<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 SEPTEMBER 30, 1999
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File No. 1-3548
MINNESOTA POWER, INC.
A Minnesota Corporation
IRS Employer Identification No. 41-0418150
30 West Superior Street
Duluth, Minnesota 55802-2093
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,
73,460,518 shares outstanding
as of October 31, 1999
<PAGE>
MINNESOTA POWER, INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet -
September 30, 1999 and December 31, 1998 1
Consolidated Statement of Income -
Quarter Ended and Nine Months Ended
September 30, 1999 and 1998 2
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1999 and 1998 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 19
Part II. Other Information
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
i
<PAGE>
DEFINITIONS
The following abbreviations or acronyms are used in the text.
Abbreviation or Acronym Term
- ----------------------------- ---------------------------------------------
1998 Form 10-K Minnesota Power's Annual Report on Form 10-K
for the Year Ended December 31, 1998
ACE ACE Limited
ADESA ADESA Corporation
AFC Automotive Finance Corporation
AutoVIN AutoVIN, Inc.
Cape Coral Holdings Cape Coral Holdings, Inc.
Capital Re Capital Re Corporation
CIP Conservation Improvement Programs
Common Stock Minnesota Power, Inc. Common Stock
Company Minnesota Power, Inc. and its subsidiaries
DRIP Dividend Reinvestment and Stock Purchase Plan
ESOP Employee Stock Ownership Plan
FERC Federal Energy Regulatory Commission
Heater Heater Utilities, Inc.
Florida Water Florida Water Services Corporation
FPSC Florida Public Service Commission
MAPP Mid-Continent Area Power Pool
Mid South Mid South Water Systems, Inc.
Minnesota Power Minnesota Power, Inc. and its subsidiaries
MP Real Estate MP Real Estate Holdings, Inc.
MPUC Minnesota Public Utilities Commission
NCUC North Carolina Utilities Commission
Palm Coast Palm Coast Holdings, Inc.
PCUC Palm Coast Utilities Corporation
PSCW Public Service Commission of Wisconsin
Square Butte Square Butte Electric Cooperative
XL Capital XL Capital Ltd.
ii
<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;
- Year 2000 issues;
- delays or changes in costs of Year 2000 compliance;
- failure of major suppliers, customers or others with whom the
Company does business to resolve their own Year 2000 issues on
a timely basis;
- pricing and transportation of commodities;
- market demand, including structural market changes;
- changes in tax rates or policies or in rates of inflation;
- changes in project costs;
- unanticipated changes in operating expenses and capital expenditures;
- capital market conditions;
- competition for new energy development opportunities; and
- legal and administrative proceedings (whether civil or criminal)
and settlements that influence the business and profitability of
the Company.
Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time and it is not possible for management to
predict all of such factors, nor can it assess the impact of any such factor on
the business or the extent to which any factor, or combination of factors, may
cause results to differ materially from those contained in any forward-looking
statement.
iii
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MINNESOTA POWER
CONSOLIDATED BALANCE SHEET
Millions
SEPTEMBER 30, DECEMBER 31,
1999 1998
Unaudited Audited
- --------------------------------------------------------------------------------
ASSETS
PLANT AND INVESTMENTS
Electric Operations $ 769.4 $ 771.5
Water Services 433.8 329.4
Automotive Services 222.4 186.2
Investments 211.4 263.5
--------- --------
Total Plant and Investments 1,637.0 1,550.6
--------- --------
CURRENT ASSETS
Cash and Cash Equivalents 157.4 89.4
Trading Securities 154.8 169.9
Accounts Receivable (less Allowance
of $10.6 and $9.6) 286.9 156.1
Fuel, Material and Supplies 25.7 24.0
Prepayments and Other 72.8 48.1
--------- --------
Total Current Assets 697.6 487.5
--------- --------
OTHER ASSETS
Goodwill 180.0 169.8
Deferred Regulatory Charges 57.2 56.1
Other 52.2 53.1
--------- --------
Total Other Assets 289.4 279.0
--------- --------
TOTAL ASSETS $ 2,624.0 $2,317.1
- --------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Without Par Value, 130.0
Shares Authorized;
73.4 and 72.3 Shares Outstanding $ 551.1 $ 529.0
Unearned ESOP Shares (60.0) (62.5)
Accumulated Other Comprehensive Income (Loss) (31.7) 1.5
Retained Earnings 319.7 317.6
--------- --------
Total Common Stock Equity 779.1 785.6
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 714.6 672.2
--------- --------
Total Capitalization 1,600.2 1,564.3
--------- --------
CURRENT LIABILITIES
Accounts Payable 245.7 123.3
Accrued Taxes, Interest and Dividends 76.3 62.9
Notes Payable 151.9 81.0
Long-Term Debt Due Within One Year 9.3 9.0
Other 67.9 69.8
--------- --------
Total Current Liabilities 551.1 346.0
--------- --------
OTHER LIABILITIES
Accumulated Deferred Income Taxes 139.9 153.4
Contributions in Aid of Construction 179.3 108.2
Deferred Regulatory Credits 55.6 55.2
Other 97.9 90.0
--------- --------
Total Other Liabilities 472.7 406.8
--------- --------
TOTAL CAPITALIZATION AND LIABILITIES $ 2,624.0 $2,317.1
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
-1-
<PAGE>
MINNESOTA POWER
CONSOLIDATED STATEMENT OF INCOME
Millions Except Per Share Amounts - Unaudited
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------
OPERATING REVENUE
Electric Operations $ 155.2 $ 147.2 $ 422.7 $ 422.0
Water Services 31.1 24.2 85.4 70.0
Automotive Services 105.5 83.9 306.3 245.4
Investments 14.5 11.0 28.6 44.8
------- -------- -------- -------
Total Operating Revenue 306.3 266.3 843.0 782.2
------- -------- -------- -------
OPERATING EXPENSES
Fuel and Purchased Power 54.9 54.6 154.8 158.1
Operations 180.4 155.5 515.3 468.4
Interest Expense 15.1 15.1 43.7 50.5
------- -------- -------- -------
Total Operating Expenses 250.4 225.2 713.8 677.0
------- -------- -------- -------
OPERATING INCOME 55.9 41.1 129.2 105.2
DISTRIBUTIONS ON REDEEMABLE
PREFERRED SECURITIES OF
SUBSIDIARY 1.5 1.5 4.5 4.5
INCOME TAX EXPENSE 21.1 16.0 49.6 38.3
------- -------- -------- -------
INCOME BEFORE INCOME (LOSS)
FROM EQUITY INVESTMENTS 33.3 23.6 75.1 62.4
INCOME (LOSS) FROM
EQUITY INVESTMENTS - NET
OF TAX 1.2 2.2 (17.8) 4.7
------- -------- -------- -------
NET INCOME 34.5 25.8 57.3 67.1
DIVIDENDS ON PREFERRED STOCK 0.5 0.5 1.5 1.4
------- -------- -------- -------
EARNINGS AVAILABLE FOR COMMON STOCK $ 34.0 $ 25.3 $ 55.8 $ 65.7
======= ======== ======== =======
AVERAGE SHARES OF COMMON STOCK 68.6 64.0 68.2 63.0
BASIC AND DILUTED
EARNINGS PER SHARE OF
COMMON STOCK $0.50 $0.39 $0.82 $1.04
DIVIDENDS PER SHARE OF
COMMON STOCK $0.2675 $0.255 $0.8025 $0.765
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
-2-
<PAGE>
MINNESOTA POWER
CONSOLIDATED STATEMENT OF CASH FLOWS
Millions - Unaudited
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 57.3 $ 67.1
Loss (Income) From Equity Investments -
Net of Dividends Received 13.6 (11.2)
Depreciation and Amortization 57.4 56.0
Deferred Income Taxes 6.5 (1.0)
Deferred Investment Tax Credits (1.3) (1.2)
Pre-Tax Gain on Sale of Property - (0.6)
Changes in Operating Assets and Liabilities
Trading Securities 15.1 (13.5)
Notes and Accounts Receivable (130.9) (91.2)
Fuel, Material and Supplies (1.7) 1.2
Accounts Payable 122.4 122.0
Other Current Assets and Liabilities (13.5) 7.1
Other - Net (1.7) 13.2
------- -------
Cash From Operating Activities 123.2 147.9
------- -------
INVESTING ACTIVITIES
Proceeds From Sale of Investments in
Securities 64.5 32.8
Proceeds From Sale of Property - 1.4
Additions to Investments (27.6) (32.2)
Additions to Plant (94.3) (51.3)
Acquisition of Subsidiaries - Net of
Cash Acquired (67.8) (23.8)
Changes to Other Assets - Net (12.0) 5.5
------- -------
Cash For Investing Activities (137.2) (67.6)
------- -------
FINANCING ACTIVITIES
Issuance of Common Stock 20.8 102.8
Issuance of Long-Term Debt 50.8 9.1
Changes in Notes Payable - Net 70.9 (46.6)
Reductions of Long-Term Debt (8.1) (16.6)
Dividends on Preferred and Common Stock (55.1) (49.2)
------- -------
Cash From (For) Financing Activities 79.3 (0.5)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 2.7 (4.8)
------- -------
CHANGE IN CASH AND CASH EQUIVALENTS 68.0 75.0
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 89.4 41.8
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 157.4 $ 116.8
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Period For
Interest - Net of Capitalized $47.4 $55.8
Income Taxes $38.5 $41.4
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
-3-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements and notes should be
read in conjunction with the Company's 1998 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. Prior year
balances have been reclassified to present comparable information for all
periods.
NOTE 1. STOCK SPLIT
On March 2, 1999 the Company's Common Stock was split two-for-one. All common
share and per share amounts have been adjusted for all periods to reflect the
two-for-one stock split.
NOTE 2. 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
September 30, 1999
- ---------------------
Operating Revenue $ 306.3 $155.2 $31.1 $105.5<F1> $ 2.9 $ 11.7 $(0.1)
Operation and Other Expense 215.7 105.7 18.4 80.6 0.4 6.9<F2> 3.7
Depreciation and Amortization 19.6 11.4 3.7 4.4 - - 0.1
Interest Expense 15.1 5.2 2.6 3.0 - - 4.3
------- ------ ----- ------ ------- ------ -----
Operating Income (Loss) 55.9 32.9 6.4 17.5 2.5 4.8 (8.2)
Distributions on Redeemable
Preferred Securities of Subsidiary 1.5 0.4 - - - - 1.1
Income Tax Expense (Benefit) 21.1 13.7 2.5 7.8 0.4 2.1 (5.4)
------- ------ ----- ------ ------- ------ -----
Income (Loss) before
Loss from Equity Investments 33.3 18.8 3.9 9.7 2.1 2.7 (3.9)
Income (Loss) from
Equity Investments - Net of Tax 1.2 (0.2) - - 1.4 - -
------- ------ ----- ------ ------- ------ -----
Net Income (Loss) $ 34.5 $ 18.6 $ 3.9 $ 9.7 $ 3.5 $ 2.7 $(3.9)
======= ====== ===== ====== ======= ====== =====
- ------------------------------------------------------------------------------------------------------------------------
For the Quarter Ended
September 30, 1998
- ---------------------
Operating Revenue $ 266.3 $147.2 $24.2 $ 83.9<F1> $ 5.5 $ 5.3 $ 0.2
Operation and Other Expense 191.3 103.0 15.3 64.8 1.1 3.7<F2> 3.4
Depreciation and Amortization 18.8 11.8 3.0 4.0 - - -
Interest Expense 15.1 5.5 2.6 2.4 - - 4.6
------- ------ ----- ------ ------- ------ -----
Operating Income (Loss) 41.1 26.9 3.3 12.7 4.4 1.6 (7.8)
Distributions on Redeemable
Preferred Securities of Subsidiary 1.5 0.4 - - - - 1.1
Income Tax Expense (Benefit) 16.0 10.5 1.3 6.0 1.3 0.7 (3.8)
------- ------ ----- ------ ------- ------ -----
Income (Loss) before
Income from Equity Investments 23.6 16.0 2.0 6.7 3.1 0.9 (5.1)
Income from
Equity Investments - Net of Tax 2.2 - - - 2.2 - -
------- ------ ----- ------ ------- ------ -----
Net Income (Loss) $ 25.8 $ 16.0 $ 2.0 $ 6.7 $ 5.3 $ 0.9 $(5.1)
======= ====== ===== ====== ======= ====== =====
- ------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Included $15.2 million of Canadian operating revenue in 1999 ($10.7 million in 1998).
<F2> Included $0.7 million of minority interest in 1999 ($0.2 million in 1998).
</FN>
</TABLE>
-4-
<PAGE>
NOTE 2. BUSINESS SEGMENTS (Continued)
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 Nine Months Ended
September 30, 1999
- -------------------------
Operating Revenue $ 843.0 $ 422.7 $ 85.4 $306.3<F1> $ 10.3 $ 18.5 $ (0.2)
Operation and Other Expense 612.7 307.6 51.9 229.4 2.5 12.4<F4> 8.9
Depreciation and Amortization 57.4 33.7 10.3 13.0 - 0.1 0.3
Interest Expense 43.7 15.8 7.5 7.9 - - 12.5
--------- -------- ------ ------ ------- ------ ------
Operating Income (Loss) 129.2 65.6 15.7 56.0 7.8 6.0 (21.9)
Distributions on Redeemable
Preferred Securities of
Subsidiary 4.5 1.3 - - - - 3.2
Income Tax Expense (Benefit) 49.6 25.9 6.1 24.7 2.2 2.6 (11.9)
--------- -------- ------ ------ ------- ------ ------
Income (Loss) before
Loss from Equity Investments 75.1 38.4 9.6 31.3 5.6 3.4 (13.2)
Loss from
Equity Investments - Net of Tax (17.8) (0.2) - - (17.6)<F3> - -
--------- -------- ------ ------ ------- ------ ------
Net Income (Loss) $ 57.3 $ 38.2 $ 9.6 $ 31.3 $ (12.0) $ 3.4 $(13.2)
========= ======== ====== ====== ======= ====== ======
Total Assets $ 2,624.0 $1,003.1 $232.4 $788.1<F2> $ 483.5 $116.5 $ 0.4
Accumulated Depreciation
and Amortization $ 873.8 $ 624.2 $194.6 $ 53.2 - $ 1.8 -
Construction Work in Progress $ 49.5 $ 24.6 $19.1 $ 5.8 - - -
Capital Expenditures $ 68.6 $ 34.5 $14.1 $ 20.0 - - -
- -------------------------------------------------------------------------------------------------------------------------
For the Nine Months Ended
September 30, 1998
- -------------------------
Operating Revenue $ 782.2 $ 422.0 $ 70.0 $245.4<F1> $ 18.7 $ 26.0 $ 0.1
Operation and Other Expense 570.5 311.0 44.7 186.8 2.7 15.5<F4> 9.8
Depreciation and Amortization 56.0 35.5 8.7 11.5 - 0.1 0.2
Interest Expense 50.5 16.6 7.7 7.2 - - 19.0
--------- -------- ------ ------ ------ ------ ------
Operating Income (Loss) 105.2 58.9 8.9 39.9 16.0 10.4 (28.9)
Distributions on Redeemable
Preferred Securities of
Subsidiary 4.5 1.3 - - - - 3.2
Income Tax Expense (Benefit) 38.3 22.4 3.4 19.3 4.3 4.7 (15.8)
--------- -------- ------ ------ ------- ------ ------
Income (Loss) before
Income from Equity Investments 62.4 35.2 5.5 20.6 11.7 5.7 (16.3)
Income from
Equity Investments - Net of Tax 4.7 - - - 4.7 - -
--------- --------- ------ ------ ------- ------ ------
Net Income (Loss) $ 67.1 $ 35.2 $5.5 $ 20.6 $ 16.4 $ 5.7 $(16.3)
========= ========= ====== ====== ======= ====== ======
Total Assets $ 2,371.3 $ 975.6 $391.8 $631.0<F2> $ 298.1 $ 74.3 $ 0.5
Accumulated Depreciation
and Amortization $ 765.4 $ 593.0 $133.0 $ 37.9 - $ 1.5 -
Construction Work in Progress $ 51.5 $ 16.2 $ 15.5 $ 19.8 - - -
Capital Expenditures $ 51.3 $ 24.6 $ 10.4 $ 16.3 - - -
- ------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Included $41.7 million of Canadian operating revenue in 1999 ($28.1 million in 1998).
<F2> Included $130.6 million of Canadian assets in 1999 ($65.3 million in 1998).
<F3> Included a $24.1 million non-cash charge to reflect the estimated valuation of
the pending merger between Capital Re and ACE as of June 30, 1999. (See Note 5.)
<F4> Included $0.9 million of minority interest in 1999 ($1.4 million in 1998).
</FN>
</TABLE>
-5-
<PAGE>
NOTE 3. REGULATORY MATTERS
FLORIDA WATER 1995 RATE CASE. Florida Water requested an $18.1 million annual
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. The new rates were implemented in
September 1996. In November 1996 Florida Water filed with the Florida First
District Court of Appeals (Court of Appeals) an appeal of the FPSC's final order
seeking judicial review of issues relating to the amount of investment in
utility facilities recoverable in rates from current customers. Other parties to
the rate case also filed appeals. In the course of the appeals process, the FPSC
reconsidered an issue in its initial decision and, in June 1997, allowed Florida
Water to resume collecting approximately $1 million, on an annual basis, in new
customer fees. In June 1998 the Court of Appeals ruled in Florida Water's favor
on all material issues appealed by Florida Water and remanded the matter back to
the FPSC for action consistent with the Court's order. The Court of Appeals also
overturned its decision in Florida Water's 1991 Rate Case which had required a
"functional relationship" between service areas as a precondition to
implementation of uniform rates. In December 1998 the FPSC granted Florida Water
an additional annual revenue increase of approximately $1.2 million related to
several of the issues reversed by the Court of Appeals, and permitted collection
of approximately $2.4 million in surcharges to reimburse Florida Water for
revenue (plus interest) wrongfully denied in the FPSC's October 1996 order.
Florida Water began collecting the new rates in January 1999. Intervenors
protested the surcharge allocation methodology. As a result collection of the
surcharges was delayed and interest accumulated until the FPSC approved a
methodology. The FPSC reopened the record on two remaining issues on remand from
the Court of Appeals regarding the amount of investment in utility facilities
recoverable in rates from current customers. On June 14, 1999 Florida Water
filed a motion seeking approval of an offer of settlement which was heard by the
FPSC on August 23, 1999. After Florida Water agreed to modification of certain
terms of its offer settlement, on September 14, 1999 the FPSC issued a final
order which increased annual revenue by approximately $1 million; authorized
Florida Water to book approximately $8.5 million of accumulated surcharges,
including interest accrued through September 30, 1999, as a regulatory asset
recoverable in base rates beginning in the next rate case; and provided a
three-year moratorium on the initiation of rate cases by Florida Water,
exclusive of index filings which provide rate adjustments based on inflationary
costs associated with operation and maintenance expenses. The annual rate
increase of approximately $1 million associated with the settlement became
effective on October 1, 1999. In total, the FPSC approved $13.6 million of the
$18.1 million requested by Florida Water in the 1995 rate case.
1991 RATE CASE REFUNDS. In 1995 the 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 in January 1998 that did not require refunds.
In the same January 1998 order, the FPSC required Florida Water to refund, with
interest, $2.5 million, the amount paid by customers in the Spring Hill service
area from January 1996 through June 1997 under uniform rates which exceeded the
amount these customers would have paid under a modified stand-alone rate
structure. No balancing surcharge was permitted. The FPSC ordered this refund
because Spring Hill customers continued to pay uniform rates after other
customers began paying modified stand-alone rates effective January 1996
pursuant to the FPSC's interim rate order in Florida Water's 1995 Rate Case (see
Florida Water 1995 Rate Case). 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 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 1998 order, arguing that they are entitled to a refund because the FPSC
had no authority to order uniform rates. The Company has appealed the $2.5
million refund order. Initial briefs were filed by all parties in May 1998.
-6-
<PAGE>
NOTE 3. REGULATORY MATTERS (Continued)
Upon issuance of the June 1998 opinion of the Court of Appeals with respect to
Florida Water's 1995 Rate Case (see 1995 Rate Case) in which the court reversed
its previous ruling that the FPSC was without authority to order uniform rates,
customer groups supporting the FPSC's January 1998 order filed a motion with the
Court of Appeals seeking dismissal of the appeal by customer groups seeking
refunds. Customers seeking refunds filed amended briefs in September 1998. A
provision for refund related to the $2.5 million refund order was recorded in
the third quarter of 1999. The Company is unable to predict the timing or
outcome of this matter.
ELECTRIC MPUC ORDERS. On March 31, 1999 the Company made its annual filing with
the MPUC requesting approval for a 1998 year-end Conservation Improvement
Program (CIP) tracker account balance (deferred regulatory charge) of $18.9
million; recovery from customers in 1999 of $3.5 million of 1998 margins lost
due to approved conservation improvement programs; and continuation of the 2.75
percent billing adjustment factor. On July 27, 1999 the MPUC issued an order
approving the Company's CIP filing, except for the recovery of lost margins
which was denied. The MPUC's primary rationale for denial of lost margin
recovery was that in 1998 Electric Operations earned in excess of its allowed
return on equity. In a companion order, the MPUC opened an investigation into
the reasonableness of Minnesota Power's rates.
In September 1999 the MPUC granted the Company's request for rehearing of both
orders. On September 9, 1999 the MPUC clarified the scope of its investigation
into the reasonableness of the Company's rates and shortened the time period for
interested party comments. On September 29, 1999 the Company filed the required
report with respect to 1998 actual and 1999 projected electric earnings and
explained why current rates are just and reasonable. The Company anticipates
that the MPUC will make a decision in 1999 whether further investigation will be
made into the reasonableness of Minnesota Power's rates. At the October 28, 1999
hearing regarding recovery of the Company's 1998 lost margins, the MPUC tabled a
final decision until early December 1999. The Company is unable to predict the
outcome of these matters.
NOTE 4. ACQUISITIONS
PALM COAST UTILITIES CORPORATION. On January 22, 1999 Florida Water purchased
the assets and assumed certain liabilities of PCUC from ITT Industries, Inc. for
$16.8 million plus $1,000 per new water connection for an eight-year period. The
Company estimates the present value of these future water connections at $5.1
million. PCUC provides service to approximately 15,000 water and 14,000
wastewater customers in Flagler County, Florida. The transaction was accounted
for using the purchase method. Financial results have been included in the
Company's consolidated financial statements since the date of purchase. Pro
forma financial results have not been presented due to immateriality.
ADESA AUCTION FACILITIES. On April 30, 1999 ADESA acquired Des Moines Auto
Auction located in Des Moines, Iowa and on July 2, 1999 ADESA Canada, Inc.
purchased the Vancouver Auto Auction of New Westminster, British Columbia. The
two transactions had a combined purchase price of $31.3 million and were
accounted for using the purchase method and resulted in goodwill of $11.9
million which will be amortized over a 40 year period. Financial results for
each facility have been included in the Company's consolidated financial
statements since the date of purchase. Pro forma financial results have not been
presented due to immateriality. The 33-acre Des Moines facility has three
auction lanes and primarily serves consignment and fleet/lease accounts. AFC
provides dealer floorplan financing at this auction. The 70-acre Vancouver
facility has six auction lanes. The purchase of the Vancouver auction facility
is a major component of the Company's Canadian growth strategy.
MID SOUTH WATER SYSTEMS, INC. On June 17, 1999 Heater acquired the assets of Mid
South Water Systems, Inc. (Mid South) located in Sherills Ford, North Carolina
for $9 million. The acquisition was accounted for using the purchase method.
Financial results have been included in the Company's consolidated financial
statements since the date of purchase. Pro forma financial results have not been
presented due to immateriality. Mid South serves approximately 12,000 customers.
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<PAGE>
NOTE 4. ACQUISITIONS (Continued)
CAPE CORAL. On June 30, 1999 Cape Coral Holdings, Inc. (Cape Coral Holdings), a
subsidiary of MP Real Estate, purchased, for $45.0 million, certain real estate
properties located in Cape Coral, Florida, from subsidiaries of Avatar Holdings
Inc., a publicly traded developer and home builder headquartered in Coral
Gables, Florida. Cape Coral, located adjacent to Fort Myers, Florida, has a
population of 100,000 and is Florida's second largest municipality in land area.
Properties purchased include approximately 2,500 acres of commercial and
residential zoned land, including home sites, a golf resort, marina and
commercial buildings. Concurrently with the purchase, Cape Coral Holdings
assigned to a third party the rights to a shopping center and a portion of the
vacant land for $8.8 million, which reduced the net amount paid by Cape Coral
Holdings to $36.2 million. The transaction was accounted for using the purchase
method. Financial results have been included in the Company's consolidated
financial statements since the date of purchase. Pro forma financial results
have not been presented due to immateriality.
NOTE 5. INVESTMENT IN CAPITAL RE
Minnesota Power owns 7.3 million shares, or 19.9 percent, of Capital Re. On June
10, 1999 Capital Re and ACE Limited (ACE) signed an agreement providing for the
merger of Capital Re with ACE. Under the terms of the Agreement and Plan of
Merger (Merger Agreement), Capital Re's shareholders would have received 0.6
ordinary shares of ACE for each share of Capital Re at closing, subject to a
maximum value to Capital Re shareholders of $22 per share.
On October 6, 1999 Capital Re received an unsolicited all-cash acquisition offer
from XL Capital Ltd. (XL Capital). To consider XL Capital's offer, Capital Re
postponed its October 7, 1999 shareholder meeting at which there was to be a
vote on the proposed merger with ACE. Capital Re has since received from ACE
proposed amendments to the Merger Agreement and competing offers from XL
Capital.
On October 26, 1999 Capital Re and ACE signed an amended merger agreement. Under
the terms of the amended agreement, each Capital Re share will be exchanged for
0.65 ordinary shares of ACE plus cash, as needed, to deliver an aggregate value
of $14 for each Capital Re share, as long as ACE's stock price is between $14.34
and $19.54 per share at closing. The amount of cash is subject to a minimum of
$1.30 per Capital Re share and a maximum of $4.68 per Capital Re share. If ACE's
stock price is below $14.34 per share or above $19.54 per share, Capital Re
shareholders would receive less value or more value, respectively. Minnesota
Power is unable to predict the timing of this transaction.
Minnesota Power's net income for nine months ended September 30, 1999 included a
$24.1 million non-cash charge to income from equity investments. The non-cash
charge reflected an estimated Capital Re valuation of $17 per share based on
ACE's stock price at June 30, 1999 and the exchange ratio in the ACE Merger
Agreement. As a result of the pending merger with ACE, Minnesota Power
discontinued the equity method of accounting for its investment in Capital Re.
Minnesota Power currently accounts for its investment in Capital Re as an
available-for-sale security with changes in value reflected in accumulated other
comprehensive income (loss) on the balance sheet. Accordingly, a $31.3 million
charge to accumulated other comprehensive income (loss) was recorded on the
balance sheet during the third quarter of 1999 to reflect the September 30, 1999
Capital Re share price of $10. Adjustments to Minnesota Power's investment in
Capital Re will be recognized in net income at the time a Capital Re merger
transaction is finalized. Assuming the transaction is finalized prior to year
end at a value of $14 per share, the after-tax loss of $31.3 million at
September 30, 1999 would be reduced by $17.7 million, resulting in a charge to
fourth quarter net income of $13.6 million.
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NOTE 6. INCOME TAX EXPENSE
Quarter Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------
Millions
Current Tax
Federal $ 19.9 $ 14.7 $ 42.4 $ 35.1
Foreign 0.3 1.2 1.2 3.8
State 4.1 3.7 5.0 8.6
------ ------ ------ ------
24.3 19.6 48.6 47.5
------ ------ ------ ------
Deferred Tax
Federal (1.4) (0.7) 10.3 0.5
Foreign 0.1 - 0.1 -
State (0.5) (0.7) (3.9) (1.5)
------ ------ ------ ------
(1.8) (1.4) 6.5 (1.0)
------ ------ ------ ------
Deferred Tax Credits (0.6) (0.6) (1.3) (1.2)
------ ------ ------ ------
Total Income Tax Expense $ 21.9(a) $ 17.6(a) $ 53.8(b) $ 45.3(b)
- --------------------------------------------------------------------------------
(a) Included income tax expense of $0.8 million in 1999 ($1.6 million in 1998)
associated with income from equity investments.
(b) Included income tax expense of $4.2 million in 1999 ($7.0 million in 1998)
associated with income from equity investments.
NOTE 7. TOTAL COMPREHENSIVE INCOME
For the quarter ended September 30, 1999 total comprehensive income was $3.7
million ($25.0 million of income for the quarter ended September 30, 1998). For
the nine months ended September 30, 1999 total comprehensive income was $24.1
million ($65.1 million for the nine months ended September 30, 1998). Total
comprehensive income included net income, unrealized gains and losses on
securities classified as available-for-sale, and foreign currency translation
adjustments.
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<PAGE>
NOTE 8. SQUARE BUTTE PURCHASED POWER CONTRACT
The Company has had a power purchase agreement with Square Butte since 1977
which has provided a long-term supply of low-cost energy to customers in the
Company's electric service territory and enabled the Company to meet power pool
reserve requirements. Square Butte, a North Dakota cooperative corporation, owns
a 455-megawatt coal-fired generating unit (Unit) near Center, North Dakota. The
Unit is adjacent to a generating unit owned by Minnkota Power Cooperative, Inc.
(Minnkota), a North Dakota cooperative corporation whose Class A members are
also members of Square Butte. Minnkota serves as the operator of the Unit and
also purchases power from Square Butte.
In May 1998 the Company and Square Butte entered into a new power purchase
agreement (1998 Agreement), replacing the 1977 agreement. The Company extended
by 20 years, to January 1, 2027, its access to Square Butte's low-cost
electricity and eliminated its unconditional obligation for all of Square
Butte's costs if not paid by Square Butte when due. The 1998 Agreement was
reached in conjunction with the termination of Square Butte's previous leveraged
lease financing arrangement and refinancing of associated debt.
Similar to the previous agreement, the Company is initially entitled to
approximately 71 percent of the Unit's output under the 1998 Agreement. After
2005 and upon compliance with a two-year advance notice requirement, Minnkota
has the option to reduce the Company's entitlement by 5 percent annually, to a
minimum of 50 percent.
Under the 1998 Agreement, the Company is obligated to pay its pro rata share of
Square Butte's costs based on the Company's entitlement to Unit output. The
Company's payment obligation is suspended if Square Butte fails to deliver any
power, whether produced or purchased, for a period of one year. Under the 1977
agreement the Company was unconditionally obligated to pay all of Square Butte's
costs, if not paid by Square Butte when due. Square Butte's fixed costs consist
primarily of debt service. At September 30, 1999 Square Butte had total debt
outstanding of $343.1 million. Total annual debt service for Square Butte is
expected to be approximately $36 million in each of the years 1999 through 2002
and $23 million in 2003. Variable operating costs include the price of coal
purchased from BNI Coal, a subsidiary of Minnesota Power, under a long-term
contract. The Company's payments to Square Butte are approved as purchased power
expense for ratemaking purposes by both the MPUC and FERC.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MINNESOTA POWER is a diversified services company with operations in four
business segments: (1) Electric Operations, which include electric and gas
services, coal mining and telecommunications; (2) Water Services, which include
water and wastewater services; (3) Automotive Services, which include a network
of vehicle auctions, a finance company, an auto transport company and a vehicle
remarketing company; and (4) Investments, which include a securities portfolio,
intermediate-term investments and real estate operations. Corporate Charges
represent general corporate expenses, including interest, not specifically
allocated to any one business segment.
CONSOLIDATED OVERVIEW
Significant growth in the Company's Automotive Services and Water Services
segments contributed to higher operating results in 1999. For the third quarter
of 1999, net income increased 34 percent over 1998 and earnings per share
increased 28 percent over the prior period. For the nine months ended September
30, 1999, the Company reported a $24.1 million non-cash charge associated with
the Company's investment in Capital Re. Excluding the non-cash charge, net
income for the nine months ended September 30, 1999 increased 21 percent over
1998 and earnings per share increased 13 percent over the prior period. Earnings
per share in 1999 reflected the impact of the additional 4.2 million shares of
Common Stock issued by the Company in an underwritten public offering in
September 1998.
Quarter Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------
Millions
Operating Revenue
Electric Operations $ 155.2 $147.2 $ 422.7 $ 422.0
Water Services 31.1 24.2 85.4 70.0
Automotive Services 105.5 83.9 306.3 245.4
Investments 14.6 10.8 28.8 44.7
Corporate Charges (0.1) 0.2 (0.2) 0.1
------- ------ ------- -------
$ 306.3 $266.3 $ 843.0 $ 782.2
Operating Expenses
Electric Operations $ 122.3 $120.3 $ 357.1 $ 363.1
Water Services 24.7 20.9 69.7 61.1
Automotive Services 88.0 71.2 250.3 205.5
Investments 7.3 4.8 15.0 18.3
Corporate Charges 8.1 8.0 21.7 29.0
------- ------ ------- -------
$ 250.4 $225.2 $ 713.8 $ 677.0
Net Income
Electric Operations $ 18.6 $ 16.0 $ 38.2 $ 35.2
Water Services 3.9 2.0 9.6 5.5
Automotive Services 9.7 6.7 31.3 20.6
Investments 6.2 6.2 (8.6)(a) 22.1
Corporate Charges (3.9) (5.1) (13.2) (16.3)
------- ------- ------- -------
$ 34.5 $ 25.8 $ 57.3 $ 67.1
- --------------------------------------------------------------------------------
Basic and Diluted
Earnings Per Share of
Common Stock $0.50 $0.39 $0.82(a) $1.04
Average Shares of Common
Stock - Millions 68.6 64.0 68.2 63.0
- --------------------------------------------------------------------------------
(a) Included a $24.1 million ($0.35 per share) non-cash charge to reflect the
estimated valuation of the pending merger between Capital Re and ACE as of
June 30, 1999.
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<PAGE>
NET INCOME
The following net income discussion summarizes significant events for the
quarter and nine months ended September 30, 1999.
Electric Operations reflected higher margins from bulk power electric sales and
lower sales to large industrial customers in 1999.
Water Services generated higher net income in 1999 due to strategic purchases
that increased the customer base by 23 percent, regulatory relief granted by the
FPSC in settlement of Florida Water's 1995 Rate Case, increased average
consumption and management of operating costs.
Automotive Services showed significant growth during 1999 reflecting a
profitable mix of same-store growth and selective acquisitions. The number of
vehicles offered for sale at ADESA auction facilities increased 17 percent over
the third quarter of 1998 (15 percent over the nine months ended September 30,
1998). Increased financing activity and the maturing of loan production offices
that opened in 1998 at AFC also contributed to higher net income from Automotive
Services.
Investments reported lower net income in 1999 primarily due to a $24.1 million
non-cash charge that reflected the estimated valuation of the pending merger
between Capital Re and ACE.
Minnesota Power owns 7.3 million shares, or 19.9 percent, of Capital Re. On June
10, 1999 Capital Re and ACE signed an agreement providing for the merger of
Capital Re with ACE. Under the terms of the Agreement and Plan of Merger (Merger
Agreement), Capital Re's shareholders would have received 0.6 ordinary shares of
ACE for each share of Capital Re at closing, subject to a maximum value to
Capital Re shareholders of $22 per share.
On October 6, 1999 Capital Re received an unsolicited all-cash acquisition offer
from XL Capital. To consider XL Capital's offer, Capital Re postponed its
October 7, 1999 shareholder meeting at which there was to be a vote on the
proposed merger with ACE. Capital Re has since received from ACE proposed
amendments to the Merger Agreement and competing offers from XL Capital.
On October 26, 1999 Capital Re and ACE signed an amended merger agreement. Under
the terms of the amended agreement, each Capital Re share will be exchanged for
0.65 ordinary shares of ACE plus cash, as needed, to deliver an aggregate value
of $14 for each Capital Re share, as long as ACE's stock price is between $14.34
and $19.54 per share at closing. The amount of cash is subject to a minimum of
$1.30 per Capital Re share and a maximum of $4.68 per Capital Re share. If ACE's
stock price is below $14.34 per share or above $19.54 per share, Capital Re
shareholders would receive less value or more value, respectively. Minnesota
Power is unable to predict the timing of this transaction.
The non-cash charge included in income reflected an estimated Capital Re
valuation of $17 per share based on ACE's stock price at June 30, 1999 and the
exchange ratio in the ACE Merger Agreement. As a result of the pending merger
with ACE, Minnesota Power discontinued the equity method of accounting for its
investment in Capital Re. Minnesota Power currently accounts for its investment
in Capital Re as an available-for-sale security with changes in value reflected
in accumulated other comprehensive income (loss) on the balance sheet.
Accordingly, a $31.3 million charge to accumulated other comprehensive income
(loss) was recorded on the balance sheet during the third quarter of 1999 to
reflect the September 30, 1999 Capital Re share price of $10. Adjustments to
Minnesota Power's investment in Capital Re will be recognized in net income at
the time a Capital Re merger transaction is finalized. Assuming the transaction
is finalized prior to year end at a value of $14 per share, the after-tax loss
of $31.3 million at September 30, 1999 would be reduced by $17.7 million,
resulting in a charge to fourth quarter net income of $13.6 million.
Investments also reflected lower net income because of stock market volatility
affecting returns from short-term investments during 1999 and the discontinuance
of equity accounting for the Company's investment in Capital Re. In addition,
1998 net income included dividend income received from a venture capital
investment and more large bulk land sales by Real Estate Operations.
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<PAGE>
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 1999 AND 1998
OPERATING REVENUE
Electric Operations operating revenue was $8.0 million higher in 1999 primarily
due to a $22.4 million increase from sales to other power suppliers because of
extreme weather conditions affecting the power market during the third quarter
of 1999. Temperatures, which were at record highs during the last week of July
1999, created high demand for power from other power suppliers. Revenue from
industrial customers was down $12.2 million in 1999 due to decreased taconite
production, paper manufacturing and pipeline usage. Revenue from residential and
commercial customers was $1.1 million higher in 1999 because of the unusually
hot weather in July 1999. Revenue in 1998 reflected $3.8 million of CIP lost
margin recovery. Total retail kilowatthour sales were down 9.1 percent from
1998.
Revenue from electric sales to taconite customers accounted for 10 percent of
consolidated operating revenue in 1999 (16 percent in 1998). Electric sales to
paper and pulp mills accounted for 5 percent of consolidated operating revenue
in 1999 (6 percent in 1998). Sales to other power suppliers accounted for 16
percent of consolidated operating revenue in 1999 (10 percent in 1998).
Water Services operating revenue was $6.9 million higher in 1999, with $3.3
million of the increase coming from PCUC which was purchased in January 1999.
The remainder of the increase resulted from regulatory relief granted by the
FPSC in December 1998 and September 1999, and more consumption due to customer
growth. Overall consumption increased 3 percent in 1999.
Automotive Services operating revenue was $21.6 million higher in 1999 due to
stronger sales at ADESA auction facilities, and increased financing activity and
the maturing of loan production offices opened in 1998 by AFC. ADESA offered for
sale on consignment 453,000 vehicles (387,000 in 1998) at its 29 auction
facilities in 1999 (28 in 1998). AFC financed approximately 186,000 vehicles in
1999 (140,000 in 1998) through its 84 loan production offices. AFC has had 84
loan production offices since August 1998, 29 of which were opened during the
summer of 1998.
Investments operating revenue was $3.8 million lower in 1999. Portfolio
operating revenue was $2.6 million lower in 1999 due to stock market volatility
affecting returns from short-term investments. The Company's securities
portfolio, excluding Capital Re shares, earned an annualized after-tax return of
4.3 percent in 1999 (7.2 percent in 1998). Real Estate Operations operating
revenue was $6.4 million higher in 1999 because two large sales contributed $6.9
million.
OPERATING EXPENSES
Electric Operations operating expenses were $2.0 million higher in 1999
primarily due to higher employee compensation and property taxes.
Water Services operating expenses were $3.8 million higher in 1999 due to
inclusion of PCUC and Mid South operations.
Automotive Services operating expenses were $16.8 million higher in 1999
primarily due to increased sales activity at the auction facilities and the
floorplan financing business. Additional expenses associated with more auction
facilities and loan production offices also contributed to higher expenses in
1999.
Investments operating expenses were $2.5 million higher in 1999 primarily due to
the inclusion of Cape Coral operations and two large sales by Real Estate
Operations.
INCOME (LOSS) FROM EQUITY INVESTMENTS - NET OF TAX
Income (loss) from equity investments - net of tax was $1.0 million lower in
1999 primarily due to the discontinuance of equity accounting for the Company's
investment in Capital Re. This decrease was partially offset by $1.2 million of
equity income from investments in venture capital funds.
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<PAGE>
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
OPERATING REVENUE
Electric Operations operating revenue was slightly higher in 1999. Revenue in
1999 reflected a $22.2 million increase from sales to other power suppliers
because of extreme weather conditions affecting the power market during the
third quarter of 1999. Temperatures, which were at record highs during the last
week of July 1999, created a high demand for power from other power suppliers.
Revenue from industrial customers was down $18.4 million in 1999 due to
decreased taconite production, paper manufacturing and pipeline usage. Revenue
from residential and commercial customers was $3.4 million higher in 1999
because the winter weather in northern Minnesota and Wisconsin was colder than
1998 and unusually hot in July 1999. Revenue in 1998 included $3.8 million of
CIP lost margin recovery. Total retail kilowatthour sales were down 6.3 percent
from 1998.
Revenue from electric sales to taconite customers accounted for 13 percent of
consolidated operating revenue in 1999 (16 percent in 1998). Electric sales to
paper and pulp mills accounted for 5 percent of consolidated operating revenue
in 1999 (6 percent in 1998). Sales to other power suppliers accounted for 10
percent of consolidated operating revenue in 1999 (8 percent in 1998).
Water Services operating revenue was $15.4 million higher in 1999, with $8.7
million of the increase coming from PCUC which was purchased in January 1999.
The remainder of the increase was attributed to regulatory relief granted by the
FPSC in December 1998 and September 1999, and more consumption due to customer
growth. Overall consumption increased 14 percent in 1999. In 1998 overall
consumption was lower than normal due to some of the Company's water systems
being adversely impacted by record rainfall during the first quarter. Gains
totaling $600,000 from the sale of a water system and the sale of land in
Florida were included in 1998 revenue.
Automotive Services operating revenue was $60.9 million higher in 1999 due to
stronger sales at ADESA auction facilities, and increased financing activity and
the maturing of loan production offices opened in 1998 by AFC. ADESA offered for
sale on consignment 1,277,000 vehicles (1,115,000 in 1998) at its 29 auction
facilities in 1999 (28 in 1998). In 1999 ADESA auction financial results
included a full nine months of operations from three vehicle auctions acquired
in late April and May 1998, five months of operations from a vehicle auction
acquired in late April 1999 and three months from a vehicle auction facility
acquired in July 1999. AFC financed approximately 508,000 vehicles in 1999
(393,000 in 1998) through its 84 loan production offices. AFC has had 84 loan
production offices since August 1998, 29 of which were opened during the summer
of 1998.
Investments operating revenue was $15.9 million lower in 1999. Portfolio
operating revenue was $8.4 million lower in 1999 due to stock market volatility
affecting returns from short-term investments. The Company's securities
portfolio, excluding Capital Re shares, earned an annualized after-tax return of
3.6 percent in 1999 (6.4 percent in 1998). Also, revenue in 1998 included $3.9
million of dividend income received from a venture capital investment. Real
Estate Operations operating revenue was $7.5 million lower in 1999 because 1998
included four large sales at Palm Coast and two large sales at Lehigh. Combined,
the six sales contributed $13.0 million to revenue in 1998. In 1999 two large
sales contributed $6.9 million to revenue. The remainder of the decrease was due
to normal fluctuations in Florida real estate sales.
OPERATING EXPENSES
Electric Operations operating expenses were $6.0 million lower in 1999 primarily
due to a $3.3 million reduction in fuel and purchased power expenses because of
fewer kilowatthour sales and a $1.8 million decrease in depreciation expense
primarily the result of plant life extensions. Operating expenses were also $2.7
million lower in 1999 because the amortization of an early retirement program
was completed in July 1998.
Water Services operating expenses were $8.6 million higher in 1999 primarily due
to inclusion of PCUC and Mid South operations.
-14-
<PAGE>
Automotive Services operating expenses were $44.8 million higher in 1999
primarily due to increased sales activity at the auction facilities and the
floorplan financing business. Additional expenses associated with more auction
facilities and loan production offices also contributed to higher expenses in
1999.
Investments operating expenses were $3.3 million lower in 1999 primarily due to
fewer sales by Real Estate Operations.
Corporate Charges operating expenses were $7.3 million lower in 1999. The
decrease is partially attributed to less interest expense in 1999 because the
average commercial paper balance was lower. Also, interest expense in 1998
reflected a settlement with the Internal Revenue Service on tax issues relating
to prior years. As a result of the settlement, in the first quarter of 1998 $4.7
million previously accrued as income tax expense were reversed and recorded as
interest expense. There was no impact on consolidated net income from this
transaction.
INCOME (LOSS) FROM EQUITY INVESTMENTS - NET OF TAX
Income (loss) from equity investments - net of tax was $22.5 million lower in
1999 primarily due to a $24.1 million non-cash charge that reflected the
estimated valuation of the pending merger between Capital Re and ACE, and the
discontinuance of equity accounting for the Company's investment in Capital Re.
Equity income from investments in venture capital funds was $1.4 million higher
in 1999.
OUTLOOK
ELECTRIC OPERATIONS. On March 31, 1999 the Company made its annual filing with
the MPUC requesting approval for a 1998 year-end CIP tracker account balance
(deferred regulatory charge) of $18.9 million; recovery from customers in 1999
of $3.5 million of 1998 margins lost due to approved conservation improvement
programs; and continuation of the 2.75 percent billing adjustment factor. On
July 27, 1999 the MPUC issued an order approving the Company's CIP filing,
except for the recovery of lost margins which was denied. The MPUC's primary
rationale for denial of lost margin recovery was that in 1998 Electric
Operations earned in excess of its allowed return on equity. In a companion
order, the MPUC opened an investigation into the reasonableness of Minnesota
Power's rates.
In September 1999 the MPUC granted the Company's request for rehearing of both
orders. On September 9, 1999 the MPUC clarified the scope of its investigation
into the reasonableness of the Company's rates and shortened the time period for
interested party comments. On September 29, 1999 the Company filed the required
report with respect to 1998 actual and 1999 projected electric earnings and
explained why current rates are just and reasonable. The Company anticipates
that the MPUC will make a decision in 1999 whether further investigation will be
made into the reasonableness of Minnesota Power's rates. At the October 28, 1999
hearing regarding recovery of the Company's 1998 lost margins, the MPUC tabled a
final decision until early December 1999. The Company is unable to predict the
outcome of these matters.
CASH FLOW ACTIVITIES. Cash flow from operations during the nine months ended
September 30, 1999 reflected improved operating results and continued focus on
working capital management. 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 8 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 uses 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.
-15-
<PAGE>
AFC also uses proceeds from the sale of commercial paper issued by the Company
to meet its operational requirements. AFC offers short-term on-site financing
for dealers to purchase vehicles at auctions in exchange for a security interest
in those vehicles. The financing is provided through the earlier of the date the
dealer sells the vehicle or a general borrowing term of 30 to 45 days. AFC sells
certain finance receivables on a revolving basis to a wholly owned,
unconsolidated, qualified special purpose subsidiary. This subsidiary in turn
sells, on a revolving basis, an undivided interest in eligible finance
receivables, up to a maximum at any one time outstanding of $300.0 million, to
third party purchasers under an agreement which expires at the end of 2002. At
September 30, 1999 AFC had sold $314.9 million of finance receivables to this
subsidiary ($202.9 million at December 31, 1998). Third party purchasers had
purchased an undivided interest in finance receivables of $224.0 million from
this subsidiary at September 30, 1999 ($170.0 million at December 31, 1998).
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
September 30, 1999 compared to December 31, 1998 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.
Notes payable increased temporarily to finance Automotive Services' cash
requirements due to significant auction sales and financing growth. The Company
also used the temporary increase in notes payable and proceeds from the
September 1998 issuance of Common Stock to fund the January 1999 purchase of
PCUC. Florida Water purchased the assets of PCUC from ITT Industries, Inc. for
$16.8 million plus $1,000 per new water connection for an eight-year period. The
Company estimates the present value of these future water connections to be $5.1
million.
On April 30, 1999 ADESA acquired Des Moines Auto Auction located in Des Moines,
Iowa and on July 2, 1999 ADESA Canada, Inc. purchased the Vancouver Auto Auction
of New Westminster, British Columbia. The two transactions had a combined
purchase price of $31.3 million. The Company funded these transactions with
internally generated funds and notes payable that are expected to be replaced
with long-term debt financing.
On June 17, 1999 Heater acquired the assets of Mid South of Sherills Ford, North
Carolina for $9 million. The Company funded this transaction with internally
generated funds and proceeds from a long-term revolving line of credit.
On June 30, 1999 Cape Coral Holdings, Inc., a subsidiary of MP Real Estate,
purchased, for $36.2 million, certain real estate properties located in Cape
Coral, Florida, from subsidiaries of Avatar Holdings Inc. The Company funded
this transaction with internally generated funds and proceeds from a long-term
revolving line of credit.
CAPITAL REQUIREMENTS. Consolidated capital expenditures for the nine months
ended September 30, 1999 totaled $68.6 million ($51.3 million in 1998).
Expenditures for 1999 included $34.5 million for Electric Operations, $14.1
million for Water Services and $20.0 million for Automotive Services. Internally
generated funds and proceeds from the September 1998 issuance of Common Stock
were the primary sources of funding for these expenditures.
NEW ACCOUNTING STANDARDS. In June 1998 the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. (SFAS) 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS 137,
effective for fiscal years beginning after June 15, 2000. SFAS 133 establishes
accounting and reporting standards requiring that every derivative instrument be
recorded on the balance sheet as either an asset or liability measured at fair
value. SFAS 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset the related results on the hedged item. The Company currently
believes it has only a limited amount of derivative activity and adoption of
SFAS 133 is not expected to have a material impact on the Company's financial
position and results of operations.
-16-
<PAGE>
YEAR 2000. The Year 2000 issue relates to computer systems that recognize the
year in a date field using only the last two digits. Unless corrected, the Year
2000 may be interpreted as 1900, causing errors or shutdowns in computer systems
which may, in turn, disrupt operations.
STATE OF READINESS. The Company has been addressing the Year 2000 issue for over
five years. In the ordinary course of business, it has replaced, or is in the
process of replacing, many of its major computer systems with new systems that
have been designed to be Year 2000 compliant. These updated systems handle
critical aspects of the Company's operations, including energy management and
generation control for Electric Operations, and customer information and
financial management Company-wide.
Each of the business segments has its own Year 2000 plan, which has been
reviewed and is being monitored by a corporate-level Year 2000 Risk Assessment
Team. The Company's plan for Year 2000 readiness involves four phases:
inventory, evaluation, remediation and contingency planning. Testing is an
ongoing and integral part of the evaluation, remediation and contingency
planning phases.
INVENTORY. Each business segment has performed an extensive inventory of
its information technology systems and other systems that use embedded
microprocessors (collectively, "Systems"). The business processes supported
by each System have been prioritized based on the degree of impact business
operations would encounter if the System were disrupted.
The inventory phase also includes identifying third parties with whom the
Company has material relationships. The degree to which each business
segment depends on third party support varies. Water Services, Automotive
Services and Real Estate Operations have identified minimal risk in most
areas. Where a third party is critical to a business process, efforts have
been initiated to obtain Year 2000 compliance information to identify the
degree of risk exposure the Company may encounter. Electric Operations is
working with its large power customers to share Year 2000 information and
determine their readiness. In addition, Electric Operations is working with
its fuel and transportation providers in an effort to ensure adequate
supplies of fuel.
The internal inventory phase was substantially completed in June 1998.
Regular contact with third parties with whom the Company has material
relationships will continue throughout 1999.
EVALUATION. This phase involves computer program code review and testing,
vendor contacts, System testing and fully-integrated System testing where
practical. The objective of this phase is to develop and update the
remediation plan. Some Systems, upon inspection, are determined to be
non-compliant and are immediately placed on the remediation schedule. Some
Systems require testing to determine compliance status. The evaluation
phase was substantially complete in February 1999.
REMEDIATION. In this phase each System is either fixed, replaced or
removed. Critical Systems fixed or replaced are tested again for Year 2000
readiness.
The electric industry is unique in its reliance on the integrity of the
power pool grid to support and maintain reliable, efficient operations.
Preparation for the Year 2000 by Electric Operations is linked to the Year
2000 compliance efforts of other utilities as well as to those of its major
customers whose loads support the integrity of the power pool grid.
Electric Operations is coordinating its Year 2000 efforts with the plans
established by the North American Electric Reliability Council (NERC) under
the direction of the U.S. Department of Energy and is also working with the
MAPP Year 2000 Task Force and a utility industry consortium to obtain and
share utility-specific Year 2000 compliance information.
As of November 5, 1999 the remediation phase for mission-critical systems
within Electric Operations was complete. As defined by NERC,
mission-critical systems are those systems that could be related to the
loss of a 50-megawatt or larger generation source, the loss of a
transmission facility or the interruption of system load. The Company's
believes its mission-critical systems used to produce, deliver and transmit
electricity are ready for date changes associated with Year 2000.
-17-
<PAGE>
The Company estimates that as of November 5, 1999 the remediation phase for
all business segment systems is approximately 91 percent complete based on
the number of systems remediated. The bulk of the remaining systems are
support systems within Electric Operations that are not mission critical.
The remediation phase for the Company's other business segments was
substantially complete in June 1999.
CONTINGENCY PLANNING. Each business segment has developed contingency plans
designed to continue critical processes in the event the Company
experiences Year 2000 disruptions despite remediation and testing. These
plans include establishment of internal communications, securing adequate
on-site supplies of certain critical materials and staffing for key Year
2000 dates. Contingency plans will also be tested when appropriate. Some
contingency plans have already undergone testing. The Company successfully
participated in both the April and September 1999 NERC drills. The April
1999 drill tested inter and intra backup communications for the scenario
that assumed 10 percent of voice and data communications had failed, while
the September 1999 drill was a dress rehearsal of staff deployment and
backup communication for the millennium rollover. As of November 5, 1999
the Company estimates the contingency planning phase is approximately 97
percent complete.
COSTS. In the ordinary course of business over the last five years, the Company
has replaced major business and operating computer systems. These systems should
require minimal remediation efforts because of their recent implementation.
Formal Year 2000 readiness plans were established in March 1998. Since that
time, the Company has incurred $3.8 million in expenses primarily for labor
associated with inventory, evaluation and remediation efforts. The Company
estimates its remaining costs to prepare for the Year 2000 will be approximately
$1.2 million, some of which will be incurred during the year 2000 for systems
not critical to daily operations. Funds to address Year 2000 issues have been
provided for in the Company's existing budgets. These costs include the
assignment of existing personnel to Year 2000 projects, maintenance and repair
expenses, and capitalized improvements. To date no critical projects have been
deferred because of Year 2000 issues. The Company does not anticipate that its
costs associated with Year 2000 readiness will materially impact the Company's
earnings in any year.
RISKS. Based upon information to date, the Company believes that, in the most
reasonably likely worst-case scenario, Year 2000 issues could result in abnormal
operating conditions, such as short-term interruption of generation,
transmission and distribution functions within Electric Operations, as well as
Company-wide loss of system monitoring and control functions, and loss of voice
communications. These conditions, along with power outages due to possible
instability of regional electric transmission grids, could result in temporary
interruption of service to customers. The Company believes that it is unlikely
that our customers will experience any interruption to their electric service.
The Company does not believe the overall impact of this scenario will have a
material impact on its financial condition or operations due to the anticipated
short-term nature of interruptions.
-----------------------
Readers are cautioned that forward-looking statements including those contained
above, should be read in conjunction with the Company's disclosures under the
heading: "SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995" located in the preface of this Form 10-Q.
-18-
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's securities portfolio has exposure to both price and interest rate
risk. Investments held principally for near-term sale are classified as trading
securities and recorded at fair value. Trading securities consist primarily of
the common stock of publicly traded companies, with utilities being the largest
industry sector. Investments held for an indefinite period of time are
classified as available-for-sale securities and also recorded at fair value. The
available-for-sale securities portfolio consists primarily of the preferred
stock of utilities and financial institutions with investment grade debt ratings
and Capital Re shares. (See Note 5 to the consolidated financial statements in
Item 1 of this quarterly report on Form 10-Q.)
In strategies designed to reduce market risks, the Company sells common stock
short and enters into short sales of treasury futures contracts. Selling common
stock short is intended to reduce price risks associated with securities in the
Company's trading securities portfolio. The stock sold short consists primarily
of the stock of companies in similar industries. Treasury futures are used as a
hedge to reduce interest rate risks associated with holding fixed dividend
preferred stocks included in the Company's available-for-sale securities
portfolio. Generally, treasury futures contracts mature in 90 days.
September 30, 1999 Fair Value
- --------------------------------------------------------------------------------
Millions
Trading Securities Portfolio $154.9
Available-For-Sale Securities Portfolio $100.0(a)
Other Available-For-Sale Securities $17.5(b)
- --------------------------------------------------------------------------------
(a) The notional fair value of outstanding sales of treasury futures contracts
was $9.0 million, which represented 79 contracts with a notional basis of
$9.1 million.
(b) Securities in a grantor trust established to fund certain employee benefits.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Reference is made to the Company's 1998 Form 10-K for background information on
the following updates. Unless otherwise indicated, cited references are to the
Company's 1998 Form 10-K.
Ref. Page 2. - Eighth Paragraph
Ref. Page 25. - Tenth Paragraph
Ref. 10-Q for the quarter ended March 31, 1999 Page 13. - Fourth and Fifth
Paragraphs
Ref. 10-Q for the quarter ended June 30, 1999 Page 19. - Second, Third and
Fourth Paragraphs
Steel imports continue to be a critical issue facing the American steel
industry. Total imports for the first eight months of 1999 were 23.3 million net
tons of steel, 8.2 percent higher than the same period in 1997, the last record
year prior to the unprecedented import surge of 1998. The surge of imported
steel in recent years continues to depress average prices for steel mill
products. Prices for 1999 continue to be off about 25 percent compared to the
same period in 1998. In 1998 the United States imported a record 42 million tons
of steel, which represented an 83 percent increase over the 23 million-ton
average for each of the previous eight years (1990-1997).
Domestic production for the first eight months of 1999 was 68.3 million net
tons, down some 4 percent from the same period in 1998. Capacity utilization for
the industry during that same period was 81.5 percent, down from 90.0 percent
from the same period in 1998. The continued lower worldwide demand for steel
produced in the United States is having an adverse affect on northern
Minnesota's taconite producers and the economy of northern Minnesota in general.
The Company is unable to predict the eventual impact of this issue on the
Company's Electric Operations.
-19-
<PAGE>
Ref. Page 3. - Contract Status for Minnesota Power Large Power Customers
Ref. 10-Q for the quarter ended March 31, 1999 Page 14. - First Paragraph
On August 5, 1999 the MPUC approved a new contract for electric service with
Potlatch Corp. The new contract has a contract termination date of December 31,
2004 and combines the billing of Potlatch's Brainerd, Cloquet and Grand Rapids
facilities.
Ref. Page 3. - Contract Status for Minnesota Power Large Power Customers
On September 30, 1999 Blandin Paper Co. signed an amendment to its agreement
with Minnesota Power to increase its operating flexibility and extend its
contract from April 2004 to April 2006. The amendment is pending regulatory
approval.
Ref. Page 3. - First Full Paragraph
Ref. Page 25. - Eleventh Paragraph
Ref. 10-Q for the quarter ended June 30, 1999 Page 19. - Fifth Paragraph
Six of the seven taconite producers in Minnesota have collective bargaining
agreements with the United Steel Workers of America (USWA). These agreements
expired in August 1999. Five-year collective bargaining agreements have been
ratified with five of the six USWA taconite producers. Contract negotiations
with the sixth taconite producer have been put on hold pending the outcome of
acquisition discussions with another company.
Ref. Page 6. - Seventh Full Paragraph
Ref. Page 25. - Insert after Eleventh Paragraph
Ref. 10-Q for the quarter ended March 31, 1999 Page 14. - Fifth Paragraph
Ref. 10-Q for the quarter ended June 30, 1999 Page 19. - Sixth Paragraph
In September 1999 the MPUC granted the Company's request for reconsideration of
the July 27, 1999 orders which denied the recovery of lost margins related to
CIP and opened an investigation into the reasonableness of Minnesota Power's
rates. On September 9, 1999 the MPUC clarified the scope of its investigation
into the reasonableness of the Company's rates and shortened the time period for
interested party comments. On September 29, 1999 the Company filed the required
report with respect to 1998 actual and 1999 projected electric earnings and
explained why current rates are just and reasonable. The Company anticipates
that the MPUC will make a decision in 1999 whether further investigation will be
made into the reasonableness of Minnesota Power's rates. At the October 28, 1999
hearing regarding recovery of the Company's 1998 lost margins, the MPUC tabled a
final decision until early December 1999. The Company is unable to predict the
outcome of these matters.
Ref. Page 10. - Seventh Full Paragraph
Ref. 10-Q for the quarter ended June 30, 1999 Page 20. - Second Paragraph
1995 RATE CASE. After Florida Water agreed to modification of certain terms of
its June 14, 1999 offer of settlement, on September 14, 1999 the FPSC issued a
final order with respect to Florida Water's 1995 rate case. The final order
increased annual revenue by approximately $1 million; authorized Florida Water
to book approximately $8.5 million of accumulated surcharges, including interest
accrued through September 30, 1999, as a regulatory asset recoverable in base
rates beginning in the next rate case; and provided a three-year moratorium on
the initiation of rate cases by Florida Water, exclusive of index filings which
provide rate adjustments based on inflationary costs associated with operation
and maintenance expenses. The annual rate increase of approximately $1 million
associated with the settlement became effective on October 1, 1999. In total,
the FPSC approved $13.6 million of the $18.1 million requested by Florida Water
in the 1995 rate case.
-20-
<PAGE>
Ref. Page 12. - Second Paragraph
In October 1999 ADESA broke ground to begin building a six-lane vehicle auction
facility in Calgary, Alberta, Canada. The new facility is expected to occupy 25
of the 65 acres acquired. Opening is scheduled in the spring of 2000.
Ref. Page 12. - Third Paragraph
On September 30, 1999 the Company, through a wholly owned subsidiary, acquired
90 percent of AutoVIN, Inc., the Automated Vehicle Information Network. AutoVIN
provides professional field information services to the automotive industry,
including vehicle condition reporting, inventory verification auditing, program
compliance auditing and facility inspection. AutoVIN has been providing services
to AFC and will now work closely with AFC to offer auto dealers one-stop
shopping for financial and information services.
Ref. Page 13. - Third Paragraph
Ref. Page 22. - Fifth and Sixth Paragraphs
Ref. Form 8-K dated and filed May 27, 1999
Ref. Form 8-K dated and filed June 15, 1999
Ref. 10-Q for the quarter ended June 30, 1999 Page 11. - Fifth through Seventh
Paragraph
Ref. Form 8-K dated and filed October 20, 1999
On October 6, 1999 Capital Re received an unsolicited all-cash acquisition offer
from XL Capital. To consider XL Capital's offer, Capital Re postponed its
October 7, 1999 shareholder meeting at which there was to be a vote on the
proposed merger with ACE. Capital Re has since received from ACE proposed
amendments to the June 10, 1999 Agreement and Plan of Merger (Merger Agreement)
and competing offers from XL Capital.
On October 21, 1999 ACE filed a lawsuit in Delaware Chancery Court against
Capital Re alleging that Capital Re breached its existing Merger Agreement with
ACE by, among other things, entering into negotiations with XL Capital. ACE also
sought a temporary restraining order to prevent Capital Re from terminating its
existing Merger Agreement until ACE's claims can be decided by the Delaware
court. This temporary restraining order was denied on October 25, 1999.
On October 26, 1999 Capital Re and ACE signed an amended merger agreement. Under
the terms of the amended agreement, each Capital Re share will be exchanged for
0.65 ordinary shares of ACE plus cash, as needed, to deliver an aggregate value
of $14 for each Capital Re share, as long as ACE's stock price is between $14.34
and $19.54 per share at closing. The amount of cash is subject to a minimum of
$1.30 per Capital Re share and a maximum of $4.68 per Capital Re share. If ACE's
stock price is below $14.34 per share or above $19.54 per share, Capital Re
shareholders would receive less value or more value, respectively. Minnesota
Power is unable to predict the timing of this transaction.
-21-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10(a) Third Amendment to Receivables Purchase Agreement, dated as of
October 30, 1998, among AFC Funding Corporation, as Seller;
Automotive Finance Corporation, as Servicer; Pooled Accounts
Receivable Capital Corporation, as Purchaser; and Nesbitt Burns
Securities Inc., as Agent.
10(b) Fourth Amendment to Receivables Purchase Agreement, dated as of
September 22, 1999, among AFC Funding Corporation, as Seller;
Automotive Finance Corporation, as Servicer; Pooled Accounts
Receivable Capital Corporation, as Purchaser; and Nesbitt Burns
Securities Inc., as Agent.
27(a) Financial Data Schedule for the Nine Months Ended September 30,
1999.
27(b) Restated Financial Data Schedule for the Nine Months Ended
September 30, 1998.
(b) Reports on Form 8-K.
Report on Form 8-K dated and filed October 20, 1999 with respect to Item 5.
Other Events.
-22-
<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, Inc.
-------------------------------
(Registrant)
November 5, 1999 D. G. Gartzke
-------------------------------
D. G. Gartzke
Senior Vice President - Finance
and Chief Financial Officer
November 5, 1999 Mark A. Schober
-------------------------------
Mark A. Schober
Controller
-23-
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
- -------
10(a) Third Amendment to Receivables Purchase Agreement, dated as of October
30, 1998, among AFC Funding Corporation, as Seller; Automotive Finance
Corporation, as Servicer; Pooled Accounts Receivable Capital
Corporation, as Purchaser; and Nesbitt Burns Securities Inc., as Agent.
10(b) Fourth Amendment to Receivables Purchase Agreement, dated as of
September 22, 1999, among AFC Funding Corporation, as Seller;
Automotive Finance Corporation, as Servicer; Pooled Accounts Receivable
Capital Corporation, as Purchaser; and Nesbitt Burns Securities Inc.,
as Agent.
27(a) Financial Data Schedule for the Nine Months Ended September 30, 1999.
27(b) Restated Financial Data Schedule for the Nine Months Ended
September 30, 1998.
<PAGE>
THIRD AMENDMENT TO
RECEIVABLES PURCHASE AGREEMENT
THIS THIRD AMENDMENT (this "Amendment") dated as of October 30, 1998 is
entered into among AFC FUNDING CORPORATION, an Indiana corporation (the
"Seller"), AUTOMOTIVE FINANCE CORPORATION, an Indiana corporation (the
"Servicer"), POOLED ACCOUNTS RECEIVABLE CAPITAL CORPORATION, a Delaware
corporation (the "Purchaser"), and NESBITT BURNS SECURITIES INC., a Delaware
corporation, as agent for Purchaser (the "Agent").
R E C I T A L S
1. The Seller, the Servicer, the Purchaser and the Agent are parties
to that certain Receivables Purchase Agreement dated as of December 31, 1996
(as amended by the first Amendment dated as of February 28, 1997 and the
Second Amendment dated as of August 15, 1997, the "Agreement").
2. The Seller, the Servicer, the Purchaser and the Agent desire to
amend the Agreement as hereinafter set forth.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Certain Defined Terms. Capitalized terms which are used herein
without definition and that are defined in the Agreement shall have the same
meanings herein as in the Agreement.
2. Amendments to Agreement. The Agreement is hereby amended as
follows:
2.1 Change in Control. Paragraph (a) of the definition of "Change in
Control" in Exhibit I to the Agreement is amended to read as follows:
"(a) Minnesota Power, Inc. shall fail to own at least
50% of the outstanding voting stock of ADESA;"
2.2 Eligible Receivable. Paragraph (m) of the definition of "Eligible
Receivable" in Exhibit I to the Agreement is amended in its entirety as follows:
"which arises from the making of a loan to finance the
purchase of a motor vehicle, the ownership of which is evidenced by a
certificate of title, driven or drawn by mechanical power, manufactured
primarily for use on the public streets, roads or highways with two
axles (but not
<PAGE>
including any recreational vehicles); provided, however, that up to 5%
(but in any event not to exceed $5,000,000) of the Net Receivables Pool
Balance (which Net Receivables Pool Balance shall be calculated without
taking into account any Tractor Receivables) may consist of otherwise
Eligible Receivables which are Tractor Receivables."
2.3 Receivable. The definition of "Receivable" in Exhibit I to the
Agreement is amended in its entirety as follows:
"'Receivable' means any right to payment from any Person,
whether constituting an account, chattel paper, instrument or a general
intangible, arising from the providing of financing and other services
by the Originator to new, used and wholesale automobile or other motor
vehicle dealers for which the Obligor under the Dealer Note or similar
agreement is a resident of the United States of America, or any of its
possessions or territories, and that is denominated and payable only in
United States dollars, and includes the right to payment of any
interest or finance charges and other obligations of such Person with
respect thereto."
2.4 Exhibit I to the Agreement is amended by adding thereto the
following definitions in the appropriate alphabetical order:
"GAAP" means, generally accepted accounting principles and
practices in the United States, consistently applied."
"Tangible Net Worth" means, with respect to any Person, the net
worth of such Person calculated in accordance with GAAP after
subtracting therefrom the aggregate amount of such Person's intangible
assets, including, without limitation, goodwill, franchises, licenses,
patents, trademarks, tradenames, copyrights, service marks and brand
names and capitalized software."
"Tractor Receivable" means, those Receivables generated as a
result of the making of loans to finance the purchase of Tractors.
"Tractors" means, any non-cargo carrying power unit
manufactured with a minimum of two axles and a maximum of three axles
intended primarily for use on the public streets, roads and highways
and designed to operate in combination with a semitrailer or trailer;
provided, further, this definition specifically excludes any
semitrailer or trailer.
2.5 Reporting Requirements. Paragraph (l)(i) and (ii) of Exhibit IV to
the Agreement are amended to read as follows:
-2-
<PAGE>
"(l) Reporting Requirements. The Seller will provide to the Agent
(in multiple copies, if requested by the Agent)(except that with
respect to paragraphs (i), (ii), (iii) and (iv)) the Seller will cause
the Servicer to provide to the Agent and the Servicer will deliver to
the Agent the following:
(i) as soon as available and in any event within 45 days after
the end of the first three quarters of each fiscal year of AFC
in a format acceptable to the Agent, balance sheets of AFC,
its consolidated subsidiaries and Seller as of the end of such
quarter and statements of income, cash flows and retained
earnings of AFC and its consolidated subsidiaries and balance
sheets and income statements of the Seller for the period
commencing at the end of the previous fiscal year and ending
with the end of such quarter, certified by the chief financial
officer of such Person;
(ii) as soon as available and in any event within 90 days
after the end of each fiscal year of AFC, (A) a copy of the
annual report for AFC and its consolidated subsidiaries,
containing financial statements for such year audited by
PricewaterhouseCoopers LLP or other independent certified
public accountants acceptable to the Agent and (B) the income
statement of the Seller for such year certified by the chief
financial officer of the Seller;"
2.6 Termination Events: Paragraph (e) of Exhibit V to the Agreement is
amended to read as follows:
"(e) A default shall occur in the payment when due (subject to any
applicable grace period), whether by acceleration or otherwise, of
any Debt of either the Seller, AFC or ADESA or a default shall occur in
the performance or observance of any obligation or condition with
respect to such Debt if the effect of such default is to accelerate the
maturity of any such Debt and the Debt with respect to which
non-payment and/or non-performance shall have occurred exceeds, at any
point in time, with respect to the Seller or AFC, $1,000,000 in the
aggregate for all such occurrences or, with respect to ADESA,
$5,000,000, in the aggregate for all such occurrences;"
2.7 Net Worth. Paragraph (n)(i) of Exhibit V to the Agreement is
amended by deleting "$18,000,000" and inserting in its place "$24,000,000."
2.8 Leverage Test. Exhibit V to the Agreement is amended by inserting
the following at the end thereof:
-3-
<PAGE>
" ; or (r) The sum of all of AFC's Debt (including
intercompany loans between AFC and Minnesota Power, Inc.), plus the
Investment of the Participation, plus the outstanding balance of any
other non-recourse transactions exceeds 8.5 times the total
stockholder's equity of AFC on a quarterly basis."
3. Representations and Warranties. Each of the Seller and the Servicer
hereby represents and warrants to the Agent and the Purchaser as follows:
(a) Representations and Warranties. The representations and
warranties of such Person contained in Exhibit III to the Agreement are
true and correct as of the date hereof (unless stated to relate solely
to an earlier date, in which case such representations and warranties
were true and correct as of such earlier date).
(b) Enforceability. The execution and delivery by such Person of
this Amendment, and the performance of its obligations under this
Amendment and the Agreement, as amended hereby, are within its
corporate powers and have been duly authorized by all necessary
corporate action on its part. This Amendment and the Agreement, as
amended hereby, are its valid and legally binding obligations,
enforceable in accordance with its terms.
(c) Termination Event. No Termination Event or Unmatured
Termination Event has occurred and is continuing.
4. Effectiveness. This Amendment shall become effective as of the date
hereof upon receipt by the Agent of the following, each duly executed and dated
as of the date hereof (or such other date satisfactory to the Agent), in form
and substance satisfactory to the Agent:
(a) counterparts of this Amendment (whether by facsimile or
otherwise) executed by each of the parties hereto;
(b) a written statement from Moody's Investors Service, Inc. and
Standard & Poor's that this Amendment will not result in a downgrade or
withdrawal of the rating of the Notes; and
(c) such other documents and instruments as the Agent may
reasonably request.
5. Effect of Amendment. Except as expressly amended and modified by
this Amendment, all provisions of the Agreement shall remain in full force and
effect. After this Amendment becomes
-4-
<PAGE>
effective, all references in the Agreement (or in any other Transaction
Document) to "the Receivables Purchase Agreement," "this Agreement," "hereof,"
"herein" or words of similar effect, in each case referring to the Agreement,
shall be deemed to be references to the Agreement as amended by this Amendment.
This Amendment shall not be deemed to expressly or impliedly waive, amend or
supplement any provision of the Agreement other than as set forth herein.
6. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties on separate counterparts, and each
counterpart shall be deemed to be an original, and all such counterparts shall
together constitute but one and the same instrument.
7. Governing Law. This Amendment shall be governed by, and construed
in accordance with, the internal laws of the State of Indiana without reference
to conflict of laws principles.
8. Section Headings. The various headings of this Amendment are
inserted for convenience only and shall not affect the meaning or interpretation
of this amendment or the Agreement or any provision hereof or thereof.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
AFC FUNDING CORPORATION
By: Curtis L. Phillips
---------------------------------------
Name: Curtis L. Phillips
---------------------------------
Title: Executive Vice President/Chief
Financial Officer and Treasurer
---------------------------------
AUTOMOTIVE FINANCE CORPORATION
By: Curtis L. Phillips
---------------------------------------
Name: Curtis L. Phillips
---------------------------------
Title: Executive Vice President/Chief
Financial Officer and Treasurer
---------------------------------
POOLED ACCOUNTS RECEIVABLE CAPITAL
CORPORATION
By: Dwight Jenkins
---------------------------------------
Name: Dwight Jenkins
---------------------------------
Title: Vice President
---------------------------------
NESBITT BURNS SECURITIES INC.
By: David J. Kucera
---------------------------------------
Name: David J. Kucera
---------------------------------
Title: Managing Director
---------------------------------
By: Jeffrey J. Phillips
---------------------------------------
Name:
---------------------------------
Title:
---------------------------------
S-1
<PAGE>
[AFC Funding Corporation]
FOURTH AMENDMENT TO RECEIVABLES PURCHASE AGREEMENT
This FOURTH AMENDMENT (this "Amendment"), dated as of September 22,
1999, is among AFC Funding Corporation, an Indiana corporation (the "Seller"),
Automotive Finance Corporation, an Indiana corporation (the "Servicer"), POOLED
ACCOUNTS RECEIVABLE CAPITAL CORPORATION, a Delaware Corporation (the
"Purchaser"), and NESBITT BURNS SECURITIES, INC., a Delaware Corporation, as
Agent for Purchaser (in such capacity, the "Agent").
RECITALS
1. The Seller, the Servicer, the Purchaser and the Agent are parties
to the Receivables Purchase Agreement, dated as of December 31, 1996 (as amended
by the First Amendment dated as of February 28, 1997; the Second Amendment dated
as of August 15, 1997; and the Third Amendment dated as of October 30, 1998,
the "Agreement").
2. The Seller, the Servicer, the Purchaser, and the Agent desire to
amend the Agreement as hereinafter set forth.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
SECTION 1. Amendments to the Agreement. The Agreement is hereby amended
as follows:
1.1 The definition of "Purchase Limit" in Exhibit I to the Agreement is
hereby amended by substituting "$300,000,000" for "$225,000,000" where the
latter appears in that definition.
1.2 The definition of "Termination Date" in Exhibit I to the Agreement
is hereby amended by substituting "December 30, 2002" for "December 31, 2001"
where the latter appears in that definition.
1.3 The definition of "Loss Percentage" in Exhibit I to the Agreement
is hereby amended and restated in its entirety as follows:
"Loss Percentage" means, on any date, the greatest of (i) 4 times
the highest Delinquency Ratio during the 12 calendar months ended
immediately preceding such date, (ii) the Loss Reserve Ratio, and (iii)
12%.
<PAGE>
1.4 The definition of "Net Spread" in Exhibit I to the Agreement is
hereby amended and restated in its entirety as follows:
"Net Spread' means the annualized percentage equivalent of a
fraction (computed as of the last day of each calendar month), the
numerator of which is the excess of (x) all Finance Charge and Floor
Plan Fee Collections received and applied during such calendar month
(including recoveries) over (y) the sum of, without duplication, (i)
the Carry Costs for such calendar month, (ii) the aggregate amount of
Receivables that became Defaulted Receivables during such calendar
month, (iii) the Outstanding Balance of Pool Receivables that have been
or, consistent with the Credit and Collection Policy, should have been
written off the Seller's books as uncollectible during such calendar
month (but excluding any Receivables that were included in the
calculation of Net Spread pursuant to clause (ii) above in any previous
calendar month), and (iv) the aggregate amount of non-cash adjustments
that reduced the Outstanding Balance of any Pool Receivable during such
calendar month (but excluding any Receivable that was included in the
calculation of Net Spread pursuant to clause (ii) above in any previous
calendar month); and the denominator of which is the average aggregate
Outstanding Balances of the Pool Receivables during such calendar
month."
1.5 Clause (viii) of paragraph (l) of Exhibit IV to the Agreement is
hereby amended and restated in its entirety as follows:
"(viii) such other information respecting the Receivables
(including a Portfolio Certificate on a more frequent basis than
provided in clause (iii) above), the Related Security (including
inventory reports by branch, obligor, vehicle identification number,
and other descriptions sufficient to identify the Related Security) or
the condition of operations, financial or otherwise, of the Seller or
AFC as the Agent may from time to time reasonably request;"
SECTION 2. Conditions to Effectiveness.
2.1 This Amendment shall become effective on the date hereof upon
receipt by the Agent of the following, each duly executed and dated as of the
date hereof (or such other date satisfactory to the Agent), in form and
substance satisfactory to the Agent:
(a) counterparts of this Amendment (whether by facsimile or
otherwise) executed by each of the parties hereto;
(b) a written statement from Moody's Investors Service, Inc. and
Standard & Poor's that this Amendment will not result in a downgrade or
withdrawal of the rating of the Notes; and
(c) such other documents and instruments as the Agent may
reasonably request.
-2-
<PAGE>
SECTION 3. Effect of Amendment; Ratification. Except as specifically
amended hereby, the Agreement is hereby ratified and confirmed in all respects,
and all of its provisions shall remain in full force and effect. After this
Amendment becomes effective, all references in the Agreement (or in any other
Transaction Document) to "the Receivables Purchase Agreement", "this Agreement",
"hereof", "herein", or words of similar effect, in each case referring to the
Agreement, shall be deemed to be references to the Agreement as amended hereby.
This Amendment shall not be deemed to expressly or impliedly waive, amend, or
supplement any provision of the Agreement other than as specifically set forth
herein.
SECTION 4. Counterparts. This Amendment may be executed in any number
of counterparts and by different parties on separate counterparts, and each
counterpart shall be deemed to be an original, and all such counterparts shall
together constitute but one and the same instrument.
SECTION 5. Governing Law. This Amendment shall be governed by, and
construed in accordance with, the internal laws of the State of Indiana without
regard to any otherwise applicable conflict of laws principles.
SECTION 6. Section Headings. The various headings of this Amendment are
inserted for convenience only and shall not affect the meaning or interpretation
of this Amendment or the Agreement or any provision hereof or thereof.
[SIGNATURE PAGES TO FOLLOW]
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first written above.
AFC FUNDING CORPORATION
By: Curtis L. Phillips
---------------------------------------
Name: Curtis L. Phillips
---------------------------------
Title: Executive Vice President, Chief
Financial Officer and Treasurer
---------------------------------
AUTOMOTIVE FINANCE CORPORATION
By: Curtis L. Phillips
---------------------------------------
Name: Curtis L. Phillips
---------------------------------
Title: Executive Vice President, Chief
Financial Officer and Treasurer
---------------------------------
POOLED ACCOUNTS RECEIVABLE CAPITAL
CORPORATION
By: Dwight Jenkins
---------------------------------------
Name: Dwight Jenkins
---------------------------------
Title: Vice President
---------------------------------
NESBITT BURNS SECURITIES INC.
By: David J. Kucera
---------------------------------------
Name: David J. Kucera
---------------------------------
Title: Managing Director
---------------------------------
By: Jeffrey J. Phillips
---------------------------------------
Name: Jeffrey J. Phillips
---------------------------------
Title: Managing Director
---------------------------------
S-1
ACKNOWLEDGED AND ACCEPTED
CAPITAL MARKETS ASSURANCE CORPORATION
By: Robert M. Lupoli
---------------------------------------
Name: Robert M. Lupoli
---------------------------------
Title: Director
---------------------------------
S-2
<PAGE>
ACKNOWLEDGED AND ACCEPTED
BANK OF MONTREAL FIFTH THIRD BANK, INDIANA
By: Leon H. Sinclair By: David P. Greene
--------------------------------------- ------------------------------
Name: Leon H. Sinclair Name: David P. Greene
--------------------------------- ------------------------
Title: Director Title: Vice President
--------------------------------- ------------------------
HARRIS TRUST AND SAVINGS BANK
By: Thad D. (illegible)
---------------------------------------
Name: Thad D. (illegible)
---------------------------------
Title: V.P.
---------------------------------
SUN TRUST BANK, CENTRAL FLORIDA,
N.A.
By: C. A. Black
---------------------------------------
Name: Christopher A. Black
---------------------------------
Title: Director
---------------------------------
LLOYDS TSB BANK, PLC
By: Gavin Rees
---------------------------------------
Name: Gavin Rees
---------------------------------
Title: Assistant Vice President
Structured Finance
R185
---------------------------------
By: Amy Vespasiano
---------------------------------------
Name: Amy Vespasiano
---------------------------------
Title: Vice President
Structured Finance
V024
---------------------------------
S-3
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MINNESOTA
POWER'S CONSOLIDATED BALANCE SHEET, STATEMENT OF INCOME, AND STATEMENT OF CASH
FLOW FOR THE PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,203
<OTHER-PROPERTY-AND-INVEST> 434
<TOTAL-CURRENT-ASSETS> 698
<TOTAL-DEFERRED-CHARGES> 57
<OTHER-ASSETS> 232
<TOTAL-ASSETS> 2,624
<COMMON> 551
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 320
<TOTAL-COMMON-STOCKHOLDERS-EQ> 779
95
12
<LONG-TERM-DEBT-NET> 714
<SHORT-TERM-NOTES> 152
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 9
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 771
<TOT-CAPITALIZATION-AND-LIAB> 2,624
<GROSS-OPERATING-REVENUE> 843
<INCOME-TAX-EXPENSE> 50
<OTHER-OPERATING-EXPENSES> 670
<TOTAL-OPERATING-EXPENSES> 714
<OPERATING-INCOME-LOSS> 129
<OTHER-INCOME-NET> (22)<F1>
<INCOME-BEFORE-INTEREST-EXPEN> 101
<TOTAL-INTEREST-EXPENSE> 44
<NET-INCOME> 57
1
<EARNINGS-AVAILABLE-FOR-COMM> 56
<COMMON-STOCK-DIVIDENDS> 54
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 123
<EPS-BASIC> 0.82<F2>
<EPS-DILUTED> 0.82<F2>
<FN>
<F1>Included $5 million for Distributions on Redeemable Preferred Securities of
Subsidiary and a $17 million Loss from Equity Investments - Net of Tax. The $17
million Loss from Equity Investments - Net of Tax included a $24 million
non-cash charge to reflect the estimated valuation of the transaction between
Capital Re Corporation and ACE Limited as of June 30, 1999. (See Note 5 to the
consolidated financial statements in Item 1 of Minnesota Power's quarterly
report on Form 10-Q for the period ended September 30, 1999.)
<F2>On March 2, 1999 Minnesota Power, Inc.'s Common Stock split two-for-one.
Financial data schedules filed prior to the effective date have not been
restated for this recapitalization.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MINNESOTA
POWER'S CONSOLIDATED BALANCE SHEET, STATEMENT OF INCOME, AND STATEMENT OF CASH
FLOW FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,094
<OTHER-PROPERTY-AND-INVEST> 446
<TOTAL-CURRENT-ASSETS> 550
<TOTAL-DEFERRED-CHARGES> 60
<OTHER-ASSETS> 222
<TOTAL-ASSETS> 2,371
<COMMON> 520
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 314
<TOTAL-COMMON-STOCKHOLDERS-EQ> 773
95
12
<LONG-TERM-DEBT-NET> 678
<SHORT-TERM-NOTES> 83
<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> 665
<TOT-CAPITALIZATION-AND-LIAB> 2,371
<GROSS-OPERATING-REVENUE> 782
<INCOME-TAX-EXPENSE> 38
<OTHER-OPERATING-EXPENSES> 627
<TOTAL-OPERATING-EXPENSES> 677
<OPERATING-INCOME-LOSS> 105
<OTHER-INCOME-NET> 0<F1>
<INCOME-BEFORE-INTEREST-EXPEN> 118
<TOTAL-INTEREST-EXPENSE> 51
<NET-INCOME> 67
1
<EARNINGS-AVAILABLE-FOR-COMM> 66
<COMMON-STOCK-DIVIDENDS> 48
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 143
<EPS-BASIC> 1.04<F2>
<EPS-DILUTED> 1.04<F2>
<FN>
<F1>Includes $5 million of Income from Equity Investments and $5 million of
Distributions on Redeemable Preferred Securities of Subsidiary.
<F2>On March 2, 1999 Minnesota Power, Inc.'s Common Stock split two-for-one.
Financial data schedules filed prior to the effective date have not been
restated for this recapitalization.
</FN>
</TABLE>
