<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, 2000
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 1-3548
ALLETE
(LEGALLY INCORPORATED AS MINNESOTA POWER, INC.)
A Minnesota Corporation
IRS Employer Identification No. 41-0418150
30 West Superior Street
Duluth, Minnesota 55802-2093
Telephone - (218) 279-5000
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,
74,478,061 shares outstanding
as of September 30, 2000
<PAGE>
ALLETE
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet -
September 30, 2000 and December 31, 1999 1
Consolidated Statement of Income -
Quarter and Nine Months Ended September 30, 2000
and 1999 2
Consolidated Statement of Cash Flows -
Nine Months Ended September 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 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 17
Part II. Other Information
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
i
<PAGE>
DEFINITIONS
The following abbreviations or acronyms are used in the text.
Abbreviation or Acronym Term
----------------------- -------------------------------------------------
1999 Form 10-K ALLETE'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.
ALLETE ALLETE and its subsidiaries
Capital Re Capital Re Corporation
Common Stock ALLETE Common Stock
Company ALLETE and its subsidiaries
EPS Earnings Per Share of Common Stock
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
Manheim Manheim Auctions, Inc.
Mid South Mid South Water Systems, Inc.
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
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
those of Congress, state legislatures, the FERC, the MPUC, the FPSC, the
NCUC, the PSCW and various county regulators, 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 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>
ALLETE
CONSOLIDATED BALANCE SHEET
Millions
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
Unaudited Audited
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents $ 182.7 $ 101.5
Trading Securities 104.2 179.6
Accounts Receivable (Less Allowance of $12.4 and $13.9) 283.8 176.4
Inventories 28.3 24.2
Prepayments and Other 117.7 82.8
--------- ---------
Total Current Assets 716.7 564.5
Property, Plant and Equipment 1,327.3 1,258.8
Investments 115.3 197.2
Goodwill 326.4 181.0
Other Assets 110.7 111.1
--------- ---------
TOTAL ASSETS $ 2,596.4 $ 2,312.6
-------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Accounts Payable $ 281.9 $ 124.7
Accrued Taxes, Interest and Dividends 71.9 79.4
Notes Payable 207.7 96.5
Long-Term Debt Due Within One Year 10.5 9.1
Other 71.9 88.6
--------- ---------
Total Current Liabilities 643.9 398.3
Long-Term Debt 709.2 712.8
Accumulated Deferred Income Taxes 123.0 139.9
Other Liabilities 149.9 149.3
--------- ---------
Total Liabilities 1,626.0 1,400.3
--------- ---------
Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary ALLETE 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
Common Stock Without Par Value, 130.0 Shares Authorized
74.5 and 73.5 Shares Outstanding 571.8 552.0
Unearned ESOP Shares (56.6) (59.2)
Accumulated Other Comprehensive Income (Loss) (3.7) 2.4
Retained Earnings 383.9 310.6
--------- ---------
Total Stockholders' Equity 895.4 817.3
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,596.4 $ 2,312.6
-------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
-1-
<PAGE>
<TABLE>
ALLETE
CONSOLIDATED STATEMENT OF INCOME
Millions Except Per Share Amounts - Unaudited
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUE
Energy Services $ 146.1 $ 154.8 $ 426.6 $ 422.3
Automotive Services 137.4 105.5 386.6 306.3
Water Services 30.2 31.1 89.9 85.4
Investments 9.8 16.6 70.0 30.9
------- ------- ------- -------
Total Operating Revenue 323.5 308.0 973.1 844.9
------- ------- ------- -------
OPERATING EXPENSES
Fuel and Purchased Power 61.7 54.9 171.6 154.8
Operations 196.7 180.4 595.8 515.3
Interest Expense 15.7 15.1 47.2 43.7
------- ------- ------- -------
Total Operating Expenses 274.1 250.4 814.6 713.8
------- ------- ------- -------
OPERATING INCOME BEFORE CAPITAL RE AND ACE 49.4 57.6 158.5 131.1
INCOME (LOSS) FROM INVESTMENT IN CAPITAL RE
AND RELATED DISPOSITION OF ACE - 0.3 48.0 (15.5)
------- ------- ------- -------
OPERATING INCOME 49.4 57.9 206.5 115.6
DISTRIBUTIONS ON REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY 1.5 1.5 4.5 4.5
INCOME TAX EXPENSE 12.9 21.9 72.4 53.8
------- ------- ------- -------
NET INCOME $ 35.0 $ 34.5 $ 129.6 $ 57.3
======= ======= ======= =======
AVERAGE SHARES OF COMMON STOCK
Basic 70.0 68.6 69.6 68.2
Diluted 70.4 68.9 69.8 68.4
EARNINGS PER SHARE OF COMMON STOCK
Basic $0.50 $0.50 $1.85 $0.82
Diluted $0.50 $0.50 $1.84 $0.82
DIVIDENDS PER SHARE OF COMMON STOCK $0.2675 $0.2675 $0.8025 $0.8025
-------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
</TABLE>
-2-
<PAGE>
<TABLE>
ALLETE
CONSOLIDATED STATEMENT OF CASH FLOWS
Millions - Unaudited
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 129.6 $ 57.3
(Gain) Loss From Investment in Capital Re
and Related Disposition of ACE (48.0) 15.5
Depreciation and Amortization 63.2 57.4
Deferred Income Taxes (16.3) 5.2
Changes In Operating Assets and Liabilities
Trading Securities 75.4 15.1
Accounts Receivable (89.9) (130.9)
Inventories (4.2) (1.7)
Accounts Payable 143.4 122.4
Other Current Assets and Liabilities (58.5) (13.5)
Other - Net 18.3 (5.3)
------- -------
Cash From Operating Activities 213.0 121.5
------- -------
INVESTING ACTIVITIES
Proceeds From Sale of Investments 144.6 64.5
Additions to Investments (37.4) (29.5)
Additions to Property, Plant and Equipment (94.0) (68.6)
Acquisitions - Net of Cash Acquired (189.4) (93.6)
Other - Net 10.7 (8.3)
------- -------
Cash For Investing Activities (165.5) (135.5)
------- -------
FINANCING ACTIVITIES
Issuance of Common Stock 18.4 20.8
Issuance of Long-Term Debt 51.6 50.8
Changes in Notes Payable - Net 111.2 70.9
Reductions of Long-Term Debt (53.8) (8.1)
Redemption of Preferred Stock (31.5) -
Dividends on Preferred and Common Stock (56.2) (55.1)
------- -------
Cash From Financing Activities 39.7 79.3
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (6.0) 2.7
------- -------
CHANGE IN CASH AND CASH EQUIVALENTS 81.2 68.0
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 101.5 89.4
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 182.7 $ 157.4
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Period For
Interest - Net of Capitalized $ 44.7 $ 47.4
Income Taxes $ 83.0 $ 38.5
-------------------------------------------------------------------------------------------------------------------
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>
Energy Automotive Water Corporate
Consolidated Services Services Services Investments Charges
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Quarter Ended
---------------------
September 30, 2000
------------------
Operating Revenue $323.5 $146.1 $137.4<F1> $30.2 $ 9.9 $(0.1)
Operation and Other Expense 236.6 110.3 100.3 17.8 4.1<F2> 4.1
Depreciation and Amortization Expense 21.8 11.3 6.8 3.5 0.1 0.1
Interest Expense 15.7 5.2 5.4 2.7 - 2.4
------ ------ ------ ----- ------ -----
Operating Income (Loss) 49.4 19.3 24.9 6.2 5.7 (6.7)
Distribution on Redeemable
Preferred Securities of Subsidiary 1.5 0.6 - - - 0.9
Income Tax Expense (Benefit) 12.9 7.3 9.5 2.4 0.7 (7.0)
------ ------ ------ ----- ------ -----
Net Income (Loss) $ 35.0 $ 11.4 $ 15.4 $ 3.8 $ 5.0 $(0.6)
====== ====== ====== ===== ====== =====
-------------------------------------------------------------------------------------------------------------------
For the Quarter Ended
---------------------
September 30, 1999
------------------
Operating Revenue $308.0 $154.8 $105.5<F1> $31.1 $ 16.7 $(0.1)
Operation and Other Expense 215.7 105.7 80.6 18.4 7.3<F2> 3.7
Depreciation and Amortization Expense 19.6 11.4 4.4 3.7 - 0.1
Interest Expense 15.1 5.2 3.0 2.6 - 4.3
------ ------ ------ ----- ------ -----
Operating Income (Loss) Before Capital Re 57.6 32.5 17.5 6.4 9.4 (8.2)
Income from Investment in Capital Re 0.3 - - - 0.3 -
------ ------ ------ ----- ------ -----
Operating Income (Loss) 57.9 32.5 17.5 6.4 9.7 (8.2)
Distribution on Redeemable
Preferred Securities of Subsidiary 1.5 0.4 - - - 1.1
Income Tax Expense (Benefit) 21.9 13.5 7.8 2.5 3.5 (5.4)
------ ------ ------ ----- ------ -----
Net Income (Loss) $ 34.5 $ 18.6 $ 9.7 $ 3.9 $ 6.2 $(3.9)
====== ====== ====== ===== ====== =====
-------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Included $33.9 million of Canadian operating revenue in 2000 ($16.9 million in 1999).
<F2> Included $0.1 million of minority interest in 2000 ($0.7 million in 1999).
</FN>
</TABLE>
-4-
<PAGE>
NOTE 1. BUSINESS SEGMENTS (Continued)
Millions
<TABLE>
<CAPTION>
Energy Automotive Water Corporate
Consolidated Services Services Services Investments Charges
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Nine Months Ended
-------------------------
September 30, 2000
------------------
Operating Revenue $ 973.1 $ 426.6 $ 386.6<F1> $ 89.9 $ 70.3 $ (0.3)
Operation and Other Expense 704.2 323.5 285.5 54.3 29.3<F3> 11.6
Depreciation and Amortization Expense 63.2 34.4 17.3 11.0 0.2 0.3
Interest Expense 47.2 15.7 13.1 7.8 - 10.6
-------- -------- -------- ------ ------ ------
Operating Income (Loss) Before ACE 158.5 53.0 70.7 16.8 40.8 (22.8)
Income from Disposition of ACE 48.0 - - - 48.0 -
-------- -------- -------- ------ ------ ------
Operating Income (Loss) 206.5 53.0 70.7 16.8 88.8 (22.8)
Distribution on Redeemable
Preferred Securities of Subsidiary 4.5 1.5 - - - 3.0
Income Tax Expense (Benefit) 72.4 20.1 28.7 6.5 31.7 (14.6)
-------- -------- -------- ------ ------ ------
Net Income (Loss) $ 129.6 $ 31.4 $ 42.0 $ 10.3 $ 57.1 $(11.2)
======== ======== ======== ====== ====== ======
Total Assets $2,596.4 $ 879.7 $1,101.5<F2> $325.0 $289.8 $ 0.4
Property, Plant and Equipment $1,327.3 $ 773.7 $ 291.3 $262.3 - -
Accumulated Depreciation and Amortization $ 948.9 $ 660. $ 78.3 $208.3 $ 2.0 -
Capital Expenditures $ 94.0 $ 34.9 $ 40.3 $ 18.8 - -
-------------------------------------------------------------------------------------------------------------------
For the Nine Months Ended
-------------------------
September 30, 1999
------------------
Operating Revenue $ 844.9 $ 422.3 $ 306.3<F1> $ 85.4 $ 31.1 $ (0.2)
Operation and Other Expense 612.7 307.6 229.4 51.9 14.9<F3> 8.9
Depreciation and Amortization Expense 57.4 33.7 13.0 10.3 0.1 0.3
Interest Expense 43.7 15.8 7.9 7.5 - 12.5
-------- -------- -------- ------ ------ ------
Operating Income (Loss) Before Capital Re 131.1 65.2 56.0 15.7 16.1 (21.9)
Loss from Investment in Capital Re (15.5) - - - (15.5) -
-------- -------- ------- ------ ------ ------
Operating Income (Loss) 115.6 65.2 56.0 15.7 0.6 (21.9)
Distribution on Redeemable
Preferred Securities of Subsidiary 4.5 1.3 - - - 3.2
Income Tax Expense (Benefit) 53.8 25.7 24.7 6.1 9.2 (11.9)
-------- -------- -------- ------ ------ ------
Net Income (Loss) $ 57.3 $ 38.2 $ 31.3 $ 9.6 $ (8.6) $(13.2)
======== ======== ======== ====== ====== ======
Total Assets $2,444.7 $1,001.7 $ 788.2<F2> $333.7 $320.7 $ 0.4
Property, Plant and Equipment $1,246.2 $ 768.0 $ 222.4 $255.8 - -
Accumulated Depreciation and Amortization $ 873.8 $ 624.2 $ 53.2 $194.6 $ 1.8 -
Capital Expenditures $ 68.6 $ 34.5 $ 20.0 $ 14.1 - -
-------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Included $77.2 million of Canadian operating revenue in 2000 ($41.7 million in 1999).
<F2> Included $229.8 million of Canadian assets in 2000 ($130.6 million in 1999).
<F3> Included $0.5 million of minority interest in 2000 ($0.9 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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Millions
Current Tax
Federal $ 15.1 $ 19.9 $ 77.8 $ 42.4
Foreign 0.7 0.3 1.8 1.2
State 0.6 4.1 9.1 5.0
------ ------ ------ ------
16.4 24.3 88.7 48.6
------ ------ ------ ------
Deferred Tax
Federal (2.2) (1.4) (12.8) 10.3
Foreign (0.2) 0.1 (0.5) 0.1
State (0.5) (0.5) (1.8) (3.9)
------ ------ ------ ------
(2.9) (1.8) (15.1) 6.5
------ ------ ------ ------
Deferred Tax Credits (0.6) (0.6) (1.2) (1.3)
------ ------ ------ ------
Total Income Tax Expense $ 12.9 $ 21.9 $ 72.4 $ 53.8
-------------------------------------------------------------------------------------------------------------------
</TABLE>
-6-
<PAGE>
NOTE 4. EARNINGS PER SHARE
The difference between basic and diluted earnings per share arises from
outstanding stock options and performance share awards granted under the
Company's Executive and Director Long-Term Incentive Compensation Plans.
<TABLE>
<CAPTION>
Reconciliation of Basic and Diluted Basic Dilutive Diluted
Earnings Per Share EPS Securities EPS
-------------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts
Nine Months Ended September 30, 2000
------------------------------------
<S> <C> <C> <C>
Net Income $ 129.6 - $ 129.6
Less: Dividends on Preferred Stock 0.9 - 0.9
------- -------
Earnings Available for Common Stock $ 128.7 - $ 128.7
Common Shares 69.6 0.2 69.8
Per Share $1.85 - $1.84
-------------------------------------------------------------------------------------------------------------------
</TABLE>
Stock options granted in January 1999 (0.8 million) were antidilutive and not
included in determining diluted earnings per share because the exercise price
exceeded the average market price of the Company's stock. There was no
difference between basic and diluted earnings per share for the nine months
ended September 30, 1999 or the three months ended September 30, 1999 and 2000.
The Company paid dividends on preferred stock of $0.1 million for the three
months ended September 30, 2000 ($0.5 million for the three months ended
September 30, 1999) and $0.9 million for the nine months ended September 30,
2000 ($1.5 million for the nine months ended September 30, 1999).
NOTE 5. TOTAL COMPREHENSIVE INCOME
For the quarter ended September 30, 2000 total comprehensive income was $31.8
million ($3.7 million for the quarter ended September 30, 1999). For the nine
months ended September 30, 2000 total comprehensive income was $123.5 million
($24.1 million for the nine months ended September 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 6. ACQUISITIONS
ADESA AUCTION FACILITIES. On August 31, 2000 ADESA acquired 51 percent of
Interstate Auto Auction located in Ocala, Florida. Interstate Auto Auction,
which was renamed A & H, LLC and is doing business as ADESA Ocala, operates five
auction lanes on 26.5 acres.
On August 11, 2000 ADESA purchased Beebe Auto Exchange, Inc. (Beebe). Beebe
operated two Arkansas auto auctions: Mid-Ark Auto Auction (renamed ADESA Little
Rock) in North Little Rock and Central Arkansas Auto Auction (renamed ADESA
Central Arkansas) in Beebe, Arkansas. ADESA Little Rock operates ten auction
lanes on approximately 81 acres and ADESA Central Arkansas operates six auction
lanes on approximately 66 acres.
On June 20, 2000 ADESA acquired all of the outstanding common shares of Auction
Finance Group, Inc. (AFG). AFG owns CAAG Auto Auction Holdings Ltd., which was
doing business as Canadian Auction Group. 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.
-7-
<PAGE>
NOTE 6. ACQUISITIONS (Continued)
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. 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 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 five preceding paragraphs had a combined
purchase price of approximately $183.9 million and resulted in goodwill of
$151.5 million, which the Company is amortizing over a 40-year useful life.
These transactions were 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 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 5,600 water and wastewater customers in three communities in Marion
County, Florida. The systems acquired are designed to accommodate a total of
10,000 water and wastewater customers. The Company funded this transaction with
internally generated funds.
NOTE 7. INVESTMENTS IN CAPITAL RE AND ACE
In May 2000 ALLETE 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 ALLETE received in December
1999 when Capital Re merged with ACE. As a result of the merger, in 1999 ALLETE
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 ALLETE'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 8. 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 ALLETE 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 interest 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.
-8-
<PAGE>
NOTE 9. 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.
In August 2000 the Company redeemed all 113,358 shares of 5% Preferred Stock at
$102.50 per share plus accrued and unpaid dividends of $0.75 per share for an
aggregate of $11.7 million.
Proceeds from the sale of a portion of the Company's securities portfolio and
internally generated funds were used to fund these redemptions.
NOTE 10. 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 September 30,
2000 Square Butte had total debt outstanding of $329.4 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 the
Company, 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.
NOTE 11. SUBSEQUENT EVENT
Effective October 7, 2000 ADESA acquired nine vehicle auction facilities from
Manheim for $251 million, plus $3.5 million for land and construction costs
associated with two of the auction facilities acquired. This transaction was
funded with internally generated funds and the issuance of $250 million of
Floating Rate First Mortgage Bonds, due October 20, 2003. The Company has the
option to redeem these bonds on or after October 20, 2001, in whole or in part
from tme to time, on any interest payment date prior to their maturity. The
bonds had an initial interest rate of 7.61%. ADESA now owns or leases, and
operates 57 vehicle auction facilities throughout the United States and Canada.
-9-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ALLETE is a multi-services company with operations in four business segments:
(1) Energy 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 real estate operations, investments in emerging technologies
relating to the electric industry and a securities portfolio. Corporate charges
represent general corporate expenses, including interest, not specifically
related to any one business segment.
CONSOLIDATED OVERVIEW
Net income and earnings per share for the three months ended September 30, 2000
continued the strong performance of the same period in 1999, though a cooler
summer resulted in lower income at Energy Services from wholesale power
marketing.
For the nine months ended September 30, 2000 the Company reported continued
strong performance across all business segments, though a cooler summer resulted
in lower income at Energy Services from wholesale power marketing. 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 Capital Re and
ACE Transactions below), net income and earnings per share for the nine months
ended September 30, 2000 increased 22 percent and 20 percent, respectively, over
the same period in 1999.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Millions
Operating Revenue
Energy Services $146.1 $154.8 $ 426.6 $422.3
Automotive Services 137.4 105.5 386.6 306.3
Water Services 30.2 31.1 89.9 85.4
Investments 9.9 16.7 70.3 31.1
Corporate Charges (0.1) (0.1) (0.3) (0.2)
------ ------ ------- ------
$323.5 $308.0 $ 973.1 $844.9
Operating Expenses
Energy Services $126.8 $122.3 $ 373.6 $357.1
Automotive Services 112.5 88.0 315.9 250.3
Water Services 24.0 24.7 73.1 69.7
Investments 4.2 7.3 29.5 15.0
Corporate Charges 6.6 8.1 22.5 21.7
------ ------ ------- ------
$274.1 $250.4 $ 814.6 $713.8
Net Income
Energy Services $ 11.4 $ 18.6 $ 31.4 $ 38.2
Automotive Services 15.4 9.7 42.0 31.3
Water Services 3.8 3.9 10.3 9.6
Investments 5.0 6.2 26.7<F1> 15.5<F2>
Corporate Charges (0.6) (3.9) (11.2) (13.2)
------ ------ ------- ------
35.0 34.5 99.2 81.4
Capital Re and ACE Transactions - - 30.4 (24.1)
------ ------ ------- ------
$ 35.0 $ 34.5 $ 129.6 $ 57.3
-------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share of Common Stock
Before Capital Re and ACE Transactions $ 0.50 $ 0.50 $ 1.40 $1.17
Capital Re and ACE Transactions - - 0.44 (0.35)
------ ------ ------- -----
$ 0.50 $ 0.50 $ 1.84 $0.82
Diluted Average Shares of Common Stock - Millions 70.4 68.9 69.8 68.4
-------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Including the $30.4 million gain associated with the ACE transaction, net income from Investments was
$57.1 million for the nine months ended September 30, 2000. (See Note 7.)
<F2> Including the $24.1 million non-cash charge associated with the Capital Re transaction, net income
from Investments was an $8.6 million loss for the nine months ended September 30, 1999. (See Note 7.)
</FN>
</TABLE>
-10-
<PAGE>
NET INCOME
The following net income discussion summarizes significant events for the nine
months ended September 30, 2000.
ENERGY SERVICES reflected lower net income in 2000 primarily due to lower demand
for electricity in the region's wholesale power market as a result of more
moderate summer weather. Transmission constraints were also a factor in 2000.
Total retail megawatthour sales exceeded record levels that were achieved in
1999.
AUTOMOTIVE SERVICES reported higher net income in 2000 due to increased sales
activity at ADESA auction facilities and increased financing activity at AFC's
loan production offices. During 2000 ADESA acquired or opened 19 new vehicle
auction facilities and completed the acquisition of 11 salvage auction
facilities. Same store growth at ADESA auction facilities increased 13 percent
as measured by earnings before interest, taxes, depreciation, amortization and
lease expense.
WATER SERVICES generated higher net income in 2000 due to increased water
consumption as a result of drier weather conditions and customer growth,
regulatory relief granted by Florida's Hillsborough Board of County
Commissioners in 2000 and higher rates approved by the FPSC in 1999. Net income
in 1999 also included the recognition of regulatory relief granted by the FPSC.
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 earnings on investments in emerging technologies.
CORPORATE CHARGES in 2000 reflected the reversal of previously recorded tax
reserves related to various Federal and state tax issues.
CAPITAL RE AND ACE TRANSACTIONS. In May 2000 ALLETE 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 ALLETE received in December 1999 when Capital Re merged with ACE. As a
result of the merger, in 1999 ALLETE 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 ALLETE'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.
For the nine months ended September 30, 2000, income tax expense included $17.6
million related to the ACE transaction. For the nine months ended September 30,
1999, income tax expense included $7.9 million related to the Capital Re
transaction.
-11-
<PAGE>
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 2000 AND 1999
OPERATING REVENUE
ENERGY SERVICES operating revenue was down $8.7 million, or 6 percent, in 2000
primarily because of a softer wholesale market. Wholesale prices and volumes
were down from last year primarily due to lower demand for electricity in the
region's wholesale power market as a result of more moderate summer weather.
Transmission constraints were also a factor in 2000. The decrease in revenue was
partially offset by a 13 percent increase in megawatthour sales to retail
customers and higher gas revenue. Higher demand from large industrial customers
led to the increase in retail megawatthour sales.
Revenue from electric sales to taconite customers accounted for 13 percent of
consolidated operating revenue in 2000 (10 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 7 percent of
consolidated operating revenue in 2000 (16 percent in 1999).
AUTOMOTIVE SERVICES operating revenue was up $31.9 million, or 30 percent, in
2000 primarily due to a 23 percent increase in vehicles sold through ADESA
auction facilities and a 7 percent increase in the number of vehicles financed
at AFC loan production offices. At ADESA auction facilities 337,000 vehicles
were sold in 2000 (274,000 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 February 2000, two auction facilities opened in April 2000, 11
salvage auctions acquired in May 2000 and 13 auction facilities acquired in June
2000. Financial results for 2000 also reflected less than two months of
operations for three auction facilities acquired in August 2000. AFC financed
approximately 198,000 vehicles in 2000 (186,000 in 1999). AFC had 86 loan
production offices at September 30, 2000 (84 at September 30, 1999).
WATER SERVICES operating revenue was down $0.9 million, or 3 percent, in 2000
primarily due to the recognition of $2.7 million of regulatory relief granted by
the FPSC in 1999. Water consumption was up 5 percent in 2000 because of drier
weather conditions in Florida. Customer growth and the inclusion of water
systems acquired during 1999 and early 2000 also contributed to the increase in
water consumption. In addition, revenue in 2000 was $1.0 million higher due to
regulatory relief granted by Florida's Hillsborough Board of County
Commissioners in 2000 and $0.3 million higher due to higher rates approved by
the FPSC in 1999.
INVESTMENTS operating revenue was down $6.8 million, or 41 percent, in 2000 due
to the timing of commercial real estate sales in Florida. The Company's real
estate operations reported strong sales during the first half of 2000. In 1999
the Company's real estate operations recorded two significant sales totaling
$6.9 million.
OPERATING EXPENSES
ENERGY SERVICES operating expenses were up $4.5 million in 2000 due to increased
fuel and purchased power expenses. Fuel expense was up $1.3 million in 2000
because the Company paid higher prices for coal. In 2000 purchased power expense
was up $1.6 million due to purchased gas and $3.9 million because the Company
purchased 218,000, or 42 percent, more megawatthours. During 2000 generation at
the Company's hydro plants was down 130,000 megawatthours due to lack of rain in
the Midwest.
AUTOMOTIVE SERVICES operating expenses were up $24.5 million in 2000 primarily
due to the inclusion of new vehicle auction facilities acquired or opened in
late 1999 and 2000. Increased sales activity at existing auction facilities and
financing activity at AFC also increased operating expenses in 2000.
WATER SERVICES operating expenses were down $0.7 million in 2000 due to cost
control efforts.
INVESTMENTS operating expenses were down $3.1 million in 2000 due to fewer sales
by the Company's real estate operations.
-12-
<PAGE>
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
OPERATING REVENUE
ENERGY SERVICES operating revenue was up $4.3 million, or 1 percent, in 2000 due
to a 7 percent increase in retail megawatthour sales because of higher demand
from large industrial customers and additional gas revenue. This increase was
partially offset by fewer sales from wholesale power marketing activities.
Wholesale prices and volumes were down from last year because of lower demand
for electricity in the region's wholesale power market as a result of more
moderate summer weather. Transmission constraints were also a factor in 2000.
Revenue from electric sales to taconite customers accounted for 13 percent of
consolidated operating revenue in both 2000 and 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 (10 percent in 1999).
AUTOMOTIVE SERVICES operating revenue was up $80.3 million, or 26 percent, in
2000 primarily due to a 17 percent increase in both vehicles sold through ADESA
auction facilities and the number of vehicles financed at AFC loan production
offices. At ADESA auction facilities 940,000 vehicles were sold in 2000 (804,000
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 nine months of operations for two auction facilities acquired in 1999,
eight months of operations for one auction facility acquired in February 2000,
six months of operations for two auction facilities opened in April 2000, four
months of operations for 11 salvage auctions acquired in May 2000 and three
months of operations for 13 auction facilities acquired in June 2000. Financial
results for 2000 also reflected less than two months of operations for three
auction facilities acquired in August 2000. AFC financed approximately 595,000
vehicles in 2000 (509,000 in 1999). AFC had 86 loan production offices at
September 30, 2000 (84 at September 30, 1999).
WATER SERVICES operating revenue was up $4.5 million, or 5 percent, 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 $1.0 million higher due to regulatory relief granted by Florida's
Hillsborough Board of County Commissioners in 2000 and $0.8 million higher due
to higher rates approved by the FPSC in 1999. Revenue in 1999 reflected the
recognition of $2.7 million of regulatory relief granted by the FPSC.
INVESTMENTS operating revenue was up $39.2 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. In 1999 two
large sales contributed $6.9 million to revenue. Improved returns from the
securities portfolio and $5.5 million more income from investments in emerging
technologies also contributed to higher operating revenue from Investments in
2000. The Company's securities portfolio recorded an after-tax return of 7% in
2000 (3.58% in 1999).
OPERATING EXPENSES
ENERGY SERVICES operating expenses were up $16.5 million in 2000 primarily due
to increased fuel and purchased power expenses. Fuel expense was $7.1 million
higher in 2000 because the Company paid higher prices for coal and generated
415,000, or 9 percent, more megawatthours to meet the higher requirements of the
Company's industrial customers. In 2000 purchased power expense was up $4.8
million due to purchased gas and $4.9 million because of higher prices paid for
purchased power.
AUTOMOTIVE SERVICES operating expenses were up $65.6 million in 2000 primarily
due to the inclusion of new vehicle auction facilities acquired or opened in
1999 and 2000. Increased sales activity at the auction facilities and increased
financing activity at AFC also increased operating expenses in 2000.
WATER SERVICES operating expenses were up $3.4 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 $14.5 million in 2000 due to the cost of
property sold by the Company's real estate operations.
-13-
<PAGE>
OUTLOOK
CORPORATE OUTLOOK. On September 1, 2000 the Company began doing business under
the name ALLETE with a new ticker symbol (NYSE: ALE). This reflects the
Company's success at its strategic objective of transitioning from a diversified
electric company to a multi-services company. The significant investment in new
vehicle auction facilities during 2000 will contribute to ALLETE's growth and
profitability strategy and is expected to increase the Company's growth in
operating earnings from 10 percent in 2000 to 12 percent in 2001.
ENERGY SERVICES. As the electric industry continues to restructure, the
contribution from Energy Services is expected to remain stable. Approximately
half of the electricity the Company sells is to large industrial 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 the Company.
Overall, the domestic steel industry continues to face price deterioration and
high levels of imported products. Through August 2000 the United States imported
over 27 million net tons of steel. This level of imports is almost 17 percent
higher than the same period in 1999 and remains almost 3 percent higher than in
1998, a crisis year for the industry. When annualized, this level of imports
equates to an estimated 41 million-ton year, just slightly less than 1998's
import record of 41.5 million net tons. The average value of all steel mill
product imports has declined to about $70 per ton, or 15.4 percent, below the
pre-crisis value in first quarter 1998.
Although imports remain high, shipments of steel from U.S. steel mills have
stayed moderately strong. In the first eight months of 2000, U.S. steel mills
shipped 75.6 million net tons, up 10.7 percent from the same period in 1999 when
68.3 million net tons were shipped.
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. ADESA
also acquired three other vehicle auction facilities in August 2000 and
completed the acquisition of nine vehicle auction facilities from Manheim in
October 2000. 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 57 vehicle auction
facilities throughout the United States and Canada. By the end of 2000 AFC will
exit all the ADT auctions acquired by Manheim where AFC 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.
WATER SERVICES includes the largest investor owned water utilities in both
Florida and North Carolina. The Company continues to position itself by
selectively acquiring targeted water systems and developing a non-regulated
presence in the contract maintenance business. Both Florida and North Carolina
are currently experiencing rapid population growth which should contribute to
annual customer growth of 4 to 7 percent, respectively, over the next two years.
INVESTMENTS. Over the last 5 years, sales by real estate operations have been 3
to 4 times more than the acquisition cost of property sold, creating strong cash
generation and profitability. The real estate strategy is to acquire large
portfolios of property, add value and resell them at going market prices.
-14-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW ACTIVITIES. Cash flow from operations during the nine months ended
September 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. Securities investments can be
liquidated to provide funds for reinvestment in existing businesses or
acquisition of new businesses. Approximately 6 million original issue shares of
Common Stock are available for issuance through Invest Direct, the Company's
direct stock purchase and dividend reinvestment plan.
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 purchasers under an agreement which
expires at the end of 2002. At September 30, 2000 AFC had sold $363.6 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 $257 million from this subsidiary at September 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 $92 million
at September 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
September 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 ALLETE sold its 4.7 million shares of ACE.
ALLETE received the ACE shares and $25 million in cash in December 1999 when
Capital Re merged with ACE. Prior to the merger, ALLETE 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.
-15-
<PAGE>
In June 2000 ADESA acquired all of the outstanding common shares of AFG. AFG
owns CAAG Auto Auction Holdings Ltd. which was doing business as Canadian
Auction Group. 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.
In August 2000 ADESA purchased Beebe Auto Exchange, Inc. (Beebe). Beebe operated
two Arkansas auto auctions, Mid-Ark Auto Auction (renamed ADESA Little Rock) in
North Little Rock and Central Arkansas Auto Auction (renamed ADESA Central
Arkansas) in Beebe, Arkansas. ADESA Little Rock operates ten auction lanes on
approximately 81 acres and ADESA Central Arkansas operates six auction lanes on
approximately 66 acres. Together, these auctions sold more than 40,000 vehicles
in 1999. This purchase strengthens ADESA's presence in the South and complements
existing auctions in Shreveport, Memphis, Dallas, Houston, San Antonio and
Austin.
In August 2000 ADESA acquired 51 percent of Interstate Auto Auction located in
Ocala, Florida. Interstate Auto Auction, which was renamed A & H, LLC and is
doing business as ADESA Ocala, operates five auction lanes on 26.5 acres.
The transactions described in the five preceding paragraphs had a combined
purchase price of approximately $183.9 million. The Company funded these
transactions with proceeds from the sale of ACE shares, proceeds from the sale
of a portion of the Company's securities portfolio and internally generated
funds.
In October 2000 ADESA completed the purchase of nine auction facilities from
Manheim for $251 million, plus $3.5 million for land and construction costs
associated with two of the auction facilities acquired. The nine auction
facilities include eight auctions Manheim acquired from ADT. The Company funded
this transaction with internally generated funds and the temporary issuance of
short-term debt. The short-term debt was refinanced in October 2000 with
long-term debt (see Long-Term Debt below). ADESA owns or leases, and operates 57
auctions across North America.
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 5,600 water and wastewater customers in three communities in
Marion County, Florida. The systems acquired are designed to accommodate a total
of 10,000 water and wastewater customers. The Company funded this transaction
with internally generated funds.
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 ALLETE 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 interest 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.
In July 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 SEC declared the registration
statement effective on August 7, 2000. In October 2000 the Company issued $250
million of Floating Rate First Mortgage Bonds, due October 20, 2003. The Company
has the option to redeem these bonds on or after October 20, 2001, in whole or
in part from time to time, on any interest payment date prior to their maturity.
Proceeds were used to refinance short-term debt incurred in connection with the
recent acquisition of nine vehicle auction facilities from Manheim. The new
bonds had an initial interest rate of 7.61%. The Company may sell the remaining
securities registered in July 2000 if warranted by market conditions and the
Company's capital requirements. Any offer and sale of the first mortgage bonds
and debt securities will be made only by means of a prospectus.
-16-
<PAGE>
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 August 2000 the Company redeemed all 113,358 shares of 5% Preferred Stock at
$102.50 per share plus accrued and unpaid dividends of $0.75 per share for an
aggregate of $11.7 million. Internally generated funds were 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. ALLETE has guaranteed ADESA's obligations under
the lease.
CAPITAL REQUIREMENTS. Consolidated capital expenditures for the nine months
ended September 30, 2000 totaled $94.0 million ($68.6 million in 1999).
Expenditures for 2000 included $34.9 million for Energy Services, $40.3 million
for Automotive Services and $18.8 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.
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 ALLETE sold its entire investment in ACE. (See Note 7.)
September 30, 2000 Fair Value
-----------------------------------------------------------
Millions
Trading Securities Portfolio $104.2
Available-For-Sale Securities Portfolio $13.3
------------------------------------------------------------
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<PAGE>
PART II. OTHER INFORMATION
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
Ref. 10-Q for the quarter ended June 30, 2000, Page 17. - Second and Third
Paragraphs
Overall, the domestic steel industry continues to face price deterioration and
high levels of imported products. Through August 2000 the United States imported
over 27 million net tons of steel. This level of imports is almost 17 percent
higher than the same period in 1999 and remains almost 3 percent higher than in
1998, a crisis year for the industry. When annualized, this level of imports
equates to an estimated 41 million-ton year, just slightly less than 1998's
import record of 41.5 million net tons. The average value of all steel mill
product imports has declined to about $70 per ton, or 15.4 percent, below the
pre-crisis value in first quarter 1998.
Although imports remain high, shipments of steel from U.S. steel mills have
stayed moderately strong. In the first eight months of 2000, U.S. steel mills
shipped 75.6 million net tons, up 10.7 percent from the same period in 1999 when
68.3 million net tons were shipped.
Ref. Page 5. - Table
USG Interiors (USG), a subsidiary of USG Corporation and a ceiling tile
manufacturer in Cloquet, Minnesota, will become a Large Power Customer of the
Company. USG has added new production capability and made modifications to their
facilities that increase their electrical demand. Following MPUC approval the
new contract is expected to be in effect January 1, 2001 and extend to December
31, 2005.
Ref. Page 7. - Ninth Paragraph
On October 13, 2000 the Company filed with the FERC, as required by Order 2000,
its description of efforts the Company has made to participate in a regional
transmission organization (RTO) and an explanation of the reasons why the
Company has not filed an application with the FERC to transfer operational
control of its transmission facilities to an approved RTO. The Company's
explanation included concerns about financial uncertainties and participation by
other regional transmission owners including those who are not regulated by
FERC.
Ref. Page 7. - Tenth Paragraph
In April 2000 Mid-Continent Area Power Pool (MAPP) and Mid-America
Interconnected Network (MAIN) approved a memorandum of understanding to merge
the reliability functions of the two organizations into a Midwest Reliability
Organization (MRO). The new MRO will be designed and structured to comply with
North American Electric Reliability Council's requirements applicable to
regional reliability organizations (RRO). A combined, larger RRO is expected to
provide cost savings and improve the wholesale energy market by applying
consistent rules across a broader region. Definitive agreements have been
completed and provided to the membership of MAPP and MAIN. Both organizations
were scheduled to vote in October 2000 to decide whether or not to establish the
new organization. MAPP members voted 92 percent in favor of the combination.
MAIN members have postponed their vote until January 25, 2001, and the Company
is not able to predict the outcome of this vote.
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10 Guarantee Agreement, dated August 16, 2000, made by and among ALLETE
(legally incorporated as Minnesota Power, Inc.), CoBank, ACB and ABN
AMRO Bank, N.V.
27 Financial Data Schedule for the Nine Months Ended September 30, 2000.
(b) Reports on Form 8-K.
Report on Form 8-K filed July 19, 2000 with respect to Item 7. Financial
Statements and Exhibits.
Report on Form 8-K filed August 8, 2000 with respect to Item 5. Other
Events.
Report on Form 8-K filed October 10, 2000 with respect to Item 5. Other
Events and Item 7. Financial Statements and Exhibits.
Report on Form 8-K filed October 18, 2000 with respect to Item 7. Financial
Statements and Exhibits.
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<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.
ALLETE
(legally incorporated as Minnesota Power, Inc.)
October 27, 2000 D. G. Gartzke
-------------------------------
D. G. Gartzke
Senior Vice President - Finance
and Chief Financial Officer
October 27, 2000 Mark A. Schober
-------------------------------
Mark A. Schober
Controller
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<PAGE>
EXHIBIT INDEX
Exhibit
Number
10 Guarantee Agreement, dated August 16, 2000, made by and among ALLETE
(legally incorporated as Minnesota Power, Inc.), CoBank, ACB and ABN AMRO
Bank, N.V.
27 Financial Data Schedule for the Nine Months Ended September 30, 2000.
