<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 JUNE 30, 2000
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,
74,259,810 shares outstanding
as of July 31, 2000
<PAGE>
<TABLE>
<CAPTION>
MINNESOTA POWER, INC.
INDEX
Page
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet -
June 30, 2000 and December 31, 1999 1
Consolidated Statement of Income -
Quarter and Six Months Ended June 30, 2000 and 1999 2
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 2000 and 1999 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
i
<PAGE>
DEFINITIONS
The following abbreviations or acronyms are used in the text.
Abbreviation or Acronym Term
----------------------- -------------------------------------------
1999 Form 10-K Minnesota Power's Annual Report on Form
10-K for the Year Ended December 31, 1999
ACE ACE Limited
ADESA ADESA Corporation
ADESA Canada ADESA Canada Inc.
ADT ADT Automotive Holdings, Inc.
AFC Automotive Finance Corporation
AFG Auction Finance Group, Inc.
CAG Canadian Auction Group
Capital Re Capital Re Corporation
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.
Impact Auto Impact Auto Auctions Ltd. and Suburban
Auto Parts Inc., collectively
Florida Water Florida Water Services Corporation
FPSC Florida Public Service Commission
FTC Federal Trade Commission
LTV LTV Steel Company, Inc.
Manheim Manheim Auctions, Inc.
MAPP Mid-Continent Area Power Pool
Mid South Mid South Water Systems, Inc.
Minnesota Power Minnesota Power, Inc. and its subsidiaries
MPUC Minnesota Public Utilities Commission
NCUC North Carolina Utilities Commission
Note ____ Note ____ to the consolidated financial
statements included in this Quarterly
Report on Form 10-Q
PCUC Palm Coast Utility Corporation
PSCW Public Service Commission of Wisconsin
SEC United States Securities and Exchange
Commission
Spruce Creek Spruce Creek South Utilities Inc.
Square Butte Square Butte Electric Cooperative
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 Congress, state legislatures, the FERC, the MPUC, the FPSC, the NCUC
and the PSCW, with respect to allowed rates of return, industry and rate
structure, acquisition and disposal of assets and facilities, operation
and construction of plant facilities, recovery of purchased power and
other capital investments, and present or prospective wholesale and retail
competition (including but not limited to retail wheeling and transmission
costs);
- economic and geographic factors including political and economic risks;
- changes in and compliance with environmental and safety laws and policies;
- weather conditions;
- population growth rates and demographic patterns;
- competition for retail and wholesale customers;
- pricing and transportation of commodities;
- market demand, including structural market changes;
- changes in tax rates or policies or in rates of inflation;
- changes in project costs;
- unanticipated changes in operating expenses and capital expenditures;
- capital market conditions;
- competition for new energy development opportunities; and
- legal and administrative proceedings (whether civil or criminal) and
settlements that influence the business and profitability of the Company.
Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which that
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 these factors, nor can it assess the impact of each of these
factors 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
<TABLE>
MINNESOTA POWER
CONSOLIDATED BALANCE SHEET
Millions
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
Unaudited Audited
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents $ 193.7 $ 101.5
Trading Securities 98.1 179.6
Accounts Receivable (Less Allowance of $15.4 and $13.9) 283.3 176.4
Inventories 26.5 24.2
Prepayments and Other 106.3 82.8
--------- ---------
Total Current Assets 707.9 564.5
Property, Plant and Equipment 1,311.5 1,258.8
Investments 109.0 197.2
Goodwill 322.2 181.0
Other Assets 109.6 111.1
--------- ---------
TOTAL ASSETS $ 2,560.2 $ 2,312.6
-------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Accounts Payable $ 292.1 $ 124.7
Accrued Taxes, Interest and Dividends 86.9 79.4
Notes Payable 126.7 96.5
Long-Term Debt and Preferred Stock Due Within One Year 19.2 9.1
Other 75.7 88.6
--------- ---------
Total Current Liabilities 600.6 398.3
Long-Term Debt 720.1 712.8
Accumulated Deferred Income Taxes 125.8 139.9
Other Liabilities 152.0 149.3
--------- ---------
Total Liabilities 1,598.5 1,400.3
--------- ---------
Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary MP&L Capital I
Which Holds Solely Company Junior Subordinated Debentures 75.0 75.0
Redeemable Serial Preferred Stock - 20.0
STOCKHOLDERS' EQUITY
Cumulative Preferred Stock 11.5 11.5
Common Stock Without Par Value, 130.0 Shares Authorized
74.2 and 73.5 Shares Outstanding 565.7 552.0
Unearned ESOP Shares (57.5) (59.2)
Accumulated Other Comprehensive Income (Loss) (0.5) 2.4
Retained Earnings 367.5 310.6
--------- ---------
Total Stockholders' Equity 886.7 817.3
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,560.2 $ 2,312.6
-------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
MINNESOTA POWER
CONSOLIDATED STATEMENT OF INCOME
Millions Except Per Share Amounts - Unaudited
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUE
Electric Services $ 138.9 $ 135.3 $ 280.5 $ 267.5
Automotive Services 129.7 104.0 249.2 200.8
Water Services 31.7 29.9 59.7 54.3
Investments 26.7 10.0 60.2 14.3
------- -------- -------- -------
Total Operating Revenue 327.0 279.2 649.6 536.9
------- -------- -------- -------
OPERATING EXPENSES
Fuel and Purchased Power 55.1 52.3 109.9 99.9
Operations 199.6 170.9 399.1 334.9
Interest Expense 15.2 14.4 31.5 28.6
------- -------- -------- -------
Total Operating Expenses 269.9 237.6 540.5 463.4
------- -------- -------- -------
OPERATING INCOME BEFORE CAPITAL RE AND ACE 57.1 41.6 109.1 73.5
INCOME (LOSS) FROM INVESTMENT IN CAPITAL RE
AND RELATED DISPOSITION OF ACE 48.0 (13.4) 48.0 (15.8)
------- -------- -------- -------
OPERATING INCOME 105.1 28.2 157.1 57.7
DISTRIBUTIONS ON REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY 1.5 1.5 3.0 3.0
INCOME TAX EXPENSE 39.4 24.8 59.5 31.9
------- -------- -------- -------
NET INCOME 64.2 1.9 94.6 22.8
DIVIDENDS ON PREFERRED STOCK 0.3 0.5 0.8 1.0
------- -------- -------- -------
EARNINGS AVAILABLE FOR COMMON STOCK $ 63.9 $ 1.4 $ 93.8 $ 21.8
======= ======== ======== =======
AVERAGE SHARES OF COMMON STOCK 69.6 68.2 69.4 68.0
BASIC AND DILUTED
EARNINGS PER SHARE OF COMMON STOCK $0.92 $0.02 $1.35 $0.32
DIVIDENDS PER SHARE OF COMMON STOCK $0.2675 $0.2675 $0.535 $0.535
-------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
</TABLE>
-2-
<PAGE>
<TABLE>
MINNESOTA POWER
CONSOLIDATED STATEMENT OF CASH FLOWS
Millions - Unaudited
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 94.6 $ 22.8
(Gain) Loss From Investment in Capital Re
and Related Disposition of ACE (48.0) 15.8
Depreciation and Amortization 41.4 37.8
Deferred Income Taxes (12.8) 7.6
Changes In Operating Assets and Liabilities
Trading Securities 81.5 1.1
Accounts Receivable (89.5) (128.2)
Inventories (2.3) (0.4)
Accounts Payable 153.6 125.1
Other Current Assets and Liabilities (28.3) (29.9)
Other - Net 14.0 10.9
------- -------
Cash From Operating Activities 204.2 62.6
------- -------
INVESTING ACTIVITIES
Proceeds From Sale of Investments 144.6 36.1
Additions to Investments (27.6) (20.1)
Additions to Property, Plant and Equipment (56.5) (42.7)
Acquisitions - Net of Cash Acquired (181.0) (64.6)
Other - Net 9.0 (1.3)
------- -------
Cash For Investing Activities (111.5) (92.6)
------- -------
FINANCING ACTIVITIES
Issuance of Common Stock 13.1 14.9
Issuance of Long-Term Debt 48.8 25.6
Changes in Notes Payable - Net 30.2 83.3
Reductions of Long-Term Debt (41.4) (7.7)
Redemption of Preferred Stock (10.0) -
Dividends on Preferred and Common Stock (37.7) (36.5)
------- -------
Cash From Financing Activities 3.0 79.6
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (3.5) 2.1
------- -------
CHANGE IN CASH AND CASH EQUIVALENTS 92.2 51.7
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 101.5 89.4
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 193.7 $ 141.1
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Period For
Interest - Net of Capitalized $24.0 $30.8
Income Taxes $54.6 $27.2
-------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
</TABLE>
-3-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements and notes should be
read in conjunction with the Company's 1999 Form 10-K. In the opinion of the
Company, all adjustments necessary for a fair statement of the results for the
interim periods have been included. The results of operations for an interim
period may not give a true indication of results for the year.
NOTE 1. BUSINESS SEGMENTS
Millions
<TABLE>
<CAPTION>
Electric Automotive Water Corporate
Consolidated Services Services Services Investments Charges
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Quarter Ended
---------------------
June 30, 2000
-------------
Operating Revenue $327.0 $138.9 $129.7<F1> $31.7 $ 26.8 $(0.1)
Operation and Other Expense 233.6 106.2 95.2 18.8 10.2<F2> 3.2
Depreciation and Amortization Expense 21.1 11.6 5.7 3.7 - 0.1
Interest Expense 15.2 5.3 3.8 2.5 - 3.6
------ ------ ------ ----- ------ -----
Operating Income (Loss) Before ACE 57.1 15.8 25.0 6.7 16.6 (7.0)
Income from Disposition of ACE 48.0 - - - 48.0 -
------ ------ ------ ----- ------ -----
Operating Income (Loss) 105.1 15.8 25.0 6.7 64.6 (7.0)
Distribution on Redeemable
Preferred Securities of Subsidiary 1.5 0.5 - - - 1.0
Income Tax Expense (Benefit) 39.4 6.0 10.3 2.6 24.0 (3.5)
------ ------ ------ ----- ------ -----
Net Income (Loss) $ 64.2 $ 9.3 $ 14.7 $ 4.1 $ 40.6 $(4.5)
====== ====== ====== ===== ====== =====
-------------------------------------------------------------------------------------------------------------------
For the Quarter Ended
---------------------
June 30, 1999
-------------
Operating Revenue $279.2 $135.3 $104.0<F1> $29.9 $ 10.0 $ -
Operation and Other Expense 203.8 104.1 75.9 17.8 3.5<F2> 2.5
Depreciation and Amortization Expense 19.4 11.4 4.4 3.4 0.1 0.1
Interest Expense 14.4 5.3 2.5 2.5 - 4.1
------ ------ ------ ----- ------ -----
Operating Income (Loss)
Before Capital Re 41.6 14.5 21.2 6.2 6.4 (6.7)
Loss from Investment in Capital Re (13.4) - - - (13.4) -
------ ------ ------ ----- ------ -----
Operating Income (Loss) 28.2 14.5 21.2 6.2 (7.0) (6.7)
Distribution on Redeemable
Preferred Securities of Subsidiary 1.5 0.5 - - - 1.0
Income Tax Expense (Benefit) 24.8 5.4 9.2 2.4 10.7 (2.9)
------ ------ ------ ----- ------ -----
Net Income (Loss) $ 1.9 $ 8.6 $ 12.0 $ 3.8 $(17.7) $(4.8)
====== ====== ====== ===== ====== =====
-------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Included $26.2 million of Canadian operating revenue in 2000 ($13.4 million in 1999).
<F2> Included $0.2 million of minority interest in 2000 ($0.1 million in 1999).
</FN>
</TABLE>
-4-
<PAGE>
NOTE 1. BUSINESS SEGMENTS
Millions
<TABLE>
<CAPTION>
Electric Automotive Water Corporate
Consolidated Services Services Services Investments Charges
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended
------------------------
June 30, 2000
-------------
Operating Revenue $ 649.6 $ 280.5 $ 249.2<F1> $ 59.7 $ 60.4 $ (0.2)
Operation and Other Expense 467.6 213.2 185.2 36.5 25.2<F3> 7.5
Depreciation and Amortization Expense 41.4 23.1 10.5 7.5 0.1 0.2
Interest Expense 31.5 10.5 7.7 5.1 - 8.2
-------- -------- -------- ------ ------ ------
Operating Income (Loss) Before ACE 109.1 33.7 45.8 10.6 35.1 (16.1)
Income from Disposition of ACE 48.0 - - - 48.0 -
-------- -------- -------- ------ ------ ------
Operating Income (Loss) 157.1 33.7 45.8 10.6 83.1 (16.1)
Distribution on Redeemable
Preferred Securities of Subsidiary 3.0 0.9 - - - 2.1
Income Tax Expense (Benefit) 59.5 12.8 19.2 4.1 31.0 (7.6)
-------- -------- -------- ------ ------ ------
Net Income (Loss) $ 94.6 $ 20.0 $ 26.6 $ 6.5 $ 52.1 $(10.6)
======== ======== ======== ====== ====== ======
Total Assets $2,560.2 $ 889.4 $1,073.8<F2> $324.4 $272.1 $ 0.5
Property, Plant and Equipment $1,311.5 $ 769.4 $ 279.5 $262.6 - -
Accumulated Depreciation and
Amortization $1,018.0 $ 650.7 $ 162.5 $202.8 $ 2.0 -
Capital Expenditures $ 56.5 $ 20.4 $ 24.5 $ 11.6 - -
-------------------------------------------------------------------------------------------------------------------
For the Six Months Ended
------------------------
June 30, 1999
-------------
Operating Revenue $ 536.9 $ 267.5 $ 200.8<F1> $ 54.3 $ 14.4 $ (0.1)
Operation and Other Expense 397.0 201.9 148.8 33.5 7.6<F3> 5.2
Depreciation and Amortization Expense 37.8 22.3 8.6 6.6 0.1 0.2
Interest Expense 28.6 10.6 4.9 4.9 - 8.2
-------- -------- -------- ------ ------ ------
Operating Income (Loss)
Before Capital Re 73.5 32.7 38.5 9.3 6.7 (13.7)
Loss from Investment in Capital Re (15.8) - - - (15.8) -
-------- -------- -------- ------ ------ ------
Operating Income (Loss) 57.7 32.7 38.5 9.3 (9.1) (13.7)
Distribution on Redeemable
Preferred Securities of Subsidiary 3.0 0.9 - - - 2.1
Income Tax Expense (Benefit) 31.9 12.2 16.9 3.6 5.7 (6.5)
-------- -------- -------- ------ ------ ------
Net Income (Loss) $ 22.8 $ 19.6 $ 21.6 $ 5.7 $(14.8) $ (9.3)
======== ======== ======== ====== ====== ======
Total Assets $2,438.3 $1,018.7 $ 733.0<F2> $322.3 $363.9 $ 0.4
Property, Plant and Equipment $1,220.4 $ 766.7 $ 199.5 $254.2 - -
Accumulated Depreciation and
Amortization $ 865.7 $ 617.7 $ 49.2 $197.0 $ 1.8 -
Capital Expenditures $ 42.7 $ 20.9 $ 12.5 $ 9.3 - -
-------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Included $44.3 million of Canadian operating revenue in 2000 ($24.8 million in 1999).
<F2> Included $227.9 million of Canadian assets in 2000 ($100.7 million in 1999).
<F3> Included $0.4 million of minority interest in 2000 ($0.2 million in 1999).
</FN>
</TABLE>
-5-
<PAGE>
NOTE 2. REGULATORY MATTERS
FLORIDA WATER 1991 RATE CASE REFUNDS. In 1995 the Florida First District Court
of Appeals (Court of Appeals) reversed a 1993 FPSC order establishing uniform
rates for most of Florida Water's service areas. With "uniform rates" all
customers in each uniform rate area pay the same rates for water and wastewater
services. In response to the Court of Appeals' order, in August 1996 the FPSC
ordered Florida Water to issue refunds to those customers who paid more since
October 1993 under uniform rates than they would have paid under stand-alone
rates. This order did not permit a balancing surcharge to customers who paid
less under uniform rates. Florida Water appealed, and the Court of Appeals ruled
in June 1997 that the FPSC could not order refunds without balancing surcharges.
In response to the Court of Appeals' ruling, the FPSC issued an order in January
1998 that did not require refunds. Florida Water's potential refund liability at
that time was about $12.5 million, which included interest, to customers who
paid more under uniform rates.
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. The
FPSC did not include Spring Hill in this interim rate order because Hernando
County had assumed jurisdiction over Spring Hill's rates. In June 1997 Florida
Water reached an agreement with Hernando County to revert prospectively to
stand-alone rates for Spring Hill customers.
Customer groups which paid more under uniform rates have appealed the FPSC's
January 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. In
June 1998 the Court of Appeals reversed its previous ruling that the FPSC was
without authority to order uniform rates at which time 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. A decision is not expected before 2001. The Company is unable
to predict the timing or outcome of the appeals process.
NOTE 3. INCOME TAX EXPENSE
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Millions
Current Tax
Federal $ 43.1 $ 12.5 $ 62.7 $ 22.5
Foreign 0.6 0.5 1.1 0.9
State 5.2 (0.7) 8.5 0.9
------ ------ ------ ------
48.9 12.3 72.3 24.3
------ ------ ------ ------
Deferred Tax
Federal (8.3) 13.3 (10.6) 11.7
Foreign (0.2) - (0.3) -
State (0.8) (0.5) (1.3) (3.4)
------ ------ ------ ------
(9.3) 12.8 (12.2) 8.3
------ ------ ------ ------
Deferred Tax Credits (0.2) (0.3) (0.6) (0.7)
------ ------ ------ ------
Total Income Tax Expense $ 39.4 $ 24.8 $ 59.5 $ 31.9
-------------------------------------------------------------------------------------------------------------------
</TABLE>
-6-
<PAGE>
NOTE 4. TOTAL COMPREHENSIVE INCOME
For the quarter ended June 30, 2000 total comprehensive income was $42.7 million
($1.5 million loss for the quarter ended June 30, 1999). For the six months
ended June 30, 2000 total comprehensive income was $91.7 million ($20.4 million
for the six months ended June 30, 1999). Total comprehensive income includes net
income, unrealized gains and losses on securities classified as
available-for-sale, and foreign currency translation adjustments.
NOTE 5. ACQUISITIONS
ADESA AUCTION FACILITIES. On June 20, 2000 ADESA acquired all of the outstanding
common shares of Auction Finance Group, Inc. (AFG). AFG, which is headquartered
in Miami, Florida, owns CAAG Auto Auction Holdings Ltd., a wholesale automotive
remarketing company with locations throughout Canada, doing business as Canadian
Auction Group. The transaction was accounted for using the purchase method which
included an estimated allocation of the purchase price. Final purchase
accounting adjustments are not expected to be material. 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. This acquisition added 13 vehicle auction facilities and
associated dealer financing business to ADESA's existing locations and
established ADESA as the premier automotive services company in Canada.
On May 31, 2000 ADESA Canada purchased the remaining 27 percent of Impact Auto.
ADESA Canada acquired 20 percent of Impact Auto on October 1, 1995, 27 percent
in March 1999 and another 26 percent in January 2000. 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 each purchase.
Pro forma financial results have not been presented due to immateriality. Impact
Auto is Canada's largest national salvage auction chain with 11 sites in six
provinces. Impact Auto provides remarketing services to insurance companies for
their "total loss" vehicles.
On February 7, 2000 ADESA purchased the Mission City Auto Auction in San Diego,
California. 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. The Mission City auction, which has been renamed
ADESA San Diego, operates six auction lanes on 30 acres with full reconditioning
facilities.
The transactions described in the three preceding paragraphs had a combined
purchase price of approximately $175.5 million and resulted in goodwill of
$145.9 million, which the Company expects to amortize over a 40-year useful
life. The Company funded these transactions with proceeds from the sale of ACE
shares and proceeds from the sale of a portion of the Company's securities
portfolio.
SPRUCE CREEK SOUTH UTILITIES INC. On June 29, 2000 Florida Water purchased the
assets of Spruce Creek for $5.5 million, plus a commitment to pay a fee for
water connections through June 2005. 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. Spruce Creek
serves 3,100 water and 2,500 wastewater customers in three communities in Marion
County, Florida. The systems acquired are designed to accommodate 10,000
customers. The Company funded this transaction with internally generated funds.
-7-
<PAGE>
NOTE 6. INVESTMENTS IN CAPITAL RE AND ACE
In May 2000 Minnesota Power recorded a $30.4 million, or $0.44 per share,
after-tax gain on the sale of the 4.7 million shares of ACE that Minnesota Power
received in December 1999 when Capital Re merged with ACE. As a result of the
merger, in 1999 Minnesota Power recorded a $36.2 million, or $0.52 per share,
after-tax non-cash charge as follows: a $24.1 million, or $0.35 per share,
charge in the second quarter following the merger agreement and discontinuance
of Minnesota Power's equity accounting for Capital Re and a $12.1 million, or
$0.17 per share, charge in the fourth quarter upon completion of the merger.
NOTE 7. LONG-TERM DEBT
On March 30, 2000 ADESA issued $35 million of 8.10% Senior Notes, Series B, due
March 30, 2010. Proceeds were used to refinance short-term bank indebtedness
incurred for the acquisition of vehicle auction facilities purchased in 1999 and
for general corporate purposes.
On June 22, 2000 Minnesota Power refinanced $4.6 million of 6.875% Pollution
Control Revenue Refunding Bonds, Series 1991-A with $4.6 million of Adjustable
Rate Pollution Control Revenue Refunding Bonds Series 2000 due December 1, 2015.
The new bonds had an initial rate of 4.75%.
On June 29, 2000 Heater issued an $8 million, 8.24%, note to COBANK, ACB, due
June 20, 2025. Proceeds were used to refinance short-term indebtedness incurred
for the 1999 acquisition of Mid South and capital improvements in 1999 and 2000.
NOTE 8. PREFERRED STOCK
In April 2000 the Company redeemed all 100,000 shares of Redeemable Serial
Preferred Stock A, $7.125 Series for an aggregate of $10 million. Proceeds from
the Company's securities portfolio were used to fund this redemption.
NOTE 9. SQUARE BUTTE PURCHASED POWER CONTRACT
The Company has a power purchase agreement with Square Butte that extends
through 2026 (Agreement). It provides a long-term supply of low-cost energy to
customers in the Company's electric service territory and enables 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.
The Company is entitled to approximately 71 percent of the Unit's output under
the 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. 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.
Square Butte's fixed costs consist primarily of debt service. At June 30, 2000
Square Butte had total debt outstanding of $329.6 million. Total annual debt
service for Square Butte is expected to be approximately $36 million in each of
the years 2000 through 2003 and $23 million in 2004. 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.
-8-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MINNESOTA POWER is a multi-services company with operations in four business
segments: (1) ELECTRIC SERVICES, which include electric and gas services, coal
mining and telecommunications; (2) AUTOMOTIVE SERVICES, which include a network
of vehicle auctions, a finance company, an auto transport company, a vehicle
remarketing company and a company that provides field information services; (3)
WATER SERVICES, which include water and wastewater services; 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 related to any one business
segment.
CONSOLIDATED OVERVIEW
For the quarter and six months ended June 30, 2000 the Company reported
continued strong performance across all business segments. Significant
acquisitions and growth in Automotive Services and the performance of
Investments contributed to higher operating results in 2000.
Excluding the Capital Re and ACE transactions (see net income discussion for
Investments below), net income for the second quarter of 2000 increased 30
percent over the second quarter of 1999 and net income for the six months ended
June 30, 2000 increased 37 percent over the same period in 1999. Excluding the
Capital Re and ACE transactions, earnings per share were $0.48 for the second
quarter of 2000, an increase of 30 percent over the second quarter of 1999 and
earnings per share were $0.91 per share for the six months ended June 30, 2000,
a 36 percent increase over the same period in 1999.
<TABLE>
<CAPTION>
Quarter Ended Year to Date
June 30, June 30,
2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
Millions
<S> <C> <C> <C> <C>
Operating Revenue
Electric Services $138.9 $135.3 $280.5 $267.5
Automotive Services 129.7 104.0 249.2 200.8
Water Services 31.7 29.9 59.7 54.3
Investments 26.8 10.0 60.4 14.4
Corporate Charges (0.1) - (0.2) (0.1)
------ ------ ------ ------
$327.0 $279.2 $649.6 $536.9
Operating Expenses
Electric Services $123.1 $120.8 $246.8 $234.8
Automotive Services 104.7 82.8 203.4 162.3
Water Services 25.0 23.7 49.1 45.0
Investments 10.2 3.6 25.3 7.7
Corporate Charges 6.9 6.7 15.9 13.6
------ ------ ------ ------
$269.9 $237.6 $540.5 $463.4
Net Income
Electric Services $ 9.3 $ 8.6 $ 20.0 $ 19.6
Automotive Services 14.7 12.0 26.6 21.6
Water Services 4.1 3.8 6.5 5.7
Investments 10.2<F1> 6.4<F2> 21.7<F1> 9.3<F2>
Corporate Charges (4.5) (4.8) (10.6) (9.3)
------ ------ ------ ------
33.8 26.0 64.2 46.9
Capital Re and ACE Transactions 30.4 (24.1) 30.4 (24.1)
------ ------ ------ ------
$ 64.2 $ 1.9 $ 94.6 $ 22.8
--------------------------------------------------------------------------------------------------------------------
Basic and Diluted Earnings Per Share of Common Stock
Before Capital Re and ACE Transactions $ 0.48 $ 0.37 $ 0.91 $ 0.67
Capital Re and ACE Transactions 0.44 (0.35) 0.44 (0.35)
------ ------ ------ ------
$ 0.92 $ 0.02 $ 1.35 $ 0.32
Average Shares of Common Stock - Millions 69.6 68.2 69.4 68.0
--------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Including the $30.4 million gain associated with the ACE transaction, net income from Investments was $40.6
million for the quarter ended June 30, 2000 and $52.1 million for the six months ended June 30, 2000.
(See Note 6.)
<F2> Including the $24.1 million non-cash charge associated with the Capital Re transaction, net income from
Investments was a $17.7 million loss for the quarter ended June 30, 1999 and a $14.8 million loss for the
six months ended June 30, 1999. (See Note 6.)
</FN>
</TABLE>
-9-
<PAGE>
NET INCOME
The following net income discussion summarizes significant events for the six
months ended June 30, 2000.
ELECTRIC SERVICES reflected stable net income in 2000 with growth in
megawatthour sales offset by associated expenses.
AUTOMOTIVE SERVICES reported higher net income in 2000 due to increased sales
activity at ADESA auctions facilities and increased financing activity at AFC's
loan production offices. During 2000 ADESA acquired or opened 16 new vehicle
auction facilities, completed the acquisition of 11 salvage auction facilities
and announced plans to purchase 9 additional vehicle auction facilities in the
third quarter of 2000.
WATER SERVICES generated higher net income in 2000 due to increased water
consumption as a result of drier weather conditions and customer growth. Net
income in 2000 also reflected higher rates approved by the FPSC in 1999.
INVESTMENTS reported higher net income in 2000 because of significant sales by
the Company's real estate operations, improved returns on the Company's
securities portfolio and gains on intermediate-term investments in emerging
technologies relating to the electric industry.
In May 2000 Minnesota Power recorded a $30.4 million, or $0.44 per share,
after-tax gain on the sale of the 4.7 million shares of ACE that Minnesota Power
received in December 1999 when Capital Re merged with ACE. As a result of the
merger, in 1999 Minnesota Power recorded a $36.2 million, or $0.52 per share,
after-tax non-cash charge as follows: a $24.1 million, or $0.35 per share,
charge in the second quarter following the merger agreement and discontinuance
of Minnesota Power's equity accounting for Capital Re and a $12.1 million, or
$0.17 per share, charge in the fourth quarter upon completion of the merger.
COMPARISON OF THE QUARTERS ENDED JUNE 30, 2000 AND 1999
OPERATING REVENUE
ELECTRIC SERVICES operating revenue was up $3.6 million in 2000, even though
total megawatthour sales were about the same as in 1999. Megawatthour sales from
retail customers were 5 percent higher in 2000 and contributed $3.8 million more
to revenue. The increase was primarily due to higher requirements from large
industrial customers. Megawatthour sales from wholesale power marketing
activities decreased 28 percent in 2000 and contributed $2.3 million less to
revenue due to cooler weather in 2000. Non-regulated subsidiaries within
Electric Services contributed $1.1 million more to revenue in 2000.
Revenue from electric sales to taconite customers accounted for 13 percent of
consolidated operating revenue in 2000 (14 percent in 1999). Electric sales to
paper and pulp mills accounted for 5 percent of consolidated operating revenue
in both 2000 and 1999. Sales to other power suppliers accounted for 6 percent of
consolidated operating revenue in 2000 (8 percent in 1999).
AUTOMOTIVE SERVICES operating revenue was up $25.7 million in 2000 primarily due
to a 14 percent increase in vehicles sold through ADESA auction facilities and a
16 percent increase in the number of vehicles financed at AFC loan production
offices. At ADESA auction facilities 307,000 vehicles were sold in 2000 (270,000
in 1999). The increase in vehicles sold was primarily attributable to new
auctions acquired or opened in 1999 and 2000. Financial results for 2000
included three months of operations for one auction facility acquired in July of
1999, one auction facility acquired in February 2000 and two auction facilities
opened in April 2000. Financial results for 2000 also reflected one month of
operations for 11 salvage auctions acquired in May 2000 and a partial month of
operations for 13 auction facilities acquired in June 2000. AFC financed
approximately 202,000 vehicles in 2000 (175,000 in 1999). AFC had 86 loan
production offices at June 30, 2000 (84 at June 30, 1999).
WATER SERVICES operating revenue was up $1.8 million in 2000 because of a 10
percent increase in water consumption. Drier weather conditions, customer growth
and the inclusion of water systems acquired during 1999 and early 2000 led to
the increase in water consumption. In addition, revenue in 2000 was $0.3 million
higher due to higher rates approved by the FPSC in 1999.
-10-
<PAGE>
INVESTMENTS operating revenue was up $16.8 million in 2000. Significant sales by
the Company's real estate operations were the primary reason for the increase.
In 2000 revenue from real estate operations was $15.1 million higher. The
increase was primarily attributed to four large sales that contributed $13.1
million to revenue. Revenue from Investments was also higher due to $2.7 million
of gains on intermediate-term investments in emerging technologies relating to
the electric industry.
OPERATING EXPENSES
ELECTRIC SERVICES operating expenses were up $2.3 million in 2000 primarily due
to increased fuel expense. Fuel expense was $5.8 million higher in 2000 because
the Company paid higher prices for coal and generated 422,000, or 36 percent,
more megawatthours. Purchased power expense was $3.0 million lower in 2000
because the Company purchased 411,000, or 37 percent, fewer megawatthours.
During 1999 one of the Company's generating plants was down for scheduled
maintenance which forced the Company to incur higher purchased power expense in
1999 to meet requirements.
AUTOMOTIVE SERVICES operating expenses were up $21.9 million in 2000 primarily
due to the inclusion of new vehicles auctions facilities acquired or opened in
late 1999 and 2000. Increased sales activity at existing auction facilities and
financing activity at the automobile dealer floorplan financing business also
increased operating expenses in 2000.
WATER SERVICES operating expenses were up $1.3 million in 2000 due to the
inclusion of water systems acquired in the second quarter of 1999 and early
2000.
INVESTMENTS operating expenses were up $6.6 million in 2000 due to the cost of
property sold by the Company's real estate operations.
INCOME (LOSS) FROM INVESTMENT IN CAPITAL RE AND RELATED DISPOSITION OF ACE
Income (loss) from investment in Capital Re and related disposition of ACE
reflected a $48 million gain on the disposition of ACE shares in 2000 and a
$16.1 million non-cash charge associated with the loss on the Capital Re share
exchange at June 30, 1999.
INCOME TAX EXPENSE
Income tax expense was up $14.6 million in 2000 primarily due to the gain on the
disposition of ACE shares and increased operating income. In 1999 income tax
expense included the recognition of $15.0 million of deferred taxes related to
the Company's investment in Capital Re.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
OPERATING REVENUE
ELECTRIC SERVICES operating revenue was up $13.0 million in 2000 primarily due
to a 5 percent increase in megawatthour sales. More sales from wholesale power
marketing activities and higher requirements by large industrial customers led
to the increase in megawatthour sales. Megawatthour sales from wholesale power
marketing activities increased 6 percent in 2000 and contributed $2.1 million
more to revenue, while megawatthour sales to industrial customers increased 5
percent in 2000 and contributed $4.4 million more to revenue. Residential and
commercial megawatthour sales were up 2 percent in 2000 and contributed $1.8
million more to revenue. In addition, non-regulated subsidiaries within Electric
Services contributed $1.9 million more to revenue in 2000.
Revenue from electric sales to taconite customers accounted for 13 percent of
consolidated operating revenue in 2000 (15 percent in 1999). Electric sales to
paper and pulp mills accounted for 5 percent of consolidated operating revenue
in both 2000 and 1999. Sales to other power suppliers accounted for 6 percent of
consolidated operating revenue in 2000 (7 percent in 1999).
-11-
<PAGE>
AUTOMOTIVE SERVICES operating revenue was up $48.4 million in 2000 primarily due
to a 14 percent increase in vehicles sold through ADESA auction facilities and a
23 percent increase in the number of vehicles financed at AFC loan production
offices. At ADESA auction facilities 602,000 vehicles were sold in 2000 (530,000
in 1999). The increase in vehicles sold was primarily attributable to new
auctions acquired or opened in 1999 and 2000. Financial results for 2000
included six months of operations for two auction facilities acquired in 1999,
five months of operations for one auction facility acquired in February 2000 and
three months of operations for two auction facilities opened in April 2000.
Financial results for 2000 also reflected one month of operations for 11 salvage
auctions acquired in May 2000 and a partial month of operations for 13 auction
facilities acquired in June 2000. AFC financed approximately 397,000 vehicles in
2000 (323,000 in 1999). AFC had 86 loan production offices at June 30, 2000 (84
at June 30, 1999).
WATER SERVICES operating revenue was up $5.4 million in 2000 because of a 13
percent increase in water consumption. Drier weather conditions, customer growth
and the inclusion of water systems acquired during 1999 and early 2000 led to
the increase in water consumption. In addition, revenue in 2000 was $0.5 million
higher due to higher rates approved by the FPSC in 1999.
INVESTMENTS operating revenue was up $46.0 million in 2000. Significant sales by
the Company's real estate operations were the primary reason for the increase.
In 2000 seven large sales contributed $31.9 million to revenue. Improved returns
from the securities portfolio and the $6.3 million of gains on intermediate-term
investments in emerging technologies relating to the electric industry also
contributed to higher operating revenue from Investments in 2000. The Company's
securities portfolio recorded an after-tax return of 6.02 percent in 2000 (3.32
percent in 1999).
OPERATING EXPENSES
ELECTRIC SERVICES operating expenses were up $12.0 million in 2000 primarily due
to increased fuel and purchased power expenses. Fuel expense was $5.8 million
higher in 2000 because the Company paid higher prices for coal and generated
418,000, or 15 percent, more megawatthours to support the higher requirements of
industrial retail customers. Purchased power expense was $4.2 million higher in
2000 because of increased prices in the wholesale market and more megawatthours
bought to meet MPEX's marketing activities in the first quarter of 2000. MPEX is
the Company's wholesale power marketing division.
AUTOMOTIVE SERVICES operating expenses were up $41.1 million in 2000 primarily
due to the inclusion of new vehicles auctions facilities acquired or opened in
1999 and 2000. Increased sales activity at the auction facilities and financing
activity at the automobile dealer floorplan financing business also increased
operating expenses in 2000.
WATER SERVICES operating expenses were up $4.1 million in 2000 due to the
inclusion of water systems acquired in the second quarter of 1999 and early
2000.
INVESTMENTS operating expenses were up $17.6 million in 2000 due to the cost of
property sold by the Company's real estate operations.
INCOME (LOSS) FROM INVESTMENT IN CAPITAL RE AND RELATED DISPOSITION OF ACE
Income (loss) from investment in Capital Re and related disposition of ACE
reflected a $48 million gain on the disposition of ACE shares in 2000 and a
$16.1 million non-cash charge associated with the loss on the Capital Re share
exchange at June 30, 1999.
INCOME TAX EXPENSE
Income tax expense was up $27.6 million in 2000 primarily due to the gain on the
disposition of the ACE shares and increased operating income. In 1999 income tax
expense included the recognition of $15.0 million of deferred taxes related to
the Company's investment in Capital Re.
-12-
<PAGE>
OUTLOOK
ELECTRIC SERVICES. As the electric industry continues to restructure, the
contribution from Electric Services is expected to remain stable with a solid
customer base. Approximately half of the electricity the Company sells is to
Large Power Customers, primarily taconite producers, which have long-term
all-requirements contracts. Approximately 80 percent of the ore consumed by
integrated steel facilities in the Great Lakes region originates from five
taconite customers of Minnesota Power.
On May 24, 2000 LTV announced its intention to close permanently its taconite
pellet operation in Hoyt Lakes, Minnesota because it is no longer able to
provide taconite pellets of competitive quality or cost. The financial impact of
the LTV closure on Minnesota Power is minimal because LTV is not a Large Power
Customer. LTV plans to close in the summer of 2001.
The domestic steel industry continues to face high levels of imported products.
Through May 2000, finished steel imports, at 12,599,000 net tons, were 17
percent higher than in the same period in 1999 and remain on pace to exceed 30
million tons this year. In 1999 the United States imported 35,657,000 tons of
steel, higher than any year except 1998. Overall steel prices remain somewhat
depressed.
On a national level, despite the high level of imports, the strong U.S. economy
continues to help fuel demand for domestically produced steel.
AUTOMOTIVE SERVICES. ADESA is the second largest and the fastest growing vehicle
auction business in North America. In May 2000 ADESA purchased the remaining 27
percent ownership in Impact Auto, which added 11 salvage auctions to the
Automotive Services segment. The June 2000 acquisition of AFG added 13 Canadian
vehicle auction facilities and associated dealer financing business to ADESA and
established ADESA as the premier automotive services company in Canada. The
ADESA/Manheim transaction, which is scheduled to close in the third quarter of
2000, will add nine vehicle auction facilities to ADESA. These acquisitions are
expected to increase the number of vehicles sold by 60 percent in the near term
with additional growth potential in the future. ADESA currently owns (or leases)
and operates 45 vehicle auction facilities throughout the United States and
Canada. Once the Manheim transaction closes and operations begin at the Calgary
auction, which is under construction, ADESA will have 55 vehicle auction
facilities. By the end of 2000 AFC will exit 17 of the 21 ADT auctions where it
now has loan production offices. AFC plans to continue to serve these areas from
newly established loan production offices or from other existing offices. AFC
does not anticipate that the relocations will have a material financial impact.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW ACTIVITIES. Cash flow from operations during the six months ended June
30, 2000 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. Additional 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 6 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 for services provided. However, ADESA has arrangements to use the
proceeds from the sale of commercial paper issued by the Company to meet
short-term working capital requirements arising from the timing of payment
obligations to vehicle sellers and the availability of funds from vehicle
purchasers. During the sales process, ADESA does not typically take title to
vehicles.
AFC also has arrangements to use 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 million, to third party
-13-
<PAGE>
purchasers under an agreement which expires at the end of 2002. At June 30, 2000
AFC had sold $333.1 million of finance receivables to the special purpose
subsidiary ($296.8 million at December 31, 1999). Third party purchasers had
purchased an undivided interest in finance receivables of $237 million from this
subsidiary at June 30, 2000 ($225 million at December 31, 1999). Unsold finance
receivables held by the special purpose subsidiary are recorded by AFC as
residual interest at fair value. Fair value is based upon estimates of future
cash flows, using assumptions that market participants would use to value such
instruments, including estimates of anticipated credit losses over the life of
the receivables sold; a discount rate was not used due to the short-term nature
of the receivables sold. The fair value of AFC's residual interest was $79.5
million at June 30, 2000 ($57.6 million at December 31, 1999). 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 June
30, 2000 compared to December 31, 1999 were due to increased sales and financing
activity at 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.
SALE OF INVESTMENTS. In May 2000 Minnesota Power sold its 4.7 million shares of
ACE. Minnesota Power received the ACE shares and $25 million in cash in December
1999 when Capital Re merged with ACE. Prior to the merger, Minnesota Power owned
7.3 million shares, or 20 percent, of Capital Re. The $127 million in proceeds
from the sale of ACE shares and proceeds from the sale of a portion of the
Company's securities portfolio were used to fund the acquisitions of AFG and
Impact Auto.
ACQUISITIONS. In February 2000 ADESA purchased the Mission City Auto Auction in
San Diego, California. The Mission City auction, which has been renamed ADESA
San Diego, operates six auction lanes on 30 acres with full reconditioning
facilities.
In May 2000 ADESA Canada purchased the remaining 27 percent of Impact Auto.
ADESA Canada acquired 20 percent of Impact Auto on October 1, 1995, 27 percent
in March 1999 and another 26 percent in January 2000. Impact is Canada's largest
national salvage auction chain with 11 sites in six provinces. Impact Auto
provides remarketing services to insurance companies for their "total loss"
vehicles.
In June 2000 ADESA acquired all of the outstanding common shares of AFG. AFG,
which is headquartered in Miami, Florida, owns CAAG Auto Auction Holdings Ltd.,
a wholesale automotive remarketing company with locations throughout Canada,
doing business as Canadian Auction Group. The acquisition of AFG added 13
vehicle auction facilities and associated dealer financing business to ADESA's
existing locations and established ADESA as the premier automotive services
company in Canada.
The transactions described in the three preceding paragraphs had a combined
purchase price of approximately $175.5 million. The Company funded these
transactions with proceeds from the sale of ACE shares and proceeds from the
sale of a portion of the Company's securities portfolio.
In July 2000 ADESA signed a definitive agreement with Manheim to buy eight ADT
auctions and one Manheim auction for $251 million. In January 2000 Manheim
agreed to purchase 28 ADT auctions. Following FTC review of the Manheim/ADT
transaction, Manheim agreed to sell the nine auctions ADESA intends to purchase.
The ADESA/Manheim transaction is subject to approval by the FTC and satisfaction
of various other customary conditions. Closing is anticipated in the third
quarter of 2000. The Company expects to finance the transaction through the
issuance of long-term debt. As a result of these transactions, by the end of
2000 AFC will exit 17 of the 21 ADT auctions where it now has loan production
offices. AFC plans to continue to serve these areas from newly established loan
production offices or from other existing offices. AFC does not anticipate that
the relocations will have a material financial impact.
In June 2000 Florida Water purchased the assets of Spruce Creek for $5.5
million, plus a commitment to pay fees for water connections through June 2005.
Spruce Creek serves 3,100 water and 2,500 wastewater customers in three
communities in Marion County, Florida. The systems acquired are designed to
accommodate 10,000 customers. The Company funded this transaction with
internally generated funds.
-14-
<PAGE>
LONG-TERM DEBT. In March 2000 ADESA issued $35 million of 8.10% Senior Notes,
Series B, due March 30, 2010. Proceeds were used to refinance short-term bank
indebtedness incurred for the acquisition of vehicle auction facilities
purchased in 1999 and for general corporate purposes.
In June 2000 Minnesota Power refinanced $4.6 million of 6.875% Pollution Control
Revenue Refunding Bonds, Series 1991-A with $4.6 million of Adjustable Rate
Pollution Control Revenue Refunding Bonds Series 2000 due December 1, 2015. The
new bonds had an initial rate of 4.75%.
In June 2000 Heater issued an $8 million, 8.24%, note to COBANK, ACB, due June
20, 2025. Proceeds were used to refinance short-term indebtedness incurred for
the 1999 acquisition of Mid South and capital improvements in 1999 and 2000.
On July 21, 2000 the Company filed a registration statement with the SEC
pursuant to Rule 415 under the Securities Act of 1933 for an aggregate of $400
million of first mortgage bonds and debt securities. The registration statement
has not yet been declared effective by the SEC. Any offer and sale of the first
mortgage bonds and debt securities will be made only by means of a prospectus.
PREFERRED STOCK. In April 2000 the Company redeemed all 100,000 shares of
Redeemable Serial Preferred Stock A, $7.125 Series for an aggregate of $10
million. In July 2000 the Company redeemed all 100,000 shares of Redeemable
Serial Preferred Stock A, $6.70 Series for an aggregate of $10 million. Proceeds
from the sale of a portion of the Company's securities portfolio were used to
fund these redemptions.
In July 2000 the Company called all 113,358 outstanding shares of 5% Preferred
Stock at $102.50 per share plus accrued and unpaid dividends of $0.75 per share.
The redemption date is August 24, 2000. Internally generated funds will be used
to fund this redemption.
LEASES. In April 2000 leases for three ADESA auction facilities (Boston,
Charlotte and Knoxville) were refinanced in a $28.4 million leveraged lease
transaction. The new lease expires on April 1, 2010, but may be terminated after
2005 under certain conditions. Minnesota Power has guaranteed ADESA's
obligations under the lease.
CAPITAL REQUIREMENTS. Consolidated capital expenditures for the six months ended
June 30, 2000 totaled $56.5 million ($42.7 million in 1999). Expenditures for
2000 included $20.4 million for Electric Services, $24.5 million for Automotive
Services and $11.6 million for Water Services. Internally generated funds and
the issuance of long-term debt 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.
------------------------------
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.
-15-
<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. In strategies designed to hedge
overall market risks, the Company also sells common stock short. Investments
held for an indeterminate period of time are classified as available-for-sale
securities and also recorded at fair value. Available-for-sale securities
consisted of securities in a grantor trust established to fund certain employee
benefits. In May 2000 Minnesota Power sold its entire investment in ACE. (See
Note 6.)
June 30, 2000 Fair Value
-------------------------------------------------------------------
Millions
Trading Securities Portfolio $98.1
Available-For-Sale Securities Portfolio $15.6
-------------------------------------------------------------------
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Shareholders on May 12, 2000.
(b) Not applicable.
(c) The election of directors and the appointment of independent
accountants were voted on at the Annual Meeting of Shareholders.
The results were as follows:
<TABLE>
<CAPTION>
Votes
Withheld or Broker
Directors Votes For Against Abstentions Nonvotes
--------- --------- ------- ----------- --------
<S> <C> <C> <C> <C>
Kathleen A. Brekken 60,712,617 969,462 - -
Merrill K. Cragun 60,781,641 900,438 - -
Dennis E. Evans 60,668,305 1,013,774 - -
Glenda E. Hood 60,689,798 992,281 - -
Peter J. Johnson 60,816,228 865,851 - -
George L. Mayer 60,827,600 854,479 - -
Jack I. Rajala 60,774,686 907,393 - -
Edwin L. Russell 55,351,436 6,330,643 - -
Arend J. Sandbulte 58,430,776 3,251,303 - -
Nick Smith 60,741,616 940,463 - -
Bruce W. Stender 60,832,047 850,032 - -
Donald C. Wegmiller 58,440,100 3,241,979 - -
Independent Accountants
-----------------------
PricewaterhouseCoopers LLP 60,675,157 474,377 532,545 -
</TABLE>
(d) Not applicable.
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<PAGE>
ITEM 5. OTHER INFORMATION
Reference is made to the Company's 1999 Form 10-K for background information on
the following updates. Unless otherwise indicated, cited references are to the
Company's 1999 Form 10-K.
Ref. Page 4. - First and Second Paragraphs
Ref. 10-Q for the quarter ended March 31, 2000, Page 11. - Third and Fourth
Paragraphs
The domestic steel industry continues to face high levels of imported products.
Through May 2000, finished steel imports, at 12,599,000 net tons, were 17
percent higher than in the same period in 1999 and remain on pace to exceed 30
million tons this year. In 1999 the United States imported 35,657,000 tons of
steel, higher than any year except 1998. Overall steel prices remain somewhat
depressed.
On a national level, despite the high level of imports, the strong U.S. economy
continues to help fuel demand for domestically produced steel.
Ref. Page 5. - Second Paragraph
On May 24, 2000 LTV announced its intention to close permanently its taconite
pellet operation in Hoyt Lakes, Minnesota because it is no longer able to
provide taconite pellets of competitive quality or cost. The financial impact of
the LTV closure on Minnesota Power is minimal because LTV is not a
full-requirements customer. LTV plans to close in the summer of 2001.
Ref. Page 9. - Fourth Full Paragraph
Ref. 10-Q for the quarter ended March 31, 2000, Page 12. - Second Full Paragraph
During the second quarter of 2000 Split Rock Energy LLC received the necessary
regulatory approvals and began operations in June 2000.
Ref. Page 12. - Third Full Paragraph
Ref. 10-Q for the quarter ended March 31, 2000, Page 9. - Third Paragraph
Ref. 8-K filed June 28, 2000
On July 28, 2000 ADESA signed a definitive agreement with Manheim to buy eight
ADT auctions and one Manheim auction for $251 million. In January 2000 Manheim
agreed to purchase 28 ADT auctions. Following FTC review of the Manheim/ADT
transaction, Manheim agreed to sell the nine auctions ADESA intends to purchase.
The ADESA/Manheim transaction is subject to approval by the FTC and satisfaction
of various other customary conditions. Closing is anticipated in the third
quarter of 2000. The Company expects to finance the transaction through the
issuance of long-term debt. As a result of these transactions, by the end of
2000 AFC will exit 17 of the 21 ADT auctions where it now has loan production
offices. AFC plans to continue to serve these areas from newly established loan
production offices or from other existing offices. AFC does not anticipate that
the relocations will have a material financial impact.
Ref. Page 14. - Fourth Full Paragraph
In June 2000 Florida Water purchased the assets of Spruce Creek for $5.5
million, plus a commitment to pay fees for water connections through June 2005.
Spruce Creek serves 3,100 water and 2,500 wastewater customers in three
communities in Marion County, Florida. The systems acquired are designed to
accommodate 10,000 customers. The Company funded this transaction with
internally generated funds.
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10 (a) Wholesale Power Coordination and Dispatch Operating Agreement,
dated April 14, 2000, between Minnesota Power, Inc. and Split Rock
Energy LLC.
10 (b) Letter addressed to the Federal Regulatory Commission, dated
April 21, 2000, amending the Wholesale Power Coordination and
Dispatch Operating Agreement, dated April 14, 2000, between
Minnesota Power, Inc. and Split Rock Energy LLC.
27 Financial Data Schedule for the Six Months Ended June 30, 2000.
(b) Reports on Form 8-K.
Report on Form 8-K filed June 20, 2000 with respect to Item 5. Other Events.
Report on Form 8-K filed June 28, 2000 with respect to Item 5. Other Events.
Report on Form 8-K filed July 19, 2000 with respect to Item 7. Financial
Statements and Exhibits.
-18-
<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)
August 3, 2000 D. G. Gartzke
-------------------------------
D. G. Gartzke
Senior Vice President - Finance
and Chief Financial Officer
August 3, 2000 Mark A. Schober
-------------------------------
Mark A. Schober
Controller
-19-
<PAGE>
EXHIBIT INDEX
Exhibit
Number
10(a) Wholesale Power Coordination and Dispatch Operating Agreement,
dated April 14, 2000, between Minnesota Power, Inc. and Split Rock
Energy LLC.
10(b) Letter addressed to the Federal Regulatory Commission, dated
April 21, 2000, amending the Wholesale Power Coordination and
Dispatch Operating Agreement, dated April 14, 2000, between
Minnesota Power, Inc. and Split Rock Energy LLC.
27 Financial Data Schedule for the Six Months Ended June 30, 2000.
