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 JUNESEPTEMBER 30, 2004
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No.Number 1-3548
ALLETE, INC.
A Minnesota Corporation
IRS(Exact name of Registrant as specified in its charter)
MINNESOTA 41-0418150
(State of Incorporation) (IRS Employer
Identification No. 41-0418150)
30 West Superior Street
Duluth, MinnesotaWEST SUPERIOR STREET
DULUTH, MINNESOTA 55802-2093
Telephone -(Address of principal executive offices)
(Zip Code)
(218) 279-5000
(Registrant's telephone number, including area code)
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
----- ------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
----- ------------
Common Stock, no par value,
88,647,01529,552,037 shares outstanding
as of JulyOctober 31, 2004
INDEX
Page
Definitions 2
Safe Harbor Statement Under the Private Securities Litigation
Reform Act of 1995 3
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet -
JuneSeptember 30, 2004 and December 31, 2003 4
Consolidated Statement of Income -
Quarter and SixNine Months Ended JuneSeptember 30, 2004
and 2003 5
Consolidated Statement of Cash Flows -
SixNine Months Ended JuneSeptember 30, 2004 and 2003 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 28
Item 4. Controls and Procedures 3029
Part II. Other Information
Item 1. Legal Proceedings 30
Item 2. Changes inUnregistered Sales of Equity Securities and
Use of Proceeds and
Issuer Purchases of Equity30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 3130
Item 5. Other Information 3130
Item 6. Exhibits and Reports on Form 8-K 3331
Signatures 3532
1 ALLETE SecondThird Quarter 2004 Form 10-Q
DEFINITIONS
The following abbreviations or acronyms are used in the text. References in this
report to "we," "us" and "our" are to ALLETE, Inc. and its subsidiaries,
collectively.
ABBREVIATION OR ACRONYM TERM
- --------------------------------------------------------------------------------
2003 Form 10-K ALLETE's Annual Report on Form 10-K for the Year
Ended December 31, 2003
Aqua America Aqua America, Inc.
ADESA ADESA, Inc.
ADESA Impact Collectively, Automotive Recovery Services,
Inc. and Impact Auto Auctions Ltd.
ADESA Importation ADESA Importation Services, Inc.
AFC Automotive Finance CorporationAICPA American Institute of Certified Public Accountants
ALLETE ALLETE, Inc.
ALLETE Properties ALLETE Properties, Inc.
APB Accounting Principles Board
Aqua America Aqua America, Inc.
BNI Coal BNI Coal, Ltd.
Company ALLETE, Inc. and its subsidiaries
EBITDA Earnings Before Interest, Taxes,
Depreciation and Amortization ExpenseEITF Emerging Issues Task Force
EPA Environmental Protection Agency
ESOP Employee Stock Ownership Plan
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Florida Water Florida Water Services Corporation
FPSC Florida Public Service Commission
FSP Financial Accounting Standards Board Staff Position
GAAP Accounting Principles Generally Accepted Accounting Principles in the
United States
GeoInsight GeoInsight, Inc.
IPO Initial Public Offering
MTBE Methyl Tertiary-Butyl EtherIRS Internal Revenue Service
Minnesota Power An operating division of ALLETE, Inc.
Minnkota Power Minnkota Power Cooperative, Inc.
MPUC Minnesota Public Utilities Commission
MW Megawatt(s)
Note ___ Note ___ to the consolidated financial statements
in this Form 10-Q
NRG Energy NRG Energy, Inc.
NYSE New York Stock Exchange
PSCW Public Service Commission of Wisconsin
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards No.
Split Rock Energy Split Rock Energy LLC
Square Butte Square Butte Electric Cooperative
SWL&P Superior Water, Light and Power Company
Taconite Harbor Taconite Harbor Energy Center
WDNR Wisconsin Department of Natural Resources
ALLETE SecondThird Quarter 2004 Form 10-Q 2
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, we are hereby filing cautionary statements
identifying important factors that could cause our actual results to differ
materially from those projected in forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) made by or on
behalf of ALLETE in this Quarterly Report on Form 10-Q, in presentations, in
response to questions or otherwise. Any statements that express, or involve
discussions as to, expectations, beliefs, plans, objectives, assumptions or
future events or performance (often, but not always, through the use of words or
phrases such as "anticipates," "believes," "estimates," "expects," "intends,"
"plans," "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, risks 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 our control and may cause actual results or
outcomes to differ materially from those contained in forward-looking
statements:
- - our ability to successfully implement our strategic objectives, including
the completion and impact of the planned spin-off of our Automotive
Services business;objectives;
- - war and acts of terrorism;
- - prevailing governmental policies and regulatory actions, including those of
the United States Congress, Canadian federal government, state and
provincial legislatures, the FERC, the MPUC, the FPSC,
the PSCW, and various county regulators and city administrators, about
allowed rates of return, financings, industry and rate structure, acquisition
and disposal of assets and facilities, operation and construction of plant
facilities, recovery of purchased power and capital investments, and present or
prospective wholesale and retail competition (including but not limited to
transmission costs) as well as vehicle-related laws, including vehicle
brokerage, and auction laws;zoning and permitting of land held for resale;
- - unanticipated effects of restructuring initiatives in the electric and
automotive industries;industry;
- - economic and geographic factors, including political and economic risks;
- - changes in and compliance with environmental and safety laws and policies;
- - weather conditions;
- - natural disasters;
- market factors affecting supply and demand for used vehicles; - wholesale power market conditions;
- - population growth rates and demographic patterns;
- - the effects of competition, including competition for retail and wholesale
customers, as well as sellers and buyers of vehicles;customers;
- - pricing and transportation of commodities;
- - changes in tax rates or policies or in rates of inflation;
- - unanticipated project delays or changes in project costs;
- - unanticipated changes in operating expenses and capital expenditures;
- - capital market conditions;
- - competition for economic expansion or development opportunities;
- - our ability to manage expansion and integrate acquisitions; and
- - the outcome of legal and administrative proceedings (whether civil or
criminal) and settlements that affect the business and profitability of
ALLETE.
Additional disclosures regarding factors that could cause our results and
performance to differ from results or performance anticipated by this report are
discussed in Item 7.7 under the heading "Factors that May Affect Future Results"
beginning on page 46 of our 2003 Form 10-K. Risk factors associated with our
Automotive Services business are no longer applicable to ALLETE as that business
was spun off as of September 20, 2004. Any forward-looking statement speaks only
as of the date on which such statement is made, and we undertake no obligation
to update any forward-looking statement to reflect events or circumstances after
the date on which that statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time and it is not
possible for management to predict all of these factors, nor can it assess the
impact of each of these factors on the businesses of ALLETE or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statement. Readers are
urged to carefully review and consider the various disclosures made by us in our
2003 Form 10-K and in our other reports filed with the SEC that attempt to
advise interested parties of the factors that may affect our business.
3 ALLETE SecondThird Quarter 2004 Form 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLETE
CONSOLIDATED BALANCE SHEET
Millions - Unaudited
JUNESEPTEMBER 30, DECEMBER 31,
2004 2003
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and Cash Equivalents $ 602.9172.7 $ 219.6
Restricted Cash 155.8 3.4113.4
Accounts Receivable (Less Allowance of $14.1$1.5 and $26.4) 551.3 403.8$1.3) 72.0 63.3
Inventories 40.7 37.938.5 31.8
Prepayments and Other 15.6 15.819.4 16.5
Discontinued Operations 9.6 14.92.2 476.7
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 1,375.9 695.4304.8 701.7
Property, Plant and Equipment - Net 1,484.7 1,499.0885.0 919.3
Investments 184.6 204.6
Goodwill 509.5 511.0
Other Intangible Assets 30.7 33.3190.6 170.1
Other Assets 88.0 70.163.1 62.9
Discontinued Operations 8.2 87.95.8 1,247.3
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $3,681.6$1,449.3 $3,101.3
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Accounts Payable $ 396.027.2 $ 243.928.3
Accrued Taxes and Interest 43.5 35.221.1 29.8
Notes Payable - 53.0
Long-Term Debt Due Within One Year 320.1 37.51.9 35.6
Other 98.8 107.124.5 38.8
Discontinued Operations 15.0 49.56.5 340.7
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 873.481.2 526.2
Long-Term Debt 790.9 747.7389.5 514.7
Accumulated Deferred Income Taxes 182.2 160.7
Minority Interest 74.3 8.4157.9 167.3
Other Liabilities 157.5 153.1156.1 154.6
Discontinued Operations 2.7 45.02.2 278.3
Commitments and Contingencies
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 2,081.0786.9 1,641.1
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common Stock Without Par Value, 130.043.3 Shares Authorized
88.629.5 and 87.329.1 Shares Outstanding 963.7395.3 859.2
Unearned ESOP Shares (43.8)(16.4) (45.4)
Accumulated Other Comprehensive Loss - Continuing Operations (8.4) (9.0)
Accumulated Other Comprehensive Gain 8.4 14.5- Discontinued Operations - 23.5
Retained Earnings 672.3291.9 631.9
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,600.6662.4 1,460.2
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,681.6$1,449.3 $3,101.3
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
ALLETE SecondThird Quarter 2004 Form 10-Q 4
ALLETE
CONSOLIDATED STATEMENT OF INCOME
Millions Except Per Share Amounts - Unaudited
QUARTER ENDED SIXNINE MONTHS ENDED
JUNESEPTEMBER 30, JUNESEPTEMBER 30,
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUE Energy Services
Regulated Utility $136.9 $125.8 $278.3 $263.8
Nonregulated 47.0 32.7 87.9 73.8
Automotive Services 232.1 240.7 479.8 473.6
Investments (0.7) 10.7 27.8 21.6$183.2 $170.1 $582.7 $530.3
- --------------------------------------------------------------------------------------------------------------------
Total Operating Revenue 415.3 409.9 873.8 832.8
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Fuel and Purchased Power Regulated Utility 65.9 56.8 123.0 112.8
Nonregulated 11.3 8.1 23.1 19.5
Operations
Regulated Utility 53.2 52.5 110.6 110.3
Nonregulated 33.7 24.5 62.2 52.8
Automotive71.9 64.9 218.0 197.2
Operating and Investments 180.7 189.9 384.1 380.0
Interest 13.8 16.0 26.9 32.9Maintenance 69.0 55.3 221.3 194.7
Depreciation 12.3 12.6 37.2 38.4
Taxes Other than Income 6.7 7.1 21.5 22.7
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 358.6 347.8 729.9 708.3159.9 139.9 498.0 453.0
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME FROM CONTINUING OPERATIONS 56.7 62.1 143.9 124.523.3 30.2 84.7 77.3
- -------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest Expense (7.5) (13.2) (25.7) (38.0)
Other (18.4) 0.5 (21.4) 2.4
- -------------------------------------------------------------------------------------------------------------------
Total Other Expense (25.9) (12.7) (47.1) (35.6)
- -------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (2.6) 17.5 37.6 41.7
INCOME TAX EXPENSE 23.8 25.0 57.9 49.4(BENEFIT) (2.0) 6.6 14.4 16.1
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 32.9 37.1 86.0 75.1BEFORE
CHANGE IN ACCOUNTING PRINCIPLE (0.6) 10.9 23.2 25.6
INCOME FROM DISCONTINUED OPERATIONS - NET OF TAX 1.8 7.3 1.2 13.613.7 36.7 79.3 110.7
CHANGE IN ACCOUNTING PRINCIPLE - --------------------------------------------------------------------------------------------------------------------NET OF TAX - - (7.8) -
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 34.713.1 $ 44.447.6 $ 87.2 $ 88.794.7 $136.3
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
AVERAGE SHARES OF COMMON STOCK
Basic 85.1 82.6 84.7 82.428.5 27.7 28.3 27.5
Diluted 85.6 82.9 85.2 82.628.6 27.8 28.5 27.6
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Continuing Operations $0.39 $0.45 $1.02 $0.91$(0.03) $0.40 $0.82 $0.93
Discontinued Operations 0.02 0.09 0.01 0.170.48 1.32 2.80 4.02
Change in Accounting Principle - --------------------------------------------------------------------------------------------------------------------
$0.41 $0.54 $1.03 $1.08
- --------------------------------------------------------------------------------------------------------------------(0.28) -
- -------------------------------------------------------------------------------------------------------------------
$0.45 $1.72 $3.34 $4.95
- -------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Continuing Operations $0.38 $0.45 $1.01 $0.91$(0.02) $0.40 $0.82 $0.93
Discontinued Operations 0.02 0.08 0.01 0.160.47 1.31 2.78 4.00
Change in Accounting Principle - --------------------------------------------------------------------------------------------------------------------
$0.40 $0.53 $1.02 $1.07
- --------------------------------------------------------------------------------------------------------------------(0.27) -
- -------------------------------------------------------------------------------------------------------------------
$ 0.45 $1.71 $3.33 $4.93
- -------------------------------------------------------------------------------------------------------------------
DIVIDENDS PER SHARE OF COMMON STOCK $0.2825 $0.2825 $0.565 $0.565$0.8475 $0.8475 $2.5425 $2.5425
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
5 ALLETE SecondThird Quarter 2004 Form 10-Q
ALLETE
CONSOLIDATED STATEMENT OF CASH FLOWS
Millions - Unaudited
SIXNINE MONTHS ENDED
JUNESEPTEMBER 30,
2004 2003
- --------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income from Continuing Operations $ 87.215.4 $ 88.725.6
Change in Accounting Principle 7.8 -
Depreciation and Amortization 43.0 42.937.2 38.4
Deferred Income Taxes 7.1 12.0
Gain on Sale of Plant (15.5) (17.0)(2.8) (2.4)
Changes in Operating Assets and Liabilities
Accounts Receivable (146.4) (84.8)(8.7) 19.6
Inventories (1.8) 3.2(6.7) 1.9
Prepayments and Other (0.2) (1.8)(2.9) 1.8
Accounts Payable 118.7 54.6(1.1) (1.0)
Other Current Liabilities (13.2) (3.2)(23.0) (5.0)
Other Assets (4.1) 2.4(0.2) (3.0)
Other Liabilities 3.6 8.51.5 (3.3)
Net Operating Activities from Discontinued Operations 119.9 208.3
- --------------------------------------------------------------------------------------------------------------------
Cash from Operating Activities 78.4 105.5136.4 280.9
- --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from Sale of Plant 75.4 -
Proceeds from Sale of Available-For-Sale Securities 1.6 6.4
Changes to Investments 16.3 (2.4)15.7 (1.9)
Additions to Property, Plant and Equipment (43.4) (118.6)(48.8) (53.6)
Other (1.5) (15.0)5.1 6.9
Net Investing Activities from (for) Discontinued Operations 60.1 (84.3)
- --------------------------------------------------------------------------------------------------------------------
Cash from (for) Investing Activities 48.4 (129.6)33.7 (126.5)
- --------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of Common Stock 34.9 17.8
Issuance of Subsidiary Common Stock 136.0 -38.5 29.3
Issuance of Long-Term Debt 405.6 65.9
Net Increase in Book Overdrafts 31.2 70.8
Payments for Debt Issuance Costs (9.9) -8.6 26.3
Changes in Notes Payable - Net (52.2) (72.9)(53.0) 169.4
Reductions of Long-Term Debt (81.5) (3.2)(129.9) (274.0)
Dividends on Common Stock (46.8) (45.6)
Transfer to Restricted Cash (152.4) -(71.3) (69.0)
Net Financing Activities from (for) Discontinued Operations (18.6) 40.5
- --------------------------------------------------------------------------------------------------------------------
Cash fromfor Financing Activities 264.9 32.8(225.7) (77.5)
- --------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (6.4) 30.8- DISCONTINUED OPERATIONS - 30.5
- --------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS 385.3 39.5(55.6) 107.4
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 226.1 229.5 203.0
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $611.4 $242.5$173.9 $310.4
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Period for
Interest - Net of Capitalized $26.4 $33.2$42.8 $55.1
Income Taxes $59.6 $22.6$61.8 $35.3
- --------------------------------------------------------------------------------------------------------------------
Included $8.5$1.2 million of cash from Discontinued Operations at JuneSeptember 30, 2004 ($9.7196.2 million at JuneSeptember
30, 2003) and $116.1 million at December 31, 2003 ($138.0 million at December 31, 2002).
The accompanying notes are an integral part of these statements.
ALLETE SecondThird Quarter 2004 Form 10-Q 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements and notes should be
read in conjunction with our 2003 Form 10-K. In our opinion, all adjustments
necessary for a fair presentation 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 the results for the year.
NOTE 1. BUSINESS SEGMENTS
Millions
ENERGY SERVICES
--------------------- INVESTMENTS
REGULATED NON- AUTOMOTIVE AND CORPORATE
CONSOLIDATED UTILITY REGULATED SERVICES CHARGES
- -------------------------------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED JUNE 30, 2004
Operating Revenue $415.3 $136.9 $ 47.0 $232.1 $(0.7)
Operation and Other Expense 323.5 109.2 42.4 165.2 6.7
Depreciation and Amortization Expense 21.3 9.9 2.6 8.8 -
Interest Expense 13.8 4.6 0.6 4.7 3.9
- -------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) from
Continuing Operations 56.7 13.2 1.4 53.4 (11.3)
Income Tax Expense (Benefit) 23.8 5.0 0.3 21.1 (2.6)
- -------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 32.9 8.2 1.1 32.3 (8.7)
Income (Loss) from
Discontinued Operations - NetDISCONTINUED OPERATIONS
AUTOMOTIVE SERVICES. On September 20, 2004 the spin-off of Tax 1.8 - - (4.0) -
- -------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 34.7 $8.2 $ 1.1 $ 28.3 $(8.7)
- -------------------------------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED JUNE 30, 2003
Operating Revenue $409.9 $125.8 $ 32.7 $240.7 $10.7
Operation and Other Expense 309.9 98.9 30.1 171.3 9.6
Depreciation and Amortization Expense 21.9 10.4 2.5 8.9 0.1
Interest Expense 16.0 5.0 0.7 3.7 6.6
- -------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) from
Continuing Operations 62.1 11.5 (0.6) 56.8 (5.6)
Income Tax Expense (Benefit) 25.0 4.6 (0.5) 22.7 (1.8)
- -------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 37.1 6.9 (0.1) 34.1 (3.8)
Income (Loss) from
Discontinued Operations - Net of Tax 7.3 - - (0.1) -
- -------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 44.4 $ 6.9 $ (0.1) $ 34.0 $(3.8)
- -------------------------------------------------------------------------------------------------------------------
Included $5.8 million of income from the Water Services businesses in 2004 ($7.4 million in 2003).
Included $43.3 million of Canadian operating revenue in 2004 ($47.6 million in 2003).
7 ALLETE Second Quarter 2004 Form 10-Q
NOTE 1. BUSINESS SEGMENTS (CONTINUED)
Millions
ENERGY SERVICES
--------------------- INVESTMENTS
REGULATED NON- AUTOMOTIVE AND CORPORATE
CONSOLIDATED UTILITY REGULATED SERVICES CHARGES
- ---------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2004
Operating Revenue $873.8 $278.3 $ 87.9 $479.8 $27.8
Operation and Other Expense 660.0 213.8 80.2 344.7 21.3
Depreciation and Amortization Expense 43.0 19.8 5.1 18.1 -
Interest Expense 26.9 9.3 0.9 8.7 8.0
- ---------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) from
Continuing Operations 143.9 35.4 1.7 108.3 (1.5)
Income Tax Expense 57.9 13.3 0.2 42.7 1.7
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 86.0 22.1 1.5 65.6 (3.2)
Income (Loss) from
Discontinued Operations - Net of Tax 1.2 - - (4.0) -
- ---------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 87.2 $ 22.1 $ 1.5 $ 61.6 $(3.2)
- ---------------------------------------------------------------------------------------------------------------------
Total Assets $3,681.6 $1,212.4 $244.6 $2,076.8 $130.0
Property, Plant and Equipment - Net $1,484.7 $734.2 $190.7 $555.8 $4.0
Accumulated Depreciation $870.5 $709.2 $47.4 $113.9 -
Capital Expenditures $43.4 $27.9 $6.6 $5.7 $0.2
FOR THE SIX MONTHS ENDED JUNE 30, 2003
Operating Revenue $832.8 $263.8 $ 73.8 $ 473.6 $21.6
Operation and Other Expense 632.6 202.4 67.3 347.5 15.4
Depreciation and Amortization Expense 42.8 20.7 5.0 17.0 0.1
Interest Expense 32.9 10.2 1.1 8.1 13.5
- ---------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) from
Continuing Operations 124.5 30.5 0.4 101.0 (7.4)
Income Tax Expense (Benefit) 49.4 12.2 (0.3) 40.2 (2.7)
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 75.1 18.3 0.7 60.8 (4.7)
Income from Discontinued Operations - Net of Tax 13.6 - - 0.4 -
- ---------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 88.7 $ 18.3 $ 0.7 $ 61.2 $(4.7)
- ---------------------------------------------------------------------------------------------------------------------
Total Assets $3,409.2 $922.8 $214.5 $1,718.5 $163.3
Property, Plant and Equipment - Net $1,480.6 $730.5 $174.3 $571.8 $4.0
Accumulated Depreciation $819.7 $686.6 $40.1 $93.0 -
Capital Expenditures $67.5 $23.7 $14.4 $12.8 -
- ---------------------------------------------------------------------------------------------------------------------
Included $5.2 million of income from the Water Services businesses in 2004 ($13.2 million in 2003).
Discontinued Operations represented $17.8 million of total assets in 2004 ($390.1 million in 2003) and $3.0
million of capital expenditures in 2004 ($16.6 million in 2003).
Included $89.1 million of Canadian operating revenue in 2004 ($87.7 million in 2003).
Included $241.3 million of Canadian assets in 2004 ($214.6 million in 2003).
ALLETE Second Quarter 2004 Form 10-Q 8
NOTE 2. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTS RECEIVABLE. AFC sells the majority of U.S. dollar denominated finance
receivables on a revolving basis to a wholly owned, bankruptcy remote, special
purpose subsidiary that is consolidated for accounting purposes. AFC and the
special purpose subsidiary amended its securitization agreement in June 2004
concurrent with the completion of ADESA's IPO. The agreement expires in January
2005 subject to annual renewal and allows for the revolving sale to a bank
conduit facility of up to a maximum of $500 million in undivided interests in
eligible finance receivables subject to committed liquidity. The special purpose
subsidiary had $425 million of committed liquidity at June 30, 2004. Receivables
sold are not reported on our consolidated financial statements. At June 30, 2004
AFC managed total finance receivables of $599 million ($533 million at December
31, 2003), of which $522 million had been sold to the special purpose subsidiary
($458 million at December 31, 2003). The special purpose subsidiary then in turn
sold loans, with recourse to the special purpose subsidiary, of $370 million to
the bank conduit facility at June 30, 2004 ($334 million at December 31, 2003)
leaving $229 million of finance receivables recorded on our consolidated balance
sheet at June 30, 2004 ($199 million at December 31, 2003). Proceeds from the
revolving sale of receivables to the bank conduit facility were used to fund new
loans to customers. AFC and the special purpose subsidiary must maintain certain
financial covenants including, among others, limits on the amount of debt AFC
can incur, minimum levels of tangible net worth, and termination events tied to
the performance of the finance receivables portfolio. The securitization
agreement also incorporates the financial covenants of ADESA's new credit
facility. AFC has historically performed better than the covenant thresholds set
forth in the securitization agreement, and we are not aware of any changing
circumstances that would put AFC or us in noncompliance with the covenants
therein.
ACCOUNTING FOR STOCK-BASED COMPENSATION. We have elected to account for
stock-based compensation in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, we recognize expense for performance
share awards granted and do not recognize expense for employee stock options
granted. The after-tax expense recognized for performance share awards was
approximately $0.8 million for the first six months of 2004 ($1.4 million for
the first six months of 2003). The following table illustrates the effect on net
income and earnings per share if we had applied the fair value recognition
provisions of SFAS 123, "Accounting for Stock-Based Compensation."
QUARTER ENDED SIX MONTHS ENDED
EFFECT OF SFAS 123 JUNE 30, JUNE 30,
ACCOUNTING FOR STOCK-BASED COMPENSATION 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts
Net Income
As Reported $34.7 $44.4 $87.2 $88.7
Less: Employee Stock Compensation Expense
Determined Under SFAS 123 - Net of Tax 0.1 0.1 0.2 0.2
- -------------------------------------------------------------------------------------------------------------------
Pro Forma Net Income $34.6 $44.3 $87.0 $88.5
- -------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
As Reported $0.41 $0.54 $1.03 $1.08
Pro Forma $0.41 $0.54 $1.03 $1.07
Diluted Earnings Per Share
As Reported $0.40 $0.53 $1.02 $1.07
Pro Forma $0.40 $0.53 $1.02 $1.07
- -------------------------------------------------------------------------------------------------------------------
In the previous table, the expense for employee stock options granted determined
under SFAS 123 was calculated using the Black-Scholes option pricing model and
the following assumptions:
2004 2003
- -------------------------------------------------------------------------------------------------------------------
Risk-Free Interest Rate 3.3% 3.1%
Expected Life - Years 5 5
Expected Volatility 28.1% 25.2%
Dividend Growth Rate 2% 2%
- -------------------------------------------------------------------------------------------------------------------
RESTRICTED CASH. Our Automotive Services
business had $155.8 million of
restricted cash at June 30, 2004 primarily consisting of funds held in escrow
for the redemption of certain debt in August 2004. (See Note 7.)
9 ALLETE Second Quarter 2004 Form 10-Q
NOTE 2. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS. In May 2004 the FASB issued FASB Staff Position (FSP)
106-2, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003" (Act), which
provides accounting and disclosure guidance for employers that sponsor
postretirement health care plans that provide prescription drug benefits. FSP
106-2 requires that the Accumulated Postretirement Benefit Obligation and
Postretirement Benefit Cost reflect the impact of the Act upon adoption, which
is required for the first interim period beginning after June 15, 2004. We
provide postretirement health benefits that include prescription drug benefits,
and expect our postretirement prescription drug benefits to qualify us for the
federal subsidy to be provided for under the Act. We expect that the federal
subsidy will reduce our postretirement benefit costwas completed by approximately $2 million
pretax annually. We will adopt FSP 106-2 in the third quarter of 2004.
NOTE 3. SPIN-OFF AND IPO OF AUTOMOTIVE SERVICES
In October 2003 our Board of Directors approved a plan to spin offdistributing to ALLETE shareholders our Automotive Services business as a publicly traded company doing
business asall of ALLETE's shares of
ADESA Inc. In March 2004 our Boardcommon stock. One share of Directors approved an IPO of
less than 20 percent of all ADESA common stock outstanding. Onwas distributed for each
outstanding share of ALLETE common stock held at the close of business on
September 13, 2004, the record date. The distribution was made from ALLETE's
retained earnings to the extent of ADESA's undistributed earnings ($363.4
million) with the remainder made from common stock ($600.2 million).
In June 21, 2004 ADESA issued 6.3 million shares of common stock through an IPO
priced at $24.00 per share. Thisshare which netted proceeds of $136.0 million after
transaction costs, issued $125 million of senior notes and borrowed $275 million
under a new $525 million credit facility. With these funds, ADESA repaid
previously existing debt and all intercompany debt outstanding to ALLETE. The
IPO represented 6.6 percent of ADESA's 94.9 million shares outstanding. As a
result of the IPO, ALLETE recorded a $73.1 million increase to
Common Stock with no gain being recognized. We will accountwe accounted for the 6.6 percent public ownership of ADESA as
a minority interest. We will continueinterest and continued to own and consolidate the remaining portion
of ADESA until the completion of the spin-off.
The spin-off is expected to take the form of a tax-free stock dividend to
ALLETE's shareholders, who would receive a pro rata number of shares of ADESA
common stock for each share of ALLETE common stock that they own. The spin-off
is subject to the approval of the final plan by ALLETE's Board of Directors,
favorable market conditions, receipt of tax opinions and other customary
conditions. ALLETE's Board of Directors is expected to meet in late August 2004
to finalize details of the spin-off of Automotive Services, which is expected to
bewas completed by the end ofon September 20, 2004.
In accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," we will report thehave reported our Automotive Services business in
discontinued operations after the spin-off. For the quarter and six months ended
June 30, 2004, $0.3 million of minority interest expense was included in
Automotive and Investment Operations Expenses on our consolidated statement of
income.
NOTE 4. DISCONTINUED OPERATIONSDiscontinued Operations.
WATER SERVICES. During 2003, we sold, under condemnation or imminent threat of
condemnation, substantially all of our water assets in Florida for a total sales
price of approximately $445 million. EarningsIncome from Discontinued Operationsdiscontinued operations for
2003 included a $71.6 million or $0.86 per share, after-tax gain on the sale of substantially all
our Water Services businesses ($0.2 million first quarter; $0.2 million second
quarter; $3.0 million or $0.04 per share, third quarter; $68.2 million or $0.82 per share, fourth quarter). The gain was
net of all selling, transaction and employee termination benefit expenses, as
well as impairment losses on certain remaining assets.
In June 2004 we essentially concluded our strategy to exit our Water Services
businesses when we completed the salessale of our North Carolina water assets and the
sale of the remaining 72 water and wastewater systems in Florida. Aqua America
purchased our North Carolina water assets for $48 million and the
assumption ofassumed
approximately $28 million in debt, and also purchased 63 of our water and
wastewater systems in Florida for $14 million. Seminole County purchased the
remaining 9 Florida systems for a total of $4 million. The transactions relatedFPSC approved the
Seminole County transaction in September 2004. The transaction relating to the
sale of our remaining63 water and wastewater systems in Florida areto Aqua America remains
subject to regulatory approval by the FPSC. The approval process may result in
an adjustment to the final purchase price based on the FPSC's determination of
plant investment for the systems. EarningsIncome from Discontinued Operationsdiscontinued operations for the
nine months ended September 30, 2004 included a $5.4$5.2 million or $0.06 per share, after-tax gain on
the sale of North Carolina water assets and remaining water and wastewater
systems in Florida ($0.4 million of after-tax expenses first quarter andquarter; $5.8
million or $0.06 per
share, net gain second quarter; $0.2 million of after-tax expenses third
quarter). We expect to sell our water assets in Georgia in 2004.
The net cash proceeds from the sale of all water assets in 2003 and 2004, after
transaction costs, retirement of most Florida Water debt and payment of income
taxes, were approximately $300 million. These net proceeds were used to retire
debt at ALLETE. We expect to sell our water assets in Georgia in the second half
of 2004.
ALLETE Second Quarter 2004 Form 10-Q 10
NOTE 4. DISCONTINUED OPERATIONS (Continued)
In October 2003 the FPSC voted to initiate an investigation into the ratemaking
considerations of the gain on sale of Florida Water's assets, and whether gains
should be shared with the previous customers of Florida Water. In June 2004
Florida enacted legislation which provides that gains or losses resulting from
the purchase or condemnation of a utility's assets, which results in the loss of
customers and revenue served by such assets, are to be borne by the shareholders
of the utility. This appliesIn accordance with this legislation, in September 2004 the FPSC
closed all dockets related to all transactions prior to and afterits investigations into the effective dateratemaking
considerations of the new law.gain on sale of Florida Water's assets.
7 ALLETE Third Quarter 2004 Form 10-Q
NOTE 1. DISCONTINUED OPERATIONS (CONTINUED)
SUMMARY OF DISCONTINUED OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Millions
QUARTER ENDED SIXNINE MONTHS ENDED
JUNESEPTEMBER 30, JUNESEPTEMBER 30,
INCOME STATEMENT 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Operating Revenue
$7.6 $31.2 $15.2 $62.1Automotive Services $201.9 $226.4 $681.7 $701.8
Water Services 1.2 28.4 16.3 88.7
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
$203.1 $254.8 $698.0 $790.5
- -----------------------------------------------------------------------------------------------------------------
Pre-Tax Income (Loss) from Operations
$0.2 $11.5 $(0.2) $19.4Automotive Services $25.8 $47.5 $132.8 $146.5
Water Services (0.7) 8.9 (0.9) 29.6
- -----------------------------------------------------------------------------------------------------------------
25.1 56.4 131.9 176.1
- -----------------------------------------------------------------------------------------------------------------
Income Tax Expense 0.2 4.4(Benefit)
Automotive Services 11.4 19.2 54.0 58.7
Water Services (0.3) 3.5 (0.3) 11.4
- 7.5-----------------------------------------------------------------------------------------------------------------
11.1 22.7 53.7 70.1
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Net Income from Operations 14.0 33.7 78.2 106.0
- 7.1 (0.2) 11.9
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Gain (Loss) on Disposal
8.7 0.4 8.1 3.1Automotive Services (0.1) - (6.7) 2.0
Water Services (0.3) 4.5 14.4 5.6
- -----------------------------------------------------------------------------------------------------------------
(0.4) 4.5 7.7 7.6
- -----------------------------------------------------------------------------------------------------------------
Income Tax Expense 6.9 0.2 6.7 1.4(Benefit)
Automotive Services - -------------------------------------------------------------------------------------------------------------------------
1.8 0.2 1.4 1.7
- -------------------------------------------------------------------------------------------------------------------------(2.6) 0.7
Water Services (0.1) 1.5 9.2 2.2
- -----------------------------------------------------------------------------------------------------------------
(0.1) 1.5 6.6 2.9
- -----------------------------------------------------------------------------------------------------------------
Net Gain (Loss) on Disposal (0.3) 3.0 1.1 4.7
- -----------------------------------------------------------------------------------------------------------------
Income from Discontinued Operations $1.8 $7.3 $1.2 $13.6$13.7 $36.7 $ 79.3 $110.7
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
JUNESEPTEMBER 30, DECEMBER 31,
BALANCE SHEET INFORMATION 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Assets of Discontinued Operations
Cash and Cash Equivalents $ 8.5 $ 6.5$1.2 $116.1
Other Current Assets 1.1 8.41.0 360.6
Property, Plant and Equipment 6.0 81.25.8 660.9
Investments - 34.5
Goodwill - 511.0
Other Intangibles - 33.3
Other Assets 2.2 6.7
- -------------------------------------------------------------------------------------------------------------------------
$17.8 $102.8
- -------------------------------------------------------------------------------------------------------------------------7.6
Liabilities of Discontinued Operations
Current Liabilities $15.0 $49.56.5 340.7
Long-Term Debt - 19.9252.8
Other Liabilities 2.7 25.12.2 25.5
Foreign Currency Translation Adjustment - -------------------------------------------------------------------------------------------------------------------------
$17.7 $94.523.5
- -------------------------------------------------------------------------------------------------------------------------
Included $6.6 million of accrued charges related to our vehicle import business. (See ADESA Importation Litigation.)
Included a $2.0 million recovery from a settlement related to the 2002 sale of our vehicle transport business.
-----------------------------------------------------------------------------------------------------------------
ADESA IMPORTATION LITIGATION. In 2002 a formerALLETE Third Quarter 2004 Form 10-Q 8
NOTE 2. REVERSE STOCK SPLIT
On September 20, 2004 our one-for-three reverse common stock split became
effective. All common share and per share amounts have been adjusted for all
periods to reflect the one-for-three reverse stock split.
NOTE 3. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING FOR STOCK-BASED COMPENSATION. We have elected to account for
stock-based compensation in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, we recognize expense for performance
share awards granted and do not recognize expense for employee of ADESA Importation,
our vehicle import business, which we exitedstock options
granted. The after-tax expense recognized in net income for performance share
awards was approximately $0.8 million for the first nine months of 2004 ($1.2
million for the first nine months of 2003). The following table illustrates the
effect on net income and earnings per share if we had applied the fair value
recognition provisions of SFAS 123, "Accounting for Stock-Based Compensation."
QUARTER ENDED NINE MONTHS ENDED
EFFECT OF SFAS 123 SEPTEMBER 30, SEPTEMBER 30,
ACCOUNTING FOR STOCK-BASED COMPENSATION 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts
Net Income
As Reported $13.1 $47.6 $94.7 $136.3
Less: Employee Stock Compensation Expense
Determined Under SFAS 123 - Net of Tax - 0.1 0.2 0.3
- ------------------------------------------------------------------------------------------------------------------
Pro Forma $13.1 $47.5 $94.5 $136.0
- ------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
As Reported $0.45 $1.72 $3.34 $4.95
Pro Forma $0.45 $1.72 $3.34 $4.94
Diluted Earnings Per Share
As Reported $0.45 $1.71 $3.33 $4.93
Pro Forma $0.45 $1.71 $3.32 $4.92
- ------------------------------------------------------------------------------------------------------------------
In the previous table, the expense for employee stock options granted determined
under SFAS 123 was calculated using the Black-Scholes option pricing model and
the following assumptions:
2004 2003
- ------------------------------------------------------------------------------------------------------------------
Risk-Free Interest Rate 3.3% 3.1%
Expected Life - Years 5 5
Expected Volatility 28.1% 25.2%
Dividend Growth Rate 2% 2%
- ------------------------------------------------------------------------------------------------------------------
NEW ACCOUNTING STANDARDS. In the third quarter of 2003, filed
suit against ADESA2004 we adopted both FSP
106-2, "Accounting and ADESA Importation alleging breach of contract and breach
of other oral agreements related to ADESA Importation's purchase of
International Vehicle Importers, Inc. in December 2000. ADESA Importation filed
a counterclaim against the former employee including allegations of a number of
improper acts by the employee including breach of contract, breach of fiduciary
duty and fraud. Pursuant to Michigan law, the case was originally evaluated by a
three attorney panel. During the mandatory case evaluation process, the three
attorney panel awarded the former employee damages of $153,000. At the same
time, the panel awarded ADESA and ADESA Importation damages of $225,000 for its
counterclaims. The former employee rejected the panel's decision resulting in a
jury trial. On June 1, 2004 a jury awarded damages of $5.8 millionDisclosure Requirements Related to the former
employee related to the allegation that ADESA breached oral agreements to
provide funding to ADESA Importation. The jury also foundMedicare
Prescription Drug, Improvement and Modernization Act of 2003" (see Note 14) and
EITF 03-16, "Accounting for Investments in favor of ADESA and
ADESA Importation on three of its counterclaims including breach of contract,
breach of fiduciary duty and fraud and awarded ADESA and ADESA Importation
$69,000. ADESA and ADESA Importation believe that they have valid grounds for
appeal in this matter and intend to appeal the jury award, seeking reversal of
the verdict or a new trial. Post-trial motions were filed with the trial court
in July 2004. In prior periods ADESA did not accrue an amount for this matter,
based upon the finding of the three attorney panel during the case evaluation.Limited Liability Companies" (see
Note 10).
9 ALLETE Third Quarter 2004 Form 10-Q
NOTE 4. BUSINESS SEGMENTS
As a result of the jury trial verdict, ADESA accrued $6.6 million ($4.0 million
after taxes) forspin-off of our Automotive Services business in September
2004 (see Note 1), we redefined our business into four segments. REGULATED
UTILITY includes our rate regulated electric, water and gas services in
northeastern Minnesota and northwestern Wisconsin. NONREGULATED ENERGY
OPERATIONS includes our coal mining activities in North Dakota and nonregulated
generation consisting primarily of generation from Taconite Harbor in northern
Minnesota and generation secured through the jury award plusKendall County power purchase
agreement. REAL ESTATE includes our Florida real estate operations. OTHER
includes our telecommunications activities, investments in emerging
technologies, and general corporate charges and interest not specifically
related to any one business segment. General corporate charges include employee
salaries and benefits as well as legal feesand other outside service fees.
DISCONTINUED OPERATIONS includes our Automotive Services business that was spun
off on September 20, 2004, our Water Services businesses, the majority of which
were sold in the second
quarter2003, and spin-off costs incurred by ALLETE. (See Note 1.)
NONREGULATED
REGULATED ENERGY REAL
CONSOLIDATED UTILITY OPERATIONS ESTATE OTHER
- ---------------------------------------------------------------------------------------------------------------------
Millions
FOR THE QUARTER ENDED SEPTEMBER 30, 2004
Operating Revenue $183.2 $136.1 $31.1 $5.2 $ 10.8
Fuel and Purchased Power 71.9 63.4 8.5 - -
Operating and Other Expense 75.7 42.0 18.3 2.4 13.0
Depreciation Expense 12.3 9.7 1.9 - 0.7
- ---------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) from
Continuing Operations 23.3 21.0 2.4 2.8 (2.9)
Interest Expense (7.5) (5.0) (0.4) (0.1) (2.0)
Other Income (Expense) (18.4) - 0.2 - (18.6)
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
Before Income Taxes (2.6) 16.0 2.2 2.7 (23.5)
Income Tax Expense (Benefit) (2.0) 6.5 0.7 1.1 (10.3)
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations (0.6) $ 9.5 $ 1.5 $1.6 $(13.2)
---------------------------------------------------
Income from Discontinued Operations -
Net of Tax 13.7
- ------------------------------------------------------------
Net Income $ 13.1
- ------------------------------------------------------------
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
Operating Revenue $170.1 $127.1 $30.2 $6.1 $ 6.7
Fuel and Purchased Power 64.9 52.8 12.1 - -
Operating and Other Expense 62.4 38.6 11.7 2.8 9.3
Depreciation Expense 12.6 10.2 1.9 - 0.5
- ---------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) from
Continuing Operations 30.2 25.5 4.5 3.3 (3.1)
Interest Expense (13.2) (5.2) (0.4) - (7.6)
Other Income (Expense) 0.5 (0.1) - - 0.6
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
Before Income Taxes 17.5 20.2 4.1 3.3 (10.1)
Income Tax Expense (Benefit) 6.6 8.0 1.3 1.4 (4.1)
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 10.9 $ 12.2 $ 2.8 $1.9 $(6.0)
---------------------------------------------------
Income from Discontinued Operations - Net of Tax 36.7
- ------------------------------------------------------------
Net Income $ 47.6
- ------------------------------------------------------------
ALLETE Third Quarter 2004 as a loss from discontinued operations.Form 10-Q 10
NOTE 4. BUSINESS SEGMENTS (CONTINUED)
NONREGULATED
REGULATED ENERGY REAL
CONSOLIDATED UTILITY OPERATIONS ESTATE OTHER
- -----------------------------------------------------------------------------------------------------------------
Millions
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
Operating Revenue $582.7 $414.3 $91.0 $39.6 $ 37.8
Fuel and Purchased Power 218.0 186.4 31.6 - -
Operating and Other Expense 242.8 132.3 50.5 14.2 45.8
Depreciation Expense 37.2 29.5 5.6 - 2.1
- -----------------------------------------------------------------------------------------------------------------
Operating Income (Loss) from
Continuing Operations 84.7 66.1 3.3 25.4 (10.1)
Interest Expense (25.7) (14.3) (1.2) (0.2) (10.0)
Other Income (Expense) (21.4) 0.1 1.2 - (22.7)
- -----------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
Before Income Taxes 37.6 51.9 3.3 25.2 (42.8)
Income Tax Expense (Benefit) 14.4 19.8 0.7 10.4 (16.5)
- -----------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
Before Change in Accounting Principle 23.2 $ 32.1 $ 2.6 $14.8 $(26.3)
--------------------------------------------------
Income from Discontinued Operations -
Net of Tax 79.3
Change in Accounting Principle (7.8)
- --------------------------------------------------------
Net Income $ 94.7
- --------------------------------------------------------
Total Assets $1,449.3 $1,081.6 $161.3 $74.8 $123.6
Property, Plant and Equipment - Net $885.0 $729.6 $117.1 - $38.3
Accumulated Depreciation $766.6 $717.6 $40.1 - $8.9
Capital Expenditures $65.0 $38.4 $6.6 - $3.8
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
Operating Revenue $530.3 $385.8 $85.1 $34.3 $ 25.1
Fuel and Purchased Power 197.2 165.6 31.6 - -
Operating and Other Expense 217.4 128.2 42.7 14.6 31.9
Depreciation Expense 38.4 30.9 5.6 0.1 1.8
- -----------------------------------------------------------------------------------------------------------------
Operating Income (Loss) from
Continuing Operations 77.3 61.1 5.2 19.6 (8.6)
Interest Expense (38.0) (15.4) (1.4) (0.1) (21.1)
Other Income (Expense) 2.4 5.0 0.5 - (3.1)
- -----------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
Before Income Taxes 41.7 50.7 4.3 19.5 (32.8)
Income Tax Expense (Benefit) 16.1 20.2 1.1 8.2 (13.4)
- -----------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 25.6 $ 30.5 $ 3.2 $11.3 $(19.4)
--------------------------------------------------
Income from Discontinued Operations -
Net of Tax 110.7
- -------------------------------------------------------
Net Income $136.3
- -------------------------------------------------------
Total Assets $3,478.7 $1,007.0 $182.3 $81.0 $89.8
Property, Plant and Equipment - Net $911.5 $729.0 $144.8 - $37.7
Accumulated Depreciation $735.9 $694.2 $35.3 - $6.4
Capital Expenditures $98.7 $33.1 $17.8 - $2.7
- -----------------------------------------------------------------------------------------------------------------
Discontinued Operations represented $8.0 million of total assets in 2004 ($2,118.6 million in 2003) and
$16.2 million of capital expenditures in 2004 ($45.1 million in 2003).
11 ALLETE SecondThird Quarter 2004 Form 10-Q
NOTE 5. INVESTMENTS
At JuneSeptember 30, 2004 Investments included the real estate assets of ALLETE
Properties, debt and equity securities consisting primarily of $45.0 million of
securities held
for employee benefits, ($41.4 million at December 31, 2003) and
$34.5 million of economic development revenue bonds held by ADESA in conjunction
with a capital lease of a vehicle auction facility in Georgia ($34.5 million at
December 31, 2003), and our emerging technology investments.
JUNE 30, DECEMBER 31,
INVESTMENTS 2004 2003
- ---------------------------------------------------------------------------------------------------------------------
Millions
Real Estate Assets $ 76.1 $ 78.5
Debt and Equity Securities 81.6 88.6
Emerging Technology Investments 26.9 37.5
- ---------------------------------------------------------------------------------------------------------------------
$ 184.6 $ 204.6
- ---------------------------------------------------------------------------------------------------------------------
We account for
our emerging technology investments under the cost method, and
review for impairment on a quarterly basis. During the second quarter of 2004 we
recorded $7.9 million ($4.7 million after taxes) of impairment losses primarily
related to direct investments in certain privately-held start-up companies whose
future business prospects have diminished significantly. Recent developments at
these companies indicate that future commercial viability is unlikely, as is new
financing necessary to continue development.
Our total carrying value of $26.9 million at June 30, 2004 included $20.4
million for investments in three venture capital funds that have a current fund
reported value of approximately $10 million. The venture capital funds invest in
many privately-held start-up companies, and generally value the investments at
the most recent round of equity financing with failed investments written down
to zero. Experience indicates that failures in the fund's portfolio emerge early
while successful companies tend to take longer to materialize. In addition, the
most recent round of equity financing may produce a low valuation as it would
not reflect subsequent positive developments occurring at the various companies
in which the funds have invested. Based on our evaluation of these three venture
capital funds, we anticipate that the funds' future value will exceed our
carrying value as successful companies emerge and become fully valued. We have
the ability and intent to hold our investment in these venture capital funds for
a reasonable period of time sufficient for the forecasted valuation to be
realized. As such, we did not consider these venture capital fund investments to
be other-than-temporarily impaired at June 30, 2004.
NOTE 6. GOODWILL AND OTHER INTANGIBLES
We conduct our annual goodwill impairment testing in the second quarter of each
year and the 2004 test resulted in no impairment. No event or change has
occurred that would indicate the carrying amount has been impaired since our
annual test.method. (See Note 10.)
GOODWILL
- --------------------------------------------------------------------------------------------------------------------
Millions
Carrying Value, December 31, 2003 $511.0
Acquired during Year -
Change due to Foreign Currency Translation Adjustment (1.5)
- --------------------------------------------------------------------------------------------------------------------
Carrying Value, June 30, 2004 $509.5
- --------------------------------------------------------------------------------------------------------------------
JUNESEPTEMBER 30, DECEMBER 31,
OTHER INTANGIBLE ASSETSINVESTMENTS 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Millions
Customer RelationshipsReal Estate Assets $ 29.674.8 $ 29.6
Computer Software 29.1 28.1
Other 5.5 5.7
Accumulated Amortization (33.5) (30.1)78.5
Debt and Equity Securities 100.2 54.1
Emerging Technology Investments 15.6 37.5
- --------------------------------------------------------------------------------------------------------------------
$ 30.7 $ 33.3----------------------------------------------------------------------------------------------
$190.6 $170.1
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Other Intangible Assets are amortized using the straight-line method.
Amortization periods are seven to twenty-five years for Customer Relationships,
one to seven years for Computer SoftwareDebt and three to ten years for Other.
ALLETE Second Quarter 2004 Form 10-Q 12
NOTE 7. LONG-TERM DEBT
JUNE 30, DECEMBER 31,
LONG-TERM DEBT 2004 2003
- --------------------------------------------------------------------------------------------------------------------
Millions
ALLETE
First Mortgage Bonds
6.68% Series Due 2007 $ 20.0 $ 20.0
7% Series Due 2007 60.0 60.0
7 1/2% Series Due 2007 35.0 35.0
7% Series Due 2008 50.0 50.0
6% Pollution Control Series E Due 2022 111.0 111.0
Senior Notes, 7.80% Due 2008 125.0 125.0
Variable Demand Revenue Refunding Bonds
Series 1997 A, B, C and D Due 2007 - 2020 39.0 39.0
Industrial Development Revenue Bonds 6.5% Due 2025 35.1 35.1
Other Long-Term Debt, 1.1% - 8.8% Due 2004 - 2025 76.2 75.2
- --------------------------------------------------------------------------------------------------------------------
551.3 550.3
Less Due Within One Year 159.0 35.6
- --------------------------------------------------------------------------------------------------------------------
392.3 514.7
- --------------------------------------------------------------------------------------------------------------------
Automotive Services (ADESA)
Variable Term Loan A Facility Due 2009 175.0 -
Variable Term Loan B Facility Due 2010 100.0 -
Senior Notes
7.70% Series A Due 2006 90.0 90.0
8.10% Series B Due 2010 35.0 35.0
Senior Subordinated Notes 7 5/8% Series Due 2012 125.0 -
Variable Notes
Due 2006 - 45.0
Due 2020 - 28.4
Capital Lease Obligation 34.5 34.5
Other Long-Term Debt, 6% Due 2004 - 2005 0.2 2.0
- --------------------------------------------------------------------------------------------------------------------
559.7 234.9
Less Due Within One Year 161.1 1.9
- --------------------------------------------------------------------------------------------------------------------
398.6 233.0
- --------------------------------------------------------------------------------------------------------------------
Net Long-Term Debt $790.9 $747.7
- --------------------------------------------------------------------------------------------------------------------
Excluded Automotive Services.
In January 2004 ALLETE used internally generated funds to retire approximately
$3.5equity securities included $54.9 million in principal amount of Industrial Development Revenue Bonds Series
1994-A, due January 1, 2004.
In June 2004 ALLETE called $125 million in principal amount of 7.80% Senior
Notes due 2008. Proceeds from the saleADESA stock held by an ESOP
as part of our water assetsRetirement Savings and proceedsStock Ownership Plan. The ESOP received
fromthe ADESA were used to repay this debt on July 26, 2004. Asshares as a result of the redemption, wespin-off of ADESA on September 20, 2004. The
ADESA shares relate to unearned ESOP shares of ALLETE common stock that have not
yet been allocated to participants. We report ADESA stock held by the ESOP as
available-for-sale under SFAS 115, "Accounting for Certain Investments in Debt
and Equity Securities." Available-for-sale securities are recorded at fair value
with unrealized gains and losses included in accumulated other comprehensive
income, net of tax; gains and losses are recognized in earnings when securities
are sold. In October 2004 the ESOP sold 2.7 million shares of ADESA stock
related to unearned ESOP shares for total proceeds of $54.0 million. This
resulted in an expenseafter-tax gain of $18.5$9.2 million which will be recognized in the
thirdfourth quarter of 2004 comprised of an early redemption premium and the write-off of unamortized
debt issuance costs. We have accounted for this debt as due within one year in
the table above.
In July 2004 ALLETE called, for redemption in August 2004, $111 million in
principal amount of Collateralized 6% Pollution Control Refunding Revenue Bonds
Series E due 2022 and expects to refinance these bonds in August 2004 at a more
favorable interest rate.
In June 2004 ADESA substantially completed the restructuring of debt in
conjunction with its June IPO and planned spin-off from ALLETE. In June 2004
ADESA issued $125 million of 7 5/8% Senior Subordinated Notes at par with a
maturity date of June 15, 2012, borrowed $275 million under a new $525 million
credit facility, and repaid $75.1 million of previously existing debt and all
intercompany debt outstanding to ALLETE. In July 2004 ADESA called for
redemption all of its $90 million in principal amount of 7.70% Senior Notes due
2006 and all of its $35 million in principal amount of 8.10% Senior Notes due
2010. The redemptions are scheduled to occur on August 11, 2004, and ADESA
expects to recognize expenses of approximately $14 million in the third quarter
comprised of an early redemption premium and the write-off of unamortized debt
issuance costs. We have accounted for the $125 million of debt to be redeemed by
ADESA as due within one year in the table above.
13 ALLETE Second Quarter 2004 Form 10-Q
2004. (See Note 13.)
NOTE 7. LONG-TERM DEBT (CONTINUED)
ADESA's new credit facility contains customary affirmative and negative
covenants, including restrictions on the ability to incur indebtedness, grant
liens, pay dividends or make distributions to shareholders and make any
prepayment or redemption with respect to the senior subordinated notes. The new
credit facility also contains financial covenants including: a maximum total
leverage ratio, a minimum interest coverage ratio and a minimum fixed charge
coverage ratio. At June 30, 2004, ADESA was in compliance with the covenants
contained in the new credit facility.
In June 2004 ADESA entered into two interest rate swap agreements with notional
amounts of $105 million and $60 million to manage its exposure to interest rate
movements on its variable rate debt. Both interest rate swap agreements contain
amortizing provisions and mature in December 2006. ADESA has designated its
interest rate swap agreements as cash flow hedges. The fair value of the
interest rate swap agreements is estimated using pricing models widely used in
financial markets and represents the estimated amount ADESA would receive or pay
to terminate the agreement at the reporting date. At June 30, 2004 the fair
value of the interest rate swap agreements is an unrealized loss of $0.6 million
and is recorded in accrued expenses and other liabilities on the consolidated
balance sheet. In accordance with the provisions of SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," changes in the fair value of the
interest rate swap agreements designated as cash flow hedges are recorded in
Accumulated Other Comprehensive Income. ADESA is exposed to credit loss in the
event of nonperformance by the counterparties; however, nonperformance is not
anticipated.
NOTE 8.6. SHORT-TERM BORROWINGS
In April 2004 ALLETE used internally generated funds and proceeds from the sale
of water assets to repay the remaining $53.0 million outstanding on a $250
million credit agreement which would have expired in July 2004.
NOTE 9. PENSION AND7. LONG-TERM DEBT
In January 2004 we used internally generated funds to retire approximately $3.5
million in principal amount of Industrial Development Revenue Bonds Series
1994-A, due January 1, 2004.
In July 2004 we repaid $125 million in principal amount of 7.80% Senior Notes
due 2008. Proceeds from the sale of our water assets and proceeds received from
ADESA were used to repay this debt. As a result of the redemption, we recognized
an expense of $18.5 million in the third quarter of 2004 comprised of an early
redemption premium and the write-off of unamortized debt issuance costs.
In August 2004 we issued $111 million in principal amount of 4.95%
Collateralized Pollution Control Refunding Revenue Bonds Series 2004 due 2022.
Proceeds were used to redeem $111 million in principal amount of 6%
Collateralized Pollution Control Refunding Revenue Bonds Series E due 2022.
ALLETE Third Quarter 2004 Form 10-Q 12
NOTE 8. OTHER POSTRETIREMENT BENEFIT PLANSINCOME (EXPENSE)
POSTRETIREMENT HEALTH
PENSION AND LIFE
------------------------ ----------------------
COMPONENTS OF PERIODIC BENEFIT EXPENSEQUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Millions
FOR THE QUARTER ENDED JUNE 30,
Service Cost $ 2.1 $ 1.7 $1.1 $ 0.9
Interest Cost 5.2 4.9 1.8 1.7
Expected ReturnDebt Prepayment Premium and Unamortized
Debt Issuance Costs $(18.5) - $(18.5) -
Loss on Plan AssetsEmerging Technology Investments (1.0) - (6.9) (7.2) (1.1) (1.0)
Amortization of Prior Service Costs 0.2 0.2$(3.8)
Split Rock Energy Equity Income (Loss) - $(0.2) - Amortization of Net Loss 0.4 - 0.3 -
Amortization of Transition Obligation - - 0.6 0.6
- ------------------------------------------------------------------------------------------------------------------
Periodic Benefit Expense (Benefit) $ 1.0 $(0.4) $2.7 $ 2.2
- ------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30,
Service Cost $ 4.2 $ 3.4 $2.2 $1.8
Interest Cost 10.4 9.8 3.6 3.4
Expected Return on Plan Assets (13.8) (14.4) (2.2) (2.0)
Amortization of Prior Service Costs 0.4 0.4 - -
Amortization of Net Loss 0.8 - 0.5 -
Amortization of Transition Obligation 0.1 0.1 1.25.0
Investments and Other Income 1.1 0.7 4.0 1.2
- ------------------------------------------------------------------------------------------------------------------
Periodic Benefit Expense (Benefit)-------------------------------------------------------------------------------------------------------------------
$(18.4) $ 2.1 $(0.7) $5.3 $4.40.5 $(21.4) $ 2.4
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
ALLETE Second Quarter 2004 Form 10-Q 14
NOTE 10.9. INCOME TAX EXPENSE
QUARTER ENDED SIXNINE MONTHS ENDED
JUNESEPTEMBER 30, JUNESEPTEMBER 30,
2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Millions
Current Tax Expense
Federal $16.2 $15.3 $38.3 $31.9
Foreign 4.1 7.3 7.8 9.2$ 0.4 $ 3.7 $ 11.7 $ 12.8
State 3.0 2.3 8.0 6.01.1 2.4 5.5 4.5
- ------------------------------------------------------------------------------------------------------------------
23.3 24.9 54.1 47.1-------------------------------------------------------------------------------------------------------------------
1.5 6.1 17.2 17.3
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Deferred Tax Expense (Benefit)
Federal 0.5(2.2) 1.3 (0.5) 0.2
4.1 2.4
State 0.2 0.1 0.5 0.5(1.1) (0.3) (1.3) (0.3)
- ------------------------------------------------------------------------------------------------------------------
0.7 0.3 4.6 2.9-------------------------------------------------------------------------------------------------------------------
(3.3) 1.0 (1.8) (0.1)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Deferred Tax Credits (0.2) (0.2) (0.8) (0.6)(0.5) (1.0) (1.1)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Income Tax Expense on Continuing Operations 23.8 25.0 57.9 49.4(2.0) 6.6 14.4 16.1
Income Tax Expense on Discontinued Operations 7.1 4.6 6.7 8.911.0 24.2 60.3 73.0
Income Tax Benefit on Change in Accounting Principle - ------------------------------------------------------------------------------------------------------------------- (5.5) -
- -------------------------------------------------------------------------------------------------------------------
Total Income Tax Expense $30.9 $29.6 $64.6 $58.3$ 9.0 $ 30.8 $ 69.2 $ 89.1
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
13 ALLETE Third Quarter 2004 Form 10-Q
NOTE 10. ADOPTION OF NEW ACCOUNTING PRINCIPLES
In the third quarter of 2004, we adopted EITF 03-16, "Accounting for Investments
in Limited Liability Companies," which requires the use of the equity method of
accounting for investments in all limited liability companies, including
investments we have in venture capital funds included in our emerging technology
portfolio. EITF 03-16 was issued in the second quarter of 2004. We had
previously accounted for these investments under the cost method of accounting.
EITF 03-16 is effective for reporting periods beginning after June 15, 2004.
Pursuant to EITF 03-16, the effect of adoption is reported as the cumulative
effect of a change in accounting principle.
The cumulative effect of this change on prior years was an after-tax loss of
$7.8 million, which was recorded as a change in accounting principle and
reflected in income for the nine months ended September 30, 2004. The effect of
the change on the quarter ended September 30, 2004 decreased net income by $0.6
million (increased net income by $1.1 million for the nine months ended
September 30, 2004). If the equity method of accounting had been used in 2003,
net income for the quarter ended September 30, 2003 would have increased $0.1
million and net income for the nine months ended September 30, 2003 would have
decreased $0.8 million, or $0.03 per share.
The effect of the change to equity accounting for our venture capital funds and
the impact of adoption of FSP 106-2 (see Note 14) on the first and second
quarters of 2004 is as follows:
QUARTER ENDED
MARCH 31, JUNE 30,
EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLE 2004 2004
- ---------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts
Net Income
As Reported $52.5 $34.7
Effect of Change in Accounting for Venture Capital Funds 0.2 1.5
Effect of Adoption of FSP 106-2 - 0.5
- ---------------------------------------------------------------------------------------------------------------
Before Cumulative Effect of Change in Accounting Principle 52.7 36.7
Cumulative Effect on Prior Years (to December 31, 2003) of
Change in Accounting for Venture Capital Funds (7.8) -
- ---------------------------------------------------------------------------------------------------------------
As Restated $44.9 $36.7
- ---------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
As Reported $1.87 $1.22
Effect of Change in Accounting for Venture Capital Funds 0.01 0.05
Effect of Adoption of FSP 106-2 - 0.02
- ---------------------------------------------------------------------------------------------------------------
Before Cumulative Effect of Change in Accounting Principle 1.88 1.29
Cumulative Effect on Prior Years (to December 31, 2003) of
Change in Accounting for Venture Capital Funds (0.28) -
- ---------------------------------------------------------------------------------------------------------------
As Restated $1.60 $1.29
- ---------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share
As Reported $1.86 $1.22
Effect of Change in Accounting for Venture Capital Funds - 0.05
Effect of Adoption of FSP 106-2 - 0.02
- ---------------------------------------------------------------------------------------------------------------
Before Cumulative Effect of Change in Accounting Principle 1.86 1.29
Cumulative Effect on Prior Years (to December 31, 2003) of
Change in Accounting for Venture Capital Funds (0.27) -
- ---------------------------------------------------------------------------------------------------------------
As Restated $1.59 $1.29
- ---------------------------------------------------------------------------------------------------------------
ALLETE Third Quarter 2004 Form 10-Q 14
NOTE 11. EARNINGS PER SHARE
The difference between basic and diluted earnings per share arises from
outstanding stock options and performance share awards granted under our
Executive and Director Long-Term Incentive Compensation Plans.
QUARTER ENDED SIXNINE MONTHS ENDED
JUNESEPTEMBER 30, JUNESEPTEMBER 30,
------------------------------- ------------------------------------------------------------ ------------------------------
RECONCILIATION OF BASIC AND DILUTED DILUTIVE DILUTIVE
EARNINGS PER SHARE BASIC SECURITIES DILUTED BASIC SECURITIES DILUTED
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts
2004
Net Income (Loss) from Continuing Operations
$32.9Before Change in Accounting Principle $(0.6) - $32.9 $86.0$(0.6) $23.2 - $86.0$23.2
Common Shares 85.1 0.5 85.6 84.7 0.5 85.228.5 0.1 28.6 28.3 0.2 28.5
Per Share from Continuing Operations $0.39$(0.03) - $0.38 $1.02$(0.02) $0.82 - $1.01$0.82
2003
Net Income (Loss) from Continuing Operations
$37.1Before Change in Accounting Principle $10.9 - $37.1 $75.1$10.9 $25.6 - $75.1$25.6
Common Shares 82.6 0.3 82.9 82.4 0.2 82.627.7 0.1 27.8 27.5 0.1 27.6
Per Share from Continuing Operations $0.45$0.40 - $0.45 $0.91$0.40 $0.93 - $0.91$0.93
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NOTE 12. COMPREHENSIVE INCOME
For the quarter ended JuneSeptember 30, 2004 total comprehensive income was $30.7a $3.7
million loss ($66.347.4 million of income for the quarter ended JuneSeptember 30, 2003).
For the sixnine months ended JuneSeptember 30, 2004 total comprehensive income was
$81.1$71.8 million ($122.9170.3 million for the sixnine months ended JuneSeptember 30, 2003).
Total comprehensive income includes net income, unrealized gains and losses on
securities classified as available-for-sale, and interest rate swaps, additional pension liability and
foreign currency translation adjustments.
JUNESEPTEMBER 30, DECEMBER 31,
ACCUMULATED OTHER COMPREHENSIVE GAIN (LOSS) 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Millions
Unrealized Gain on Securities $ 1.11.4 $ 0.8
Interest Rate Swaps (0.3) -
Foreign Currency Translation Gain 17.4 23.5
Additional Pension Liability (9.8) (9.8)
Foreign Currency Translation Adjustment - Discontinued Operations - 23.5
- ------------------------------------------------------------------------------------------------------------------
$(8.4) $ 8.4 $14.514.5
- ------------------------------------------------------------------------------------------------------------------
NOTE 13. EMPLOYEE STOCK AND INCENTIVE PLANS
We sponsor a leveraged ESOP as part of our Retirement Savings and Stock
Ownership Plan. On September 20, 2004 the ESOP received ADESA shares as a result
of the spin-off of ADESA. At September 30, 2004 the ESOP held 3.3 million shares
of ADESA related to unearned ESOP shares that have not yet been allocated to
participants. The ESOP is required to sell the ADESA stock, and will use the
proceeds to purchase ALLETE common stock on the open market. We expect to
receive an IRS letter ruling that will allow us up to approximately 600 days
from September 20, 2004 to complete the sale of the ADESA shares and the
purchase of ALLETE stock. Pursuant to AICPA Statement of Position 93-6,
"Employers' Accounting for Employee Stock Ownership Plans," unallocated ALLETE
common stock currently held and purchased by the ESOP will be treated as
unearned ESOP shares and not considered as outstanding for earnings per share
computations. ESOP shares are included in earnings per share computations after
they are allocated to participants. In October 2004 the ESOP sold 2.7 million
shares of ADESA stock related to unearned ESOP shares for total proceeds of
$54.0 million. Approximately 0.6 million shares of ADESA stock related to
unearned ESOP shares remain in the ESOP and will be sold under the direction of
an independent trustee.
15 ALLETE SecondThird Quarter 2004 Form 10-Q
NOTE 13. EMPLOYEE STOCK AND INCENTIVE PLANS (CONTINUED)
The employee stock options outstanding at the date of the spin-off were
converted to reflect the spin-off and one-for-three reverse stock split. This
conversion was done to preserve the noncompensatory nature of the options under
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation."
NOTE 14. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
POSTRETIREMENT HEALTH
PENSION AND LIFE
----------------------- ----------------------
COMPONENTS OF PERIODIC BENEFIT EXPENSE 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Millions
FOR THE QUARTER ENDED SEPTEMBER 30,
Service Cost $ 2.1 $ 1.7 $0.9 $ 0.9
Interest Cost 5.2 4.8 1.6 1.7
Expected Return on Plan Assets (6.9) (7.2) (1.2) (1.0)
Amortization of Prior Service Costs 0.2 0.2 - -
Amortization of Net Loss 0.4 - 0.1 -
Amortization of Transition Obligation 0.1 0.1 0.6 0.6
- ------------------------------------------------------------------------------------------------------------------
Periodic Benefit Expense (Benefit) $ 1.1 $(0.4) $2.0 $ 2.2
- ------------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
Service Cost $ 6.3 $ 5.1 $3.0 $ 2.7
Interest Cost 15.6 14.6 5.0 5.1
Expected Return on Plan Assets (20.7) (21.6) (3.4) (3.0)
Amortization of Prior Service Costs 0.6 0.6 - -
Amortization of Net Loss 1.2 - 0.4 -
Amortization of Transition Obligation 0.2 0.2 1.8 1.8
- ------------------------------------------------------------------------------------------------------------------
Periodic Benefit Expense (Benefit) $ 3.2 $ (1.1) $6.8 $ 6.6
- ------------------------------------------------------------------------------------------------------------------
In May 2004 the FASB issued FSP 106-2, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003" (Act), which provides accounting and disclosure guidance for employers
that sponsor postretirement health care plans that provide prescription drug
benefits. FSP 106-2 requires that the accumulated postretirement benefit
obligation and postretirement benefit cost reflect the impact of the Act upon
adoption. We provide postretirement health benefits that include prescription
drug benefits, and expect our postretirement prescription drug benefits to
qualify us for the federal subsidy to be provided for under the Act. We adopted
FSP 106-2 in the third quarter of 2004. The impact of adoption reduced our
after-tax postretirement medical expense by $0.5 million for the three months
ended September 30, 2004 and $1.0 million for the nine months ended September
30, 2004. In addition, our accumulated postretirement benefit obligation has
been reduced by $12.3 million.
ALLETE Third Quarter 2004 Form 10-Q 16
NOTE 15. COMMITMENTS, GUARANTEES AND CONTINGENCIES
SQUARE BUTTE POWER PURCHASE AGREEMENT. Minnesota Power has a power purchase
agreement with Square Butte that extends through 2026 (Agreement). It provides a
long-term supply of low-cost energy to customers in our electric service
territory and enables Minnesota Power to meet power pool reserve requirements.
Square Butte, a North Dakota cooperative corporation, owns a 455-MW coal-fired
generating unit (Unit) near Center, North Dakota. The Unit is adjacent to a
generating unit owned by Minnkota Power, a North Dakota cooperative corporation
whose Class A members are also members of Square Butte. Minnkota Power serves as
the operator of the Unit and also purchases power from Square Butte.
Minnesota Power is entitled to approximately 71 percent of the Unit's output
under the Agreement. After 2005 and upon compliance with a two-year advance
notice requirement, Minnkota Power has the option to reduce Minnesota Power's
entitlement by 5 percent annually, to a minimum of 50 percent. In December 2003
we received notice from Minnkota Power that they will reduce our output
entitlement, effective January 1, 2006, by 5 percent to approximately 66
percent. Minnesota Power is obligated to pay its pro rata share of Square
Butte's costs based on Minnesota Power's entitlement to Unit output. Minnesota
Power's payment obligation shallwill be suspended if Square Butte fails to deliver
any power, whether produced or purchased, for a period of one year. Square
Butte's fixed costs consist primarily of debt service. At JuneSeptember 30, 2004
Square Butte had total debt outstanding of $287.7$297.4 million. Total annual debt
service for Square Butte is expected to be approximately $23 million in each of
the years 2004 through 2008. Variable operating costs include the price of coal
purchased from BNI Coal, our subsidiary, under a long-term contract. Minnesota
Power's payments to Square Butte are approved as a purchased power expense for
ratemaking purposes by both the MPUC and the FERC.
LEASING AGREEMENTS. In September 2004 BNI Coal entered into an operating lease
agreement for a new dragline that was placed in service at BNI Coal's mine on
September 30, 2004. BNI Coal is obligated to make lease payments totaling $2.8
million annually for the lease term which expires in 2027. BNI Coal has the
option at the end of the lease term to renew the lease at a fair market rental,
to purchase the dragline at fair market value, or to surrender the dragline and
pay a $3.0 million termination fee.
We lease other properties and equipment under operating lease agreements with
terms expiring through 2019.2013. The aggregate amount of minimum lease payments for
all of these other operating leases during 2004 is $19.9 million ($16.1$3.2 million in 2005; $13.62005, $3.1 million in
2006; $6.52006, $2.7 million in 2007; $5.92007, $1.9 million in 2008;2008 and $49.5$4.2 million thereafter). Automotive Services' portion of these
minimum lease payments is $18.8 million in 2004 ($15.2 million in 2005; $12.7
million in 2006; $5.9 million in 2007; $5.6 million in 2008; and $48.8 million
thereafter).thereafter.
KENDALL COUNTY POWER PURCHASE AGREEMENT. We have 275 MW of nonregulated
generation (non rate-base generation sold at market-based rates to the wholesale
market) through an agreement with a wholly owned subsidiary of NRG Energyan independent power producer that extends
through September 2017. Under the agreement we pay a fixed capacity charge for
the right, but not the obligation, to capacity and energy from a 275
MW275-MW
generating unit at NRG Energy'sa facility in Kendall County facility near Chicago, Illinois. The
annual fixed capacity charge is approximately $21 million. We are also
responsible for arranging the natural gas fuel supply. Our strategy is to enter
into long-term contracts to sell a significant portion of the 275 MW from the
Kendall County facility; the balance will be sold in the spot market through
short-term agreements. We currently have 130 MW (100 MW in 2003) of long-term
capacity sales contracts for the Kendall County generation, with 50 MW expiring
in April 2012 and 80 MW expiring in September 2017. Neither the Kendall County
agreement nor the related sales contracts are derivatives under SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." To date, the
Kendall County facility has operated at a loss due to negative spark spreads
(the differential between electric and natural gas prices) in the wholesale
power market and our resulting inability to cover the fixed capacity charge on
unsold capacity (currently 145 MW). We expect the facility to continue to
generate losses until such time as spark spreads improve or we are able to enter
into additional long-term capacity sales contracts. We are currently exploring
options to minimize or eliminate these ongoing losses.
We are utilizing Tenaska
Power Services Company to provide operational and scheduling services for the
Kendall County generating unit.
COAL AND SHIPPING CONTRACTS. We have three coal supply agreements with various
expiration dates ranging from December 2006 to December 2009. We also have rail
and shipping agreements for transportation of all of our coal with various
expiration dates ranging from December 2005 to December 2011. Our minimum annual
obligation under these coal and shipping agreements rangeranges from approximately
$28 million in 2004 to $10 million in 2008.
EMERGING TECHNOLOGY INVESTMENTS. We have investments in emerging technologies
through minority investments in venture capital funds structured as limited
liability companies, and direct investments in privately-held start-up
companies. We have committed to make additional investments in certain emerging
technology holdings. The total future commitment was $4.7$4.6 million at JuneSeptember
30, 2004 ($4.8 million at December 31, 2003) and is expected to be invested at
various times through 2007.
17 ALLETE SecondThird Quarter 2004 Form 10-Q
16
NOTE 13.15. COMMITMENTS, GUARANTEES AND CONTINGENCIES (CONTINUED)
ENVIRONMENTAL MATTERS. Our businesses are subject to regulation by various
U.S.
and Canadian federal, state provincial and local authorities concerning environmental matters. We do not
currently anticipate that potential expenditures for environmental matters will
be material; however, we are unable to predict the outcome of the issues
discussed below.
We review environmental matters on a quarterly basis. Accruals for environmental
matters are recorded when it is probable that a liability has been incurred and
the amount of the liability can be reasonably estimated, based on current law
and existing technologies. These accruals are adjusted periodically as
assessment and remediation efforts progress or as additional technical or legal
information becomes available. Accruals for environmental liabilities are
included in the balance sheet at undiscounted amounts and exclude claims for
recoveries from insurance or other third parties. Costs related to environmental
contamination treatment and cleanup are charged to expense unless recoverable in
rates from customers.
SWL&P MANUFACTURED GAS PLANT. In May 2001 SWL&P received notice from the WDNR
that the City of Superior had found soil contamination on property adjoining a
former Manufactured Gas Plant (MGP) site owned and operated by SWL&P from 1889
to 1904. The WDNR requested SWL&P to initiate an environmental investigation.
The WDNR also issued SWL&P a Responsible Party letter in February 2002. The
environmental investigation is underway. In February 2003 SWL&P submitted a
Phase II environmental site investigation report to the WDNR. This report
identified some MGP-like chemicals that were found in the soil near the former
plant site. During March and April 2003 sediment samples were taken from nearby
Superior Bay. The report on the results of this sampling was completed and sent
to the WDNR during the first quarter of 2004. The next phase of the
investigation will beis to determine any impact to soil or ground water between the
former MGP site and Superior Bay. AThe site work plan for this additionalphase of the
investigation by SWL&P was filed in December 2003 with the WDNR. Permission from
landowners is currently being obtained to perform the additional tests.performed during October 2004. Although it is not possible to
quantify the potential clean-up cost until the investigation is completed, and a work plan is developed, a
$0.5 million liability was recorded in December 2003 to address the known areas
of contamination. We have recorded a corresponding dollar amount as a regulatory
asset to offset this liability. The PSCW has approved SWL&P's deferral of these
MGP environmental investigation and potential clean-up costs for future recovery
in rates, subject to a regulatory prudency review. ALLETE maintains pollution
liability insurance coverage that includes coverage for SWL&P. A claim has been
filed with respect to this matter. The insurance carrier has issued a
reservation of rights letter and we continue to work with the insurer to
determine the availability of insurance coverage.
MINNESOTA POWER COAL-FIRED GENERATING FACILITIES. During 2002 Minnesota Power
received and responded to a third request from the EPA, under Section 114 of the
federal Clean Air Act Amendments of 1990 (Clean Air Act), seeking additional
information regarding capital expenditures at all of its coal-fired generating
stations. This action is part of an industry-wide investigation assessing
compliance with the New Source Review and the New Source Performance Standards
(emissions standards that apply to new and changed units) of the Clean Air Act
at electric generating stations. We have received no feedback from the EPA based
on the information we submitted. There is, however, ongoing litigation involving
the EPA and other electric utilities for alleged violations of these rules. It
is expected that the outcome of some of the cases could provide the utility
industry direction on this topic. We are unable to predict what actions, if any,
may be required as a result of the EPA's request for information. As a result,
we have not accrued any liability for this environmental matter.
SQUARE BUTTE GENERATING FACILITY. In June 2002 Minnkota Power, the operator of
Square Butte, received a Notice of Violation from the EPA regarding alleged New
Source Review violations at the M.R. Young Station which includes the Square
Butte generating unit. The EPA claims certain capital projects completed by
Minnkota Power should have been reviewed pursuant to the New Source Review
regulations potentially resulting in new air permit operating conditions.
Minnkota Power has held several meetings with the EPA to discuss the alleged
violations. Based on an EPA request, Minnkota Power performed a study related to
the technological feasibility of installing various controls for the reduction
of nitrogen oxides and sulfur dioxide emissions. Discussions with the EPA are ongoing and we are unable to predict
the outcome or cost impacts. If Square Butte is required to make significant
capital expenditures to comply with EPA requirements, we expect such capital
expenditures to be debt financed. Our future cost of purchased power would
include our pro rata share of this additional debt service.
17 ALLETE Second Quarter 2004 Form 10-Q
NOTE 13. COMMITMENTS, GUARANTEES AND CONTINGENCIES (CONTINUED)
ADESA IMPACT TAUNTON FACILITY. In December 2003 the Massachusetts Department of
Environmental Protection (MDEP) identified ADESA as a potentially responsible
party regarding contamination of several private drinking water wells in a
residential development that abuts the Taunton, Massachusetts salvage auction
facility. The wells had elevated levels of MTBE. MTBE is an oxygenating additive
in gasoline to reduce harmful emissions. The EPA has identified MTBE as a
possible carcinogen. ADESA engaged GeoInsight, an environmental services firm,
to conduct tests of the soil and groundwater at the salvage vehicle auction
site.
In December 2003 GeoInsight collected soil samples, conducted groundwater tests
and provided oversight for the installation of monitoring wells in various
locations on and adjacent to the property adjoining the residential community.
The results of the soil and water tests indicated levels of MTBE exceeding MDEP
standards. In January 2004 GeoInsight collected air samples from two residences
that were identified as having elevated drinking water concentrations of MTBE.
ADESA has determined that inhalation of, or contact exposure to, this air poses
minimal risk to human health. In response to its empirical findings, ADESA
proposed to the MDEP that we install water filtration units in the approximately
33 affected residences. Thirty-two units have been installed.
GeoInsight prepared an immediate response action (IRA) plan, which was required
by the MDEP, to determine the extent of the environmental impact and define
activities to prevent further environmental contamination. The IRA plan, which
was filed in January 2004, describes the initial activities ADESA performed, and
proposes additional measures that it will use to further assess the existence of
any imminent hazard to human health. In addition, as required by the MDEP, ADESA
has conducted an analysis to identify sensitive receptors that may have been
affected, including area schools and municipal wells. GeoInsight does not
believe that an imminent hazard condition exists at the Taunton site; however,
the investigation and assessment of site conditions are ongoing.
ADESA submitted an IRA plan status report to the MDEP in March 2004.
Additionally, ADESA is submitting bi-weekly status updates to the MDEP. A
comprehensive ground water sampling event and residential sampling event were
conducted in April 2004. ADESA's representatives met with the Taunton City
Council to propose that ADESA extend municipal water services to the adjoining
residential community at an approximate cost of $1 million. In August 2004 ADESA
expects to present a detailed engineering proposal to the Taunton City Council.
ADESA has an accrual of $1.2 million at June 30, 2004 with respect to this
matter, including the estimated costs (as of June 30, 2004) associated with the
proposal to extend the municipal water service.
ADESA has filed a claim with our insurance carrier with respect to this matter.
On March 30, 2004 our insurance carrier responded with a request for additional
information regarding the claims.
In addition to the activity described above, ADESA has received correspondence
from an attorney representing residents of the adjoining residential community
suggesting that ADESA enter into discussions concerning property damage claims
for diminution in value due to the MTBE release. Accordingly, there is a
possibility that property damage litigation may be filed against ADESA.
Potential losses in these matters are not considered probable by ADESA
management or cannot be reasonably estimated. Accordingly, ADESA has not
recorded an accrual for the respective costs of these matters.
OTHER. We are involved in litigation arising in the normal course of business.
Also in the normal course of business, we are involved in tax, regulatory and
other governmental audits, inspections, investigations and other proceedings
that involve state and federal taxes, safety, compliance with regulations, rate
base and cost of service issues, among other things. While the resolution of
such matters could have a material effect on earnings and cash flows in the year
of resolution, none of these matters are expected to change materially our
present liquidity position, nor have a material adverse effect on our financial
condition.
See Note 4 for a discussion on the ADESA Importation litigation.
ALLETE SecondThird Quarter 2004 Form 10-Q 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ALLETE'SALLETE's operations are comprised of threefour business segments. ENERGY SERVICESREGULATED UTILITY
includes retail and wholesale rate regulated electric, water and gas services in
northeastern Minnesota and northwestern Wisconsin under the jurisdiction of
state and federal regulatory authorities. NONREGULATED ENERGY OPERATIONS
includes nonregulated generation (non-rate base generation sold at market-based
rates to the wholesale market) consisting primarily of generation from Taconite
Harbor in northern Minnesota and generation secured through the Kendall County
power purchase agreement. Nonregulated Energy Operations also includes our coal
mining and telecommunications.
AUTOMOTIVE SERVICES, with operations across the United States, Canada and
Mexico, includes wholesale vehicle auctions and related vehicle redistribution
services as well as dealer financing. Auctions and related services include
wholesale used vehicle and salvage vehicle auctions. INVESTMENTS AND CORPORATE
CHARGESactivities in North Dakota. REAL ESTATE includes our Florida real estate
operations,operations. OTHER includes our telecommunications activities, investments in
emerging technologies, and general corporate charges and interest not
specifically related to any one business segment. General corporate charges
include employee salaries and benefits as well as legal and other outside
service fees. DISCONTINUED OPERATIONS includes our Automotive Services business
that was spun off on September 20, 2004, our Water Services businesses, the
majority of which were sold in 2003, and our vehicle
transport and import businesses.spin-off costs incurred by ALLETE.
On September 20, 2004 the spin-off of Automotive Services was completed by
distributing to ALLETE shareholders all of ALLETE's shares of ADESA common
stock. Through a June 2004 IPO our Automotive Services business, doing business
as ADESA, Inc. (NYSE: KAR), issued 6.3 million shares of common stock at an IPO
price of $24.00 per share.stock. This
represented 6.6 percent of total ADESAADESA's common stock outstanding. ALLETE will continue to ownowned the
remaining 93.4 percent of ADESA until the planned spin-off which is expected to be completed by the end
of September 2004. In connection with the IPO, ADESA filed a registration
statement on Form S-1 with thewas completed. (See Note 1.)
ADESA's SEC and also became subject to the reporting
requirements under the Securities Exchange Act of 1934. These documentsfilings are available through the SEC's website at www.sec.gov.
CONSOLIDATED OVERVIEW
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts
Operating Revenue
Energy Services $183.9 $158.5 $366.2 $337.6
Automotive Services 232.1 240.7 479.8 473.6
Investments (0.7) 10.7 27.8 21.6
- ----------------------------------------------------------------------------------------------------------------------
$415.3 $409.9 $873.8 $832.8
- ----------------------------------------------------------------------------------------------------------------------
Operating Expenses
Energy Services $169.3 $147.6 $329.1 $306.7
Automotive Services 178.7 183.9 371.5 372.6
Investments and Corporate Charges 10.6 16.3 29.3 29.0
- ----------------------------------------------------------------------------------------------------------------------
$358.6 $347.8 $729.9 $708.3
- ----------------------------------------------------------------------------------------------------------------------
Net Income (Loss)
Energy Services $ 9.3 $ 6.8 $23.6 $19.0
Automotive Services 32.3 34.1 65.6 60.8
Investments and Corporate Charges (8.7) (3.8) (3.2) (4.7)
- ----------------------------------------------------------------------------------------------------------------------
Continuing Operations 32.9 37.1 86.0 75.1
Discontinued Operations 1.8 7.3 1.2 13.6
- ----------------------------------------------------------------------------------------------------------------------
$34.7 $44.4 $87.2 $88.7
- ----------------------------------------------------------------------------------------------------------------------
Diluted Average Shares of Common Stock - Millions 85.6 82.9 85.2 82.6
- ----------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share of Common Stock
Continuing Operations $0.38 $0.45 $1.01 $0.91
Discontinued Operations 0.02 0.08 0.01 0.16
- ----------------------------------------------------------------------------------------------------------------------
$0.40 $0.53 $1.02 $1.07
- ----------------------------------------------------------------------------------------------------------------------
Net income for the quarter and sixnine months ended JuneSeptember 30, 2004 decreased 2272
percent and 231 percent, respectively, from the same periods in 2003 and diluted
earnings per share for the quarter and sixnine months ended JuneSeptember 30, 2004
decreased 2574 percent and 532 percent, respectively, from the same periods in
2003. The decrease was primarily attributable to reduced earnings from
discontinued operations which include both Water and Automotive Services, a
$10.9 million after-tax debt prepayment cost at ALLETE, and a $7.8 million
non-cash after-tax charge for a change in accounting principle related to
investments in our emerging technology portfolio (see Note 10).
Income from continuing operations represents the activities that are part of
ALLETE subsequent to the spin-off of ADESA. For the quarter ended JuneSeptember 30,
2004, net income and diluted earnings per share(loss) from continuing operations decreased 11 percent and 16 percent, respectively,
frombefore the same periodchange in 2003.accounting
principle was a $0.6 million, or $0.02 per diluted share, loss ($10.9 million,
or $0.40 per diluted share, of income for the quarter ended September 30, 2003).
For the sixnine months ended JuneSeptember 30, 2004, net income
and diluted earnings per share from continuing operations
before the change in accounting principle was $23.2 million, or $0.82 per
diluted share ($25.6 million, or $0.93 per diluted share, for the nine months
ended September 30, 2003). Both the quarter and nine months ended September 30,
2004 included the $10.9 million, or $0.38 per share, after-tax debt prepayment
cost incurred in July as part of ALLETE's financial restructuring in preparation
for the spin-off of ADESA.
19 ALLETE SecondThird Quarter 2004 Form 10-Q
increased 15 percent and 11 percent, respectively, from the same period in 2003.
In 2004 net income reflected a $4.7 million after-tax impairment on our emerging
technology portfolio in the quarter and six months ended June 30, separation
expenses related to the spin-off of ADESA totaling $1.4 million after tax in the
quarter ($3.1 million in the six months ended June 30) and additional corporate
overhead expenses at ADESA of $1.7 million after tax in the quarter ($2.6
million in the six months ended).
NON-GAAP MEASURE OF LIQUIDITY. We believe earnings before interest, taxes,
depreciation and amortization expense (EBITDA) provides meaningful additional
information that helps us monitor and evaluate our ongoing results and trends.
EBITDA should not be considered in isolation nor as a substitute for measures of
liquidity prepared in accordance with GAAP which include:
CONSOLIDATED CASH FLOW
SIXQUARTER ENDED NINE MONTHS ENDED
JUNESEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Millions
Cash from Operating Activities $78.4 $105.5
Cash from (for) Investing Activities $48.4 $(129.6)
Cash from Financing Activities $264.9 $32.8
- ----------------------------------------------------------------------------------------------------------------------
We believe EBITDA is a widely accepted measure of liquidity considered by
investors, financial analysts and rating agencies. EBITDA is not an alternative
to cash flows as a measure of liquidity and may not be comparable with EBITDA as
defined by other companies.
ENERGY SERVICES
----------------------- INVESTMENTS
REGULATED NON- AUTOMOTIVE AND CORPORATE
EBITDA CONSOLIDATED UTILITY REGULATED SERVICES CHARGES
- -------------------------------------------------------------------------------------------------------------------------Except Per Share Amounts
FOR THE QUARTER ENDED JUNE 30, 2004Operating Revenue
Regulated Utility $136.1 $127.1 $414.3 $385.8
Nonregulated Energy Operations 31.1 30.2 91.0 85.1
Real Estate 5.2 6.1 39.6 34.3
Other 10.8 6.7 37.8 25.1
- -----------------------------------------------------------------------------------------------------------------
$183.2 $170.1 $582.7 $530.3
- -----------------------------------------------------------------------------------------------------------------
Operating Expenses
Regulated Utility $115.1 $101.6 $348.2 $324.7
Nonregulated Energy Operations 28.7 25.7 87.7 79.9
Real Estate 2.4 2.8 14.2 14.7
Other 13.7 9.8 47.9 33.7
- -----------------------------------------------------------------------------------------------------------------
$159.9 $139.9 $498.0 $453.0
- -----------------------------------------------------------------------------------------------------------------
Total Interest and Other Income (Expense)
Regulated Utility $ (5.0) $ (5.3) $(14.2) $(10.4)
Nonregulated Energy Operations (0.2) (0.4) - (0.9)
Real Estate (0.1) - (0.2) (0.1)
Other (20.6) (7.0) (32.7) (24.2)
- -----------------------------------------------------------------------------------------------------------------
$(25.9) $(12.7) $(47.1) $(35.6)
- -----------------------------------------------------------------------------------------------------------------
Net Income $34.7
Less: Income from(Loss)
Regulated Utility $ 9.5 $12.2 $32.1 $30.5
Nonregulated Energy Operations 1.5 2.8 2.6 3.2
Real Estate 1.6 1.9 14.8 11.3
Other (13.2) (6.0) (26.3) (19.4)
- -----------------------------------------------------------------------------------------------------------------
Continuing Operations (0.6) 10.9 23.2 25.6
Discontinued Operations 1.813.7 36.7 79.3 110.7
Change in Accounting Principle - -------------------------------------------------------------
Income (Loss) from- (7.8) -
- -----------------------------------------------------------------------------------------------------------------
$ 13.1 $47.6 $94.7 $136.3
- -----------------------------------------------------------------------------------------------------------------
Diluted Average Shares of Common Stock 28.6 27.8 28.5 27.6
- -----------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share of Common Stock
Continuing Operations 32.9 $ 8.2 $1.1 $32.3 $(8.7)
Add Back: Income Tax Expense (Benefit) 23.8 5.0 0.3 21.1 (2.6)
Interest Expense 13.8 4.6 0.6 4.7 3.9
Depreciation and Amortization Expense 21.3 9.9 2.6 8.8$(0.02) $0.40 $0.82 $0.93
Discontinued Operations 0.47 1.31 2.78 4.00
Change in Accounting Principle - - -------------------------------------------------------------------------------------------------------------------------
EBITDA $91.8 $27.7 $4.6 $66.9 $(7.4)
- -------------------------------------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED JUNE 30, 2003
Net Income $ 44.4
Less: Income from Discontinued Operations 7.3
- -------------------------------------------------------------
Income (Loss) from Continuing Operations 37.1 $ 6.9 $(0.1) $34.1 $(3.8)
Add Back: Income Tax Expense (Benefit) 25.0 4.6 (0.5) 22.7 (1.8)
Interest Expense 16.0 5.0 0.7 3.7 6.6
Depreciation and Amortization Expense 21.9 10.4 2.5 8.9 0.1
- -------------------------------------------------------------------------------------------------------------------------
EBITDA $100.0 $26.9 $ 2.6 $69.4 $ 1.1
- -------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2004
Net Income $ 87.2
Less: Income from Discontinued Operations 1.2
- -------------------------------------------------------------
Income (Loss) from Continuing Operations 86.0 $22.1 $1.5 $ 65.6 $(3.2)
Add Back: Income Tax Expense 57.9 13.3 0.2 42.7 1.7
Interest Expense 26.9 9.3 0.9 8.7 8.0
Depreciation and Amortization Expense 43.0 19.8 5.1 18.1(0.27) -
- -------------------------------------------------------------------------------------------------------------------------
EBITDA $213.8 $64.5 $7.7 $135.1 $ 6.5-----------------------------------------------------------------------------------------------------------------
$0.45 $1.71 $3.33 $4.93
- -------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2003
Net Income $ 88.7
Less: Income from Discontinued Operations 13.6
- -------------------------------------------------------------
Income (Loss) from Continuing Operations 75.1 $18.3 $ 0.7 $ 60.8 $(4.7)
Add Back: Income Tax Expense (Benefit) 49.4 12.2 (0.3) 40.2 (2.7)
Interest Expense 32.9 10.2 1.1 8.1 13.5
Depreciation and Amortization Expense 42.8 20.7 5.0 17.0 0.1
- -------------------------------------------------------------------------------------------------------------------------
EBITDA $200.2 $61.4 $ 6.5 $126.1 $ 6.2
- -------------------------------------------------------------------------------------------------------------------------
ALLETE Second Quarter 2004 Form 10-Q 20
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
STATISTICAL INFORMATION 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------
ENERGY SERVICES
Millions of-----------------------------------------------------------------------------------------------------------------
Kilowatthours Sold
Regulated Utility
Retail and Municipals
Residential 228.8 223.9 539.1 536.8233.7 250.2 772.8 787.0
Commercial 294.3 289.6 626.2 616.0334.7 347.5 960.9 963.5
Industrial 1,770.0 1,655.1 3,536.8 3,373.61,736.9 1,535.6 5,273.7 4,909.2
Municipals 189.0 204.5 402.8 405.1211.1 231.8 613.9 636.9
Other 17.8 18.3 38.0 38.819.9 20.5 57.9 59.3
- --------------------------------------------------------------------------------------------------------------------
2,499.9 2,391.4 5,142.9 4,970.3-----------------------------------------------------------------------------------------------------------------
2,536.3 2,385.6 7,679.2 7,355.9
Other Power Suppliers 168.4 300.8 385.6 508.1260.2 504.4 645.8 1,012.5
- --------------------------------------------------------------------------------------------------------------------
2,668.3 2,692.2 5,528.5 5,478.4-----------------------------------------------------------------------------------------------------------------
2,796.5 2,890.0 8,325.0 8,368.4
Nonregulated 414.6 281.1 848.6 700.2Energy Operations 349.4 400.4 1,198.0 1,100.6
- --------------------------------------------------------------------------------------------------------------------
3,082.9 2,973.3 6,377.1 6,178.6-----------------------------------------------------------------------------------------------------------------
3,145.9 3,290.4 9,523.0 9,469.0
- --------------------------------------------------------------------------------------------------------------------
AUTOMOTIVE SERVICES
Vehicles Sold
Used 445,000 471,000 926,000 933,000
Salvage 50,000 49,000 108,000 98,000
- --------------------------------------------------------------------------------------------------------------------
495,000 520,000 1,034,000 1,031,000
Conversion Rate - Used Vehicles 61.7% 61.1% 65.0% 61.8%
Loan Transactions 273,000 241,000 536,000 474,000
- --------------------------------------------------------------------------------------------------------------------
Conversion rate is the percentage of vehicles sold from those that were offered at auction.
-----------------------------------------------------------------------------------------------------------------
ALLETE Third Quarter 2004 Form 10-Q 20
NET INCOME
The following net income discussion summarizes a comparison of the sixnine months
ended JuneSeptember 30, 2004 to the sixnine months ended JuneSeptember 30, 2003.
ENERGY SERVICES'REGULATED UTILITY net income in 2004 was up $4.6 million. At Minnesota Power,
higher retail electric sales contributed to the increase. In addition, despite$1.6 million reflecting a decline7 percent
increase in kilowatthour sales to other power suppliers, power marketing margins
improved in 2004 due to the expiration of an unprofitable purchase power
arrangement in 2003.
AUTOMOTIVE SERVICES reported a $4.8 million increase in net income primarily due
to improved marginsour industrial customers partially offset by
higher pension expense, and increased costs associated with maintenance outages
at Company generating facilities and a 13scheduled outage at Square Butte.
Overall, regulated utility kilowatthour sales were similar to last year (down 1
percent) as a 4 percent increase in loan transactions at AFC. These
increases were partiallysales to retail and municipal customers
reduced the energy available for sale to other power suppliers.
NONREGULATED ENERGY OPERATIONS net income in 2004 was down $0.6 million as a 9
percent increase in nonregulated generation kilowatthour sales was more than
offset by additional corporate charges and separationhigher operating expenses. Operating expenses incurred as ADESA prepares to be a stand-alone publicly traded company.
INVESTMENTS AND CORPORATE CHARGES' net loss was $1.5 million lower in 2004 reflecting strong demandreflected
increased costs for our real estatesulfur dioxide emission allowances, while 2003 reflected a
$0.5 million reduction in Florida and reduced interest
expense. These positive developments were partially offset by an increasecosts accrued in general corporate charges primarily resulting from $1.5 million of separation
expenses associated with the planned spin-off of Automotive Services and $4.7
million of impairment losses2002 related to our emerging technology portfolio. Netthe deferral of a
generation project in Superior, Wisconsin.
REAL ESTATE net income from ALLETE Properties, our real estate operations, was up $3.8$3.5 million higher in 2004 ($13.2 million in 2004; $9.4 million in 2003) primarily due toreflecting an increase in
the number as well as the profitability of real estate sales closing during the
first sixnine months of 2004. The timing of real estate sales varies from quarter
to quarter.
DISCONTINUED OPERATIONS includedOTHER reflected $6.9 million of additional expense in 2004. The additional
expense resulted primarily from a $10.9 million debt prepayment cost associated
with the retirement of long-term debt as a part of our financial resultsrestructuring
in preparation for the spin-off of ADESA. Unallocated interest expense, however,
was $6.5 million less in 2004 due to the retirement of long-term debt in 2003
and early 2004 with the proceeds from the sale of our Water Services businesses
and the vehicle transport and import businesses. We will report our
Automotive Services' businessearly retirement of $125 million of long-term debt in discontinued operations after the planned
spin-off which is expected in SeptemberJuly 2004.
Overall, net income from
discontinued operations decreased $12.4 million, primarily because the first six
months of 2003 included $12.8 millionEarnings on invested proceeds from the operationssale of our Water Services businesses and
cash received from ADESA after the majorityIPO partially offset less income from our
emerging technology investments and additional costs incurred as a result of which werethe
reverse stock split.
DISCONTINUED OPERATIONS net income decreased $31.4 million in 2004.
Automotive Services net income was down $14.4 million, or 16 percent, primarily
due to an $8.5 million debt prepayment cost related to the early redemption of
ADESA debt in August 2004, costs associated with the business separation, and
additional corporate charges and separation expenses incurred as ADESA prepared
to be a stand-alone publicly traded company. Net income for 2004 was also down
because of a 6.6 percent reduction in our ownership of ADESA since the June 2004
IPO and a partial month of operations for September due to the spin-off. The
total number of vehicles sold at ADESA's vehicle auction facilities decreased 2
percent in 2004. Conversion rates, however, continued to exceed last year (63.2
percent in 2004; 61.5 percent in 2003). A 13 percent increase in the fourth quarternumber of
2003. The
first six monthsloan transactions resulted from an increase in the number of 2004 included a $5.4 million gain onactive dealers
combined with an increase in floorplan utilization by the sale of water
assets ($0.4 million for the first six months of 2003).existing dealer base.
Net income from other
discontinued operationsalso included $4.0$4.1 million of charges in 2004 in connection with a
lawsuit related to theADESA's vehicle import business and a $1.3 million recovery
in 2003 from the settlement of a lawsuit associated with theADESA's vehicle
transport business.
Water Services net income decreased $17.0 million, primarily because 2003
included nine months of operations, or $18.2 million, from water and wastewater
systems sold. The majority of Florida systems were sold in the fourth quarter of
2003. North Carolina assets were sold in June 2004. Net income in 2004 included
a $5.2 million gain on the sale of water assets ($3.4 million in 2003).
CHANGE IN ACCOUNTING PRINCIPLE reflected the cumulative effect on prior years
(to December 31, 2003) of changing to the equity method of accounting for
investments in limited liability companies included in our emerging technology
portfolio. (See Note 10.)
21 ALLETE SecondThird Quarter 2004 Form 10-Q
COMPARISON OF THE QUARTERS ENDED JUNESEPTEMBER 30, 2004 AND 2003
ENERGY SERVICES
Regulated utility operations include retail and wholesale rate regulated
activities under the jurisdiction of state and federal regulatory authorities.
Nonregulated operations consist of nonregulated generation (non-rate base
generation sold at market-based rates to the wholesale market), coal mining and
telecommunication activities. Nonregulated generation consists primarily of the
Taconite Harbor Energy Center in northern Minnesota and generation secured
through the Kendall County power purchase agreement, a 15-year agreement with a
wholly owned subsidiary of NRG Energy at a facility near Chicago, Illinois.REGULATED UTILITY
OPERATING REVENUE in total was up $25.4$9.0 million, or 16 percent, in 2004
reflecting increases at both our regulated utility and nonregulated operations.
Regulated utility revenue was up $11.1 million, or 97 percent, in 2004 primarily due
to higher fuel clause recoveries resulting from increased purchasepurchased power
costs (see operating expenses below),. Overall, regulated utility
kilowatthour sales were down 3 percent as a 6 percent increase in sales to
retail and increased retail electric sales.municipal customers was more than offset by decreased sales to
other power suppliers. Much of the increase in retail and municipal
electric sales was attributable to large powerindustrial customers due to higher
production levels in 2004. Sales to other power suppliers decreased
primarily due to the increased requirements of our retail customers.
Scheduled maintenance outages at one of our generating facilities and
Square Butte (see Outlook - Regulated Utility) also contributed to less
energy being available for sale to other power suppliers.
Revenue from electric sales to taconite customers accounted for 24 percent
of consolidated operating revenue in 2004 (19 percent in 2003). Electric
sales to paper and pulp mills accounted for 9 percent of consolidated
operating revenue in both 2004 and 2003.
OPERATING EXPENSES were up $13.5 million, or 13 percent, in 2004 primarily
reflecting increased purchased power expense necessitated by scheduled
maintenance outages at one of our generating facilities and Square Butte
(see Outlook - Regulated Utility). In addition, 2004 included higher
pension expense, and increased costs associated with the scheduled
maintenance outages.
NONREGULATED ENERGY OPERATIONS
OPERATING REVENUE was up $0.9 million, or 3 percent, in 2004 primarily due
to an increase in revenue from contract services as a result of work being
done for American Transmission Company on the Duluth-to-Wausau transmission
line. These services do not result in any profit margin. (See operating
expenses below.) The increase in contract services was mostly offset by
reduced nonregulated kilowatthour sales. Nonregulated kilowatthour sales in
total were down 13 percent in 2004 primarily due to lower kilowatthour
sales at the Kendall County facility.
OPERATING EXPENSES were up $3.0 million, or 12 percent, in 2004 primarily
due to expenses related to the contract services being done for American
Transmission Company. Fuel and purchased power expense was down compared to
last year due to lower kilowatthour sales in 2004. Operating expenses in
2003 reflected a $0.9 million reduction in costs accrued in 2002 related to
the deferral of a generation project in Superior, Wisconsin.
REAL ESTATE
OPERATING REVENUE and OPERATING EXPENSES were both down in 2004 primarily
due to fewer land sales. Operating revenue was down $0.9 million, or 15
percent, and operating expenses were down $0.4 million, or 14 percent.
OTHER
OPERATING REVENUE was up $4.1 million, or 61 percent, in 2004 reflecting
increased revenue from our telecommunications business due to more
equipment sales.
OPERATING EXPENSES were up $3.9 million, or 40 percent, in 2004 mostly due
to higher cost of goods sold associated with increased sales at our
telecommunications business. Corporate charges increased $0.1 million ($3.8
million in 2004; $3.7 million in 2003) reflecting reverse stock split
expenses.
TOTAL INTEREST AND OTHER INCOME (EXPENSE) reflected $13.6 million of
additional expense in 2004. In 2004 we incurred an $18.5 million debt
prepayment cost related to the early redemption of $125 million in senior
notes and recorded $1.0 million of equity losses related to our emerging
technology investments. These additional expenses were partially offset by
a $5.6 million decrease in interest expense not specifically related to any
one business segment ($2.0 million in 2004; $7.6 million in 2003). With
proceeds from the sale of our Water Services businesses and internally
generated cash in 2003 and 2004, we redeemed our quarterly income preferred
securities and various long-term debt issuances which lowered interest
expense in 2004.
ALLETE Third Quarter 2004 Form 10-Q 22
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
REGULATED UTILITY
OPERATING REVENUE was up $28.5 million, or 7 percent, in 2004 primarily due
to higher fuel clause recoveries resulting from increased purchased power
costs (see operating expenses below). Overall, regulated utility
kilowatthour sales were similar to last year (down 1 percent) as increaseda 4
percent increase in sales to retail and municipal customers reduced the
energy available for sale to other power suppliers. AnMuch of the increase in
retail and municipal electric sales was attributable to large industrial
customers due to higher production levels in 2004. Outages at Company
generating facilities and a scheduled maintenance outage at one of the Company's generating unitsSquare Butte
(see Outlook - Energy Services)Regulated Utility) also contributed to less energy being
available for sale to other power suppliers.
Nonregulated revenue was up $14.3 million, or 44 percent,
in 2004 reflecting a $7.8 million increase in revenue from the Company's
telecommunications business due to more equipment sales and a $4.7 million
increase in revenue from nonregulated generation operations. Nonregulated
kilowatthour sales were up 47 percent in 2004.
Revenue from electric sales to taconite customers accounted for 1123 percent
of consolidated operating revenue in 2004 (10(21 percent in 2003). Electric
sales to paper and pulp mills accounted for 48 percent of consolidated
operating revenue in both 2004 and 2003.
OPERATING EXPENSES in total were up $21.7$23.5 million, or 157 percent, in 2004.
Regulated utility operating expenses were up $9.4 million, or 8 percent,2004
primarily reflecting increased purchased power expense necessitated by
an outageoutages at one of
the Company'sCompany generating unitsfacilities and Square Butte (see Outlook -
Energy Services), andRegulated Utility). In addition, 2004 included higher pension expense, and
benefit expensesincreased costs associated with the outages. These increases were partially
offset by the absence of a power marketing demand payment associated with a
purchased power agreement that expired in October 2003.
NonregulatedTOTAL INTEREST AND OTHER INCOME (EXPENSE) reflected $3.8 million less
income in 2004 primarily due to the loss of equity in net income from Split
Rock Energy. Minnesota Power withdrew from Split Rock Energy trading
activities effective November 1, 2003 and all participation in February
2004.
NONREGULATED ENERGY OPERATIONS
OPERATING REVENUE was up $5.9 million, or 7 percent, in 2004 primarily due
to an increase in revenue from contract services as a result of work being
done for American Transmission Company on the Duluth-to-Wausau transmission
line. These services do not result in any profit margin (see operating
expenses below). Revenue was also higher in 2004 due to a 9 percent
increase in nonregulated generation kilowatthour sales.
OPERATING EXPENSES were up $12.3$7.8 million, or 3710 percent, in 2004 primarily
due to expenses related to the contract services being done for American
Transmission Company. In addition, 2004 operating expenses reflected
increased costs for sulfur dioxide emission allowances, while 2003
reflected a $0.9 million reduction in costs accrued in 2002 related to the
deferral of a generation project in Superior, Wisconsin.
TOTAL INTEREST AND OTHER INCOME (EXPENSE) reflected $0.9 million of
additional income in 2004 primarily due to more Minnesota land sales and
less interest expense in 2004.
REAL ESTATE
OPERATING REVENUE was up $5.3 million, or 15 percent, in 2004 as a result
of more land sales. In 2004 12 large real estate sales contributed $24.4
million to revenue, while in 2003 nine large real estate sales contributed
$15.9 million to revenue.
OPERATING EXPENSES were down $0.5 million, or 3 percent, in 2004 because
the cost basis of property sold in 2004 was lower than in 2003.
23 ALLETE Third Quarter 2004 Form 10-Q
OTHER
OPERATING REVENUE was up $12.7 million, or 51 percent, in 2004 reflecting
increased fuel and purchased power expenses, andrevenue from our telecommunications business due to more
equipment sales.
OPERATING EXPENSES were up $14.2 million, or 42 percent, in 2004 mostly due
to higher cost of goods sold associated with increased sales at the Company'sour
telecommunications business. AUTOMOTIVE SERVICES
OPERATING REVENUE was down $8.6Corporate charges increased $2.2 million
or 4 percent,($11.9 million in 2004. Revenue from
auctions2004; $9.7 million in 2003) reflecting higher incentive
compensation and benefit costs, and expenses related services was down $10.1to the reverse stock
split.
TOTAL INTEREST AND OTHER INCOME (EXPENSE) reflected $8.5 million or 5 percent, primarily
due to decreased vehicle sales volume. The number of
vehicles sold at the
Company's vehicle auction facilities decreased 5 percent from last year. The
used vehicle market shift from institutional vehicles to dealer vehicles
continued during the second quarter of 2004 reflecting an anticipated decline in
off-lease vehicles as well as a decline in vehicles repossessed by ADESA's
customers available for redistribution. The decrease in institutional vehicles
available for redistribution was partially offset by an increase in dealer
vehicles sold, a trend that is expected to continue for the remainder of 2004.
Dealer financing revenue was up $1.5 million, or 6 percent, in 2004 reflecting a
13 percent increase in the number of loan transactions. The increase in loan
transactions was a result of an increase in the number of active dealers
combined with an increase in floorplan utilization by the existing dealer base.
OPERATING EXPENSES were down $5.2 million, or 3 percent,additional expense in 2004 primarily due to lower expenses as a result of processing fewer vehicles at our wholesale used
vehicle auctions. The used vehicle market shift from institutional vehicles to
dealer vehicles also contributed to decreasedan $18.5 million debt
prepayment cost of services because dealer
vehicles cost less to process since fewer ancillary services are utilized for
these vehicles as compared to institutional vehicles. This decrease was
partially offset by additional corporate charges of $2.8 million and separation
expenses of $1.4 million incurred as Automotive Services prepared to be a
stand-alone publicly traded company. In addition, interest expense was higher
duerelated to the new debt issued in June 2004.
ALLETE Second Quarter 2004 Form 10-Q 22
INVESTMENTS AND CORPORATE CHARGES
OPERATING REVENUE was down $11.4early redemption of $125 million in senior
notes in 2004 primarily due to $7.9and $5.5 million
($4.7 million after tax) of impairment losses recorded in 2004 related to our
emerging technology portfolio and a $7.4investments. These additional expenses were partially
offset by an $11.1 million decrease in revenue from ALLETE
Properties as a result of fewer land sales. In 2004 one large real estate sale
contributed $2.0 million to revenue, while in 2003 four large real estate sales
contributed $7.9 million to revenue. Revenue in 2003 included $3.5 million of
losses related to the sale of shares the Company held directly in
publicly-traded emerging technology investments.
OPERATING EXPENSES were down $5.7 million, or 35 percent, in 2004 primarily due
to lower interest expense and fewer real estate sales. Operating expenses at
ALLETE Properties were down $2.4 million in 2004 because of fewer land sales.
Interest expense not specifically
related to any one business segment decreased
$2.7 million ($3.910.0 million in 2004; $6.6$21.1 million
in 2003) due to the redemption
of quarterly income preferred securities and various long-term debt issues in
2003 with both the. With proceeds from the sale of our Water Services businesses and
internally generated cash.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30,cash in 2003 and 2004, AND 2003
ENERGY SERVICES
OPERATING REVENUE in total was up $28.6 million, or 8 percent,we redeemed our quarterly
income preferred securities and various long-term debt issuances which
lowered interest expense in 2004. Regulated utility revenue was up $14.5 million, or 6 percent, in 2004 primarily
due to higher fuel clause recoveries resulting from increased purchase power
costs (see operating expenses below), and increased retail electric sales. Much
of the increase in retail electric sales was attributable to large power
customers due to higher production levels in 2004. Overall, regulated utility
kilowatthour sales were similar to last year (up 1 percent) as increased sales
to retail customers reduced the energy available for sale to other power
suppliers. An outage at one of the Company's generating units (see Outlook -
Energy Services) also contributed to less energy being available for sale to
other power suppliers. Equity in net income from Split Rock Energy was $5.1
million lower in 2004 as a result of Minnesota Power withdrawing from Split Rock
Energy. Nonregulated revenue was up $14.1 million, or 19 percent, in 2004
reflecting an $8.6 million increase in revenue from the Company's
telecommunications business due to more equipment sales and a $5.1 million
increase in revenue from nonregulated generation operations. Nonregulated
kilowatthour sales were up 21 percent in 2004.
Revenue from electric sales to taconite customers accounted for 10 percent of
consolidated operating revenue in both 2004 and 2003. Electric sales to paper
and pulp mills accounted for 4 percent of consolidated operating revenue in both
2004 and 2003.
OPERATING EXPENSES in total were up $22.4 million, or 7 percent in 2004.
Regulated utility operating expenses were up $9.6 million, or 4 percent,
reflecting increased purchased power expense necessitated by an outage at one of
the Company's generating units (see Outlook - Energy Services), and higher
pension and benefit expenses partially offset by the absence of a power
marketing demand payment associated with a purchased power agreement that
expired in 2003. Nonregulated utility operating expenses were up $12.8 million,
or 17 percent, reflecting increased fuel and purchased power expense, and higher
cost of goods sold associated with increased sales at the Company's
telecommunications business.
AUTOMOTIVE SERVICES
OPERATING REVENUE was up $6.2 million, or 1 percent, in 2004. Revenue from
auctions and related services was up $1.6 million, or less than 1 percent, in
2004 primarily due to a favorable Canadian exchange rate. The number of vehicles
sold at the Company's vehicle auction facilities in total were similar to last
year reflecting fewer institutional vehicles and vehicles repossessed by ADESA's
customers available for redistribution offset by an increase in dealer vehicles
sold. The increase in dealer vehicle demand contributed to an increase in the
number of vehicles sold as a percentage of the number of vehicles entered or
offered for sale at used vehicle auctions. The conversion percentage was 65.0
percent in 2004 (61.8 percent in 2003). Dealer financing revenue was up $4.6
million, or 9 percent, in 2004 reflecting a 13 percent increase in the number of
loan transactions. The increase in loan transactions was a result of an increase
in the number of active dealers combined with an increase in floorplan
utilization by the existing dealer base.
23 ALLETE Second Quarter 2004 Form 10-Q
OPERATING EXPENSES were down $1.1 million, or less than 1 percent, in 2004
primarily due to the impact of the used vehicle market shift towards more dealer
vehicles and higher average used vehicle conversion rates. The used vehicle
market shift from institutional vehicles to dealer vehicles decreased cost of
services in 2004 because dealer vehicles cost less to process since fewer
ancillary services are utilized for these vehicles as compared to institutional
vehicles. This decrease was partially offset by additional corporate charges of
$4.3 million and separation expenses of $2.6 million incurred as Automotive
Services prepared to be a stand-alone publicly traded company. In addition,
interest expense was higher due to the new debt issued in June 2004. Expenses in
2004 also reflected the negative impact of higher Canadian exchange rates in
2004.
INVESTMENTS AND CORPORATE CHARGES
OPERATING REVENUE was up $6.2 million, or 29 percent, in 2004 primarily due to a
$9.3 million increase in revenue from ALLETE Properties as a result of more land
sales. In 2004 11 large real estate sales contributed $22.0 million to revenue,
while in 2003 eight large real estate sales contributed $14.5 million to
revenue. This increase was partially offset by $7.9 million ($4.7 million after
tax) of impairment losses recorded in 2004 related to our emerging technology
portfolio. Revenue in 2003 includedwe recognized $3.5 million of
losses related to the sale of shares the Companywe held directly in publicly-traded
emerging technology investments.
OPERATING EXPENSES were up slightly in 2004 as more real estate sales and
increased general corporate charges were offset by lower interest expense.
Operating expenses at ALLETE Properties were up $2.9 million in 2004 because of
more land sales. Corporate charges increased $3.0 million ($9.0 million in 2004;
$6.0 million in 2003) reflecting higher compensation and benefit costs, and $1.7
million of costs associated with the planned spin-off of Automotive Services.
Interest expense not specifically related to any one business segment decreased
$5.5 million ($8.0 million in 2004; $13.5 million in 2003) due to the redemption
of quarterly income preferred securities and various long-term debt issues in
2003 with both the proceeds from the sale of our Water Services businesses and
internally generated cash.
CRITICAL ACCOUNTING POLICIES
Certain accounting measurements under applicable GAAP involve management's
judgment about subjective factors and estimates, the effects of which are
inherently uncertain. Accounting measurements that we believe are most critical
to our reported results of operations and financial condition include:
uncollectible receivables and allowance for doubtful accounts, impairment of
goodwill and long-lived assets, pension and postretirement health and life
actuarial assumptions, valuation of investments and provisions for environmental
remediation. These policies are reviewed with the Audit Committee of our Board
of Directors on a regular basis and summarized in our 2003 Form 10-K.
OUTLOOK
SPIN-OFF OF AUTOMOTIVE SERVICES. In June 2004 ADESA issued 6.3 million shares of
common stock through an IPO priced at $24.00 per share. This represented 6.6
percent of ADESA's 94.9 million shares outstanding. ALLETE will account for the
6.6 percent public ownership of ADESA as a minority interest and continue to own
and consolidate the remaining portion of ADESA until the completion ofEARNINGS GUIDANCE. Following the spin-off of ADESA from ALLETE. Also in June 2004, ADESA substantially completed
the restructuring of debt in conjunction with its June IPO and planned spin-off
from ALLETE. (See Note 7.) ALLETE's Board of Directors is expected to meet in
late August 2004 to finalize details of the spin-off ofour Automotive Services which is expected to be completed by the end ofin
September 2004. The spin-off is
expected to take the form of a tax-free stock dividend to ALLETE's shareholders,
who would receive a pro rata number of shares of ADESA common stock for each
share of ALLETE common stock that they own. The spin-off is subject to the
approval of the final plan by ALLETE's Board of Directors, favorable market
conditions, receipt of tax opinions and other customary conditions.
ALLETE Second Quarter 2004 Form 10-Q 24
2004 EARNINGS GUIDANCE. After the spin-off of Automotive Services is completed,
ALLETE will be(see Note 1), our remaining operations are comprised of what is nowRegulated
Utility, Nonregulated Energy Operations, Real Estate and Other (formerly
classified as (1) Energy Services, and (2) Investments and Corporate Charges.Charges).
In 2003 net income from these operations totaled $28.3 million. ALLETE estimates that$29.8 million, excluding $1.5
million of spin-off related costs reclassified to Discontinued Operations. Based
on our performance for the nine months ended September 30, 2004 netand fourth
quarter projections, our expectation for income from these
remaining businesses willcontinuing operations
before change in accounting principle (excluding the $10.9 million debt
prepayment cost incurred in 2004) is approximately $38 million for 2004, an
increase 15of 28 percent over 2003. Earnings for the nine months ended September
30, 2004 have benefited from the improved performance of the taconite industry.
Minnesota taconite production is projected to be approximately 40 million tons
in 2004 as compared to 35 million in 2003.
The earningsabove guidance does not include any gains or losses resulting from the
ESOP's sale of ADESA stock received in the spin-off. (See Note 13.) In October
2004 the ESOP sold 2.7 million shares of ADESA stock related to unearned ESOP
shares for total proceeds of $54.0 million; 2.5 million of the shares were sold
directly to ADESA. This resulted in an after-tax gain of $9.2 million which will
be recognized in the fourth quarter of 2004. Approximately 0.6 million shares of
ADESA stock related to unearned ESOP shares remain in the ESOP and will be sold
under the direction of an independent trustee.
The ESOP will use proceeds from the sale of ADESA stock to purchase ALLETE
common stock on the open market. We expect to receive an IRS letter ruling that
will allow us up to approximately $15600 days from September 20, 2004 to complete
the sale of the ADESA shares and the purchase of ALLETE stock. Pursuant to AICPA
Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership
Plans," unallocated ALLETE common stock currently held and purchased by the ESOP
will be treated as unearned ESOP shares and not considered as outstanding for
earnings per share computations. ESOP shares are included in earnings per share
computations after they are allocated to participants. Also in October 2004,
ADESA purchased 0.7 million after taxshares of Automotive Services
spin-off related expenses for advisor fees and debt retirement premiums that are
being incurred this year. This guidance does reflect the impact of cash received
from ADESA after the IPO which was invested and used for debt reduction.
ENERGY SERVICES.stock held by ALLETE's pension plan.
ALLETE Third Quarter 2004 Form 10-Q 24
REGULATED UTILITY. In February 2004 we experienced a generator failure at our
534-MW Boswell Energy Center Unit 4 (Unit 4). Unit 4 came back into service in
June. As a result of the failure, we replaced significant components of the
generator at a capital cost of approximately $6 million. The majority of the
replacement cost was covered by insurance, subject to a deductible of $1
million. We entered into power purchase agreements to replace the power lost
during the Unit 4 outage. The cost of this additional power is beingwas recovered
through the regulated utility fuel adjustment clause in Minnesota. While Unit 4
was down, some work originally planned for 2005 and 2006 was done during the
outage to minimize future outages. This outage did not have a material impact on
our results of operations. Wisconsin Public Power, Inc. owns 20 percent of Unit
4. Minnesota Power does not expect to fileBecause of the outage at our Boswell Energy Center, a request to increase rates for its
retail utility operations during 2005. We will, however, continue to monitor the
costs of servingmulti-week scheduled
maintenance outage on Unit 1 at our retail customers and evaluate the need for a rate filing in
the future.
SWL&P's application with the PSCW for authority to increase retail utility rates
6.1 percent for its Wisconsin electric utility operationsLaskin Energy Center was filed in Junedeferred until
third quarter 2004. The request covers increases55-MW Unit 1 was back in service in early October.
In September 2004 Square Butte began a scheduled multi-week maintenance outage
which was completed at the end of October. Our pro rata share of the cost of doing business. New rates, if
approved, areis
expected to go into effect in early 2005.
We will filebe approximately $6 million pretax.
In September 2004 we filed an integrated resource plan (Resource Plan) with the
MPUC in the third quarter of
2004 detailing our retail energy demand projections and our energy sourcing
options to meet the projected demand. The projections will include the future
energy needs of our existing customers, including contemplated expansions. We
expect to see modest growth in our retail and regulated wholesale loadsdemand over the next 15 years with potential for more robust growth depending on several key
expansion opportunities being pursuedyears. In the Resource
Plan we predict energy demand by customers in our service territory will
increase at an average annual rate of 1.7 percent to 2019. The Resource Plan
includes growth of 20 to 30 megawatts per year primarily from residential and
smaller commercial expansion, and a sustainable positive outlook from large
power customers in northeastern Minnesota, such as taconite processing
facilities and paper mills. We expect to realize a reduction in generating
resource supply over the steel, papernext few years under the terms of a long-term energy
supply contract with Square Butte. The combination of increased demands and
pipeline industriesreduced supply means we serve.
INVESTMENTS AND CORPORATE CHARGES.will need to secure additional base load energy to serve
our customers in future years.
The Resource Plan sets forth several options designed to meet the predicted
growing base load energy demand in the region. The options range from purchasing
additional power to building new base load energy generation facilities. We will
work with state regulators and stakeholders over the next several months to
discuss the Resource Plan. We anticipate that the MPUC will formally consider
the Resource Plan by mid-2005.
NONREGULATED ENERGY OPERATIONS. The Kendall County facility has operated at a
loss due to negative spark spreads (the differential between electric and
natural gas prices) in the wholesale power market and our resulting inability to
cover the fixed capacity charge on unsold capacity (currently 145 MW). We expect
the facility to continue to generate losses until such time as spark spreads
improve or we are able to enter into additional long-term capacity sales
contracts. This may result in annual after-tax losses of up to approximately $8
million depending on demand for unit output and spark spreads. We are currently
exploring options to minimize or eliminate these ongoing losses.
In October 2004 our 75-MW (rated capacity) Taconite Harbor Unit 1 began a
scheduled outage which is expected to be completed by mid-November 2004.
REAL ESTATE. ALLETE Properties, our Florida real estate operations, owns
approximately 17,00018,000 acres of land near Fort Myers, Palm Coast and Ormond Beach,
Florida, as well as Winter Haven Citi Centre, a retail shopping center in Winter
Haven, Florida. We add value to the land through entitlements and infrastructure
improvements, and then sell it at current market prices. Historically, proceeds
from land sales have been three to four times our carrying value. Rental income
at the retail shopping center in Winter Haven provides a recurring stream of
revenue. At JuneSeptember 30, 2004 our basis in land held by ALLETE Properties was
$47.1$46.9 million. ALLETE Properties occasionally provides seller financing, and
outstanding finance receivables were $10.8$9.7 million at JuneSeptember 30, 2004 with
maturities ranging up to ten years. Outstanding finance receivables accrue
interest at market-based rates. At JuneSeptember 30, 2004 ALLETE Properties also had
$18.2 million of other assets which consisted primarily of Winter Haven Citi
Centre. We may selectively acquire additional land if it meets our strategy of
adding value through entitlement and infrastructure improvements.
SALE OF REMAINING WATER ASSETS. In June 2004 we essentially concluded our
strategy to exit our Water Services businesses when we completed the salessale of our
North Carolina water assets and the sale of the remaining 72 water and
wastewater systems in Florida. The net cash proceeds from the sale of all water
assets in 2003 and 2004, after transaction costs, retirement of most Florida
Water debt and payment of income taxes, were approximately $300 million. These
net proceeds were used to strengthen our balance sheet and retire debt. We
continue to expect to sell our water assets in Georgia in the second half of
2004.
25 ALLETE SecondThird Quarter 2004 Form 10-Q
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW ACTIVITIES
A primary goal of our strategic plan is to improve cash flow from operations.
Our strategy includes growing theour businesses both internally by expanding
facilities, services and operations (see Capital Requirements), and externally
through acquisitions.
ConsolidatedExcluding Discontinued Operations, consolidated cash and cash equivalents was
$602.9$172.7 million at JuneSeptember 30, 2004, an increase of $383.3$59.3 million since
December 31, 2003.
Of total consolidated cash
and cash equivalents at June 30, 2004, $275.0 million was at Automotive Services
with the balance of $327.9 million held by ALLETE and its other subsidiaries.
Our Automotive Services business had $155.8 million of restricted cash at June
30, 2004 primarily consisting of funds held in escrow for the redemption of
certain debt in August 2004. (See Note 7.)
In June 2004 ADESA completed an initial public offering of 6.3 million shares at
$24.00 per share which netted proceeds of $136.0 million after transaction
costs. ADESA also completed the restructuring of its debt in conjunction with
the IPO and planned spin-off from ALLETE, and in June 2004 issued $125 million
of senior notes and borrowed $275 million under a new $525 million credit
facility. With these funds, ADESA repaid $75.1 million of previously existing
debt and all intercompany debt outstanding to ALLETE. In July 2004 ADESA also
announced the August 2004 redemption of $125 million in outstanding long-term
debt. See Note 3 for additional detail on the IPO and Note 7 for additional
detail on debt issued, repaid and slated for redemption.
InDuring the first halfnine months of 2004 ALLETEwe repaid $56.3$182.9 million in outstanding
debt using a combination of internally generated funds, and proceeds from the sale
of our Water Services assets. In July 2004 ALLETE repaid $125 million in senior long-term notes withassets and proceeds received from ADESA and the sale of our Water Services assets. Also in
July 2004, ALLETE announced the August 2004 redemption of $111.0ADESA. (See Note 1.) We
also refinanced $111 million in long-term debt that is expected to be refinanced in August 2004 at a more
favorablelower interest rate. See
Notes 76 and 87 for additional detail on debt repaid
and slated for redemption.repaid.
During the first sixnine months of 2004 and 2003, cash flow from operating
activities was affected by a number of factors representative of normal
operations.
WORKING CAPITAL. Additional working capital, if and when needed, generally is
provided by the sale of commercial paper. Approximately 3.41.1 million original
issue shares of our common stock are available for issuance through Invest
Direct,INVEST
DIRECT, our direct stock purchase and dividend reinvestment plan.
A substantial amountDIVIDENDS. On October 20, 2004 our Board of ADESA's working capital is generated internally from
payments for services provided. ADESA had historically funded short term swings
in working capital through lines of credit from ALLETE. In June 2004 ADESA
securedDirectors declared a revolving line of credit and expects this credit facility to
sufficiently meet its working capital needs and the needs of its subsidiaries
for the foreseeable future. During the sales process, ADESA does not generally
take title to or ownership of the vehicles consigned for auction but instead
facilitates the transfer of vehicle ownership directly from sellers to buyers.
AFC offers floorplan financing for dealers to purchase vehicles mostly at
auctions and takes a security interest in each financed vehicle. The financing
is provided through the earlier of the date the dealer sells the vehicle or a
general borrowing termdividend of 30
cents per share on ALLETE common stock payable December 1, 2004 to 45 days.
Significant changes in accounts receivable and accounts payable balancesshareholders
of record at June
30, 2004 compared to December 31, 2003 were due to increased sales and financing
activity at Automotive Services. Typically auction volumes are down during
December becausethe close of the holidays. As a result, ADESA and AFC had higher
receivables and higher payables at June 30,business November 15, 2004.
AFC RECEIVABLES. AFC sells the majority of U.S. dollar denominated finance
receivables on a revolving basis to a wholly owned, bankruptcy remote, special
purpose subsidiary that is consolidated for accounting purposes. AFC and the
special purpose subsidiary amended it securitization agreement in June 2004
concurrent with the completion of ADESA's IPO. The agreement expires in January
2005 subject to annual renewal and allows for the revolving sale to a bank
conduit facility of up to a maximum of $500 million in undivided interests in
eligible finance receivables subject to committed liquidity. AFC's receivables
are discussed in Note 2.
ALLETE Second Quarter 2004 Form 10-Q 26
SECURITIES.SECURITIES
In March 2001 ALLETE, ALLETE Capital II and ALLETE Capital III, jointly filed a
registration statement with the SEC pursuant to Rule 415 under the Securities
Act of 1933. The registration statement, which has been declared effective by
the SEC, relates to the possible issuance of a remaining aggregate amount of
$387 million of securities which may include ALLETE common stock, first mortgage
bonds and other debt securities, and ALLETE Capital II and ALLETE Capital III
preferred trust securities. ALLETE also previously filed a registration
statement, which has been declared effective by the SEC, relating to the
possible issuance of $25 million of first mortgage bonds and other debt
securities. We may sell all or a portion of the remaining registered securities
if warranted by market conditions and our capital requirements. Any offer and
sale of the above mentioned securities will be made only by means of a
prospectus meeting the requirements of the Securities Act of 1933 and the rules
and regulations thereunder.
CREDIT RATINGSOFF-BALANCE SHEET ARRANGEMENTS
Off-balance sheet arrangements are discussed in Note 15.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Our securities have been ratedlong-term debt obligations, including long-term debt due within one year,
represent the principal amount of bonds, notes and loans which are recorded on
our consolidated balance sheet plus interest.
Unconditional purchase obligations represent our Square Butte and Kendall County
power purchase agreements, and minimum purchase commitments under coal and rail
contracts.
Under our power purchase agreement with Square Butte that extends through 2026,
we are obligated to pay our pro rata share of Square Butte's costs based on our
entitlement to the output of Square Butte's 455 MW coal-fired generating unit
near Center, North Dakota. Our payment obligation is suspended if Square Butte
fails to deliver any power, whether produced or purchased, for a period of one
year. Square Butte's fixed costs consist primarily of debt service. The
following table reflects our share of future debt service based on our current
output entitlement of 71 percent through 2005, 66 percent thereafter. In
December 2003 we received notice from Minnkota Power that they will reduce our
output entitlement,
ALLETE Third Quarter 2004 Form 10-Q 26
effective January 1, 2006, by Standard & Poor's Ratings Services,5 percent to approximately 66 percent. Minnkota
Power has the option to reduce our entitlement by 5 percent annually, to a
divisionminimum of The McGraw-Hill Companies, Inc. (Standard & Poor's)50 percent. (See Note 15.)
Under the Kendall County agreement, we pay a fixed capacity charge for the
right, but not the obligation, to utilize one 275-MW generating unit near
Chicago, Illinois. We are responsible for arranging the natural gas fuel supply
and by Moody's Investors
Service, Inc. (Moody's).
In May 2004 Standard & Poor's affirmed ALLETE's BBB+ corporate credit rating and
removedare entitled to the rating from CREDITWATCH with developing implications. Also in May
2004, Moody's affirmed ALLETE's senior secured debt at a Baa1 rating, Issuer
Rating and senior unsecured debt at Baa2, and Prime-2 short term rating for
commercial paper. Both agencies indicated that the spin-off of ADESA would not
impact these ratings.
Rating agencies use both quantitative and qualitative measures in determining a
company's credit rating. These measures include business risk, liquidity risk,
competitive position, capital mix, financial condition, predictability of cash
flows, management strength and future direction. Some of the quantitative
measures can be analyzed through a few key financial ratios, while the
qualitative ones are more subjective. The disclosure of these credit ratings is
not a recommendation to buy, sell or hold our securities. Ratings are subject to
revision or withdrawal at any time by the assigning rating organization. Each
rating should be evaluated independently of any other rating.electricity produced. (See Note 15.)
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL 2005-2007 2008-2009 2010 AND AFTER
- ------------------------------------------------------------------------------------------------------------------
Millions
Long-Term Debt $ 585.3 $183.5 $ 79.1 $322.7
Operating Lease Obligations 78.3 17.4 9.0 51.9
Unconditional Purchase Obligations 657.0 146.2 89.1 421.7
- ------------------------------------------------------------------------------------------------------------------
$1,320.6 $347.1 $177.2 $796.3
- ------------------------------------------------------------------------------------------------------------------
CAPITAL REQUIREMENTS
Consolidated capitalCONTINUING OPERATIONS. Capital expenditures for continuing operations are
expected to be $62.6 million for 2004. Capital expenditures for continuing
operations for the sixnine months ended JuneSeptember 30, 2004 totaled $43.4$48.8 million
($67.553.6 million in 2003). Expenditures for the sixnine months ended JuneSeptember 30,
2004 included $34.5$38.4 million for Regulated Utility, $6.6 million for Nonregulated
Energy Services, $5.7Operations and $3.8 million for Other which consisted of $3.5 million for
our telecommunications business and $0.3 million for general corporate purposes.
Internally generated funds were the primary source of funding for these
expenditures.
DISCONTINUED OPERATIONS. Capital expenditures for discontinued operations for
the nine months ended September 30, 2004 totaled $16.2 million ($45.1 million in
2003). Expenditures for the nine months ended September 30, 2004 included $13.1
million for Automotive Services capital expenditures incurred prior to the
September 2004 spin-off and $0.2 million for Investments and Corporate Charges.
Expenditures for the six months ended June 30, 2004 also included $3.0$3.1 million to maintain our remaining Water
Services businesses while they were in the process of being sold.
Internally generated funds were the primary source of
funding for these expenditures.
ENVIRONMENTAL MATTERS AND OTHER
Our businesses are subject to regulation by various U.S. and Canadian, federal, state provincial and local
authorities concerning environmental matters. We do not currently anticipate
that potential expenditures for environmental matters will be material; however,
we are unable to predict the outcome of the issues discussed in Note 13.15.
NEW ACCOUNTING STANDARDS
New accounting standards are discussed in Note 2.
----------------------------3.
-------------------------
READERS ARE CAUTIONED THAT FORWARD-LOOKING STATEMENTS INCLUDING THOSE CONTAINED
ABOVE, SHOULD BE READ IN CONJUNCTION WITH OUR DISCLOSURES UNDER THE HEADING:
"SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995" LOCATED ON PAGE 3 OF THIS FORM 10-Q.
27 ALLETE SecondThird Quarter 2004 Form 10-Q
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SECURITIES INVESTMENTS
Investments include certain securities held for an indefinite period of time
which are accounted for as available-for-sale securities. Available-for-sale
securities are recorded at fair value with unrealized gains and losses included
in accumulated other comprehensive income, net of tax. Unrealized losses that
are other than temporary are recognized in earnings. At JuneSeptember 30, 2004 our
available-for-sale securities portfolio consisted of ADESA common stock held in
our Retirement Savings and Stock Ownership Plan (see Note 13) and securities in
a grantor trust established to fund certain employee benefits. Our
available-for-sale securities portfolio had a fair value of $21.1$76.0 million at
JuneSeptember 30, 2004 ($20.2 million at December 31, 2003) and a total unrealized
after-tax gain of $1.1$1.4 million at JuneSeptember 30, 2004 ($0.8 million at December
31, 2003).
As part of our emerging technology portfolio, we have several minority
investments in venture capital funds and direct investments in privately-held
start-up companies. These investments are accountedWe account for usingour investment in venture capital funds under
the equity method and account for our direct investment in privately-held
companies under the cost method
and included in Investments on our consolidated balance sheet.method. The total carrying value of these investmentsour emerging
technology portfolio was $26.9$15.6 million at JuneSeptember 30, 2004, ($37.5down $21.9 million
atfrom December 31, 2003).2003. The decline was primarily due to a change to the equity
method of accounting for the venture capital funds (see Note 10) and impairments
related to investments in privately-held companies. Our policy is to quarterly review
these investments quarterly for impairment by assessing such factors as
continued commercial viability of products, cash flow and earnings. Any
impairment would reduce the carrying value of the investment. During the second
quarter of 2004 we recorded $7.9$5.5 million ($4.73.2 million after taxes) of
impairment losses primarily related to direct investments in certain
privately-held start-up companies whose future business prospects have
diminished significantly. Recent developments at these companies indicateindicated that
future commercial viability is unlikely, as is new financing necessary to
continue development.
The total carrying value at June 30, 2004 included $20.4 million for investments
in three venture capital funds that have a current fund reported value of
approximately $10 million. The venture capital funds invest in many
privately-held start-up companies, and generally value the investments at the
most recent round of equity financing with failed investments written down to
zero. Experience indicates that failures in the fund's portfolio emerge early
while successful companies tend to take longer to materialize. In addition, the
most recent round of equity financing may produce a low valuation as it would
not reflect subsequent positive developments occurring at the various companies
in which the funds have invested. Based on our evaluation of these three venture
capital funds, we anticipate that the funds' future value will exceed our
carrying value as successful companies emerge and become fully valued. We have
the ability and intent to hold our investment in these venture capital funds for
a reasonable period of time sufficient for the forecasted valuation to be
realized. As such, we did not consider these venture capital fund investments to
be other-than-temporarily impaired at June 30, 2004.
FOREIGN CURRENCY
Our foreign currency exposure is limited to the conversion of the operating
results of our Automotive Services' Canadian subsidiaries and, to a lesser
extent, Mexican subsidiaries. We have not entered into any foreign exchange
contracts to hedge the conversion of Automotive Services' Canadian or Mexican
operating results into United States dollars. Mexican operations are not
material.
INTEREST RATES
In June 2004 ADESA entered into two interest rate swap agreements with notional
amounts of $105 million and $60 million to manage its exposure to interest rate
movements on its variable rate debt. Both interest rate swap agreements contain
amortizing provisions and mature in December 2006. ADESA has designated its
interest rate swap agreements as cash flow hedges. The fair value of the
interest rate swap agreements is estimated using pricing models widely used in
financial markets and represents the estimated amount ADESA would receive or pay
to terminate the agreement at the reporting date. At June 30, 2004 the fair
value of the interest rate swap agreements is an unrealized loss of $0.6 million
and is recorded in accrued expenses and other liabilities on the consolidated
balance sheet. In accordance with the provisions of SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," changes in the fair value of the
interest rate swap agreements designated as cash flow hedges are recorded in
Accumulated Other Comprehensive Income. ADESA is exposed to credit loss in the
event of nonperformance by the counterparties; however, nonperformance is not
anticipated.
ALLETE Second Quarter 2004 Form 10-Q 28
INTEREST RATE SENSITIVE FINANCIAL INSTRUMENTS
PRINCIPAL CASH FLOW BY EXPECTED MATURITY DATE
----------------------------------------------------------------------------
SEPTEMBER 30, 2004 2004 2005 2006 2007 2008 THEREAFTER TOTAL
- --------------------------------------------------------------------------------------------------------------------
Dollars in Millions
Long-Term Debt
Fixed Rate $0.2 $0.8 $1.5 $115.8 $56.5 $155.9 $330.7
Average Interest Rate - % 7.0 7.3 6.3 7.1 7.0 5.4 6.3
Variable Rate $0.5 $1.0 $0.8 $3.3 $0.8 $54.3 $60.7
Average Interest Rate - % 2.8 3.0 3.0 1.7 3.0 1.6 1.6
- --------------------------------------------------------------------------------------------------------------------
Assumes rate in effect at September 30, 2004 remains constant through remaining term.
COMMODITY PRICE RISK
Our regulated utility operations in Minnesota and Wisconsin incur costs for fuel
(primarily coal), power and natural gas purchased for resale in our regulated
service territories, and related transportation. Our regulated utilities'
exposure to price risk for these commodities is significantly mitigated by the
current ratemaking process and regulatory environment which generally allows a
fuel clause surcharge if costs are in excess of those in our last rate filing.
Conversely, costs below those in our last rate filing result in a rate credit.
We seek to prudently manage our customers' exposure to price risk by entering
into contracts of various durations and terms for the purchase of coal and power
(in Minnesota), power and natural gas (in Wisconsin), and related transportation
costs.
ALLETE Third Quarter 2004 Form 10-Q 28
POWER MARKETING
Our power marketing activities consist of (i) purchasing energy in the wholesale
market for resale in our regulated service territories when retail energy
requirements exceed generation output, and (ii) selling excess available
regulated utility generation and purchased power, as well as selling
nonregulated generation.
From time-to-time, our regulated utility operations may have excess generation
that is temporarily not required by retail and municipal customers in our
regulated service territory. We actively sell this generation to the wholesale
market to optimize the value of our generating facilities. This generation is
generally sold in the spot market or under short-term contracts at market
prices.
We have approximately 500 MW of nonregulated generation available for sale to
the wholesale markets. This primarily consists of about 200 MW at our Taconite
Harbor facility in northern Minnesota and 275 MW obtained through a 15-year
power purchase agreement with an independent power producer at a wholly owned subsidiary of NRG Energy at thefacility in
Kendall County facility near Chicago, Illinois.
The majority of
Taconite Harbor's capability of approximately 200 MW has been sold through
various short-term and long-term capacity and energy contracts. Short term, we
have approximately 180116 MW of capacity and energy sales contracts,
and a 15 MW forward energy sales contract, all of which
expire on April 30, 2005. Long term, we have entered into two capacity and
energy sales contracts totaling 175 MW (201 MW including a 15 percent reserve)
which are effective May 1, 2005 and expire on April 30, 2010. Both contracts
contain fixed monthly capacity charges and fixed minimum energy charges. One
contract provides for an annual escalator to the energy charge based on
increases in our cost of coal, subject to a small minimum annual escalation. The
other contract provides that the energy charge will be the greater of a fixed
minimum charge or an amount based on the variable production cost of a combined
cycle natural gas unit. Our exposure in the event of a full or partial outage at
our Taconite Harbor facility is significantly limited under both contracts. When
the buyer is notified at least two months prior to an outage, there is no
exposure. Outages with less than two months notice are subject to an annual
duration limitation typical of this type of contract. We also have a 50 MW
capacity and energy sales contract that extends through April 2008 and a 15 MW
energy sales contract that extends through May 2007. The 50 MW capacity and
energy sales contract has fixed pricing through January 2006 and market-based
pricing thereafter.
Under the Kendall County agreement, which expires in September 2017, we pay a
fixed capacity charge for the right, but not the obligation, to capacity and
energy from a 275 MW275-MW generating unit. We are responsible for arranging the
natural gas fuel supply. Our strategy is to sell a significant portion of this
generation through long-term contracts of various durations. The balance will be
sold in the daily spot market or through short-term contracts. We currently have
long-term capacity sales contracts for 130 MW, with 50 MW expiring in April 2012
and the balance expiring in September 2017. To date, the Kendall County facility
has operated at a loss due to negative spark spreads (the differential between
electric and natural gas prices) in the wholesale power market and our resulting
inability to cover the fixed capacity charge on the unsold capacity (currently
145 MW). We expect the facility to continue to generate losses until such time
as spark spreads improve or we are able to enter into additional long-term
capacity sales contracts. This may result in annual after-tax losses of up to
approximately $8 million depending on demand for unit output and spark spreads.
We are currently exploring options to minimize or eliminate these ongoing
losses.
29 ALLETE Second Quarter 2004 Form 10-Q
ITEM 4. CONTROLS AND PROCEDURES
We maintain a system of controls and procedures designed to provide reasonable
assurance as to the reliability of the financial statements and other
disclosures included in this report, as well as to safeguard assets from
unauthorized use or disposition. We evaluated the effectiveness of the design
and operation of our disclosure controls and procedures under the supervision
and with the participation of management, including our chief executive officer
and chief financial officer, as of the end of the period covered by this Form
10-Q. Based upon that evaluation, our chief executive officer and chief
financial officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information required to be
included in our periodic SEC filings. There has been no change in our internal
control over financial reporting that occurred during our most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
29 ALLETE Third Quarter 2004 Form 10-Q
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Material legal and regulatory proceedings are included in the discussion of
Other Information in Item 5.5 and are incorporated by reference herein.
In late 2003 the staff of the SEC initiated an informal inquiry relating to our
internal audit function, internal financial reporting and the loan loss
methodology at AFC. We have fully and voluntarily cooperated with the informal
inquiry, and the SEC staff has not asserted that we have acted improperly or
illegally. Although we cannot predict the length, scope or results of the
informal inquiry, based upon extensive review by the Audit Committee of our
Board of Directors with the assistance of independent counsel and our
independent auditors, we believe that we have acted appropriately and that this
inquiry will not result in action that has a material adverse impact on us or
our reported results of operations. The results of the review by our Audit
Committee and independent counsel were submitted to the SEC in late February
2004. We have had no further communication with the SEC on this matter.
See Note 4 for a discussion on the ADESA Importation litigation.
ITEM 2. CHANGES INUNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS AND
ISSUER PURCHASES OF EQUITY SECURITIES
TOTAL NUMBER MAXIMUM
OF SHARES NUMBER OF
PURCHASED AS SHARES THAT
PART OF MAY YET BE
TOTAL PUBLICLY PURCHASED
ALLETE COMMON STOCK REPURCHASES NUMBER OF AVERAGE ANNOUNCED UNDER THE
ALLETE COMMON STOCK REPURCHASESFOR THE QUARTER ENDED SHARES PRICE PAID PLANS OR PLANS OR
AS OF JUNESEPTEMBER 30, 2004 PURCHASED PER SHARE PROGRAMS PROGRAMS
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
For the Quarter Ended March 31, 2004
JanuaryCalendar Month
July - - - -
February 6,333 $31.75August 62,001 $80.25 - -
March 15,247 $34.14September 8,015 $81.71 - -
- --------------------------------------------------------------------------------------------------------------------
21,580 $33.44----------------------------------------------------------------------------------------------------------------
70,016 $80.41 - -
- --------------------------------------------------------------------------------------------------------------------
For the Quarter Ended June 30, 2004
April 4,751 $34.99 - -
May - - - -
June 5,220 $35.81 - -
- --------------------------------------------------------------------------------------------------------------------
9,971 $35.42 - -
- --------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2004 31,551 $34.06 - -
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Repurchased pursuant to the stock-for-stock exercise of employee options granted under theADJUSTED FOR THE ONE-FOR-THREE REVERSE STOCK SPLIT EFFECTIVE SEPTEMBER 20, 2004.
REFLECTED SHARES OF ALLETE Executive
Long-Term Incentive Compensation Plan.COMMON STOCK REPURCHASED TO COMPLETE THE SPIN-OFF OF ADESA. THERE WERE NO
SHARES REPURCHASED PURSUANT TO STOCK-FOR-STOCK EXERCISES OF EMPLOYEE OPTIONS GRANTED UNDER THE ALLETE
EXECUTIVE LONG-TERM INCENTIVE COMPENSATION PLAN DURING THE THIRD QUARTER OF 2004.
ALLETE Second Quarter 2004 Form 10-Q 30
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) We held our Annual Meeting of Shareholders on May 11, 2004.
(b) Included in (c) below.
(c) The election of directors and the ratification of the appointment of
independent auditors were voted on at the Annual Meeting of Shareholders.
The results were as follows:
VOTES
WITHHELD BROKER
VOTES FOR OR AGAINST ABSTENTIONS NONVOTES
---------------------------------------------------------------------------------------------------------------
DIRECTORS
Wynn V. Bussmann 73,129,135 1,603,112 - -
David G. Gartzke 73,389,211 1,343,036 - -
Dennis O. Green 73,061,647 1,670,600 - -
Peter J. Johnson 73,200,980 1,531,267 - -
George L. Mayer 73,189,932 1,542,315 - -
Roger D. Peirce 73,598,134 1,134,113 - -
Jack I. Rajala 73,462,836 1,269,411 - -
Nick Smith 73,745,576 986,671 - -
Bruce W. Stender 73,225,683 1,506,564 - -
Donald C. Wegmiller 73,385,366 1,346,881 - -
Deborah L. Weinstein 73,665,887 1,066,360 - -
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP 72,408,856 1,893,568 429,823 -
---------------------------------------------------------------------------------------------------------------
(d) Not applicable.None.
ITEM 5. OTHER INFORMATION
Reference is made to our 2003 Form 10-K for background information on the
following updates. Unless otherwise indicated, cited references are to our 2003
Form 10-K.
Ref. Page 1214. - First Full Paragraph
In October 2003 the FPSC voted to initiate an investigation into the ratemaking
considerations of the gain on sale of Florida Water's assets,Table - Minimum Revenue and whether gains
should be shared with the previous customers of Florida Water. In June 2004
Florida enacted legislation which provides that gains or losses resulting from
the purchase or condemnation of a utility's assets, which results in the loss of
customers and revenue served by such assets, are to be borne by the shareholders
of the utility. This applies to all transactions prior to and after the
effective date of the new law.
Ref. Page 17 - Fifth Paragraph
Minnesota Power does not expect to file a request to increase rates for its
retail utility operations during 2005. We will, however, continue to monitor the
costs of serving our retail customers and evaluate the need for a rate filing in
the future.
Ref. Page 17 - Following the Sixth Paragraph
On May 21, 2004 the MPUC approved Minnesota Power's 2004 capital structure
petition. Minnesota Power requested a common equity ratio of 58.44 percent with
a contingency window of plus or minus 15 percent (49.67 percent to 67.21
percent). The Company's total consolidated capitalization was requested at $3.0
billion with a contingency cap of $300 million. The Company requested approval
of a total consolidated capitalization of $1.5 billion with a contingency cap of
$150 million once the spin-off of Automotive Services is completed.
31Demand Under Contract
MINIMUM REVENUE AND DEMAND UNDER CONTRACT MINIMUM MONTHLY
AS OF NOVEMBER 1, 2004 ANNUAL REVENUE MEGAWATTS
- ----------------------------------------------------------------------------------------------------------------
2004 $108.2 693
2005 $69.6 417
2006 $38.1 202
2007 $33.3 181
2008 $23.5 133
- ----------------------------------------------------------------------------------------------------------------
BASED ON PAST EXPERIENCE, WE BELIEVE REVENUE FROM OUR LARGE POWER CUSTOMERS WILL BE SUBSTANTIALLY IN EXCESS
OF THE MINIMUM CONTRACT AMOUNTS.
ALLETE SecondThird Quarter 2004 Form 10-Q 30
Ref. Page 17 - Ninth Paragraph
On June 3, 2004 SWL&P filed an application with the PSCW for authority to
increase retail utility rates 6.1 percent. This average increase is comprised of
a 4.0 percent increase in electric rates, a 7.0 percent increase in gas rates
and a 12.1 percent increase in water rates. The proposed increases are due to
increased operating costs, primarily pension, insurance, gross receipts tax and
parent company service costs. SWL&P is requesting a 12.25 percent return on
common equity. Hearings are anticipated to be held in late 2004 with new rates
expected to go into effect in early 2005.
Ref. Page 18 - First Paragraph
Ref. Form 10-Q for the quarter ended March 31, 2004, Page 26 - Fourth Paragraph
OnRef. Form 10-Q for the quarter ended June 7,30, 2004, Save Our Unique Lands (SOUL) and the North American Water Office
(NAWO) filed a complaint againstPage 32 - Second Paragraph
In August 2004 Minnesota Power at the MPUC. The complaint
alleges that Minnesota Power does not intend to own the Duluth to Wausau
transmission line, that theand American Transmission Company (ATC)entered into a
Design and Construction Services Agreement for Transmission Facilities governing
Minnesota Power's work on the Minnesota portion of the Duluth-to-Wausau
transmission line. Petitions addressing the regulatory jurisdiction over the
agreement are currently being drafted. Construction on the transmission line in
Minnesota is expected to be completed in 2005.
On September 9, 2004 the MPUC dismissed a complaint that alleged that American
Transmission Company is the ultimate beneficiary and owner of the transmission
line in Minnesota and is not a jurisdictional utility under Minnesota law, and
that American Transmission Company lacks the power of eminent domain and the
ability to conduct business in Minnesota. The dismissed complaint alleged that
ultimate ownership of the line was not clear and that the technical aspects of
the line have changed significantly since the Minnesota Environmental Quality
Board (MEQB) approved Minnesota Power's exemption request to be exempt from the requirements of
the Minnesota Power Plant Siting Act for the construction ofbuild the 12 miles of line
in Minnesota. For those reasons, SOUL and NAWO requested that theThe MPUC overturn the MEQB decision,chose to assert jurisdiction over the project, require ATC to
obtain a Certificateissue of Need to buildthe
transfer of ownership of the Minnesota portion of the line to American
Transmission Company and direct the Office of
Attorney General to initiate proceedings againstdirected Minnesota Power and ATC for
unauthorized transmission construction in Minnesota. On July 15, 2004 Minnesota
Power filedto make a reply to the MPUC's request for comments on the complaint.
Minnesota Power statedfiling that the MEQB exemption was still effective and that the
complaint had no merit. The Minnesota Department of Commerce supported Minnesota
Power's position in their comments.
Ref. Page 26 - Second through Fifth Paragraphs
Ref. Form 10-Q for the quarter ended March 31, 2004, Page 26 - Sixth Paragraph
In August 2004 ADESA expects to present a detailed engineering proposal to the
Taunton City Council.
ADESA has an accrual of $1.2 million at June 30, 2004 with respect to this
matter, including the estimated costs (as of June 30, 2004) associated with the
proposal to extend the municipal water service.
In addition, ADESA has received correspondence from an attorney representing
residents of the adjoining residential community suggesting that ADESA enter
into discussions concerning property damage claims for diminution in value due
to the MTBE release. Accordingly, thereeither
requests MPUC approval under state regulations or identifies why such approval
is a possibility that property damage
litigation may be filed against ADESA. Potential losses in these matters are not considered probable by ADESA management or cannot be reasonably estimated.
Accordingly, ADESA has not recorded an accrual for the respective costs of these
matters.
Ref. Page 28 - Executive Officers of the Registrant
Ref. Page 54 - Fourth Paragraph
Effective July 20, 2004 Donald W. Stellmaker was appointed treasurer of ALLETE
by our Board of Directors. Stellmaker, 47, joined ALLETE in 1980. His previous
positions included manager and director of corporate financial planning and
budgeting at ALLETE.
ALLETE Second Quarter 2004 Form 10-Q 32
required.
ITEM 6. EXHIBITS
AND REPORTS ON FORM 8-K
(a) Exhibits.
3 BylawsEXHIBIT
NUMBER
3(a)1 Articles of ALLETE, Inc.,Incorporation, amended and restated as amended effective July 20, 2004.
*4 Indenture, dated June 21, 2004, between ADESA, Inc. and LaSalle
Bank National Association, as trusteeof May 8, 2001
(filed as Exhibit 4.23(b) to ADESA, Inc.'s June 30, 2004the March 31, 2001 Form 10-Q, File No.
1-32198)1-3548).
+10(a) July3(a)2 Amendment to Articles of Incorporation, effective 12:00 p.m.
Eastern Time on September 20, 2004 amendment to the ALLETE Executive Annual Incentive
Plan.
+10(b) July 2004 amendment to the Minnesota Power and Affiliated
Companies Executive Investment Plan I.
+10(c) July 2004 amendment to the Minnesota Power and Affiliated
Companies Executive Investment Plan II.
+10(d) July 2004 amendment to the ALLETE Executive Long-Term Incentive
Compensation Plan.
+10(e) July 2004 amendment to the ALLETE Director Stock Plan.
*+10(f) ADESA, Inc. 2004 Equity and Incentive Plan (filed as Exhibit 10.143 to
ADESA's June 11,the September 21, 2004 S-1/A,Form 8-K, File No. 333-113499)1-3548).
*+10(g) ADESA, Inc. Director Compensation Plan (filed4(a) Twenty-third Supplemental Indenture, dated as Exhibit 10.15
to ADESA's June 11,of August 1, 2004,
S-1/A, File No. 333-113499).
*+10(h) ADESA, Inc. Director Compensation Deferral Plan (filedbetween ALLETE and The Bank of New York and Douglas J. MacInnes, as
Exhibit 10.16 to ADESA's June 11,Trustees.
4(b) Indenture of Trust, dated as of August 1, 2004, S-1/A, File No.
333-113499).
*+10(i) ADESA, Inc. Employee Stock Purchase Plan (filed as Exhibit 10.17
to ADESA's June 11, 2004 S-1/A, File No. 333-113499).
*+10(j) ADESA, Inc. (formerly ADESA Corporation) Supplemental Executive
Retirement Plan and First through Fifth Amendments (filed as
Exhibits 10.18 through 10.23 to ADESA's June 30, 2004 Form 10-Q,
File No. 1-32198).
*10(k) Credit Agreement, dated June 21, 2004, among ADESA, Inc., as
Borrower,between the Guarantors party thereto, as Subsidiary
Guarantors, the Lenders party thereto and UBS Securities LLC and
Merrill Lynch & Co., as Joint Lead Arrangers and
Co-Bookmanagers, Bank One, N.A., General Electric Capital
Corporation, Keybank National Association, SunTrust BankCity of
Cohasset, Minnesota and U.S. Bank National Association, as Co-Documentation Agents,
Merrill Lynch & Co., as Syndication Agent, UBS AG, Stamford
Branch, as Issuing Bank, Administrative Agent and Collateral
Agent, and UBSTrustee
relating to $111 Million Collateralized Pollution Control Refunding
Revenue Bonds.
4(c) Loan Finance LLC, as Swingline Lender (filed as
Exhibit 10.5 to ADESA, Inc.'s June 30, 2004 Form 10-Q, File No.
1-32198).
*10(l) Second Amended and Restated Receivable Purchase Agreement, dated June 15, 2004, among AFC Funding Corporation, as Seller,
Automotive Finance Corporation, as Servicer, Fairway Finance
Company, LLC and such other entities from time to time as may
become Purchasers thereunder, Harris Nesbitt Corp., as the
Initial Agent and as Purchaser Agent for Fairway Finance
Company, LLC and XL Capital Assurance Inc., as Insurer (filed as
Exhibit 10.6 to ADESA, Inc.'s June 30, 2004 Form 10-Q, File No.
1-32198).
*10(m) Amendment No.of August 1, to Amended and Restated Purchase and Sale
Agreement, dated June 15, 2004, between AFC Funding Corporationthe City of
Cohasset, Minnesota and Automotive Finance Corporation (filedALLETE relating to $111 Million
Collateralized Pollution Control Refunding Revenue Bonds.
4(d) Certificate of Adjustment to the Rights Agreement as Exhibit 10.7 to
ADESA, Inc.'s June 30, 2004 Form 10-Q, File No. 1-32198).
*10(n) Master Separationamended, dated
as of July 24, 1996, between Minnesota Power & Light Company (now
ALLETE) and the Corporate Secretary of the Company, as Rights
Agent.
+10(a) ALLETE Director Compensation Trust Agreement, dated June 4, 2004, between ALLETE,
Inc. and ADESA, Inc. (filed as Exhibit 10.1 to ADESA, Inc.'s
June 30, 2004 Form 10-Q, File No. 1-32198).
33 ALLETE Second Quarter 2004 Form 10-Q
effective October 11,
2004.
31(a) Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b) Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Section 1350 Certification of Periodic Report by the Chief
Executive Officer and Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
We are a party to other long-term debt instruments that, pursuant to Regulation
S-K, Item 601(b)(4)(iii), are not filed as exhibits since the total amount of
debt authorized under each such omitted instrument does not exceed 10 percent of
our total consolidated assets. These instruments include the following:
- $38,995,000 City of Cohasset, Minnesota, Variable Rate Demand
Revenue Refunding Bonds (Minnesota Power & Light Company
Project) Series 1997A, Series 1997B, Series 1997C and Series
1997D.
- $35,105,000 Collier County Industrial Development Authority,
6.50% Industrial Development Refunding Revenue Bonds (Florida
Water Services Corporation, formerly Southern States Utilities,
Inc., Project) Series 1996.
We will furnish copies of these instruments to the SEC upon its request.
- -------------------------
* Incorporated herein by reference as indicated.---------------
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
Report on Form 8-K filed June 1, 2004 with respect to Item 5. Other Events
and Regulation FD Disclosure.
Report on Form 8-K filed June 16, 2004 with respect to Item 5. Other Events
and Regulation FD Disclosure.
Report on Form 8-K filed June 22, 2004 with respect to Item 5. Other Events
and Regulation FD Disclosure.
Report on Form 8-K filed July 1, 2004 with respect to Item 5. Other Events
and Regulation FD Disclosure.MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT.
31 ALLETE SecondThird Quarter 2004 Form 10-Q 34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLETE, INC.
August 6,November 4, 2004 James K. Vizanko
-----------------------------------------------------------------------------------------------------
James K. Vizanko
Senior Vice President and Chief Financial Officer
August 6,November 4, 2004 Mark A. Schober
-----------------------------------------------------------------------------------------------------
Mark A. Schober
Senior Vice President and Controller
35 ALLETE SecondThird Quarter 2004 Form 10-Q 32
EXHIBIT INDEX
EXHIBIT
NUMBER
- --------------------------------------------------------------------------------
3 Bylaws4(a) Twenty-third Supplemental Indenture, dated as of August 1, 2004,
between ALLETE Inc.,and The Bank of New York and Douglas J. MacInnes, as
Trustees.
4(b) Indenture of Trust, dated as of August 1, 2004, between the City of
Cohasset, Minnesota and U.S. Bank National Association, as Trustee
relating to $111 Million Collateralized Pollution Control Refunding
Revenue Bonds.
4(c) Loan Agreement, dated as of August 1, 2004, between the City of
Cohasset, Minnesota and ALLETE relating to $111 Million
Collateralized Pollution Control Refunding Revenue Bonds.
4(d) Certificate of Adjustment to the Rights Agreement as amended, effectivedated
as of July 20, 2004.
10(a) July 2004 amendment to the ALLETE Executive Annual Incentive Plan.
10(b) July 2004 amendment to the24, 1996, between Minnesota Power & Light Company (now
ALLETE) and Affiliated Companies
Executive Investment Plan I.
10(c) July 2004 amendment to the Minnesota Power and Affiliated Companies
Executive Investment Plan II.
10(d) July 2004 amendment toCorporate Secretary of the ALLETE Executive Long-Term Incentive
Compensation Plan.
10(e) July 2004 amendment to theCompany, as Rights Agent.
10(a) ALLETE Director Stock Plan.Compensation Trust Agreement, effective October 11,
2004.
31(a) Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b) Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Section 1350 Certification of Periodic Report by the Chief Executive
Officer and Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
ALLETE SecondThird Quarter 2004 Form 10-Q