Securities and Exchange Commission Washington, DC 20549 FORM 10-Q (Mark One) /X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1997 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, 33,126,189 shares outstanding as of July 31, 1997
Minnesota Power & Light Company Index Page Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheet - June 30, 1997 and December 31, 1996 1 Consolidated Statement of Income - Quarter and Six Months Ended June 30, 1997 and 1996 2 Consolidated Statement of Cash Flows - Six Months Ended June 30, 1997 and 1996 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 12 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15
Definitions The following abbreviations or acronyms are used in the text. Abbreviation or Acronym Term - ----------------------- ---------------------------------------------------- 1996 Form 10-K Minnesota Power's Annual Report on Form 10-K for the Year Ended December 31, 1996 ADESA ADESA Corporation AFC Automotive Finance Corporation Americas' Water Americas' Water Services Corporation BNI Coal BNI Coal, Ltd. Common Stock Minnesota Power & Light Company's common stock Company Minnesota Power & Light Company and its Subsidiaries DOJ United States Department of Justice DRIP Dividend Reinvestment and Stock Purchase Plan EPA United States Environmental Protection Agency ESOP Employee Stock Ownership Plan FERC Federal Energy Regulatory Commission Heater Heater Utilities, Inc. IRS Internal Revenue Service ISI Instrumentation Services, Inc. Florida Water Florida Water Services Corporation 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) MP Water Resources MP Water Resources Group, Inc. NCUC North Carolina Utilities Commission Palm Coast Palm Coast Holdings, Inc. PSCW Public Service Commission of Wisconsin SCPSC South Carolina Public Service Commission Square Butte Square Butte Electric Cooperative SWL&P Superior Water, Light and Power Company
PART I. FINANCIAL INFORMATION Item 1. Financial Statements <TABLE> Minnesota Power Consolidated Balance Sheet In Thousands <CAPTION> June 30, December 31, 1997 1996 Unaudited Audited - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Assets Plant and Other Assets Electric operations $ 788,754 $ 796,055 Water services 322,325 323,869 Automotive services 166,384 167,274 Investments 246,741 236,509 ------------ ------------ Total plant and other assets 1,524,204 1,523,707 ------------ ------------ Current Assets Cash and cash equivalents 68,140 40,095 Trading securities 108,173 86,819 Trade accounts receivable (less reserve of $9,109 and $6,568) 180,635 144,060 Notes and other accounts receivable 18,532 20,719 Fuel, material and supplies 25,489 23,221 Prepayments and other 16,590 17,195 ------------ ------------ Total current assets 417,559 332,109 ------------ ------------ Deferred Charges Regulatory 75,037 83,496 Other 33,098 27,086 ------------ ------------ Total deferred charges 108,135 110,582 ------------ ------------ Intangible Assets Goodwill 162,593 166,986 Other 11,491 12,665 ------------ ------------ Total intangible assets 174,084 179,651 ------------ ------------ Total Assets $ 2,223,982 $ 2,146,049 - ------------------------------------------------------------------------------------------------------------------- Capitalization and Liabilities Capitalization Common stock without par value, 65,000 shares authorized 33,101 and 32,758 shares outstanding $ 404,089 $ 394,187 Unearned ESOP shares (67,301) (69,124) Net unrealized gain on securities investments 3,358 2,752 Cumulative translation adjustment (107) 73 Retained earnings 285,743 282,960 ------------ ------------ Total common stock equity 625,782 610,848 Cumulative preferred stock 11,492 11,492 Redeemable serial preferred stock 20,000 20,000 Company obligated mandatorily redeemable preferred securities of subsidiary MP&L Capital I which holds solely Company Junior Subordinated Debentures 75,000 75,000 Long-term debt 671,263 694,423 ------------ ------------ Total capitalization 1,403,537 1,411,763 ------------ ------------ Current Liabilities Accounts payable 96,600 72,787 Accrued taxes 49,891 48,813 Accrued interest and dividends 13,899 14,851 Notes payable 205,998 155,726 Long-term debt due within one year 24,660 7,208 Other 31,699 37,598 ------------ ------------ Total current liabilities 422,747 336,983 ------------ ------------ Deferred Credits Accumulated deferred income taxes 147,261 148,931 Contributions in aid of construction 102,703 98,378 Regulatory 63,368 64,394 Other 84,366 85,600 ------------ ------------ Total deferred credits 397,698 397,303 ------------ ------------ Total Capitalization and Liabilities $ 2,223,982 $ 2,146,049 - ------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these statements. </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, 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Operating Revenue and Income Electric operations $ 129,658 $ 129,219 $ 261,115 $ 260,718 Water services 22,431 23,050 43,079 42,277 Automotive services 64,388 45,215 124,898 84,908 Investments 13,949 11,019 23,407 23,275 ---------- ---------- ---------- --------- Total operating revenue and income 230,426 208,503 452,499 411,178 ---------- ---------- ---------- --------- Operating Expenses Fuel and purchased power 45,987 48,291 90,016 91,934 Operations 138,860 127,593 277,239 247,413 Interest expense 16,061 14,357 33,369 28,517 ---------- ---------- ---------- --------- Total operating expenses 200,908 190,241 400,624 367,864 ---------- ---------- ---------- --------- Income from Equity Investment 3,279 2,832 7,321 6,609 ---------- ---------- ---------- --------- Operating Income 32,797 21,094 59,196 49,923 Distributions on Redeemable Preferred Securities of Subsidiary 1,510 1,509 3,019 1,711 Income Tax Expense 12,564 4,753 21,360 15,077 ---------- ---------- ---------- --------- Net Income 18,723 14,832 34,817 33,135 Dividends on Preferred Stock 487 634 974 1,434 ---------- ---------- ---------- --------- Earnings Available for Common Stock $ 18,236 $ 14,198 $ 33,843 $ 31,701 ========== ========== ========== ========= Average Shares of Common Stock 30,430 29,053 30,323 28,919 Earnings Per Share of Common Stock $ .60 $ .49 $ 1.12 $ 1.10 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, 1997 1996 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Operating Activities Net income $ 34,817 $ 33,135 Income from equity investment - net of dividends received (7,093) (6,413) Depreciation and amortization 35,830 32,511 Deferred income taxes 1,360 (1,515) Deferred investment tax credits (862) (839) Pre-tax gain on sale of plant (4,388) (1,073) Changes in operating assets and liabilities Trading securities (21,354) (36,312) Notes and accounts receivable (31,914) (53,488) Fuel, material and supplies (2,268) 531 Accounts payable 23,813 24,201 Other current assets and liabilities (5,168) (3,460) Other - net 4,008 12,429 --------- -------- Cash from (for) operating activities 26,781 (293) --------- -------- Investing Activities Proceeds from sale of investments in securities 31,345 14,640 Proceeds from sale of plant 6,385 5,311 Additions to investments (33,355) (45,508) Additions to plant (26,591) (45,427) Changes to other assets - net 1,203 6,443 --------- -------- Cash from (for) investing activities (21,013) (64,541) --------- -------- Financing Activities Issuance of long-term debt 131,067 190,134 Issuance of Company obligated mandatorily redeemable preferred securities of subsidiary MP&L Capital I - net - 72,270 Issuance of common stock 9,745 9,015 Changes in notes payable - net 50,272 (9,588) Reductions of long-term debt (136,776) (116,455) Redemption of preferred stock - (17,568) Dividends on preferred and common stock (32,031) (31,119) --------- -------- Cash from financing activities 22,277 96,689 --------- -------- Change in Cash and Cash Equivalents 28,045 31,855 Cash and Cash Equivalents at Beginning of Period 40,095 31,577 --------- -------- Cash and Cash Equivalents at End of Period $ 68,140 $ 63,432 ========= ======== Supplemental Cash Flow Information Cash paid during the period for Interest (net of capitalized) $ 33,825 $ 25,352 Income taxes $ 15,490 $ 17,182 - ------------------------------------------------------------------------------------------------------------------- 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 1996 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 In Thousands <TABLE> <CAPTION> Investments ------------------- Corporate Electric Water Automotive Portfolio & Real Charges Consolidated Operations Services Services Reinsurance Estate & Other ------------ ---------- -------- ---------- ----------- ------ --------- <S> <C> <C> <C> <C> <C> <C> <C> Quarter Ended June 30, 1997 - --------------------------- Operating revenue and income $230,426 $129,658 $ 22,431 $ 64,388 $ 4,483 $9,526 $ (60) Operation and other expense 166,978 96,571 13,156 49,360 487 5,952<F1> 1,452 Depreciation and amortization expense 17,869 11,210 3,217 3,333 - 37 72 Interest expense 16,061 5,329 2,760 2,705 - 279 4,988 Income from equity investment 3,279 - - - 3,279 - - -------- -------- -------- -------- ------- ------- ------- Operating income (loss) 32,797 16,548 3,298 8,990 7,275 3,258 (6,572) Distributions on redeemable preferred securities of subsidiary 1,510 414 - - - - 1,096 Income tax expense (benefit) 12,564 6,096 1,028 4,756 2,555 1,414 (3,285) -------- -------- -------- -------- ------- ------- ------- Net income (loss) $ 18,723 $ 10,038 $ 2,270 $ 4,234 $ 4,720 $ 1,844 $(4,383) ======== ======== ======== ======== ======= ======= ======= 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<F2> 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 investment 2,832 - - - 2,832 - - -------- -------- -------- -------- ------- ------- -------- Operating income (loss) 21,094 10,952 2,997 3,467 6,837 2,266 (5,425) Distributions on redeemable preferred securities of subsidiary 1,509 403 - - - - 1,106 Income tax expense (benefit) 4,753 3,593 1,010 2,002 928 (782)<F3> (1,998) -------- -------- -------- -------- ------- ------- ------ Net income (loss) $ 14,832 $ 6,956 $ 1,987 $ 1,465 $ 5,909 $ 3,048 $(4,533) ======== ======== ======== ======== ======= ======= ======= - --------------------- <FN> <F1> Includes $460 of minority interest. <F2> Includes $762 of minority interest. <F3> Includes $2 million of tax benefits (see Note 4). </FN> </TABLE> -4-
Note 1. Business Segments Continued In Thousands <TABLE> <CAPTION> Investments ------------------- Corporate Electric Water Automotive Portfolio & Real Charges Consolidated Operations Services Services Reinsurance Estate & Other ------------ ---------- -------- ---------- ----------- ------ --------- <S> <C> <C> <C> <C> <C> <C> <C> Six Months Ended June 30, 1997 Operating revenue and income $ 452,499 $ 261,115 $ 43,079 $ 124,898 $ 9,177 $14,357 $ (127) Operation and other expense 331,425 191,443 27,202 97,216 1,024 9,796<F1> 4,744 Depreciation and amortization expense 35,830 22,373 6,394 6,843 - 75 145 Interest expense 33,369 10,710 5,460 5,060 - 576 11,563 Income from equity investment 7,321 - - - 7,321 - - ---------- --------- --------- --------- --------- -------- ------- Operating income (loss) 59,196 36,589 4,023 15,779 15,474 3,910 (16,579) Distributions on redeemable preferred securities of subsidiary 3,019 834 - - - - 2,185 Income tax expense (benefit) 21,360 13,495 1,342 8,345 5,446 1,731 (8,999) ---------- --------- --------- --------- --------- -------- ------- Net income (loss) $ 34,817 $ 22,260 $ 2,681 $ 7,434 $ 10,028 $ 2,179 $(9,765) ========== ========= ========= ========= ========= ======== ======= Total assets $2,223,982 $ 977,056 $ 371,201 $ 522,625 $ 289,088 $ 63,252 $ 760 Accumulated depreciation $ 685,609 $ 550,809 $ 125,466 $ 9,334 - - - Accumulated amortization $ 12,177 - - $ 11,017 - $ 1,160 - Construction work in progress $ 44,606 $ 19,551 $ 13,591 $ 11,464 - - - 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<F2> 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 investment 6,609 - - - 6,609 - - ---------- --------- --------- --------- --------- -------- -------- Operating income (loss) 49,923 30,972 4,282 5,117 13,959 7,697 (12,104) Distributions on redeemable preferred securities of subsidiary 1,711 480 - - - - 1,231 Income tax expense (benefit) 15,077 11,367 1,459 2,664 2,897 1,581<F3> (4,891) ---------- --------- --------- --------- --------- -------- ------ Net income (loss) $ 33,135 $ 19,125 $ 2,823 $ 2,453 $ 11,062 $ 6,116 $(8,444) ========== ========= ========= ========= ========= ======== ======= Total assets $2,108,031 $ 983,971 $ 359,172 $ 453,561 $ 243,952 $ 65,710 $ 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 - - - - --------------------- <FN> <F1> Includes $544 of minority interest. <F2> Includes $1.5 million of minority interest. <F3> Includes $2 million of tax benefits (see Note 4). </FN> </TABLE> -5-
Note 2. Regulatory Matters FPSC Refund Order in Connection with 1991 Rate Case. Responding to a Florida Supreme Court decision addressing the issue of retroactive ratemaking with respect to another company, in March 1996 the FPSC voted to reconsider an October 1995 order (Refund Order) which would have required Florida Water to refund about $15 million, which includes interest, to customers who paid more since October 1993 under uniform rates than they would have paid under stand-alone rates. Under the Refund Order, the collection through a surcharge of the $15 million from customers who paid less under uniform rates was not permitted. The Refund Order was in response to the Florida First District Court of Appeals (Court of Appeals) reversal in April 1995 of the 1993 FPSC order which imposed uniform rates for most of Florida Water's service areas in Florida. With "uniform rates," all customers in the uniform rate areas pay the same rates for water and wastewater services. Uniform rates are an alternative to "stand-alone" rates which are calculated based on the cost of serving each service area. The FPSC reconsidered the Refund Order, but in August 1996 the FPSC issued an order upholding by a 3 to 2 vote its decision to order refunds without offsetting surcharges. Florida Water filed an appeal of this decision with the Court of Appeals. On June 17, 1997 the Court of Appeals reversed the FPSC's August 1996 order. The Court of Appeals determined that the FPSC's order directing the refund without permitting an offsetting surcharge was not permissible because it did not comport with principles of equity or with existing Florida Supreme Court precedent. The Court of Appeals remanded the matter back to the FPSC for reconsideration, and directed the FPSC to consider requests for intervention from the various customer groups impacted by any potential surcharges. The issues to be considered on remand relate to rate design and do not involve any adjustment to Florida Water's revenue requirement. The Company has not recorded a provision for refund in connection with this case. The Company is unable to predict the outcome of this matter. Florida Water's 1995 Rate Case. Florida Water requested an $18.1 million rate increase in June 1995 for all water and wastewater customers of Florida Water regulated by the FPSC. On October 30, 1996 the FPSC issued its final order in the Florida Water rate case. The new rates, which became effective as of September 20, 1996, resulted in an annualized increase in revenue of approximately $11.1 million. This increase included, and was not in addition to, the $7.9 million increase in annualized revenue granted as interim rates effective on January 23, 1996. The FPSC approved a new rate structure called "capband," which replaces uniform rates. With capband rates, areas with similar cost of service are grouped into one of a number of rate bands, and all customers within a given band are charged the same rate. This rate structure is designed so that a customer's bill will not exceed a certain "cap" unless the customer's usage exceeds an assumed level. On November 1, 1996 Florida Water filed with the Court of Appeals an appeal of the FPSC's final order seeking judicial review of issues relating to the amount of investment in utility facilities recoverable in rates from current customers. Other parties to the rate case also filed appeals with the Court of Appeals regarding the FPSC's final order. The Company is unable to predict the outcome of this matter. Effective June 13, 1997 Florida Water resumed collecting pre-existing Allowance for Funds Prudently Invested (AFPI) charges. AFPI represents the accrued carrying cost of certain non-used and useful property excluded from rate base and is collected as a one-time charge to certain new water and wastewater customers. The recovery of AFPI charges at certain Florida Water service areas was reduced or eliminated in the FPSC's October 1996 final order issued in connection with Florida Water's 1995 rate case. In April 1997 the FPSC, acting on Florida Water's motion, allowed recovery of pre-existing AFPI charges for these service areas, subject to refund with interest in the event of an adverse court ruling in the appeal of the 1995 rate case. Florida Water estimates approximately $1 million, on an annual basis, will be collected and accounted for as deferred revenue pending results of the appeal. Hernando County Rates. As required by Hernando County, on April 14, 1997 Florida Water filed for a rate change with the Hernando County Board of Commissioners. Florida Water filed for an annual interim rate reduction of $258,780 (-3.3 percent) and a final rate increase of $123,897 (1.6 percent). On June 14, 1997 the final rate increase Florida Water requested became effective automatically by operation of law because Hernando County failed to take action on the rates within the prescribed statutory period. -6-
Note 2. Regulatory Matters (Continued) In July 1997 Florida Water reached a settlement agreement with Hernando County regarding the rate case Florida Water filed in April 1997. Under the settlement agreement, new rates will be effective September 1, 1997 and are expected to result in $6.3 million of revenue on an annual basis, a $1.6 million decrease from current revenue levels implemented on June 14, 1997. Rates will then be increased January 1, 1999 to result in $7.2 million in revenue on an annual basis. Florida Water has also agreed not to file for new rates with Hernando County prior to September 2000. All litigation was dismissed by both parties. Florida Water's settlement agreement with Hernando County supersedes the FPSC's February 14, 1997 order which required Florida Water to charge rates to customers in Hernando County based on a modified stand-alone rate structure. Hillsborough County Rates. On July 2, 1997 Florida Water filed for a rate change with the Hillsborough County Utilities Department. Florida Water filed for an annual interim rate increase of $848,845 (43.1 percent) and a final rate increase of $877,607 (44.6 percent). Interim rates are anticipated to become effective 45 days from the date of the filing. The Company is unable to predict the outcome of this case. Index Filings. In July 1997 Florida Water filed two index filings which if approved will increase revenue by $436,000. Approval is expected on or about October 1, 1997. Under Florida law water and wastewater utilities may make an annual index filing designed to recover inflationary costs associated with operation and maintenance expense. Note 3. 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 $20.1 million from 1997 through 2001. 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 4. Income Tax Expense <TABLE> <CAPTION> Quarter Ended Six Months Ended June 30, June 30, Schedule of Income Tax Expense (Benefit) 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> In Thousands Current tax Federal $ 8,881 $ 4,030 $ 16,461 $ 12,888 Foreign 743 551 1,096 450 State 1,511 1,162 3,305 4,093 ------- -------- -------- -------- 11,135 5,743 20,862 17,431 ------- -------- -------- -------- Deferred tax Federal 2,115 1,143 1,966 1,131 State (317) 84 (606) (646) ------- -------- -------- -------- 1,798 1,227 1,360 485 ------- -------- -------- -------- Change in valuation allowance - (2,000) - (2,000) ------- -------- -------- -------- Deferred tax credits (369) (217) (862) (839) ------- -------- -------- -------- Total income tax expense $12,564 $ 4,753 $ 21,360 $ 15,077 - ------------------------------------------------------------------------------------------------------------------- </TABLE> -7-
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 services, which include water and wastewater services; (3) automotive services, which include auctions, a finance company and an auto transport company; and (4) investments, which include a securities portfolio, a 21 percent equity investment in a financial guaranty reinsurance company, and real estate operations. Earnings per share of common stock for the quarter ended June 30, 1997 were 60 cents compared to 49 cents for the quarter ended June 30, 1996. Significant increases from electric operations and automotive services were the primary contributors to higher earnings in 1997. Higher earnings from electric operations include compensation from the Company's sale of its rights to microwave frequencies and property tax relief from the State of Minnesota. Automotive services earnings are higher due to a 28 percent increase in the number of cars sold at ADESA's auctions and the expansion of AFC's floor plan financing business. In 1996 portfolio and reinsurance included a one-time tax benefit for an IRS audit adjustment. Earnings per share of common stock for the six months ended June 30, 1997 were $1.12 compared to $1.10 for the six months ended June 30, 1996. Earnings in 1997 reflect a significant increase in automotive services due to a 28 percent increase in the number of cars sold at ADESA's auctions and the expansion of AFC's floor plan financing business. 1997 earnings also reflect a solid performance from electric operations and consistent performance by the portfolio and reinsurance portion of the investments segment. In 1996 portfolio and reinsurance included a one-time tax benefit for an IRS audit adjustment. Corporate charges and other reflect increased debt service costs as a result of the higher balance of commercial paper in 1997 and six months of distributions with respect to the Cumulative Quarterly Income Preferred Securities issued in March 1996. Earnings in 1996 include a gain in water services from the sale of water assets and the sale of a joint venture interest by real estate. <TABLE> <CAPTION> Quarter Ended Six Months Ended June 30, June 30, Earnings Per Share 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Electric Operations $ .32 $ .23 $ .72 $ .64 Water Services .08 .07 .09 .10 Automotive Services .14 .05 .25 .08 Investments Portfolio and reinsurance .15 .20 .33 .38 Real estate .06 .10 .07 .21 ------ ------ ------ ------- .21 .30 .40 .59 Corporate Charges and Other (.15) (.16) (.34) (.31) ------ ------ ------ ------- Total Earnings Per Share $ .60 $ .49 $ 1.12 $ 1.10 - ------------------------------------------------------------------------------------------------------------- </TABLE> Consolidated Financial Comparison Quarters Ended June 30, 1997 and 1996. Operating revenue and income was up $21.9 million (10.5 percent) due primarily to an increase in the number of cars sold at ADESA's auctions. An increase in real estate sales also contributed to the increase in operating revenue and income. Fuel and purchased power were down $2.3 million (4.8 percent) because of a 16 percent decrease in generation at the Company's coal fired generating stations due to unscheduled outages and a 9 percent reduction in power purchased from other suppliers. The price of purchased power was substantially higher per megawatthour because of a limited supply available for purchase and additional transmission fees assessed for the delivery of power within the Midwest. -8-
Operations expenses were up $11.3 million (8.8 percent), reflecting the expansion of ADESA's automobile auction operations, AFC, ISI and Palm Coast. Interest expense was higher in 1997 due primarily to a higher balance of commercial paper. Income tax expense was significantly higher in 1997 due to the $11.7 million increase in operating income and the recognition of a $2 million tax benefit by Lehigh in 1996. Consolidated Financial Comparison Six Months Ended June 30, 1997 and 1996. Operating revenue and income was up $41.3 million (10 percent), primarily due to the addition of ADESA's nine new auction sites and increased car sales at existing ADESA auctions. Also, revenue from water services was higher in 1997 because of increased rates approved by the FPSC effective in September 1996. The increase was partially offset by lower revenue following the sale of two water systems by Heater in 1996. A $1.1 million pre-tax gain on the sale of one water system in South Carolina was recognized in March 1996. Operations expenses were up $29.8 million (12.1 percent). The increase reflected $14.1 million of expenses from the eight automobile auction sites added by ADESA in 1996 and one auction site added in 1997. The expansion of AFC, and acquisitions of ISI and Palm Coast, also increased operations expense in 1997. Interest expense was higher in 1997 due primarily to more commercial paper issued. Distributions on redeemable preferred securities of subsidiary were higher in 1997 because the securities were outstanding for the six months in 1997 compared to less than four months in 1996. Income tax expense was significantly higher in 1997 due to the $9.3 million increase in operating income and the recognition of a $2 million tax benefit by Lehigh in 1996. Business Segment Comparison Quarters Ended June 30, 1997 and 1996. Electric Operations. Operating revenue and income was up slightly in 1997. Proceeds from the sale of rights to microwave frequencies and the sale of river land to the State of Minnesota offset a decline in revenue from an 11 percent decrease in total kilowatthour sales. Kilowatthour sales for resale by MPEX, the Company's power marketing division, were down 40 percent in 1997 due to less power available for resale. Less power was available because of higher prices for purchased power, various generating unit outages, reduction in transmission capability damaged by severe spring storms in the Midwest and less hydro generation in Canada. While revenue from MPEX sales was lower in 1997, higher profit margins were realized on these sales. Revenue from electric sales to taconite customers accounted for 31 percent of electric operating revenue in 1997 compared to 33 percent in 1996. Electric sales to paper and other wood-products companies accounted for 12 percent of electric operating revenue in 1997 and 11 percent in 1996. Sales to other power suppliers accounted for 12 percent of electric operating revenue in 1997 compared to 15 percent in 1996. Total electric operating expenses decreased by $5.2 million in 1997 including a $2.3 million decrease in fuel and purchased power because of reduced kilowatthour sales. Recent reform of the Minnesota property tax system also reduced operating expenses in 1997. Water Services. Operating revenue and income from water services was lower in 1997 primarily due to lower revenue following the sale of two water systems by Heater in 1996 and lower consumption by customers in Florida and North Carolina. Operating expenses were also lower because of ongoing cost controls and improved operating efficiency. -9-
Automotive Services. Operating revenue and income was $19.2 million higher in 1997 due primarily to the addition of nine new automobile auction sites and increased sales at existing sites. ADESA sold 204,000 cars in 1997 compared to 160,000 in 1996. Growth of AFC's floor plan financing business and increased transport business also increased revenue and income. Operating expenses were higher in 1997 because of the addition of nine auction sites and increased activity at existing sites. The expansion of AFC's floor plan financing business also contributed to higher operating expenses. Investments. - Securities Portfolio and Reinsurance. The Company's securities portfolio and reinsurance continued to perform well in 1997 as in 1996. Capital Re's contribution to earnings increased in 1997. A one-time tax benefit for an IRS audit adjustment was included in 1996. - Real Estate Operations. Revenue was up in 1997 as a result of additional sales of properties at Palm Coast. Expenses also were higher due to expanded operations. The recognition of $2 million of tax benefits at Lehigh in 1996 made real estate's contribution to net income higher in 1996 than 1997. Business Segment Comparison Six Months Ended June 30, 1997 and 1996. Electric Operations. Operating revenue and income from electric operations was up slightly in 1997. Proceeds from the sale of rights to microwave frequencies and the sale of river land to the State of Minnesota offset a decline in revenue resulting from a 7 percent decrease in total kilowatthour sales. The decrease is attributed to a decline in sales to other power suppliers due to less power available for resale. Less power was available because of higher prices for purchased power, various generating unit outages, reduction in transmission capability damaged by severe spring storms in the Midwest and less hydro generation in Canada. The decrease in kilowatt sales was partially offset by an increase in sales to paper customers because of a higher demand for paper. Revenue from electric sales to taconite customers accounted for 32 percent of electric operating revenue in 1997 and 1996. Electric sales to paper and other wood-products companies accounted for 12 percent of electric operating revenue in 1997 and 11 percent in 1996. Sales to other power suppliers accounted for 10 percent of electric operating revenue in 1997 compared to 12 percent in 1996. Total electric operating expenses decreased by $5.2 million in 1997 including a $1.9 million decrease in fuel and purchased power because of reduced kilowatthour sales. Lower property taxes due to the 1997 reform of the Minnesota property tax system and lower interest charges also contributed to the cost reductions in 1997 operating expenses. Water Services. Operating revenue and income from water services was higher in 1997 primarily because of increased rates approved by the FPSC in 1996 for Florida Water customers. The increase was partially offset by lower revenue following the sale of two water systems by Heater in 1996. A $1.1 million pre-tax gain on the sale of one water system in South Carolina was recognized in March 1996. Automotive Services. Operating revenue and income was $40 million higher in 1997 due primarily to the addition of nine new automobile auction sites and increased sales at existing sites. ADESA sold 391,000 cars in 1997 compared to 305,000 in 1996. Growth of AFC's floor plan financing business, increased transport business and a gain on the sale of an auction also increased revenue and income. Operating expenses were higher in 1997 because of the addition of nine auction sites and increased activity at existing sites. The expansion of AFC's floor plan financing business also contributed to higher operating expenses. -10-
Investments. - Securities Portfolio and Reinsurance. The Company's securities portfolio and reinsurance earned an annualized after tax return of 8.6 percent in 1997 compared to 9.8 percent in 1996. A one-time tax benefit for an IRS audit adjustment was included in 1996. - Real Estate Operations. Revenue was down in 1997 compared to 1996 which included $3.7 million from the sale of Lehigh's joint venture investment in a resort and golf course. The April 1996 acquisition of Palm Coast increased 1997 operating revenue and expenses. The recognition of $2 million of tax benefits at Lehigh in 1996 made real estate's contribution to net income higher in 1996 than 1997. Liquidity and Financial Position Reference is made to the Consolidated Statement of Cash Flows for the six months ended June 30, 1997 and 1996, for purposes of the following discussion. 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 4 million original issue shares of Common Stock are available for issuance through the DRIP. AFC has sold a total of $75 million of receivables to a third party purchaser since December 1996, including $25 million in May 1997. Under the terms of a five year agreement, the purchaser agrees to make investments aggregating $100 million, at any one time outstanding, to the extent that such investments are supported by eligible receivables. Proceeds from the sale of the receivables were used to repay borrowings from the Company. In June 1997 Minnesota Power refinanced $10 million of industrial development revenue bonds and $29 million of pollution control bonds with $39 million of Variable Rate Demand Revenue Refunding Bonds Series 1997A due June 1, 2020, Series 1997B and Series 1997C due June 1, 2013 and Series 1997D due December 1, 2007. A total of $36.5 million of the transaction was completed in June and July. The remaining $2.5 million of the refinancing is expected to be completed by October 1997. In May 1997 MP Water Resources' $30 million 10.44% long-term note payable was refinanced with $24 million of Florida Water's First Mortgage Bonds, 8.01% Series due May 30, 2017 and $6 million of internally generated funds. Capital Requirements. Consolidated capital expenditures for the six months ended June 30, 1997 totaled $34 million. These expenditures include $17 million for electric operations, $10 million for water services and $7 million for automotive services. Internally generated funds were the primary source for funding capital expenditures. New Accounting Standards In June 1997 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Net Income", effective for fiscal years beginning after December 15, 1997. While earlier application is permitted, the Company does not intend to do so. SFAS 130 establishes standards for reporting and display of comprehensive income in a full set of general-purpose financial statements. Comprehensive income is defined as the change in equity during a period from all transactions and other events from nonowner sources. The adoption of SFAS 130 is not expected to impact the Company's financial position or results of operations. -11-
Also in June 1997 the FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information", effective for fiscal years beginning after December 15, 1997. SFAS 131 requires the reporting of certain information about operating segments of an enterprise. The Company believes that it is already in compliance with SFAS 131 in all material respects. In February 1997 the FASB issued SFAS 128, "Earnings per Share," effective for financial statements for both interim and annual periods ending after December 15, 1997. Earlier application is not permitted. SFAS 128 specifies the computation, presentation and disclosure requirements for earnings per share (EPS). The objective of the new standard is to simplify the computation of EPS and make the U.S. standard for this computation more compatible with the EPS standards of other countries and with that of the International Accounting Standards Committee. The adoption of SFAS 128 is expected to be immaterial to the Company's results of operations. 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 13, 1997. (b) Not applicable. (c) The election of directors and the appointment of independent accountants were voted on at the Annual Meeting of Shareholders. The results were as follows: Votes Withheld or Broker Directors Votes For Against Abstentions Nonvotes --------- --------- ------- ----------- -------- Kathleen A. Brekken 28,796,594 615,305 - - Merrill K. Cragun 28,883,406 528,493 - - Dennis E. Evans 28,747,266 664,633 - - Peter J. Johnson 28,926,407 485,492 - - George L. Mayer 28,883,321 528,578 - - Paula F. McQueen 28,887,327 524,572 - - Robert S. Nickoloff 28,795,894 616,005 - - Jack I. Rajala 28,897,584 514,315 - - Edwin L. Russell 28,820,997 590,902 - - Arend J. Sandbulte 28,814,709 597,190 - - Nick Smith 28,850,785 561,114 - - Bruce W. Stender 28,900,628 511,271 - - Donald C. Wegmiller 28,842,900 568,999 - - Independent Accountants ----------------------- Price Waterhouse LLP 28,773,751 273,435 364,713 - (d) Not applicable. -12-
Item 5. Other Information Reference is made to the Company's 1996 Form 10-K for background information on the following updates. Unless otherwise indicated, cited references are to the Company's 1996 Form 10-K. Ref. Page 13. - Fifth Paragraph On June 30, 1997 the NCUC approved the transfer of LaGrange Waterworks Corporation (LaGrange) to Heater. The Company has agreed to exchange 96,000 shares of Common Stock for the outstanding shares of LaGrange. The public staff of the NCUC and the City of Fayetteville filed requests for reconsideration of the NCUC's approval of the transfer. LaGrange provides water services to approximately 5,300 customers near Fayetteville, NC. Ref. Page 13. - Following the Sixth Paragraph On June 2, 1997 operations officially began at MP Water Resources' newly formed subsidiary, Americas' Water Services Corporation (Americas' Water). Americas' Water, which is headquartered in Chicago, Illinois, offers management, operations and maintenance contract services and expertise to governments and industries throughout the Americas. MP Water Resources is a wholly owned subsidiary of the Company. Ref. Page 14. - Second Paragraph Ref. 10-Q for the quarter ended March 31, 1997, Page 5 - Fourth and Fifth Paragraphs Ref. 10-Q for the quarter ended March 31, 1997, Page 10 - Third Paragraph As required by Hernando County, on April 14, 1997 Florida Water filed for a rate change with the Hernando County Board of Commissioners. Florida Water filed for an annual interim rate reduction of $258,780 (-3.3 percent) and a final rate increase of $123,897 (1.6 percent). On June 14, 1997 the final rate increase Florida Water requested became effective automatically by operation of law because Hernando County failed to take action on the rates within the prescribed statutory period. In July 1997 Florida Water reached a settlement agreement with Hernando County regarding the rate case Florida Water filed in April 1997. Under the settlement agreement, new rates will be effective September 1, 1997 and are expected to result in $6.3 million of revenue on an annual basis, a $1.6 million decrease from current revenue levels implemented on June 14, 1997. Rates will then be increased January 1, 1999 to result in $7.2 million in revenue on an annual basis. Florida Water has also agreed not to file for new rates with Hernando County prior to September 2000. All litigation was dismissed by both parties. Florida Water's settlement agreement with Hernando County supersedes the FPSC's February 14, 1997 order which required Florida Water to charge rates to customers in Hernando County based on a modified stand-alone rate structure. Ref. Page 14. - Following the Second Paragraph On July 2, 1997 Florida Water filed for a rate change with the Hillsborough County Utilities Department. The Company filed for an annual interim rate increase of $848,845 (43.1 percent) and a final rate increase of $877,607 (44.6 percent). Interim rates are anticipated to become effective 45 days from the date of the filing. The Company is unable to predict the outcome of this case. In July 1997 Florida Water filed two index filings which if approved will increase revenue by $436,000. Approval is expected on or about October 1, 1997. Under Florida law water and wastewater utilities may make an annual index filing designed to recover inflationary costs associated with operation and maintenance expense. Ref. Page 16. - Fourth Paragraph Ref. 10-Q for the quarter ended March 31, 1997, Page 10 - Last Paragraph On May 15, 1997 ADESA acquired 100 percent of a new automobile auction in Sacramento, California. The Sacramento site is on 37 acres with five auction lanes. -13-
------------------------------------- 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", "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: (i) prevailing governmental policies and regulatory actions, including those of the FERC, the MPUC, the FPSC, the NCUC, the SCPSC and the PSCW, with respect to allowed rates of return, industry and rate structure, acquisition and disposal of assets and facilities, operation, and construction of plant facilities, recovery of purchased power, and present or prospective wholesale and retail competition (including but not limited to retail wheeling and transmission costs); (ii) economic and geographic factors including political and economic risks; (iii) changes in and compliance with environmental and safety laws and policies; (iv) weather conditions; (v) population growth rates and demographic patterns; (vi) competition for retail and wholesale customers; (vii) pricing and transportation of commodities; (viii) market demand, including structural market changes; (ix) changes in tax rates or policies or in rates of inflation; (x) changes in project costs; (xi) unanticipated changes in operating expenses and capital expenditures; (xii) capital market conditions; (xiii) competition for new energy development opportunities; and (xiv) legal and administrative proceedings (whether civil or criminal) and settlements that influence the business and profitability of the Company. Any forward-looking statements speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. ------------------------------------- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 4 Third Supplemental Indenture, dated as of May 28, 1997, between Southern States Utilities, Inc. (now Florida Water Services Corporation) and Nationsbank of Georgia, National Association (now SunTrust Bank, Central Florida, N.A.), as Trustee. 27 Financial Data Schedule (b) Reports on Form 8-K. Report on Form 8-K dated and filed June 23, 1997 with respect to Item 5. Other Events. -14-
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 7, 1997 D. G. Gartzke ------------------------------- D. G. Gartzke Senior Vice President - Finance and Chief Financial Officer August 7, 1997 Mark A. Schober ------------------------------- Mark A. Schober Controller -15-