<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended MARCH 31, 1998
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 1-3548
MINNESOTA POWER & LIGHT COMPANY
A Minnesota Corporation
IRS Employer Identification No. 41-0418150
30 West Superior Street
Duluth, Minnesota 55802
Telephone - (218) 722-2641
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Common Stock, no par value,
33,729,739 shares outstanding
as of April 30, 1998
<PAGE>
MINNESOTA POWER & LIGHT COMPANY
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet -
March 31, 1998 and December 31, 1997 1
Consolidated Statement of Income -
Quarter Ended March 31, 1998 and 1997 2
Consolidated Statement of Cash Flows -
Quarter Ended March 31, 1998 and 1997 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II. Other Information
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
<PAGE>
DEFINITIONS
The following abbreviations or acronyms are used in the text.
Abbreviation
or Acronym Term
- -------------- ----------------------------------------------------
1997 Form 10-K Minnesota Power's Annual Report on Form 10-K for
the Year Ended December 31, 1997
ADESA ADESA Corporation
AFC Automotive Finance Corporation
Common Stock Minnesota Power & Light Company's common stock
Company Minnesota Power & Light Company and its subsidiaries
DRIP Dividend Reinvestment and Stock Purchase Plan
ESOP Employee Stock Ownership Plan
FERC Federal Energy Regulatory Commission
Heater Heater Utilities, Inc.
Florida Water Florida Water Services Corporation
FPSC Florida Public Service Commission
kWh Kilowatthour(s)
Minnesota Power Minnesota Power & Light Company and its subsidiaries
MPUC Minnesota Public Utilities Commission
MW Megawatt(s)
NCUC North Carolina Utilities Commission
Palm Coast Palm Coast Holdings, Inc.
PSCW Public Service Commission of Wisconsin
Square Butte Square Butte Electric Cooperative
SWL&P Superior Water, Light and Power Company
<PAGE>
SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (Reform Act), the Company is hereby filing
cautionary statements identifying important factors that could cause the
Company's actual results to differ materially from those projected in
forward-looking statements (as such term is defined in the Reform Act) made by
or on behalf of the Company in this quarterly report on Form 10-Q, in
presentations, in response to questions or otherwise. Any statements that
express, or involve discussions as to expectations, beliefs, plans, objectives,
assumptions or future events or performance (often, but not always, through the
use of words or phrases such as "anticipates", "believes", "estimates",
"expects", "intends", "plans", "predicts", "projects", "will likely result",
"will continue", or similar expressions) are not statements of historical facts
and may be forward-looking. Forward-looking statements involve estimates,
assumptions, and uncertainties and are qualified in their entirety by reference
to, and are accompanied by, the following important factors, which are difficult
to predict, contain uncertainties, are beyond the control of the Company and may
cause actual results to differ materially from those contained in
forward-looking statements:
- prevailing governmental policies and regulatory actions, including
those of the FERC, the MPUC, the FPSC, the NCUC and the PSCW, with
respect to allowed rates of return, industry and rate structure,
acquisition and disposal of assets and facilities, operation and
construction of plant facilities, recovery of purchased power and
other capital investments, and present or prospective wholesale
and retail competition (including but not limited to retail
wheeling and transmission costs);
- economic and geographic factors including political and economic
risks;
- changes in and compliance with environmental and safety laws and
policies;
- weather conditions;
- population growth rates and demographic patterns;
- competition for retail and wholesale customers;
- pricing and transportation of commodities;
- market demand, including structural market changes;
- changes in tax rates or policies or in rates of inflation;
- changes in project costs;
- unanticipated changes in operating expenses and capital
expenditures;
- capital market conditions;
- competition for new energy development opportunities; and
- legal and administrative proceedings (whether civil or criminal)
and settlements that influence the business and profitability of
the Company.
Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time and it is not possible for management to
predict all of such factors, nor can it assess the impact of any such factor on
the business or the extent to which any factor, or combination of factors, may
cause results to differ materially from those contained in any forward-looking
statement.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
MINNESOTA POWER
CONSOLIDATED BALANCE SHEET
Millions
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
Unaudited Audited
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
PLANT AND INVESTMENTS
Electric operations $ 780.9 $ 783.5
Water services 323.1 322.2
Automotive services 168.6 167.1
Investments 254.7 252.9
--------- ---------
Total plant and investments 1,527.3 1,525.7
--------- ---------
CURRENT ASSETS
Cash and cash equivalents 97.4 41.8
Trading securities 131.9 123.5
Accounts receivable (less allowance of $15.1 and $12.6) 238.9 158.5
Fuel, material and supplies 22.9 25.0
Prepayments and other 23.0 19.9
--------- ---------
Total current assets 514.1 368.7
--------- ---------
OTHER ASSETS
Goodwill 157.8 158.9
Deferred regulatory charges 57.8 64.4
Other 55.2 54.6
--------- ---------
Total other assets 270.8 277.9
--------- ---------
TOTAL ASSETS $ 2,312.2 $ 2,172.3
- -------------------------------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common stock without par value, 65.0 shares authorized;
33.7 and 33.6 shares outstanding $ 425.2 $ 416.0
Unearned ESOP shares (65.0) (65.9)
Net unrealized gain on securities investments 5.0 5.5
Cumulative foreign translation adjustment (0.7) (0.8)
Retained earnings 297.9 296.1
--------- ---------
Total common stock equity 662.4 650.9
Cumulative preferred stock 11.5 11.5
Redeemable serial preferred stock 20.0 20.0
Company obligated mandatorily redeemable preferred securities of subsidiary
MP&L Capital I which holds solely Company
Junior Subordinated Debentures 75.0 75.0
Long-term debt 685.2 685.4
--------- ---------
Total capitalization 1,454.1 1,442.8
--------- ---------
CURRENT LIABILITIES
Accounts payable 137.7 78.7
Accrued taxes, interest and dividends 76.6 67.3
Notes payable 196.8 129.1
Long-term debt due within one year 4.5 4.7
Other 36.7 45.3
--------- ---------
Total current liabilities 452.3 325.1
--------- ---------
OTHER LIABILITIES
Accumulated deferred income taxes 150.4 151.3
Contributions in aid of construction 103.4 102.6
Deferred regulatory credits 60.1 60.7
Other 91.9 89.8
--------- ---------
Total other liabilities 405.8 404.4
--------- ---------
TOTAL CAPITALIZATION AND LIABILITIES $ 2,312.2 $ 2,172.3
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
-1-
<PAGE>
<TABLE>
MINNESOTA POWER
CONSOLIDATED STATEMENT OF INCOME
Millions Except Per Share Amounts - Unaudited
<CAPTION>
QUARTER ENDED
MARCH 31,
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING REVENUE AND INCOME
Electric operations $ 134.0 $ 131.5
Water services 20.8 20.6
Automotive services 76.7 60.5
Investments 15.1 9.5
------- -------
Total operating revenue and income 246.6 222.1
------- -------
OPERATING EXPENSES
Fuel and purchased power 49.7 44.0
Operations 152.4 138.4
Interest expense 19.8 17.3
------- -------
Total operating expenses 221.9 199.7
------- -------
INCOME FROM EQUITY INVESTMENT 4.2 4.0
------- -------
OPERATING INCOME 28.9 26.4
DISTRIBUTIONS ON REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY 1.5 1.5
INCOME TAX EXPENSE 8.9 8.8
------- -------
NET INCOME 18.5 16.1
DIVIDENDS ON PREFERRED STOCK 0.5 0.5
------- -------
EARNINGS AVAILABLE FOR COMMON STOCK $ 18.0 $ 15.6
======= =======
AVERAGE SHARES OF COMMON STOCK 31.1 30.3
BASIC AND DILUTED
EARNINGS PER SHARE OF COMMON STOCK $ 0.58 $ 0.52
DIVIDENDS PER SHARE OF COMMON STOCK $ 0.51 $ 0.51
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
</TABLE>
-2-
<PAGE>
<TABLE>
MINNESOTA POWER
CONSOLIDATED STATEMENT OF CASH FLOWS
Millions - Unaudited
<CAPTION>
QUARTER ENDED
MARCH 31,
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 18.5 $ 16.1
Income from equity investment (4.2) (4.0)
Depreciation and amortization 18.5 18.0
Deferred income taxes (1.9) (0.4)
Deferred investment tax credits (0.3) (0.5)
Pre-tax gain on sale of plant - (3.4)
Changes in operating assets and liabilities
Trading securities (8.4) (8.7)
Notes and accounts receivable (80.4) (59.4)
Fuel, material and supplies 2.1 (0.6)
Accounts payable 59.0 33.7
Other current assets and liabilities (2.4) 8.7
Other - net 10.4 3.3
------ ------
Cash from operating activities 10.9 2.8
------ ------
INVESTING ACTIVITIES
Proceeds from sale of investments in securities 13.5 11.9
Proceeds from sale of plant - 4.4
Additions to investments (10.0) (7.8)
Additions to plant (16.6) (8.6)
Changes to other assets - net (1.5) 1.0
------ ------
Cash from (for) investing activities (14.6) 0.9
------ ------
FINANCING ACTIVITIES
Issuance of common stock 8.7 4.9
Issuance of long-term debt 2.0 76.0
Changes in notes payable - net 67.7 19.1
Reductions of long-term debt (2.4) (68.6)
Dividends on preferred and common stock (16.7) (16.3)
------ ------
Cash from financing activities 59.3 15.1
------ ------
CHANGE IN CASH AND CASH EQUIVALENTS 55.6 18.8
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 41.8 40.1
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 97.4 $ 58.9
====== ======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for
Interest (net of capitalized) $ 22.0 $ 18.4
Income taxes $ 5.5 $ 2.4
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
</TABLE>
-3-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements and notes should be
read in conjunction with the Company's 1997 Form 10-K. In the opinion of the
Company, all adjustments necessary for a fair statement of the results for the
interim periods have been included. The results of operations for an interim
period may not give a true indication of results for the year.
NOTE 1. BUSINESS SEGMENTS
Millions
<TABLE>
<CAPTION>
Investments
---------------------------
Electric Water Automotive Portfolio & Real Corporate
Consolidated Operations Services Services Reinsurance Estate Charges
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Quarter Ended
March 31, 1998
- ---------------------
Operating revenue and income $ 246.6 $ 134.0 $ 20.8 $ 76.7 $ 7.1 $ 8.1 $ (0.1)
Operation and other expense 183.6 100.8 14.0 60.1 0.9 4.9<F1> 2.9
Depreciation and amortization
expense 18.5 11.8 2.9 3.6 - 0.1 0.1
Interest expense 19.8 5.5 2.6 2.2 - - 9.5
Income from equity investment 4.2 - - - 4.2 - -
-------- -------- -------- -------- -------- -------- ---------
Operating income (loss) 28.9 15.9 1.3 10.8 10.4 3.1 (12.6)
Distributions on redeemable
preferred securities
of subsidiary 1.5 0.4 - - - - 1.1
Income tax expense (benefit) 8.9 6.0 0.6 5.4 3.9 1.3 (8.3)
-------- -------- -------- ------- -------- -------- ---------
Net income (loss) $ 18.5 $ 9.5 $ 0.7 $ 5.4 $ 6.5 $ 1.8 $ (5.4)
======== ======== ======== ======== ======== ======== =========
Total assets $2,312.2 $1,012.0 $ 380.2 $ 557.1 $ 296.0 $ 66.3 $ 0.6
Accumulated depreciation $ 714.8 $ 573.6 $ 126.9 $ 14.3 - - -
Accumulated amortization $ 17.4 - - $ 16.0 - $ 1.4 -
Construction work in progress $ 43.9 $ 17.2 $ 10.7 $ 16.0 - - -
For the Quarter Ended
March 31, 1997
- ---------------------
Operating revenue and income $ 222.1 $ 131.5 $ 20.6 $ 60.5 $ 4.7 $ 4.8 $ -
Operation and other expense 164.4 94.8 14.0 47.9 0.5 3.9<F1> 3.3
Depreciation and amortization
expense 18.0 11.2 3.2 3.5 - - 0.1
Interest expense 17.3 5.4 2.7 2.3 - 0.3 6.6
Income from equity investment 4.0 - - - 4.0 - -
-------- -------- -------- -------- -------- -------- ---------
Operating income (loss) 26.4 20.1 0.7 6.8 8.2 0.6 (10.0)
Distributions on redeemable
preferred securities
of subsidiary 1.5 0.4 - - - - 1.1
Income tax expense (benefit) 8.8 7.4 0.3 3.6 2.9 0.3 (5.7)
-------- -------- -------- -------- -------- -------- ---------
Net income (loss) $ 16.1 $ 12.3 $ 0.4 $ 3.2 $ 5.3 $ 0.3 $ (5.4)
======== ======== ======== ======== ======== ======== =========
Total assets $2,216.5 $ 982.6 $ 367.1 $ 540.1 $ 263.1 $ 61.8 $ 1.8
Accumulated depreciation $ 670.9 $ 541.9 $ 121.2 $ 7.8 - - -
Accumulated amortization $ 10.5 - - $ 9.4 - $ 1.1 -
Construction work in progress $ 32.8 $ 11.4 $ 10.9 $ 10.5 - - -
- -------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Includes $0.5 million of minority interest in 1998 ($0.1 million in 1997).
</FN>
</TABLE>
-4-
<PAGE>
NOTE 2. REGULATORY MATTERS
FLORIDA WATER 1991 RATE CASE REFUNDS. In 1995 the Florida First District Court
of Appeals (Court of Appeals) reversed a 1993 FPSC order establishing uniform
rates for most of Florida Water's service areas. With "uniform rates," all
customers in each uniform rate area pay the same rates for water and wastewater
services. In response to the Court of Appeals' order, in August 1996 the FPSC
ordered Florida Water to issue refunds to those customers who paid more since
October 1993 under uniform rates than they would have paid under stand-alone
rates. This order did not permit a balancing surcharge to customers who paid
less under uniform rates. Florida Water appealed, and the Court of Appeals ruled
in June 1997 that the FPSC could not order refunds without balancing surcharges.
In response to the Court of Appeals' ruling, the FPSC issued an order on January
26, 1998 that would not require Florida Water to refund about $12.5 million,
which included interest, to customers who paid more under uniform rates.
In the same January 26, 1998 order, the FPSC required Florida Water to refund
$2.5 million, the amount paid by customers in the Spring Hill service area from
January 1996 through June 1997 under uniform rates which exceeded the amount
these customers would have paid under a modified stand-alone rate structure. No
balancing surcharge was permitted. The FPSC ordered this refund because Spring
Hill customers continued to pay uniform rates after other customers began paying
modified stand-alone rates effective January 1996 pursuant to the FPSC's interim
rate order in Florida Water's 1995 Rate Case. The FPSC did not include Spring
Hill in this interim rate order because Hernando County had assumed jurisdiction
over Spring Hill's rates. In June 1997 Florida Water reached an agreement with
Hernando County to revert prospectively to stand-alone rates for Spring Hill
customers.
Customer groups which paid more under uniform rates have appealed the FPSC's
January 26, 1998 order. The Company has appealed the $2.5 million refund
order. No provision for refund has been recorded. The Company is unable to
predict the timing or outcome of the appeals process.
FLORIDA WATER 1995 RATE CASE. Florida Water requested an $18.1 million rate
increase in June 1995 for all water and wastewater customers of Florida Water
regulated by the FPSC. In October 1996 the FPSC issued its final order approving
an $11.1 million annual increase. In November 1996 Florida Water filed with the
Court of Appeals an appeal of the FPSC's final order seeking judicial review of
issues relating to the amount of investment in utility facilities recoverable in
rates from current customers. Other parties to the rate case also filed appeals.
In June 1997, as part of the review process, the FPSC allowed Florida Water to
resume collecting approximately $1 million, on an annual basis, in new customer
connection fees. Oral arguments on the appeals were heard by the Court of
Appeals on February 10, 1998. The Company is unable to predict the timing or
outcome of the appeals process.
HILLSBOROUGH COUNTY RATES. On July 2, 1997 Florida Water filed with the
Hillsborough County Utilities Department a request for an annual interim
increase of $848,845 in annual revenue and a final increase of $877,607. Interim
rates became effective on August 18, 1997. Hearings began in April 1998 and are
expected to continue in June and July 1998. It is anticipated that final rates
will be implemented in the third quarter of 1998. The Company is unable to
predict the outcome of this case.
NORTH CAROLINA UTILITIES COMMISSION. On September 30, 1997 Heater filed with the
NCUC for a $1.1 million annual increase for its water and wastewater customers.
The hearing was held on March 10, 1998. On March 16, 1998 the NCUC issued an
order authorizing a rate increase of $343,000 pending the issuance of the final
order. The test year was adjusted for post-test year customer growth and
consumption which substantially decreased the annual rate increase required. A
final order from the NCUC is expected in May 1998.
NOTE 3. TOTAL COMPREHENSIVE INCOME
For the quarter ended March 31, 1998 total comprehensive income was $18.1
million ($14.1 million for the quarter ended March 31, 1997). The difference
between total comprehensive income and net income was primarily unrealized gains
and losses on securities classified as available-for-sale.
-5-
<PAGE>
NOTE 4. INCOME TAX EXPENSE
Quarter Ended
March 31,
1998 1997
- --------------------------------------------------------------------------------
Millions
Current tax
Federal $ 7.8 $ 7.5
Foreign 0.8 0.4
State 2.5 1.8
----- -----
11.1 9.7
----- -----
Deferred tax
Federal (1.4) (0.1)
State (0.5) (0.3)
----- -----
(1.9) (0.4)
----- -----
Deferred tax credits (0.3) (0.5)
----- -----
Total income tax expense $ 8.9 $ 8.8
- --------------------------------------------------------------------------------
NOTE 5. SQUARE BUTTE PURCHASED POWER CONTRACT
The Company has a contract to purchase power and energy from Square Butte. Under
the terms of the contract which extends through 2007, the Company is purchasing
about 71 percent of the output from a 455 MW generating plant. Reductions to
about 49 percent of the output are provided for in the contract and, at the
option of Square Butte, could begin after a five-year advance notice to the
Company.
The cost of the power and energy is a proportionate share of Square Butte's
fixed obligations and variable operating costs, based on the percentage of the
total output purchased by the Company. The annual fixed obligations of the
Company to Square Butte are $17.2 million from 1998 through 2002. The variable
operating costs are not incurred unless production takes place. The Company is
responsible for paying all costs and expenses of Square Butte if not paid by
Square Butte when due. These obligations and responsibilities of the Company are
absolute and unconditional whether or not any power is actually delivered to the
Company.
-6-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MINNESOTA POWER is a broadly diversified service company with operations in four
business segments: (1) Electric Operations, which include electric and gas
services, and coal mining; (2) Water Services, which include water and
wastewater services; (3) Automotive Services, which include a network of vehicle
auctions, a finance company and an auto transport company; and (4) Investments,
which include a securities portfolio, a 21 percent equity investment in a
financial guaranty reinsurance and insurance company, and real estate
operations. Corporate Charges represent general corporate expenses, including
interest, not specifically allocated to any one business segment.
CONSOLIDATED OVERVIEW
Earnings per share of common stock for the quarter ended March 31, 1998 were
$0.58 ($0.52 for the quarter ended March 31, 1997). All of the Company's
business segments performed soundly during the first quarter of 1998 reflecting
ongoing operational improvements and continued implementation of the Company's
corporate strategy initiated in 1996. Net income was 15 percent higher for the
quarter ended March 31, 1998 compared to the quarter ended March 31, 1997.
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1998 1997
- -------------------------------------------------------------------------------------------------------------------
Millions
<S> <C> <C>
Net Income
Electric Operations $ 9.5 $ 12.3
Water Services 0.7 0.4
Automotive Services 5.4 3.2
Investments 8.3 5.6
Corporate Charges (5.4) (5.4)
------ ------
$ 18.5 $ 16.1
====== ======
- -------------------------------------------------------------------------------------------------------------------
Basic and Diluted
Earnings Per Share of Common Stock $ 0.58 $ 0.52
Average Shares of Common Stock - Millions 31.1 30.3
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Electric Operations reported lower electric and gas retail sales due to mild
weather, and additional operating and purchased power expenses incurred because
of scheduled maintenance shutdowns at major generating facilities. The scheduled
maintenance helps position the Company to meet electric demand in the coming
summer. Water Services showed improvement in spite of record rainfall which
resulted in a 12 percent reduction in consumption. In 1997 Water Services
performance was negatively affected by a loss incurred by a non-regulated water
subsidiary. Automotive Services reflected a 14 percent increase in vehicle
sales, and the expansion and maturing of recently opened loan production offices
in the floorplan financing business. In 1997 Automotive Services included a gain
on the sale of an auction facility. Investments included dividend income
received from an investment and two large bulk land sales by real estate
operations in 1998.
-7-
<PAGE>
COMPARISON OF THE QUARTERS ENDED MARCH 31, 1998 AND 1997.
ELECTRIC OPERATIONS. Operating revenue and income from Electric Operations were
$2.5 million higher in 1998 primarily because of a $4.9 million increase in
sales to other power suppliers. Demand revenue from large industrial customers
was lower in 1998 as a result of negotiated contract extensions. Kilowatthour
sales in total were up about 2 percent. The mild weather in 1998 caused electric
sales to residential customers to decline 9 percent which in turn decreased
revenue about $1.3 million from those customers. Gas sales at SWL&P were also
$1.6 million lower primarily due to the mild weather. In 1997 the Company sold
rights to microwave frequencies in accordance with a federal mandate and
recognized a $0.8 million pre-tax gain in the first quarter of 1997. Total
operating expenses were $6.7 million higher in 1998 due to a $5.7 million
increase in fuel and purchased power expense. Increased sales to other power
suppliers and a major scheduled maintenance shutdown at Square Butte required
the Company to purchase 35 percent more power from other power suppliers.
Scheduled maintenance at a Company generating facility also increased operating
expenses in 1998. Scheduled maintenance will continue into the second quarter of
1998. Property taxes were $1.1 million lower in 1998 due to the reform of the
Minnesota property tax system in mid-1997. Income tax expense was $1.4 million
lower in 1998 because of lower operating income.
Revenue from electric sales to taconite customers accounted for 32 percent of
electric operating revenue and income in 1998 and 1997. Electric sales to paper
and pulp mills accounted for 11 percent of electric operating revenue and income
in 1998 (12 percent in 1997). Sales to other power suppliers accounted for 11
percent of electric operating revenue and income in 1998 (7 percent in 1997).
WATER SERVICES. Operating revenue and income from Water Services were $0.2
million higher in 1998 due to increased revenue from non-regulated water
subsidiaries and income earned on proceeds from the December 1997 sale of
certain water and wastewater assets to Orange County, Florida. Operating revenue
and income from regulated water subsidiaries were lower in 1998 because of a 12
percent reduction in consumption due to record rainfall. Total operating
expenses were $0.4 million lower in 1998 due primarily to fewer expenses as a
result of the sale of assets to Orange County, Florida. Operating expenses in
1997 reflected start-up costs incurred by non-regulated water subsidiaries.
Income tax expense was $0.3 million higher in 1998 because of increased
operating income.
AUTOMOTIVE SERVICES. Operating revenue and income from Automotive Services were
$16.2 million higher in 1998 due primarily to a 14 percent increase in vehicle
sales, and the expansion and maturing of AFC loan production offices opened in
1997 and early 1998. ADESA sold 214,000 vehicles in 1998 (188,000 in 1997). In
1997 operating revenue and income included a gain from the sale of an auction
facility. Total operating expenses were up $12.2 million primarily due to
expenses associated with increased vehicle sales and the expansion of the
floorplan financing business. Income tax expense was $1.8 million higher in 1998
because of increased operating income.
INVESTMENTS.
- SECURITIES PORTFOLIO AND REINSURANCE. Operating revenue and income were
$2.4 million higher in 1998 due to $3.9 million of dividend income received
from a venture capital investment. Income from equity investment included
$4.2 million in 1998 ($4.0 million in 1997) from the Company's investment
in Capital Re. Together, the Company's securities portfolio and its equity
investment in Capital Re earned an annualized after-tax return of 5.8
percent in 1998 (10.1 percent in 1997). Income tax expense was $1.0 million
higher in 1998 because of increased operating income.
- REAL ESTATE OPERATIONS. Operating revenue and income from Real Estate
Operations were $3.3 million higher in 1998 due to two large bulk land
sales at Palm Coast. Combined, the two sales contributed $5.1 million to
revenue in 1998. Operating revenue and income in 1998 also reflected fewer
lot sales compared to 1997 and less interest income because of the maturing
receivable portfolio. Total operating expenses (excluding minority
interest) were $0.4 million higher in 1998 due to expenses associated with
the two bulk land sales. Income tax expense was $1.0 million higher in 1998
because of increased operating income.
-8-
<PAGE>
LIQUIDITY AND FINANCIAL POSITION
CASH FLOW ACTIVITIES. Cash flow from operations improved during the first
quarter of 1998 due to enhanced management of working capital throughout the
Company. Cash from operating activities was also affected by a number of factors
representative of normal operations.
Working capital, if and when needed, generally is provided by the sale of
commercial paper. In addition, securities investments can be liquidated to
provide funds for reinvestment in existing businesses or acquisition of new
businesses, and approximately 4 million original issue shares of Common Stock
are available for issuance through the DRIP.
A substantial amount of ADESA's working capital is generated internally from
payments made by vehicle purchasers. However, ADESA utilizes commercial paper
issued by the Company to meet short-term working capital requirements arising
from the timing of payment obligations to vehicle sellers and the availability
of funds from vehicle purchasers. During the sales process, ADESA does not
typically take title to vehicles.
AFC also uses commercial paper issued by the Company to meet its operational
requirements. AFC offers short-term on-site financing for dealers to purchase
vehicles at auctions in exchange for a security interest in those
vehicles. The financing is provided through the earlier of the date the
dealer sells the vehicle or a general borrowing term of 30 - 90 days. At
March 31, 1998 AFC had sold $150.0 million ($124.0 million at December 31, 1997)
of receivables on a revolving basis to a third party purchaser. Under an
agreement, the purchaser agrees to purchase up to $225.0 million of receivables
on a revolving basis. Proceeds from the sale of the receivables were used to
repay borrowings from the Company and fund vehicle inventory purchases for
AFC's customers.
Significant changes in accounts receivable and accounts payable balances at
March 31, 1998 compared to December 31, 1997 were due to increased sales
activity by Automotive Services. Typically auction volumes are down during the
winter months and in December because of the holidays. As a result, both ADESA
and AFC had lower receivables and fewer payables at year end.
On or around May 8, 1998 the Company plans to file a shelf registration
statement with the Securities and Exchange Commission pursuant to Rule 415 under
the Securities Act of 1933 with respect to 3.0 million original issue shares of
Common Stock. After the registration statement becomes effective, the Company
expects to sell the registered Common Stock from time to time as warranted by
market conditions and the Company's capital requirements. The offer and sale of
such shares shall be made only by means of a prospectus.
CAPITAL REQUIREMENTS. Consolidated capital expenditures for the three months
ended March 31, 1998 totaled $16.5 million ($15.1 million in 1997). Expenditures
for 1998 include $9.2 million for Electric Operations, $3.0 million for Water
Services and $4.3 million for Automotive Services. Internally generated funds
were the primary source for funding these expenditures.
-9-
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Reference is made to the Company's 1997 Form 10-K for background information on
the following updates. Unless otherwise indicated, cited references are to the
Company's 1997 Form 10-K.
Ref. Page 4. - Table - Contract Status for Minnesota Power Large Power Customers
On April 14, 1998 the MPUC approved a contract amendment which provides for the
Company to continue to meet all of Eveleth Mines LLC's electric requirements
through October 2008.
Ref. Page 11. - Table - National Pollutant Discharge Elimination System Permits
A renewal application permit for the Laskin Energy Center was submitted to the
Minnesota Pollution Control Agency (MPCA) on March 30, 1998. The permit is
expected to be issued on or before the expiration date of October 31, 1998. The
Company has held discussions with the MPCA regarding ash pond management. While
various options are under consideration, no specific plan has been approved by
the MPCA.
Ref. Page 11. - Table - FERC Licenses for Hydroelectric Projects
On April 27, 1998 the FERC issued the Company a new 30-year license for the
Pillager hydroelectric project. The license became effective (retroactively) on
April 1, 1998.
Ref. Page 14. - First Full Paragraph
On September 30, 1997 Heater filed with the NCUC for a $1.1 million annual
increase for its water and wastewater customers. On March 16, 1998 the NCUC
issued an order authorizing a rate increase of $343,000 pending the issuance of
the final order. The test year was adjusted for post-test year customer growth
and consumption which substantially decreased the annual rate increase required.
A final order from the NCUC is expected in May 1998.
Ref. Page 15. - Second Full Paragraph
Ref. Page 22. - Table - ADESA Auctions
In late April 1998 ADESA reached agreements to purchase the assets of three
auction facilities. The auctions to be acquired are: Ark-La-Tex Auto Auction in
Shreveport, Louisiana; Greater Lansing Auto Auction in Lansing, Michigan; and
I-55 Auto Auction in St. Louis, Missouri. The Shreveport location has 5 lanes,
Lansing has 6 lanes and St. Louis has 3 lanes. ADESA will own and operate 28
vehicle auction facilities following the completion of these acquisitions. AFC
has loan production offices at the Lansing and St. Louis facilities and is
expected to add an office at the Shreveport facility.
-10-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K.
Report on Form 8-K dated and filed February 20, 1998 with respect to
Item 7. Financial Statements and Exhibits.
-11-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Minnesota Power & Light Company
-------------------------------
(Registrant)
May 7, 1998 D. G. Gartzke
-------------------------------
D. G. Gartzke
Senior Vice President - Finance
and Chief Financial Officer
May 7, 1998 Mark A. Schober
-------------------------------
Mark A. Schober
Controller
-12-
<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 MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,104
<OTHER-PROPERTY-AND-INVEST> 423
<TOTAL-CURRENT-ASSETS> 514
<TOTAL-DEFERRED-CHARGES> 58
<OTHER-ASSETS> 213
<TOTAL-ASSETS> 2,312
<COMMON> 425
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 298
<TOTAL-COMMON-STOCKHOLDERS-EQ> 662
75
32
<LONG-TERM-DEBT-NET> 685
<SHORT-TERM-NOTES> 197
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 4
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 596
<TOT-CAPITALIZATION-AND-LIAB> 2,312
<GROSS-OPERATING-REVENUE> 247
<INCOME-TAX-EXPENSE> 9
<OTHER-OPERATING-EXPENSES> 202
<TOTAL-OPERATING-EXPENSES> 222
<OPERATING-INCOME-LOSS> 29
<OTHER-INCOME-NET> 3<F1>
<INCOME-BEFORE-INTEREST-EXPEN> 38
<TOTAL-INTEREST-EXPENSE> 20
<NET-INCOME> 18
0
<EARNINGS-AVAILABLE-FOR-COMM> 18
<COMMON-STOCK-DIVIDENDS> 16
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 11
<EPS-PRIMARY> 0.58
<EPS-DILUTED> 0.58
<FN>
<F1>Includes $4 million of Income from Equity Investments and $1 million of
Distributions on Redeemable Preferred Securities of Subsidiary.
</FN>
</TABLE>
