<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 11-K
(Mark One)
/X/ Annual Report Pursuant to Section 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended DECEMBER 31, 1998
or
/ / Transition Report Pursuant to Section 15(d) of the Securities Exchange Act
of 1934
For the transition period from to
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Commission File No. 1-3548
MINNESOTA POWER AND AFFILIATED COMPANIES
EMPLOYEE STOCK OWNERSHIP PLAN
AND TRUST
(Full Title of the Plan)
----------------------------
Minnesota Power, Inc.
30 West Superior Street
Duluth, Minnesota 55802-2093
(Name of issuer of securities
held pursuant to the Plan and
the address of its principal
executive office)
----------------------------
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INDEX
Page
Report of Independent Accountants 1
Statement of Net Assets Available for Plan Benefits 2
Statement of Changes in Net Assets Available for Plan Benefits 3
Notes to Financial Statements 4
Supplemental Schedules
Schedule I: Investments Held 8
Schedule II: Transactions in Excess of 5%
of Fair Value of Plan Assets 8
Signatures 9
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Participants and Administrator
of the Minnesota Power and Affiliated
Companies Employee Stock Ownership
Plan and Trust
In our opinion, the accompanying statements of net assets available for plan
benefits and the related statements of changes in net assets available for plan
benefits present fairly, in all material respects, the net assets available for
plan benefits of the Minnesota Power and Affiliated Companies Employee Stock
Ownership Plan and Trust at December 31, 1998, and 1997, and the changes in net
assets available for plan benefits for the years then ended, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Plan's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The additional information included in Schedules I
and II is presented for purposes of additional analysis and is not a required
part of the basic financial statements but is additional information required by
the Employee Retirement Income Security Act of 1974. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
June 9, 1999
1
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MINNESOTA POWER AND AFFILIATED COMPANIES
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
Thousands
DECEMBER 31,
1998 1997
- --------------------------------------------------------------------------------
ASSETS, AT FAIR VALUE
Investment in Minnesota Power, Inc.
Common Stock $ 184,056 $ 188,208
Contributions Receivable from Company 1,095 1,095
Interest Receivable 10 10
Cash and Cash Equivalents 451 357
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Total Assets 185,612 189,670
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LIABILITIES
Accrued Interest Expense 1,095 1,095
Long-Term Debt 80,131 81,201
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Total Liabilities 81,226 82,296
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NET ASSETS AVAILABLE FOR PLAN BENEFITS $ 104,386 $ 107,374
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The accompanying notes are an integral part of these statements.
2
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MINNESOTA POWER AND AFFILIATED COMPANIES
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
Thousands
YEAR ENDED
DECEMBER 31,
1998 1997
- --------------------------------------------------------------------------------
SOURCES OF NET ASSETS
Dividend Income $ 8,626 $ 8,892
Company Contributions 1,852 1,873
Net Unrealized Appreciation
of Investments 1,844 68,615
Interest Income 35 34
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12,357 79,414
APPLICATION OF NET ASSETS
Participants' Withdrawals (5,530) (3,105)
Transfers to Pension Plan (1,600) (578)
Interest Expense (8,197) (8,278)
Administrative Expenses (18) (4)
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INCREASE (DECREASE) IN NET ASSETS (2,988) 67,449
NET ASSETS AVAILABLE FOR PLAN BENEFITS
Beginning of Year 107,374 39,925
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End of Year $ 104,386 $ 107,374
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The accompanying notes are an integral part of these statements.
3
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MINNESOTA POWER AND AFFILIATED COMPANIES
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF THE PLAN
The Minnesota Power and Affiliated Companies Employee Stock Ownership
Plan and Trust (ESOP) provides eligible employees of Minnesota Power, Inc.
(Minnesota Power); Superior Water, Light and Power Company; and MP Affiliated
Resources, Inc., (collectively, the Companies) with Minnesota Power common stock
(Common Stock) ownership benefits. The ESOP is a defined contribution plan that
is subject to the provisions of the Employee Retirement Income Security Act of
1974 (ERISA). At December 31, 1998 there were 1,539 participants in the ESOP.
BASIC ACCOUNT
Participants' Basic Accounts received shares of Common Stock purchased
with incremental investment tax credit contributions and payroll-based tax
credit contributions. Contributions to the participant's Basic Accounts ceased
after 1986.
All participants' Basic Accounts are fully vested. These shares can be
withdrawn at any time. Every December participants are required to make an
election to receive dividends on their shares either in cash or reinvest them in
Common Stock held in the ESOP.
SPECIAL ACCOUNT
For the years 1985 through 1989, the Companies received a tax deduction
for cash dividends paid to participants on ESOP shares in their Basic Account.
The Companies contributed to the ESOP an amount equal to the estimated income
tax benefit of the dividend deduction associated with shares in the Basic
Account. Shares of Common Stock purchased with these contributions were
allocated to the participants' Special Account. All participants are fully
vested in these shares which can be withdrawn when the participants terminate
employment. Dividends on these shares are automatically reinvested in Common
Stock held in the ESOP.
FIRST SUSPENSE ACCOUNT
In 1989 the ESOP was amended to enable the ESOP Trustee (as defined
below) to establish a leveraged First Suspense Account. Employees become
eligible to participate after one year of service with the Companies. The First
Suspense Account originally consisted of 633,849 shares of Common Stock
purchased for the benefit of eligible ESOP participants with proceeds from a 15
year $16.5 million loan (First Loan) bearing interest at 9.125%. This loan was
obtained by the ESOP Trustee on December 29, 1989, and guaranteed by Minnesota
Power. The First Suspense Account provides that as the First Loan is repaid,
shares of Common Stock in the First Suspense Account are allocated to each
participant's account based on the ratio of a participant's annual compensation
to the annual compensation of all participants. In any year that the value of
the shares credited to a participant's account is less than 2% of the
participant's annual compensation, the Companies will contribute additional
shares to make up the difference. Shares of Common Stock are also allocated to
participants' accounts for reinvested dividends paid on the shares in the First
Suspense Account. All participants are fully vested after 5 years of continuous
service with the Companies.
4
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SECOND SUSPENSE ACCOUNT
Minnesota Power amended the ESOP again in 1990 to enable the ESOP
Trustee to establish a leveraged Second Suspense Account and borrow an
additional $75 million (Second Loan) for the purpose of acquiring 2,830,188
newly issued shares of Common Stock from Minnesota Power for the benefit of
active ESOP participants with a basic account. Under this amendment active
participants with a Basic Account are allocated shares to their Special Account
with a value at least equal to: (a) dividends payable on shares held by those
participants in the ESOP who do not elect to receive dividends in cash, and (b)
tax savings generated from the deductibility of dividends paid on all shares
held in the ESOP as of August 4, 1989. Pursuant to this amendment, the ESOP
Trustee issued a promissory note to Minnesota Power for $75 million at a 10.25%
interest rate with a term not to exceed 25 years.
A participant who resigns or is dismissed from employment with any of
the Companies shall forfeit the nonvested portion of his or her ESOP accounts as
of the last day of the year in which the participant incurs a fifth consecutive
one-year break in service. Forfeitures will first be used by the ESOP to meet
the contribution of the 2% annual compensation requirement. Second, forfeitures
will be allocated to the payment of expenses. Third, remaining forfeitures, if
any, will be reallocated to the accounts of remaining participants as of the
last day of the year in which the forfeiture occurs.
ADMINISTRATION
The ESOP is administered for the Companies by the Employee Benefit
Plans Committee (Committee). The mailing address of the Committee is 30 West
Superior Street, Duluth, Minnesota 55802-2093. The Committee is authorized to
make rules and regulations as it may deem necessary to carry out the provisions
of the ESOP and to employ investment managers (as defined by ERISA), attorneys,
accountants, and such other persons as it shall deem necessary or desirable in
the administration of the ESOP. The Committee consists of 11 members who were
appointed by the Board of Directors of Minnesota Power. The Board of Directors
has the power to remove members of the Committee from office. Members of the
Committee receive no compensation for their services with respect to the ESOP.
As of June 1, 1999 the members of the Committee, all employees of
Minnesota Power, and their respective titles are as follows:
Name Title
----------------- ---------------------------------------------
Robert D. Edwards Executive Vice President and
President - Minnesota Power Electric (1)
David G. Gartzke Senior Vice President - Finance and
Chief Financial Officer
Roger P. Engle Vice President - Minnesota Power Electric and
President - Superior Water, Light and Power
Company
Philip R. Halverson Vice President, General Counsel and Secretary
Donald J. Shippar Senior Vice President - Minnesota Power
Electric
Claudia S. Welty Vice President - Information Technology
Mark A. Schober Controller
Lori A. Collard President - Electric Outlet, Inc.
Brenda J. Flayton Vice President - Human Resources
Alan R. Hodnik Manager - Laskin Energy Center
Jeweleon W. Tuominen Manager - Executive Compensation and Employee
Benefits
- ----------------------
(1) Committee Chairman
5
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Mellon Bank N.A. (Mellon Bank) acts as trustee (ESOP Trustee) for the
ESOP. The ESOP Trustee's main office is located at One Mellon Bank Center,
Pittsburgh, Pennsylvania 15258-0001. The ESOP Trustee carries blanket bond
insurance in the amount of $300 million. Minnesota Power maintains the
participants' records and issues quarterly reports to each participant showing
the status of individual accounts.
ESOP TERMINATION
The Companies reserve the right to reduce, suspend or discontinue their
contributions to the ESOP or to terminate the ESOP in its entirety subject to
the provisions of ERISA. In the event that the ESOP is terminated, the Committee
may require that the accounts of all participants and beneficiaries be
distributed as soon after the termination date as the Committee deems
practicable, regardless of the length of time Common Stock has been allocated to
any account.
CONTRIBUTIONS
The Companies' contribution for each year shall be paid to the ESOP
Trustee either in cash or in Common Stock. Subject to a statutory maximum, the
expenses incidental to establishing and administering the ESOP may be deducted
from the Companies' contributions to the ESOP or income earned by the shares
held in the ESOP. Expenses not attributable to such sources are payable by the
Companies. No fees or charges will be payable by any ESOP participant.
TRANSFERS
Upon retirement, participants may elect to transfer the vested amount
of their ESOP account balances to the Minnesota Power and Affiliated Companies
Retirement Plan A or Plan B.
FORFEITED ACCOUNTS
At December 31, 1998 forfeited nonvested accounts totaled $3,876. These
accounts will be used to reduce future employer contributions. Also in 1998,
employer contributions were reduced by $13,602 from forfeited nonvested
accounts.
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
The ESOP uses the accrual basis of accounting and accordingly reflects
income in the year earned and expenses when incurred. Investments are reported
at their fair value based on the quoted market price.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to (i) make estimates and
assumptions that affect the reported amounts of assets and liabilities, (ii)
disclose contingent liabilities at the date of the financial statements and
(iii) report amounts of revenue and expense during the reporting period. Actual
results could differ from those estimates.
The Plan presents in the statement of changes in net assets available
for benefits the net appreciation (depreciation) in the fair value of its
investment which consists of the realized gains or losses and the unrealized
appreciation (depreciation) on those investments.
NOTE 3 - FEDERAL INCOME TAX STATUS
A favorable determination letter dated January 30, 1996 was obtained
from the Internal Revenue Service stating that the ESOP, as amended and restated
effective January 1, 1992, qualifies as an employee stock ownership plan under
Section 401(a) of the Internal Revenue Code of 1986.
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NOTE 4 - INVESTMENTS
<TABLE>
<CAPTION>
Number of
Minnesota Power Common Stock Shares * Cost Market
-------------------------------------------------------------------------------------------------
Thousands
<S> <C> <C> <C> <C>
December 31, 1998 Allocated 1,818 $ 40,574 $ 80,014
Unallocated 2,365 58,770 104,042
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4,183 $ 99,344 $ 184,056
===== ========== ==========
December 31, 1997 Allocated 1,830 $ 39,200 $ 79,715
Unallocated 2,490 63,973 108,493
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4,320 $ 103,173 $ 188,208
===== ========== ==========
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* Does not reflect Minnesota Power's two-for-one Common Stock split effective on March 2, 1999.
</TABLE>
NOTE 5 - REPAYMENT OF LOANS
The ESOP Trustee will repay principal and interest on the First Loan
and Second Loan with dividends paid on the shares of Common Stock in each
suspense account and with certain employer contributions to the ESOP. The shares
of Common Stock acquired by the ESOP Trustee will be held in the First Suspense
Account and Second Suspense Account, and allocated to the accounts of ESOP
participants as the First Loan and Second Loan are repaid. Under current tax
law, the Companies expect to realize tax savings from the two transactions.
The First Loan was obtained from a third party lender and is guaranteed
by Minnesota Power with 276,920 unallocated shares* of Common Stock pledged as
collateral at December 31, 1998. The lender has no rights against shares once
they are allocated under the ESOP.
Principal Payments
$16.5 Million 9.125% Loan
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Thousands
1999 $ 1,260
2000 1,472
2001 1,708
2002 1,969
2003 - 2004 3,799
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$ 10,208
=========
The Second Loan was obtained from Minnesota Power. There are 2,087,674
unallocated shares* of Common Stock pledged as collateral at December 31, 1998.
Prepayments can be made without penalty. The lender has no rights against shares
once they are allocated under the ESOP.
Principal Payments
$75 Million 10.25% Loan
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Thousands
2011 $ 9,923
2012 15,000
2013 15,000
2014 15,000
2015 15,000
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$ 69,923
=========
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* Does not reflect Minnesota Power's two-for-one Common Stock split effective on
March 2, 1999.
7
<PAGE>
Schedule I
MINNESOTA POWER AND AFFILIATED COMPANIES
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
SCHEDULE OF INVESTMENTS HELD
DECEMBER 31, 1998
Thousands
Number of
Description Shares * Cost Fair Value
- --------------------------------------------------------------------------------
Minnesota Power, Inc. Common Stock ** 4,183 $99,344 $184,056
- ------------------
* Does not reflect Minnesota Power's two-for-one Common Stock split effective
on March 2, 1999.
** Party-in-interest
The above data was prepared from information certified as complete and accurate
by Mellon Bank N.A., the ESOP Trustee.
Schedule II
<TABLE>
MINNESOTA POWER AND AFFILIATED COMPANIES
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
SCHEDULE OF TRANSACTIONS IN EXCESS OF
5% OF FAIR VALUE OF PLAN ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
Dollars in Thousands
<CAPTION>
Aggregate Purchase
Price and Market
Value on Number of
Description of Purchases Transaction Dates Transactions
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mellon Bank Temporary Investment Fund $3,401 66
<CAPTION>
Aggregate
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Net
Cost of Sales Gain/ Number of
Description of Sales Asset Price (Loss) Transactions
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mellon Bank Temporary Investment Fund $3,495 $3,495 0 111
- ------------------
The above data was prepared from information certified as complete and accurate by Mellon Bank N.A., the ESOP Trustee.
</TABLE>
8
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Employee Benefit Plans Committee has duly caused this annual report to be
signed on its behalf by the undersigned hereunto duly authorized.
Minnesota Power and Affiliated Companies
Employee Stock Ownership Plan
and Trust
----------------------------------------
(Name of Plan)
June 14, 1999 By R.D. Edwards
----------------------------------------
R.D. Edwards
Chairman,
Employee Benefit Plans Committee
9
