts collected from the sale of
power or energy to others) that shall not have been paid by Square Butte when
due. These costs include the price of lignite coal purchased by Square Butte
under a cost-plus contract with BNI Coal. The Company's cost of power and energy
purchased from Square Butte during 1995, 1994 and 1993 was $57.6, $55.4 and
$56.5 million, respectively. The leasing costs of Square Butte included in the
cost of power delivered to the Company totaled $19.3 million in 1995 and in
1994, and $19.7 million in 1993, which included approximately $11, $12 and $12.5
million, respectively, of interest expense. The annual fixed lease obligations
of the Company for Square Butte are $19.4 million from 1996 through 2000. At
Dec. 31, 1995, Square Butte had total debt outstanding of $207 million. The
Company's obligation is absolute and unconditional whether or not any power is
actually delivered to the Company.
The Company's payments to Square Butte for power and energy are approved as
purchased power expense for ratemaking purposes by both the MPUC and FERC.
One principal reason the Company entered into the agreement with Square Butte
was to obtain a power supply for large industrial customers. Present electric
service contracts with these customers require payment of minimum monthly demand
charges that cover most of the fixed costs associated with having capacity
available to serve them. These contracts minimize the negative impact on
earnings that could result from significant reductions in kilowatt-hour sales to
industrial customers. The minimum contract term for the large industrial
customers is 10 years, with a four-year cancellation notice required for
termination of the contract at or beyond the end of the tenth year. Under the
terms of existing contracts, the Company would collect approximately $100.5,
$90.9, $79.0, $61.8 and $48.1 million under current rate levels for firm power
during the years 1996, 1997, 1998, 1999 and 2000, respectively, even if no power
or energy were supplied to these customers after Dec. 31, 1995. The minimum
contract provisions are expressed in megawatts of demand, and if rates change,
the amounts the Company would collect under the contracts will change in
proportion to the change in the demand rate.
13 Leasing Agreements
ADESA leases auction facilities located in North Carolina, Massachusetts and
Tennessee from an unrelated third party. The term of these leases is for five
years with no renewal options. However, at the beginning of the fourth year of
the lease term, ADESA has the option to purchase the leased facilities at a
collective price of $26.5 million. In the event ADESA does not exercise its
option to purchase, ADESA is required to guarantee any deficiency in sales
proceeds the lessor realizes in dispensing of the leased properties should the
selling price fall below $25.7 million. ADESA receives any excess sales proceeds
over the option price.
ADESA has guaranteed the payment of principal and interest on the lessor's
indebtedness which consists of $25.7 million mortgage notes, due Aug. 1, 2000.
Interest on the notes accrues at 9.82% per annum and is payable monthly. ADESA
had also guaranteed the completion of construction which took place at these
properties during 1995.
The Company leases other properties and equipment in addition to those listed
above pursuant to operating and capital lease agreements with terms expiring
through 2002. Aggregate amounts of future minimum lease payments for capital and
operating leases during each of the next five years are $6.6, $6.5, $6.4, $9.2
and $3.4 million in 1996, 1997, 1998, 1999 and 2000.
-23-
<PAGE>
14 Income Tax Expense
Schedule of Income Tax Expense 1995 1994 1993
- -------------------------------------------------------------------------------
In thousands
Charged to continuing operations
Current tax expense
Federal $ 8,559 $19,308 $24,157
Foreign 573 - -
State 4,224 4,808 5,120
-------- ------- --------
13,356 24,116 29,277
-------- ------- --------
Deferred tax expense
Federal 6,820 (511) 549
State 244 (470) 535
-------- ------- --------
7,064 (981) 1,084
-------- ------- --------
Change in valuation allowance (18,400) - -
-------- ------- --------
Deferred tax credits (865) (2,478) (2,035)
-------- ------- --------
Income tax-- continuing
operations 1,155 20,657 28,326
-------- ------- --------
Charged to discontinued operations
Current tax expense
Federal 13,396 (4,302) (4,068)
State 4,192 (2,071) (1,745)
-------- ------- --------
17,588 (6,373) (5,813)
-------- ------- --------
Deferred tax expense
Federal (11,851) 5,677 3,518
State (2,895) 1,505 916
-------- ------- --------
(14,746) 7,182 4,434
-------- ------- --------
Income tax-- discontinued
operations 2,842 809 (1,379)
-------- ------- --------
Total income tax expense $ 3,997 $21,466 $26,947
- -------------------------------------------------------------------------------
The Company's overall effective tax rates were 5.8%, 25.9%, and 30.1% in 1995,
1994 and 1993, compared to the federal statutory rate of 35%.
Reconciliation of Federal Statutory Rate
to Effective Tax Rate 1995 1994 1993
- --------------------------------------------------------------------------------
In thousands
Tax computed at federal statutory rate $24,046 $28,979 $31,333
Increase in tax from state income
taxes, net of federal income tax
benefit 3,504 2,608 3,684
Basis difference in land (72) (2,433) -
Change in valuation allowance (18,400) - -
Income from unconsolidated
subsidiaries (245) (985) (2,885)
Income from escrow funds - (1,550) -
Dividend received deduction (2,284) (2,867) (3,295)
Tax credits (1,916) (2,478) (2,097)
Other (636) 192 207
-------- ------- --------
Total income tax expense $ 3,997 $21,466 $26,947
- --------------------------------------------------------------------------------
-24-
<PAGE>
Schedule of Deferred Tax
Assets and Liabilities-- December 31 1995 1994
- --------------------------------------------------------------------------------
In thousands
Deferred tax assets
Contributions in aid of construction $ 17,528 $ 18,378
Lehigh basis difference 25,071 26,878
Deferred compensation plans 9,346 7,856
Minimum tax credit carryover 5,464 11,094
Deferred gain 4,781 12,359
Depreciation 11,950 10,472
Investment tax credits 23,904 24,144
Other 21,811 22,289
--------- ----------
Gross deferred tax assets 119,855 133,470
Deferred tax asset valuation allowance (8,943) (26,878)
--------- ----------
Total deferred tax assets 110,912 106,592
--------- ----------
Deferred tax liabilities
Depreciation 188,804 198,174
AFDC 19,399 20,526
Capital lease -- 11,432
Gain on sale of water plant 7,390 7,390
Investment tax credits 34,369 35,982
Other 25,687 25,529
--------- ----------
Total deferred tax liabilities 275,649 299,033
--------- ----------
Accumulated deferred income taxes $ 164,737 $ 192,441
- --------------------------------------------------------------------------------
In 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 management to dispose of Lehigh's assets in a
manner that would maximize the utilization of tax benefits. Based on this
directive, Lehigh recognized $18.4 million of income by reducing the valuation
reserve which offsets deferred tax assets. Additional unrealized net deferred
tax assets resulting from the original purchase of Lehigh of $8.2 million are
included on the Company's balance sheet. These assets are fully offset by the
deferred tax asset valuation allowance because under the standards of SFAS 109,
"Accounting for Income Taxes," it is currently "more likely than not" that the
value of these assets will not be realized. Management reviews the
appropriateness of the valuation allowance quarterly.
A provision has not been made for taxes on $19.1 million of pre-1993
undistributed earnings of Capital Re, an investment accounted for under the
equity method. Those earnings have been and are expected to continue to be
reinvested. The Company estimates that $7.9 million of tax would be payable on
the pre-1993 undistributed earnings of Capital Re if the Company should sell its
investment. The Company has recognized the income tax impact on undistributed
earnings of Capital Re earned since Jan. 1, 1993.
15 Pension Plans and Benefits
Pension Plans. The Company's Minnesota, Wisconsin and Florida utility
operations have noncontributory defined benefit pension plans covering eligible
employees. Pension benefits for employees in Minnesota and Wisconsin are fully
vested after five years and are based on years of service and the highest
average monthly compensation earned during four consecutive years within the
last 15 years of employment. Employees in Florida are fully vested after five
years of credited service, with benefits based on years of service and average
earnings. Company policy is to fund accrued pension costs, including
amortization of past service costs, over 5 to 30 years. Part of the pension cost
is capitalized as a cost of plant construction.
Schedule of Pension Costs 1995 1994 1993
- --------------------------------------------------------------------------------
In thousands
Service cost $ 4,290 $ 4,130 $ 3,436
Interest cost 13,025 11,753 11,969
Actual return on assets (34,515) (15,103) (30,590)
Net amortization 17,823 454 17,372
Amortization of early retirement cost 1,978 - -
-------- -------- ---------
Net cost $ 2,601 $ 1,234 $ 2,187
- --------------------------------------------------------------------------------
-25-
<PAGE>
At Dec. 31, 1995, approximately 55% of pension plan assets were invested in
equity securities, 26% in fixed income securities, 12% in other investments and
7% in Company common stock.
Pension Plans Funded Status-- October 1 1995 1994
- --------------------------------------------------------------------------------
In thousands
Actuarial present value of benefit obligations
Vested benefit obligation $(167,590) $(126,250)
Nonvested benefit obligation (7,326) (8,975)
--------- ----------
Accumulated benefit obligation (174,916) (135,225)
Excess of projected benefit obligation over accumulated
benefit obligation (25,991) (26,820)
--------- ----------
Projected benefit obligation (200,907) (162,045)
Plan assets at fair value 222,755 195,942
--------- ----------
Plan assets in excess of projected benefit obligation 21,848 33,897
Unrecognized net gain (35,474) (33,767)
Prior service cost not yet recognized in net periodic
pension cost 6,166 6,647
Unrecognized net obligation at Oct. 1, 1985, being
recognized over 20 years 1,898 2,104
--------- ----------
Prepaid (accrued) pension cost recognized on the
consolidated balance sheet $ (5,562) $ 8,881
- --------------------------------------------------------------------------------
The weighted average discount rate for 1995 and 1994 was 7.75% and 8.25%.
Projected pension obligations assume pay increases averaging 6% in 1995 and
1994. The assumed long-term rate of return on assets was 8.75% for 1995 and
1994.
BNI Coal, ADESA and Heater have defined contribution pension plans covering
eligible employees. The aggregate annual pension cost for these plans was about
$800,000, $600,000 and $700,000 in 1995, 1994 and 1993.
Postretirement Benefits. The Company provides certain health care and life
insurance benefits for retired employees. The regulatory asset for deferred
postretirement benefits is being amortized in electric rates over a five year
period beginning in 1995.
Schedule of Postretirement Benefit Costs 1995 1994
- --------------------------------------------------------------------------------
In thousands
Service cost $ 2,544 $ 2,545
Interest cost 3,624 4,389
Actual return on plan assets (103) (125)
Amortization of transition obligation 1,213 3,085
------- --------
Net periodic cost 7,278 9,894
Net amortization (deferral) 2,015 (6,285)
------- --------
Net cost $ 9,293 $ 3,609
- --------------------------------------------------------------------------------
Company policy is to fund the net periodic postretirement costs and the
amortization of the costs deferred as the amounts are collected in rates. The
Company is funding these benefits using Voluntary Employee Benefit Association
(VEBA) trusts and an irrevocable grantor trust. The maximum tax deductible
contributions are made to the VEBAs. The remainder of the funds are placed in
the irrevocable grantor trust until the funds can be used to make tax deductible
contributions to the VEBAs. The funds in the irrevocable grantor trust do not
qualify as plan assets for purposes of SFAS 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions."
Postretirement Benefit Plan Funded Status-- December 31 1995 1994
- --------------------------------------------------------------------------------
In thousands
Accumulated postretirement benefit obligation
Retirees $(35,056) $(18,879)
Fully eligible participants (9,414) (17,221)
Other active participants (15,090) (25,151)
-------- ---------
(59,560) (61,251)
Plan assets 5,702 2,486
-------- ---------
Accumulated postretirement benefit in excess of
plan assets (53,858) (58,765)
Unrecognized transition obligation 39,397 45,040
-------- ---------
Accrued postretirement benefit obligation $(14,461) $(13,725)
- --------------------------------------------------------------------------------
-26-
<PAGE>
For measurement purposes, it was assumed per capita health care benefit costs
would increase 12.25% in 1995 and that cost increases would thereafter decrease
1% each year until stabilizing at 5.25% in 2002. Accelerating the rate of
assumed health care cost increases by 1% each year would raise the 1995
transition obligation by $6.8 million and service and interest costs by a total
of $1.1 million. The weighted average discount rate used in estimating
accumulated postretirement benefit obligations was 7.75% for 1995 and 8.25% for
1994. The expected long-term rate of return on plan assets was 8.75% for 1995
and 1994.
Postemployment Benefits. The Company provides certain postemployment benefits
to employees and their dependents during the time period following employment
but before retirement. On Jan. 1, 1994, the Company adopted SFAS 112,
"Employers' Accounting for Postemployment Benefits," which recognizes the
estimated future cost of providing postemployment benefits on an accrual basis
over the active service life of employees. Adoption of SFAS 112 resulted in a
$2.2 million transition obligation.
16 Employee Stock Plans
Employee Stock Ownership Plan. The Company has sponsored an ESOP since 1975,
amending it in 1989 and 1990 to establish two leveraged accounts. The Company
accounts for the ESOP in accordance with the American Institute of Certified
Public Accountants' (AICPA) Statement of Position 93-6 (SOP 93-6).
The 1989 leveraged ESOP account covers all nonunion Minnesota and Wisconsin
employees who work more than 1,000 hours per year and have one year of service.
The ESOP used the proceeds from a $16.5 million 15-year loan at 9.125%,
guaranteed by the Company, to purchase 633,489 shares of Minnesota Power common
stock on the open market in early 1990. These shares fund employee benefits
totaling not less than 2% of the participants' salaries.
The 1990 leveraged ESOP account covers Minnesota and Wisconsin employees who
participated in the non-leveraged ESOP plan prior to Aug. 4, 1989. The ESOP
issued a $75 million promissory note at 10.25% with a term not to exceed 25
years to the Company (Employer Loan) as consideration for 2.8 million shares of
newly issued Minnesota Power common stock in November 1990. These shares are
used to fund a benefit at least equal to the value of the following: (a)
dividends on shares held in participants' 1990 leveraged ESOP accounts which are
used to make loan payments, and (b) the tax savings generated from deducting all
dividends paid on shares currently in the ESOP which were held by the plan on
Aug. 4, 1989.
The loans will be repaid with dividends received by the ESOP and with
employer contributions. ESOP shares acquired with the loans were initially
pledged as collateral for the loans. The ESOP shares are released from
collateral and allocated to participants based on the portion of total debt
service paid in the year.
Schedule of ESOP Compensation
and Interest Expense-- Year ended December 31 1995 1994 1993
- --------------------------------------------------------------------------------
In thousands
Interest expense $1,258 $1,328 $1,361
Compensation expense 1,823 2,037 2,396
------ ------ -------
Total $3,081 $3,365 $3,757
- --------------------------------------------------------------------------------
Schedule of ESOP Shares-- December 31 1995 1994
- --------------------------------------------------------------------------------
In thousands
Allocated shares 1,633 1,635
Shares released for allocation 41 49
Unreleased shares 2,757 2,903
------- -------
Total ESOP shares 4,431 4,587
- --------------------------------------------------------------------------------
Fair value of unreleased shares $78,241 $73,305
- --------------------------------------------------------------------------------
Employee Stock Purchase Plan. The Company has an Employee Stock Purchase Plan
(ESPP). At Dec. 31, 1995, 222,663 shares of common stock were held in reserve
for future issuance under the ESPP. The ESPP permits eligible employees to buy
up to $23,750 per year in Company common stock. Purchases are at 95% of the
stock's closing market price on the first day of each month. At Dec. 31, 1995,
421,629 shares had been issued under the ESPP.
-27-
<PAGE>
17 Quarterly Financial Data (Unaudited)
Information for any one quarterly period is not necessarily indicative of the
results which may be expected for the year. Previously reported quarterly
information has been revised to reflect reclassifications to conform with the
1995 method of presentation. These reclassifications had no effect on previously
reported consolidated net income.
<TABLE>
<CAPTION>
Quarter Ended March 31 June 30 Sept. 30 Dec. 31
- ----------------------------------------------------------------------------------------------------------
In thousands except earnings per share
<S> <C> <C> <C> <C>
1995
Operating revenue and income $146,688 $147,337 $186,121 $192,771
Operating income from continuing
operations 8,404 16,431 23,663 14,514
Income
Continuing operations 23,805 10,923 15,685 11,444
Discontinued operations 1,652 1,190 33 (26)
-------- -------- -------- ---------
Net Income 25,457 12,113 15,718 11, 418
Earnings available for common stock 24,657 11,313 14,918 10,617
Earnings per share of common stock
Continuing operations $0.82 $0.35 $0.52 $0.37
Discontinued operations 0.05 0.05 - -
-------- -------- -------- ---------
$0.87 $0.40 $0.52 $0.37
- ----------------------------------------------------------------------------------------------------------
1994
Operating revenue and income $139,869 $139,529 $140,755 $162,014
Operating income from continuing operations 11,019 18,398 18,636 32,069
Income
Continuing operations 9,482 12,771 14,300 22,912
Discontinued operations (114) 199 899 884
-------- -------- -------- ---------
Net Income 9,368 12,970 15,199 23,796
Earnings available for common stock 8,568 12,170 14,399 22,996
Earnings per share of common stock
Continuing operations $0.31 $0.43 $0.48 $0.77
Discontinued operations (0.01) 0.01 0.03 0.04
-------- -------- -------- ---------
$0.30 $0.44 $0.51 $0.81
- ----------------------------------------------------------------------------------------------------------
</TABLE>
-28-
<PAGE>
Definitions
These abbreviations or acronyms are used throughout this document.
Abbreviations
or Acronyms Term
- --------------------------------------------------------------------------------
APB Accounting Principles Board
BNI Coal BNI Coal, Ltd.
Boswell Boswell Energy Center Units No. 1, 2, 3 and 4
BTUs British thermal units
Capital Re Capital Re Corporation
CIP Conservation Improvement Programs
Company Minnesota Power & Light Company and its Subsidiaries
DRIP Automatic Dividend Reinvestment and Stock Purchase Plan
ESOP Employee Stock Ownership Plan
ESPP Employee Stock Purchase Plan
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
FPSC Florida Public Service Commission
Heater Heater Utilities, Inc.
Hibbard M.L. Hibbard Station
kWh Kilowatt-hour(s)
Laskin Laskin Energy Center
Lehigh Lehigh Acquisition Corporation
Minnesota Minnesota Power & Light Company
Power and its Subsidiaries
MPCA Minnesota Pollution Control Agency
MPUC Minnesota Public Utilities Commission
MW Megawatt(s)
MWh Megawatt-hour
National National Steel Pellet Co.
Note ___ Note ___ to the consolidated financial statements in the
Minnesota Power 1995 Annual Report
Reach All Reach All Partnership
SFAS Statement of Financial Accounting Standards No.
Square Butte Square Butte Electric Cooperative
SRFI Superior Recycled Fiber Industries Joint Venture
SSU Southern States Utilities, Inc.
SWL&P Superior Water, Light and Power Company
<TABLE>
Price Ranges and Dividends Paid Per Share
<CAPTION>
New York Stock Exchange American Stock Exchange
------------------------ ---------------------------------------------------------------------
Common 5% Series Preferred $7.36 Series Preferred
------------------------ ----------------------------- ----------------------------------
Dividends Dividends Dividends
Quarter High Low Paid High Low Paid High Low Paid
- -------------- ------- ------- --------- ------- ------- --------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 - First $26 3/8 $24 1/4 $0.51 $62 $54 3/4 $1.25 $ 90 3/4 $ 86 $1.84
Second 28 25 1/4 0.51 65 1/4 59 1/2 1.25 95 1/2 90 1.84
Third 28 1/8 26 3/8 0.51 75 62 3/4 1.25 99 1/2 93 1.84
Fourth 29 1/4 27 1/2 0.51 69 64 1/2 1.25 101 1/2 96 1/4 1.84
----- ----- -----
Annual $2.04 $5.00 $7.36
1994 - First $33 $28 $0.505 $73 $68 $1.25 $105 $100 $1.84
Second 30 1/8 25 0.505 68 1/2 61 1.25 101 93 3/4 1.84
Third 28 1/8 25 0.505 64 60 1/4 1.25 96 88 3/4 1.84
Fourth 26 5/8 24 3/4 0.505 64 55 1.25 91 5/8 84 3/4 1.84
------ ----- -----
Annual $2.02 $5.00 $7.36
</TABLE>
The Company has paid dividends without interruption on its common stock since
1948, the date of initial distribution of the Company's common stock by American
Power & Light Company, the former holder of all such stock. Listed above are
dividends paid per share and the high and low prices for the Company's common
and preferred stock as reported by The Wall Street Journal, Midwest Edition. On
Dec. 31, 1995, there were approximately 28,500 common stock shareholders. On
Jan. 23, 1996, the Board of Directors declared a quarterly dividend of 51 cents,
payable March 1, 1996, to common stock shareholders of record on Feb. 15, 1996.
-29-
<PAGE>
Exhibit 23(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-51989) of the Minnesota Power and Affiliated
Companies Employee Stock Purchase Plan of our report dated January 22, 1996,
appearing on page 10 of Minnesota Power & Light Company's Current Report on Form
8-K, dated February 16, 1996.
We also consent to the incorporation by reference in the Registration Statement
on Form S-8 (No. 33-32033) of the Minnesota Power and Affiliated Companies
Supplemental Retirement Plan of our report dated January 22, 1996, appearing on
page 10 of Minnesota Power & Light Company's Current Report on Form 8-K, dated
February 16, 1996.
We also consent to the incorporation by reference in the Prospectus constituting
part of the Registration Statement on Form S-3 (No. 33-51941) of the Minnesota
Power & Light Company Common Stock of our report dated January 22, 1996,
appearing on page 10 of Minnesota Power & Light Company's Current Report on Form
8-K, dated February 16, 1996.
We also consent to the incorporation by reference in the Prospectus constituting
part of the Registration Statement on Form S-3 (No. 33-50143) of the Minnesota
Power & Light Company Common Stock of our report dated January 22, 1996,
appearing on page 10 of Minnesota Power & Light Company's Current Report on Form
8-K, dated February 16, 1996.
We also consent to the incorporation by reference in the Prospectus constituting
part of the Registration Statement on Form S-3 (No. 33-56134) of the Minnesota
Power & Light Company Automatic Dividend Reinvestment and Stock Purchase Plan of
our report dated January 22, 1996, appearing on page 10 of Minnesota Power &
Light Company's Current Report on Form 8-K, dated February 16, 1996.
We also consent to the incorporation by reference in the Prospectus constituting
part of the Registration Statement on Form S-3 (No. 33-55240) of the Minnesota
Power & Light Company First Mortgage Bonds of our report dated January 22, 1996,
appearing on page 10 of Minnesota Power & Light Company's Current Report on Form
8-K, dated February 16, 1996.
We also consent to the incorporation by reference in the Prospectus constituting
part of the Registration Statement on Form S-3 (No. 33-45551) of the Minnesota
Power & Light Company Serial Preferred Stock, Cumulative, Without Par Value of
our report dated January 22, 1996, appearing on page 10 of Minnesota Power &
Light Company's Current Report on Form 8-K, dated February 16, 1996.
Price Waterhouse LLP
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
February 16, 1996
<PAGE>
Exhibit 23(b)
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-51989) pertaining to the Minnesota Power and Affiliated Companies
Employee Stock Purchase Plan of our report dated February 9, 1995 (except Note
14, as to which the date is February 23, 1995), with respect to the consolidated
financial statements of ADESA Corporation, which were included in Minnesota
Power & Light Company's Current Report on Form 8-K dated July 12, 1995, and of
our report dated January 17, 1996 (except Note 13, as to which the date is
January 19, 1996), with respect to the consolidated financial statements of
ADESA Corporation (not presented separately therein), included in the
consolidated financial statements of Minnesota Power & Light Company that are
included in Minnesota Power & Light Company's Current Report on Form 8-K, dated
February 16, 1996.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-32033) pertaining to the Minnesota Power and Affiliated
Companies Supplemental Retirement Plan of our report dated February 9, 1995
(except Note 14, as to which the date is February 23, 1995), with respect
to the consolidated financial statements of ADESA Corporation, which were
included in Minnesota Power & Light Company's Current Report on Form 8-K dated
July 12, 1995, and of our report dated January 17, 1996 (except Note 13,
as to which the date is January 19, 1996), with respect to the consolidated
financial statements of ADESA Corporation (not presented separately
therein), included in the consolidated financial statements of Minnesota
Power & Light Company that are included in Minnesota Power & Light Company's
Current Report on Form 8-K, dated February 16, 1996.
We also consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 33-51941) of the Minnesota Power & Light Company and in the
related Prospectus of our report dated February 9, 1995 (except Note 14, as to
which the date is February 23, 1995), with respect to the consolidated
financial statements of ADESA Corporation, which were included in Minnesota
Power & Light Company's Current Report on Form 8-K dated July 12, 1995, and
of our report dated January 17, 1996 (except Note 13, as to which the date is
January 19, 1996), with respect to the consolidated financial statements of
ADESA Corporation (not presented separately therein), included in the
consolidated financial statements of Minnesota Power & Light Company that are
included in Minnesota Power & Light Company's Current Report on Form 8-K, dated
February 16, 1996.
We also consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 33-50143) of the Minnesota Power & Light Company and in the
related Prospectus of our report dated February 9, 1995 (except Note 14, as to
which the date is February 23, 1995), with respect to the consolidated
financial statements of ADESA Corporation, which were included in Minnesota
Power & Light Company's Current Report on Form 8-K dated July 12, 1995, and
of our report dated January 17, 1996 (except Note 13, as to which the date is
January 19, 1996), with respect to the consolidated financial statements of
ADESA Corporation (not presented separately therein), included in the
consolidated financial statements of Minnesota Power & Light Company that are
included in Minnesota Power & Light Company's Current Report on Form 8-K, dated
February 16, 1996.
<PAGE>
We also consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 33-56134) of the Minnesota Power & Light Company and in the
related Prospectus of our report dated February 9, 1995 (except Note 14,
as to which the date is February 23, 1995), with respect to the consolidated
financial statements of ADESA Corporation, which were included in Minnesota
Power & Light Company's Current Report on Form 8-K dated July 12, 1995, and of
our report dated January 17, 1996 (except Note 13, as to which the date is
January 19, 1996), with respect to the consolidated financial statements
of ADESA Corporation (not presented separately therein), included in the
consolidated financial statements of Minnesota Power & Light Company that are
included in Minnesota Power & Light Company's Current Report on Form 8-K, dated
February 16, 1996.
We also consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 33-55240) of the Minnesota Power & Light Company and in the
related Prospectus of our report dated February 9, 1995 (except Note 14, as to
which the date is February 23, 1995), with respect to the consolidated
financial statements of ADESA Corporation, which were included in Minnesota
Power & Light Company's Current Report on Form 8-K dated July 12, 1995, and
of our report dated January 17, 1996 (except Note 13, as to which the date is
January 19, 1996), with respect to the consolidated financial statements of
ADESA Corporation (not presented separately therein), included in the
consolidated financial statements of Minnesota Power & Light Company that are
included in Minnesota Power & Light Company's Current Report on Form 8-K, dated
February 16, 1996.
We also consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 33-45551) of the Minnesota Power & Light Company and in the
related Prospectus of our report dated February 9, 1995 (except Note 14,
as to which the date is February 23, 1995), with respect to the consolidated
financial statements of ADESA Corporation, which were included in Minnesota
Power & Light Company's Current Report on Form 8-K dated July 12, 1995, and of
our report dated January 17, 1996 (except Note 13, as to which the date is
January 19, 1996), with respect to the consolidated financial statements
of ADESA Corporation (not presented separately therein), included in the
consolidated financial statements of Minnesota Power & Light Company that are
included in Minnesota Power & Light Company's Current Report on Form 8-K, dated
February 16, 1996.
Ernst & Young LLP
ERNST & YOUNG LLP
Indianapolis, Indiana
February 16, 1996
<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 DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,123,659
<OTHER-PROPERTY-AND-INVEST> 324,992
<TOTAL-CURRENT-ASSETS> 251,965
<TOTAL-DEFERRED-CHARGES> 113,668
<OTHER-ASSETS> 133,341
<TOTAL-ASSETS> 1,947,625
<COMMON> 377,684
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 276,241
<TOTAL-COMMON-STOCKHOLDERS-EQ> 584,072
0
48,547
<LONG-TERM-DEBT-NET> 639,548
<SHORT-TERM-NOTES> 96,218
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 9,743
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 499,644
<TOT-CAPITALIZATION-AND-LIAB> 1,947,625
<GROSS-OPERATING-REVENUE> 672,917
<INCOME-TAX-EXPENSE> 1,155
<OTHER-OPERATING-EXPENSES> 566,060
<TOTAL-OPERATING-EXPENSES> 614,101
<OPERATING-INCOME-LOSS> 63,012
<OTHER-INCOME-NET> 7,044
<INCOME-BEFORE-INTEREST-EXPEN> 112,746
<TOTAL-INTEREST-EXPENSE> 48,041
<NET-INCOME> 64,705
3,200
<EARNINGS-AVAILABLE-FOR-COMM> 61,505
<COMMON-STOCK-DIVIDENDS> 57,910
<TOTAL-INTEREST-ON-BONDS> 42,602
<CASH-FLOW-OPERATIONS> 123,954
<EPS-PRIMARY> 2.16
<EPS-DILUTED> 2.16
</TABLE>
