Securities and Exchange Commission Washington, D.C. 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, 1996 or / / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 1-3548 Minnesota Power & Light Company A Minnesota Corporation IRS Employer Identification No. 41-0418150 30 West Superior Street Duluth, Minnesota 55802 Telephone - (218) 722-2641 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Common Stock, no par value, 31,935,547 shares outstanding as of July 31, 1996
Minnesota Power & Light Company Index Page Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheet - June 30, 1996 and December 31, 1995 1 Consolidated Statement of Income - Quarter and Six Months Ended June 30, 1996 and 1995 2 Consolidated Statement of Cash Flows - Six Months Ended June 30, 1996 and 1995 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16
Definitions The following abbreviations or acronyms are used in the text. Abbreviation or Acronym Term - ----------------- -------------------------------------------------------- 1995 Form 10-K Minnesota Power's Annual Report on Form 10-K for the Year Ended December 31, 1995 ADESA ADESA Corporation Capital Re Capital Re Corporation Company Minnesota Power & Light Company and its Subsidiaries CPI Consolidated Papers, Inc. DRIP Dividend Reinvestment and Stock Purchase Plan ESOP Employee Stock Ownership Plan FERC Federal Energy Regulatory Commission FPSC Florida Public Service Commission Lehigh Lehigh Acquisition Corporation Minnesota Power Minnesota Power & Light Company and its Subsidiaries MPUC Minnesota Public Utilities Commission MW Megawatt(s) OOU Orange Osceola Utilities QUIPS Quarterly Income Preferred Securities Seabrook Heater of Seabrook, Inc. Square Butte Square Butte Electric Cooperative SSU Southern States Utilities, Inc.
PART I. FINANCIAL INFORMATION Item 1. Financial Statements <TABLE> Minnesota Power Consolidated Balance Sheet In Thousands <CAPTION> June 30, December 31, 1996 1995 Unaudited Audited - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Assets Plant and Other Assets Electric operations $ 799,091 $ 800,477 Water operations 319,331 323,182 Automobile auctions 140,257 123,632 Investments 227,056 201,360 ----------- ----------- Total plant and other assets 1,485,735 1,448,651 ----------- ----------- Current Assets Cash and cash equivalents 63,432 31,577 Trading securities 76,319 40,007 Trade accounts receivable (less reserve of $4,088 and $3,325) 171,700 128,072 Notes and other accounts receivable 22,309 12,220 Fuel, material and supplies 25,911 26,383 Prepayments and other 16,910 13,706 ----------- ----------- Total current assets 376,581 251,965 ----------- ----------- Deferred Charges Regulatory 82,178 88,631 Other 26,703 25,037 ----------- ----------- Total deferred charges 108,881 113,668 ----------- ----------- Intangible Assets Goodwill 124,122 120,245 Other 12,712 13,096 ----------- ----------- Total intangible assets 136,834 133,341 ----------- ----------- Total Assets $ 2,108,031 $ 1,947,625 - ------------------------------------------------------------------------------------------------------------------- Capitalization and Liabilities Capitalization Common stock without par value, 65,000,000 shares authorized 31,917,569 and 31,467,650 shares outstanding $ 384,286 $ 377,684 Unearned ESOP shares (71,047) (72,882) Net unrealized gain on securities investments 1,165 3,206 Cumulative translation adjustment (401) (177) Retained earnings 277,744 276,241 ----------- ----------- Total common stock equity 591,747 584,072 Cumulative preferred stock 11,492 28,547 Redeemable serial preferred stock 20,000 20,000 Company obligated mandatorily redeemable preferred securities of MP&L Capital I 75,000 - Long-term debt 653,039 639,548 ----------- ----------- Total capitalization 1,351,278 1,272,167 ----------- ----------- Current Liabilities Accounts payable 92,366 68,083 Accrued taxes 39,386 40,999 Accrued interest and dividends 16,136 14,471 Notes payable 89,330 96,218 Long-term debt due within one year 70,060 9,743 Other 27,155 27,292 ----------- ----------- Total current liabilities 334,433 256,806 ----------- ----------- Deferred Credits Accumulated deferred income taxes 164,994 164,737 Contributions in aid of construction 97,468 98,167 Regulatory 56,491 57,950 Other 103,367 97,798 ----------- ----------- Total deferred credits 422,320 418,652 ----------- ----------- Total Capitalization and Liabilities $ 2,108,031 $ 1,947,625 - ------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of this statement. </TABLE> -1-
<TABLE> Minnesota Power Consolidated Statement of Income In Thousands Except Per Share Amounts - Unaudited <CAPTION> Quarter Ended Six Months Ended June 30, June 30, 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Operating Revenue and Income Electric operations $ 129,219 $ 119,694 $ 260,718 $ 240,448 Water operations 23,050 17,814 42,277 33,416 Automobile auctions 45,215 - 84,908 - Investments 11,019 9,828 23,275 20,160 --------- ---------- --------- --------- Total operating revenue and income 208,503 147,336 411,178 294,024 --------- ---------- --------- --------- Operating Expenses Fuel and purchased power 48,291 44,113 91,934 84,422 Operations 87,034 60,975 173,063 123,117 Administrative and general 40,559 16,790 74,350 35,252 Interest expense 14,357 11,388 28,517 22,489 --------- ---------- --------- --------- Total operating expenses 190,241 133,266 367,864 265,280 --------- ---------- --------- --------- Income (Loss) from Equity Investments 2,832 2,361 6,609 (3,909) --------- ---------- --------- --------- Operating Income from Continuing Operations 21,094 16,431 49,923 24,835 Income Tax Expense (Benefit) 4,753 5,508 15,077 (9,893) --------- ---------- --------- --------- Income from Continuing Operations 16,341 10,923 34,846 34,728 Income from Discontinued Operations - 1,190 - 2,842 --------- ---------- --------- --------- Net Income 16,341 12,113 34,846 37,570 Dividends on Preferred Stock 634 800 1,434 1,600 Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of MP&L Capital I 1,509 - 1,711 - --------- ---------- --------- --------- Earnings Available for Common Stock $ 14,198 $ 11,313 $ 31,701 $ 35,970 ========= ========== ========= ========= Average Shares of Common Stock 29,053 28,446 28,919 28,409 Earnings Per Share of Common Stock Continuing operations $ .49 $ .35 $ 1.10 $1.17 Discontinued operations - .05 - .10 ----- ----- ------ ----- Total $ .49 $ .40 $ 1.10 $1.27 ===== ===== ====== ===== Dividends Per Share of Common Stock $ .51 $ .51 $ 1.02 $1.02 - ------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of this statement. </TABLE> -2-
<TABLE> Minnesota Power Consolidated Statement of Cash Flows In Thousands - Unaudited <CAPTION> Six Months Ended June 30, 1996 1995 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Operating Activities Net income $ 34,846 $ 37,570 Depreciation and amortization 32,511 27,575 Deferred income taxes (1,515) (29,101) Deferred investment tax credits (839) (1,024) Pre-tax gain on sale of plant (1,073) - Pre-tax loss on disposal of discontinued operations - 1,793 Changes in operating assets and liabilities excluding the effects of discontinued operations Trading securities (36,312) 18,013 Notes and accounts receivable (53,488) 8,646 Fuel, material and supplies 531 (2,090) Accounts payable 24,201 (1,325) Other current assets and liabilities (4,970) 8,221 Other - net 12,429 (2,514) ---------- --------- Cash from operating activities 6,321 65,764 ---------- --------- Investing Activities Proceeds from sale of investments in securities 14,640 94,162 Proceeds from sale of plant 5,311 - Proceeds from sale of discontinued operations - 106,115 Funds held by trustee for ADESA acquisition - (161,810) Additions to investments (51,921) (65,996) Additions to plant (45,427) (40,906) Changes to other assets - net 6,443 2,777 ---------- --------- Cash for investing activities (70,954) (65,658) ---------- --------- Financing Activities Issuance of long-term debt 190,134 9,000 Issuance of Company obligated mandatorily redeemable preferred securities of MP&L Capital I - net 72,270 - Issuance of common stock 9,015 1,467 Changes in notes payable (9,588) 124,372 Reductions of long-term debt (116,455) (2,217) Redemption of preferred stock (17,568) - Dividends on preferred and common stock (31,320) (30,846) ---------- --------- Cash from financing activities 96,488 101,776 ---------- --------- Change in Cash and Cash Equivalents 31,855 101,882 Cash and Cash Equivalents at Beginning of Period 31,577 27,001 ---------- --------- Cash and Cash Equivalents at End of Period $ 63,432 $ 128,883 ========== ========= Supplemental Cash Flow Information Cash paid during the period for Interest (net of capitalized) $ 24,930 $ 22,481 Income taxes $ 17,182 $ 11,893 - ------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of this statement. </TABLE> -3-
Notes to Consolidated Financial Statements The accompanying unaudited consolidated financial statements and notes should be read in conjunction with the Company's 1995 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. The income statement information for prior periods has been reclassified to reflect the way in which the Company currently reports information regarding its businesses. Financial statement information may not be comparable between periods due to the purchase of ADESA on July 1, 1995. Note 1. Business Segments In Thousands <TABLE> <CAPTION> Investments --------------------- Corporate Electric Water Automobile Portfolio & Real Charges Consolidated Operations Operations Auctions<F1> Reinsurance Estate & Other ------------ ---------- ---------- ------------ ----------- -------- --------- <S> <C> <C> <C> <C> <C> <C> <C> Quarter Ended June 30, 1996 - --------------------------- Operating revenue and income $208,503 $129,219 $ 23,050 $ 45,215 $4,736 $ 6,605 $ (322) Operation and other expense 159,589 102,218 13,926 37,026 731 3,845 1,843 Depreciation and amortization expense 16,295 10,512 3,070 2,705 - 8 - Interest expense 14,357 5,537 3,057 2,017 - 486 3,260 Income from equity investments 2,832 - - - 2,832 - - -------- -------- -------- -------- ------ -------- ------- Operating income (loss) 21,094 10,952 2,997 3,467 6,837 2,266 (5,425) Income tax expense (benefit) 4,753 3,593 1,010 2,002 928 (782) (1,998) -------- -------- -------- -------- ------ -------- ------- Net income $ 16,341 $ 7,359 $ 1,987 $ 1,465 $5,909 $ 3,048 $(3,427) ======== ======== ======== ======== ====== ======== ======= Quarter Ended June 30, 1995 - --------------------------- Operating revenue and income $147,336 $119,694 $ 17,814 - $6,223 $ 4,438 $ (833) Operation and other expense 109,152 91,128 11,692 - 1,322 3,492 1,518 Depreciation and amortization expense 12,726 10,115 2,551 - - 60 - Interest expense 11,388 5,573 2,534 - 1 - 3,280 Income from equity investments 2,361 - - - 2,361 - - -------- -------- -------- ------ -------- ------- Operating income (loss) from continuing operations 16,431 12,878 1,037 - 7,261 886 (5,631) Income tax expense (benefit) 5,508 5,014 348 - 488 592 (934) -------- -------- -------- ------ -------- ------- Income (loss) from continuing operations 10,923 $ 7,864 $ 689 - $6,773 $ 294 $(4,697) ======== ======== ====== ======== ======= Income from discontinued operations 1,190 -------- Net income $ 12,113 ======== - ------------------------------ <FN> <F1> Purchased July 1, 1995. </FN> </TABLE> -4-
Note 1. Business Segments (Continued) In Thousands <TABLE> <CAPTION> Investments ---------------------- Corporate Electric Water Automobile Portfolio & Real Charges Consolidated Operations Operations Auctions <F1> Reinsurance Estate & Other ------------ ---------- ---------- ------------ ----------- -------- --------- <S> <C> <C> <C> <C> <C> <C> <C> Six Months Ended June 30, 1996 - ------------------------------ Operating revenue and income $ 411,178 $ 260,718 $ 42,277 $ 84,908 $ 8,605 $ 15,281 $ (611) Operation and other expense 306,836 197,523 25,444 71,228 1,254 7,058 4,329 Depreciation and amortization expense 32,511 21,011 6,207 5,255 - 38 - Interest expense 28,517 11,212 6,344 3,308 1 488 7,164 Income from equity investments 6,609 - - - 6,609 - - ---------- --------- --------- -------- --------- -------- -------- Operating income (loss) 49,923 30,972 4,282 5,117 13,959 7,697 (12,104) Income tax expense (benefit) 15,077 11,367 1,459 2,664 2,897 1,581 (4,891) ---------- --------- --------- -------- --------- -------- -------- Net income $ 34,846 $ 19,605 $ 2,823 $ 2,453 $ 11,062 $ 6,116 $ (7,213) ========== ========= ========= ======== ========= ======== ======== Total assets $2,108,031 $ 983,971 $ 341,792 $453,561 $ 244,526 $ 82,516 $ 1,665 Accumulated depreciation $ 646,609 $ 527,425 $ 115,162 $ 4,022 - - - Accumulated amortization $ 5,819 - - $ 4,949 - $ 870 - Construction work in progress $ 55,559 $ 13,769 $ 17,816 $ 23,974 - - - Six Months Ended June 30, 1995 - ------------------------------ Operating revenue and income $ 294,024 $ 240,448 $ 33,416 - $ 12,962 $ 8,703 $ (1,505) Operation and other expense 217,464 178,165 22,749 - 2,257 10,626<F2> 3,667 Depreciation and amortization expense 25,327 20,136 5,071 - - 120 - Interest expense 22,489 11,070 4,986 - 4 2 6,427 Income (loss) from equity investments (3,909) - - - 4,619 - (8,528)<F3> ---------- --------- --------- --------- -------- -------- Operating income (loss) from continuing operations 24,835 31,077 610 - 15,320 (2,045) (20,127) Income tax expense (benefit) (9,893) 12,833 (47) - 1,950 (17,423)<F4> (7,206) ---------- --------- --------- --------- -------- -------- Income (loss) from continuing operations 34,728 $ 18,244 $ 657 - $ 13,370 $ 15,378 $(12,921) ========= ========= ========= ======== ======== Income from discontinued operations 2,842 ---------- Net income $ 37,570 ========== Total assets $1,872,156 $ 993,127 $ 325,348 - $ 518,702 $ 34,181 $ 798 Accumulated depreciation $ 604,884 $ 510,170 $ 94,714 - - - - Accumulated amortization $ 580 - - - - $ 580 - Construction work in progress $ 22,672 $ 9,943 $ 12,729 - - - - - ------------------------------- <FN> <F1> Purchased July 1, 1995. <F2> Includes $3.7 million of minority interest relating to the recognition of tax benefits. (See Note 3.) <F3> Includes an $8.5 million pre-tax provision for exiting the equipment manufacturing business. <F4> Includes $18.4 million of tax benefits. (See Note 3.) </FN> </TABLE> -5-
Note 2. Regulatory Matters FPSC Refund Order in Connection with 1993 Rate Case. On June 11, 1996 the FPSC voted 3-2 to require SSU to refund about $10 million, including interest, to certain customers who had paid more to SSU under a uniform rate structure than they would have paid under a stand-alone rate structure during the period September 1993 to January 1996. In so ruling, the majority of the FPSC determined that a February 1996 decision of the Florida Supreme Court in GTE Florida v. FPSC did not render a refund requirement unlawful independent of an offsetting surcharge. SSU believes that the GTE Florida decision substantiates SSU's claim that it would be unlawful for the FPSC to order a refund to certain customers who paid more under uniform rates without also permitting SSU to recover the refund amount from remaining customers who paid less. SSU has recorded no provision for refund. SSU intends to appeal the FPSC's order to the First District Court of Appeal. SSU's 1995 Rate Case. On July 31, 1996 the FPSC voted to allow SSU approximately 61 percent of the $18.1 million rate increase requested in June 1995. The FPSC is expected to issue its final order on SSU's request on September 4, 1996. Note 3. Income Tax Expense <TABLE> <CAPTION> Quarter Ended Six Months Ended June 30, June 30, Schedule of Income Tax Expense (Benefit) 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------- In Thousands <S> <C> <C> <C> <C> Charged to continuing operations Current tax Federal $ 4,030 $ 1,040 $ 12,888 $ 3,866 Foreign 551 - 450 - State 1,162 493 4,093 1,620 --------- --------- -------- --------- 5,743 1,533 17,431 5,486 --------- --------- -------- --------- Deferred tax Federal 1,143 3,598 1,131 3,524 State 84 781 (646) 521 --------- --------- -------- --------- 1,227 4,379 485 4,045 --------- --------- -------- --------- Change in valuation allowance (2,000) - (2,000) (18,400) --------- --------- -------- --------- Deferred tax credits (217) (404) (839) (1,024) --------- --------- -------- --------- Income tax - continuing operations 4,753 5,508 15,077 (9,893) --------- --------- -------- --------- Charged to discontinued operations Current tax Federal - 13,502 - 13,396 State - 4,209 - 4,192 --------- --------- -------- --------- - 17,711 - 17,588 --------- --------- -------- --------- Deferred tax Federal - (12,870) - (11,851) State - (3,195) - (2,895) --------- --------- -------- --------- - (16,065) - (14,746) --------- --------- -------- --------- Income tax - discontinued operations - 1,646 - 2,842 --------- --------- -------- --------- Total income tax expense (benefit) $ 4,753 $ 7,154 $ 15,077 $ (7,051) ========= ========= ======== ========= </TABLE> In March 1995 based on the results of a project which analyzed the economic feasibility of realizing future tax benefits available to the Company, the board of directors of Lehigh directed the management of Lehigh to dispose of Lehigh's assets in a manner that would maximize utilization of tax benefits. Based on this directive, Lehigh recognized $18.4 million of income in the first quarter of 1995 by reducing the valuation reserve which offsets deferred tax assets. In May 1996 an additional $2 million of income was recognized based on a management review of the appropriateness of the valuation reserve. Additional unrealized net deferred tax assets of $6.2 million resulting from the original purchase of Lehigh are included on the Company's balance sheet. These assets are fully offset by the deferred tax asset valuation allowance because under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," it is currently "more likely than not" that the value of these assets will not be realized. Management reviews the appropriateness of the valuation allowance quarterly. -6-
Note 4. Square Butte Purchased Power Contract The Company has a contract to purchase power and energy from Square Butte. Under the terms of the contract which extends through 2007, the Company is purchasing 71 percent of the output from a generating plant which is capable of generating up to 470 MW. Reductions to about 49 percent of the output are provided for in the contract and, at the option of Square Butte, could begin after a five-year advance notice to the Company. The cost of the power and energy is a proportionate share of Square Butte's fixed obligations and variable operating costs, based on the percentage of the total output purchased by the Company. The annual fixed obligations of the Company to Square Butte are $19.4 million from 1996 through 2000. The variable operating costs are not incurred unless production takes place. The Company is responsible for paying all costs and expenses of Square Butte if not paid by Square Butte when due. These obligations and responsibilities of the Company are absolute and unconditional whether or not any power is actually delivered to the Company. Note 5. Preferred Stock On May 13, 1996 Minnesota Power redeemed all of the 170,000 outstanding shares of its Serial Preferred Stock, $7.36 Series. The redemption price was $103.34 plus $.86 accrued dividends. Proceeds from the QUIPS financing in March 1996 were used to redeem the shares. Note 6. Mandatorily Redeemable Preferred Securities of MP&L Capital I MP&L Capital I (Trust) was established as a wholly owned business trust of the Company for the purpose of issuing common and preferred securities (Trust Securities). On March 20, 1996 the Trust publicly issued three million 8.05% Cumulative Quarterly Income Preferred Securities (QUIPS), representing preferred beneficial interests in the assets held by the Trust, indirectly resulting in net proceeds to the Company of $72.6 million. Holders of the QUIPS are entitled to receive quarterly distributions at an annual rate of 8.05 percent of the liquidation preference value of $25 per security. The Company is the owner of all the common trust securities, which constitute approximately 3 percent of the aggregate liquidation amount of all the Trust Securities. The sole asset of the Trust is $77.5 million of 8.05% Junior Subordinated Debentures, Series A, Due 2015 (Subordinated Debentures) issued by the Company, interest on which is deductible by the Company for income tax purposes. The Trust will use interest payments received on the Subordinated Debentures it holds to make the quarterly cash distributions on the QUIPS. The QUIPS are subject to mandatory redemption upon repayment of the Subordinated Debentures at maturity or upon redemption. The Company has the option at any time on or after March 20, 2001, to redeem the Subordinated Debentures, in whole or in part. The Company also has the option, upon the occurrence of certain events, (i) to redeem at any time the Subordinated Debentures, in whole but not in part, which would result in the redemption of all the Trust Securities, or (ii) to terminate the Trust and cause the pro rata distribution of the Subordinated Debentures to the holders of the Trust Securities. In addition to the Company's obligations under the Subordinated Debentures, the Company has guaranteed, on a subordinated basis, payment of distributions on the Trust Securities, to the extent the Trust has funds available to pay such distributions, and has agreed to pay all of the expenses of the Trust (such additional obligations collectively, the Back-up Undertakings). Considered together, the Back-up Undertakings constitute a full and unconditional guarantee by the Company of the Trust's obligations under the QUIPS. Note 7. Long-Term Debt On May 30, 1996 ADESA issued $90 million of 7.70% Senior Notes, Series A, Due 2006 in a private placement offering. Proceeds were used by ADESA to repay existing indebtedness, including borrowings under ADESA's revolving bank credit agreement, floating rate option notes and certain borrowings from Minnesota Power. In June 1996 Lehigh obtained a $20 million adjustable rate revolving line of credit due in 2003. The proceeds were used to partially finance the acquisition of real estate near Palm Coast, Florida. -7-
Note 8. Common Stock Shareholder Rights Plan. On July 24, 1996 the Board of Directors of the Company adopted a rights plan (Rights Plan) pursuant to which it declared a dividend distribution of one preferred share purchase right (Right) for each outstanding share of Common Stock of the Company (Common Stock) to shareholders of record at the close of business on July 24, 1996 (the Record Date) and authorized the issuance of one Right with respect to each share of Common Stock that becomes outstanding between the Record Date and July 23, 2006, or such earlier time as the Rights are redeemed. Each Right will be exercisable to purchase one one-hundredth of a share of Junior Serial Preferred Stock A, without par value, at an exercise price of $90, subject to adjustment, following a distribution date which shall be the earlier to occur of (i) 10 days following a public announcement that a person or group (Acquiring Person) has acquired, or obtained the right to acquire, beneficial ownership of 15 percent or more of the outstanding shares of Common Stock (Stock Acquisition Date) or (ii) 15 business days (or such later date as may be determined by the Board of Directors prior to the time that any person becomes an Acquiring Person) following the commencement of, or a public announcement of an intention to make, a tender or exchange offer if, upon consummation thereof, such person would meet the 15 percent threshold. Subject to certain exempt transactions, in the event that the 15 percent threshold is met, each holder of a Right (other than the Acquiring Person) will thereafter have the right to receive, upon exercise at the then current exercise price of the Right, Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the exercise price of the Right. If, at any time following the Stock Acquisition Date, the Company is acquired in a merger or other business combination transaction or 50 percent or more of the Company's assets or earning power are sold, each Right will entitle the holder (other than the Acquiring Person) to receive, upon exercise at the then current exercise price of the Right, common stock of the acquiring or surviving company having a value equal to two times the exercise price of the Right. Certain stock acquisitions will also trigger a provision permitting the Board of Directors to exchange each Right for one share of Common Stock. The Rights are nonvoting and expire on July 23, 2006, unless redeemed by the Company at a price of $.01 per Right at any time prior to the time a person becomes an Acquiring Person. The Board of Directors has authorized the reservation of one million shares of Junior Serial Preferred Stock A for issuance under the Rights Plan in the event of excercise of the Rights. Stock Option and Award Plans. In May 1996 Company shareholders approved an Executive Long-Term Incentive Compensation Plan (the Executive Plan) and a Director Long-Term Stock Incentive Plan (the Director Plan), effective January 1, 1996. The Executive Plan allows for the grant of up to 2.1 million shares of Common Stock to key employees of the Company. Such grants may be in the form of stock options and other awards, including stock appreciation rights, restrictive stock, performance units and performance shares. In January 1996 the Company granted non-qualified stock options to purchase 132,542 shares of Common Stock and granted 176,616 performance shares. Additionally, 24,000 restrictive shares of Common Stock were granted, with the restriction expiring over a three- year period. Pursuant to the Director Plan each nonemployee director receives an annual grant of 725 stock options and a biennial grant of performance shares equal to $10,000 in value of Common Stock on the date of grant. The Director Plan provides for the grant of up to 150,000 shares of Common Stock. The exercise price for stock options is equal to the market value of the Common Stock on the date of a grant. Stock options may be excercised 50 percent on the first anniversary date of the grant and the remaining 50 percent on the second anniversary and expire on the tenth anniversary. Grants of performance shares are earned over multi-year time periods upon the achievement of performance objectives. The Company has elected to recognize compensation cost for its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Generally, no compensation expense is recognized for stock options with exercise prices equal to the market value of the underlying shares of stock at the date of the grant. Compensation cost is recognized over the vesting periods for performance share awards based on the market value of the underlying shares of stock. -8-
Note 9. Discontinued Operations On June 30, 1995 Minnesota Power sold its interest in the paper and pulp business. The financial results of the paper and pulp business, including the loss on disposition, have been accounted for as discontinued operations. <TABLE> <CAPTION> Quarter Ended Six Months Ended June 30, June 30, Summary of Discontinued Operations 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------- In Thousands <S> <C> <C> <C> <C> Operating revenue and income - $ 22,285 - $ 44,324 ========= ======== Equity in earnings - $ 5,675 - $ 7,496 ========= ======== Income from operations - $ 4,629 - $ 7,477 Income tax expense - 1,921 - 3,117 --------- -------- - 2,708 - 4,360 --------- -------- Loss on disposal - (1,793) - (1,793) Income tax benefit - 275 - 275 --------- -------- - (1,518) - (1,518) --------- -------- Income from discontinued operations - $ 1,190 - $ 2,842 ========= ======== </TABLE> The Company is still committed to a maximum guaranty of $95 million to ensure a portion of a $33.4 million annual lease obligation for paper mill equipment under an operating lease extending to 2012. The purchaser of the Company's paper and pulp business, CPI, has agreed to indemnify the Company for any payments the Company may make as a result of the Company's obligation relating to this operating lease. -9-
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Minnesota Power has operations in four business segments: (1) electric operations, which include electric and gas services, and coal mining; (2) water operations, which include water and wastewater services; (3) automobile auctions, which also include a finance company and an auto transport company; and (4) investments, which include real estate operations in Florida, a 21 percent equity investment in a financial guaranty reinsurance company, and a securities portfolio. Earnings per share of common stock for the quarter ended June 30, 1996 were 49 cents compared to 40 cents for the quarter ended June 30, 1995. All four business segments were profitable for the second quarter ended June 30, 1996. Although earnings from electric operations decreased, water operations and investments significantly improved over second quarter results in 1995. The sale of the Company's paper and pulp business was included in the results for the quarter ended June 30, 1995 as discontinued operations. Earnings per share of common stock for the six months ended June 30, 1996 were $1.10 compared to $1.27 for the six months ended June 30, 1995. Factors contributing to 1996 earnings include increased electric and water revenue, a gain resulting from the sale of certain water operations, the inclusion of automobile auctions and improvement in real estate operations (excluding the recognition of tax benefits in 1995). Higher earnings in 1995 were attributed to the 52 cent per share recognition of tax benefits associated with real estate operations. Earnings in 1995 also reflect an 18 cent per share provision associated with exiting the truck-mounted lifting equipment business. The sale of the Company's paper and pulp business was included in 1995 as discontinued operations. <TABLE> <CAPTION> Quarter Ended Six Months Ended June 30, June 30, Earnings Per Share 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Continuing Operations Electric Operations $.23 $ .26 $ .64 $ .61 Water Operations .07 .02 .10 .02 Automobile Auctions .05 - .08 - Investments Portfolio and reinsurance .20 .24 .38 .47 Real estate .10 .01 .21 .54 ---- ----- ------ ----- .30 .25 .59 1.01 Corporate Charges and Other (.16) (.17) (.31) (.47) ---- ---- ------ ----- Total Continuing Operations .49 .36 1.10 1.17 Discontinued Operations - .04 - .10 ---- ---- ------ ----- Total Earnings Per Share $.49 $.40 $ 1.10 $1.27 ==== ==== ====== ===== </TABLE> Results of Operations Comparison of the Quarter Ended June 30, 1996 and 1995. Electric Operations. Operating revenue and income from electric operations were higher in 1996 compared to 1995 due to a 30 percent increase in total kilowatthour sales. The increase in sales is attributed primarily to the Company's ability to market energy to other power suppliers. Revenue from electric sales to taconite customers accounted for 33 percent of electric operating revenue in 1996 compared to 36 percent in 1995. Electric sales to paper and other wood-products companies accounted for 11 percent of electric operating revenue in 1996 and 13 percent in 1995. Sales to other -10-
power suppliers accounted for 15 percent of electric operating revenue in 1996 compared to 8 percent in 1995. Although revenue from electric operations was higher, earnings for the quarter ended June 30, 1996 were lower reflecting efforts in preparing for and meeting the more competitive challenges of today's electric industry. New industrial rates were lower on average while expenses associated with marketing new products and improving customer service were higher. Additionally, the costs associated with the early retirement plan offered in mid-1995 are being expensed over three years and are included in 1996 expenses. Scheduled maintenance expenses were also higher in 1996. Water Operations. Operating revenue and income from water operations were higher in 1996 due to the addition of 17,000 new water and wastewater customers as a result of the December 1995 purchase of the assets of Orange Osceola Utilities (OOU) in Florida, and SSU's implementation of a $7.9 million interim rate increase effective January 23, 1996. Operating costs also increased in 1996 because of the purchase of OOU. Automobile Auctions. ADESA sold 160,000 cars during the quarter ended June 30, 1996, the best quarterly sales since Minnesota Power purchased the business in July 1995. One additional auction site was purchased during the quarter. Operating expenses include significant start-up costs at two other new locations added in 1996 and relocation costs for two existing auction operations. Consolidated operating expenses in 1996 were significantly higher due to the inclusion of ADESA's operations following its purchase by the Company in July 1995. Investments. - Securities Portfolio and Reinsurance. The Company's securities portfolio and reinsurance performed well in 1996, however earnings were less because the portfolio balance was smaller. A portion of the portfolio was sold in 1995 to fund the purchase of ADESA. - Real Estate Operations. Increased land sales, combined with the recognition of $2 million of tax benefits at Lehigh, resulted in a more profitable quarter for the Company's real estate business in 1996. Discontinued Operations. Income from discontinued operations in 1995 reflects the sale and operating results of the paper and pulp business which was sold in June 1995. Comparison of the Six Months Ended June 30, 1996 and 1995. Electric Operations. Operating revenue and income from electric operations were higher in 1996 compared to 1995 due to a 22 percent increase in total kilowatthour sales. The increase in sales is attributed primarily to the Company's ability to market energy to other power suppliers as well as extreme winter weather in 1996 compared to the milder winter in 1995. Revenue from electric sales to taconite customers accounted for 32 percent of electric operating revenue in 1996 compared to 36 percent in 1995. Electric sales to paper and other wood-products companies accounted for 11 percent of electric operating revenue in 1996 and 13 percent in 1995. Sales to other power suppliers accounted for 12 percent of electric operating revenue in 1996 compared to 6 percent in 1995. Purchased power and other expenses for electric operations were considerably higher in 1996 than in 1995. Increased purchased power costs were incurred in 1996 to meet higher demand. However, the average cost per kilowatthour was lower than in 1995. Square Butte, one of Minnesota Power's low priced sources of energy, produced 64 percent more energy in 1996, while in 1995 it was down for scheduled maintenance. Costs associated with the early retirement offering in mid-1995 are being expensed over three years and are reflected in 1996 expenses. Scheduled maintenance expenses were higher in 1996. -11-
Water Operations. Operating revenue and income from water operations were higher in 1996 due to the $1.1 million pre-tax gain from the sale of Seabrook's assets in South Carolina, the addition of 17,000 new water and wastewater customers as a result of the December 1995 purchase of the assets of OOU in Florida, and SSU's implementation of a $7.9 million interim rate increase effective January 23, 1996. Operating costs also increased in 1996 because of the purchase of OOU. Automobile Auctions. Automobile auction operations were profitable despite severe winter weather on the east coast which limited auction sales in January 1996. New auctions began operations at Jacksonville, Florida and Newark, New Jersey during the first half of 1996. Start-up costs associated with these new sites have had a negative impact on profitability of this segment and are expected to continue having such an impact on results through 1997. All other auction sites including, ADESA's acquisition of an auto auction facility in Portage, Wisconsin, have performed well in 1996. Consolidated operating expenses in 1996 are significantly higher due to the inclusion of ADESA's operations following its purchase by the Company in July 1995. Investments. - Securities Portfolio and Reinsurance. The Company's securities portfolio and reinsurance performed well in 1996. The portfolio produced less earnings in 1996 because its balance was smaller as a result of the sale of a portion of the portfolio to fund the purchase of ADESA. - Real Estate Operations. Revenue in 1996 includes $3.7 million from the sale of Lehigh's joint venture in a resort and golf course. In 1995 $18.4 million of tax benefits were recognized by Lehigh. The Company's portion of the tax benefits reflected as net income was $14.7 million, or 52 cents per share. In 1996 an additional $2 million of tax benefits were recognized. Corporate Charges and Other. In March 1995 the Company recorded a $5 million provision, lowering earnings per share by 18 cents, in anticipation of exiting the truck-mounted lifting equipment business. Discontinued Operations. Income from discontinued operations in 1995 reflects the operating results of the paper and pulp business which was sold in June 1995. Liquidity and Financial Position Reference is made to the Consolidated Statement of Cash Flows for the six months ended June 30, 1996 and 1995, for purposes of the following discussion. Automobile auction operations, which were acquired July 1, 1995, are included in the six months ended June 30, 1996. Cash Flow Activities. Cash from operating activities was affected by a number of factors representative of normal operations. Working capital, if and when needed, generally is provided by the sale of commercial paper. In addition, securities investments can be liquidated to provide funds for reinvestment in existing businesses or acquisition of new businesses, and approximately 5,268,000 original issue shares of common stock are available for issuance through the DRIP. MP&L Capital I (Trust) was established as a wholly owned business trust of the Company for the purpose of issuing common and preferred securities. On March 20, 1996 the Trust publicly issued three million 8.05% Cumulative Quarterly Income Preferred Securities (QUIPS), representing preferred beneficial interests in the assets held by the Trust, indirectly resulting in net proceeds to the Company of $72.6 million. The net proceeds to the Company were used to retire approximately $56 million of commercial paper and approximately $17 million were used to redeem all of the outstanding shares of the Company's Serial Preferred Stock, $7.36 Series, on May 13, 1996. On May 30, 1996 ADESA issued $90 million of 7.70% Senior Notes, Series A, Due 2006 in a private placement offering. Proceeds were used by ADESA to repay existing indebtedness, including borrowings -12-
under ADESA's revolving bank credit agreement, floating rate option notes and certain borrowings from Minnesota Power. In June 1996 Lehigh obtained a $20 million adjustable rate revolving line of credit due in 2003. The proceeds were used to partially finance the acquisition of real estate near Palm Coast, Florida. On June 24, 1996 the Company's registration with the Securities and Exchange Commission became effective with respect to 5 million additional shares of common stock for offer and sale pursuant to the DRIP. Previously available to registered holders and electric utility customers, the DRIP has been amended, effective July 2, 1996, to, among other things, expand the customer feature and allow any interested investor to enroll in the plan with an initial investment of $250. Capital raised through the sale of new issue shares under the DRIP is expected to be used for general corporate purposes. Capital Requirements. Consolidated capital expenditures for the six months ended June 30, 1996 totaled $53 million. These expenditures include $19 million for electric operations, $8 million for water operations and $26 million for automobile auction operations. Internally generated funds were the primary source for funding electric and water operation expenditures. ADESA issued long-term debt to finance its construction expenditures. 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 14, 1996. (b) The election of directors, appointment of independent accountants and approval of the Minnesota Power Executive Long-Term Incentive Compensation Plan and the Minnesota Power Director Long-Term Stock Incentive Plan 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> Merrill K. Cragun 26,353,001 705,930 - - Dennis E. Evans 26,282,462 776,469 - - D. Michael Hockett 26,229,993 828,938 - - Peter J. Johnson 26,385,179 673,752 - - Jack R. Kelly, Jr. 26,322,548 736,383 - - George L. Mayer 26,364,365 694,566 - - Paula F. McQueen 26,371,643 687,288 - - Robert S. Nickoloff 26,292,136 766,795 - - Jack I. Rajala 26,379,143 679,788 - - Edwin L. Russell 26,363,621 695,310 - - Arend J. Sandbulte 26,325,841 733,090 - - Nick Smith 26,327,260 731,671 - - Bruce W. Stender 26,369,095 689,836 - - Donald C. Wegmiller 26,338,697 720,234 - - Independent Accountants - ----------------------- Price Waterhouse LLP 26,375,793 234,701 448,438 - Minnesota Power Executive Long-Term Incentive Compensation Plan - --------------------------------------------------------------- 17,096,568 3,999,538 1,743,484 4,219,341 Minnesota Power Director Long-Term Stock Incentive Plan - ------------------------------------------------------- 17,025,492 4,084,573 1,729,524 4,219,342 </TABLE> -13-
Item 5. Other Information Reference is made to the Company's 1995 Form 10-K for background information on the following updates. Unless otherwise indicated, cited references are to the Company's 1995 Form 10-K. Ref. Page 8. - Third Full Paragraph On June 19, 1996 the FERC approved the proposed wholesale rates as filed. The new rates have an effective date of January 1, 1996. Ref. Page 9. - Second Full Paragraph and Page 13. - Fourth Paragraph Ref. 10-Q for the quarter ended March 31, 1996, Page 10. - Second Paragraph On June 27, 1996 the Company filed in the U.S. Court of Appeals for the District of Columbia Circuit a petition for review of the order issued by the FERC granting a new license for the Company's St. Louis River Project. On June 28, 1996 separate petitions for review were filed in the same court by the U.S. Department of the Interior and the Fond du Lac Band of Lake Superior Chippewa, two intervenors in the licensing proceedings. The issues to be resolved concern the terms and conditions of the license which will govern the Company's operation and maintenance of the project. Ref. Page 10. - Fourth Paragraph Ref. 10-Q for the quarter ended March 31, 1996, Page 10. - Fifth Paragraph The wholesale transmission tariff filed on April 16, 1996, in anticipation of new rules governing open access transmission for wholesale service became effective on June 16, 1996 subject to refund pending a hearing before an Administrative Law Judge and final FERC approval. The hearing is scheduled to begin on January 14, 1997. As required by Order No. 888, the Company filed with the FERC on July 9, 1996, a tariff for open access transmission service incorporating the terms and conditions of the FERC's pro forma tariff with appropriate modifications. A decision on the filing is pending. In order to comply with the FERC's regulations and policies governing open access to electric transmission systems, the Company has initiated procedures which will result in the functional separation of the Company's operation of its transmission system from other aspects of its business as required by the FERC's Standards of Conduct implemented by Order No. 889. Compliance with Order No. 889 is required by November 1, 1996. On July 15, 1996, the FERC accepted for filing and made effective a tariff allowing the Comapny to sell power at market-based rates. The tariff will permit the Company to respond more quickly and in a more competitive manner to requests for power from wholesale customers. Ref. Page 13. - Table- Summary of National Pollutant Discharge Elimination System Permits Facility Issue Date Expiration Date - -------- ---------- --------------- Arrowhead DC Terminal June 17, 1996 March 31, 2001 Ref. Page 15. - Seventh Paragraph On July 31, 1996 the FPSC voted to allow SSU approximately 61 percent of the $18.1 million rate increase requested in June 1995. The FPSC is expected to issue its final order on SSU's request on September 4, 1996. -14-
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10 (a) Minnesota Power Executive Long-Term Incentive Compensation Plan 10 (b) Minnesota Power Director Long-Term Stock Incentive Plan 27 Financial Data Schedule * 99 The consolidated financial statements of ADESA Corporation for the quarter ended June 30, 1995 (filed as Item 7(a) to Form 8-K/A dated September 8 ,1995, File No. 1-3548). - ---------------- * Incorporated herein by reference as indicated. (b) Reports on Form 8-K. Report on Form 8-K dated and filed June 18, 1996 with respect to Item 5. Other Events. Report on Form 8-K dated and filed August 2, 1996 with respect to Item 5. Other Events and Item 7. Financial Statements and Exhibits. -15-
Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Minnesota Power & Light Company ------------------------------- (Registrant) August 9, 1996 D. G. Gartzke ------------------------------ D. G. Gartzke Senior Vice President - Finance and Chief Financial Officer August 9, 1996 Mark A. Schober ----------------------------- Mark A. Schober Corporate Controller -16-