SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended JUNE 30, 2002
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 1-3548
ALLETE, INC.
A Minnesota Corporation
IRS Employer Identification No. 41-0418150
30 West Superior Street
Duluth, Minnesota 55802-2093
Telephone - (218) 279-5000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
Common Stock, no par value,
85,226,304 shares outstanding
as of July 31, 2002
INDEX
Page
Definitions 2
Safe Harbor Statement 3
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet -
June 30, 2002 and December 31, 2001 4
Consolidated Statement of Income -
Quarter and Six Months Ended June 30, 2002 and 2001 5
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 20
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
1 ALLETE Second Quarter 2002 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
- --------------------------------------------------------------------------------
2001 Form 10-K ALLETE's Annual Report on Form 10-K for
the Year Ended December 31, 2001
ADESA ADESA Corporation
AFC Automotive Finance Corporation
ALLETE ALLETE, Inc.
Company ALLETE, Inc. and its subsidiaries
EBITDAL Earnings Before Interest, Taxes,
Depreciation, Amortization and
Lease Expense
Electric Odyssey Electric Outlet, Inc.
Enventis Telecom Enventis Telecom, Inc.
ESOP Employee Stock Ownership Plan
FERC Federal Energy Regulatory Commission
FGUA Florida Governmental Utility Authority
Florida Water Florida Water Services Corporation
FPSC Florida Public Service Commission
Georgia Water Georgia Water Services Corporation
Heater Heater Utilities, Inc.
Minnesota Power An operating division of ALLETE, Inc.
Minnkota Minnkota Power Cooperative, Inc.
MPUC Minnesota Public Utilities Commission
MW Megawatt(s)
NCUC North Carolina Utilities Commission
NRG Energy NRG Energy, Inc.
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
ALLETE Second Quarter 2002 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, ALLETE is hereby filing cautionary statements
identifying important factors that could cause ALLETE's 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 the control of ALLETE and may cause actual
results or outcomes to differ materially from those contained in forward-looking
statements:
- war and acts of terrorism;
- prevailing governmental policies and regulatory actions, including
those of the United States Congress, state legislatures, the FERC,
the MPUC, the FPSC, the NCUC, the PSCW and various county
regulators, 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 general vehicle-related laws,
including vehicle brokerage and auction laws;
- unanticipated impacts of restructuring initiatives in the electric
industry;
- economic and geographic factors, including political and economic
risks;
- changes in and compliance with environmental and safety laws and
policies;
- weather conditions;
- population growth rates and demographic patterns;
- the effects of competition, including the competition for retail and
wholesale customers, as well as suppliers and purchasers of
vehicles;
- pricing and transportation of commodities;
- market demand, including structural market changes;
- 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 recent acquisitions;
and
- the outcome of legal and administrative proceedings (whether civil
or criminal) and settlements that affect the business and
profitability of ALLETE.
Any forward-looking statement speaks only as of the date on which that statement
is made, and ALLETE undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which that
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time and it is not possible for management to
predict all of those factors, nor can it assess the impact of each of those
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.
3 ALLETE Second Quarter 2002 Form 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLETE
CONSOLIDATED BALANCE SHEET
Millions
JUNE 30, DECEMBER 31,
2002 2001
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and Cash Equivalents $ 232.8 $ 220.2
Trading Securities 157.2 155.6
Accounts Receivable (Less Allowance of $31.5 and $29.3) 476.8 431.2
Inventories 31.1 32.0
Prepayments and Other 25.6 28.7
Discontinued Operations 34.6 42.2
- ---------------------------------------------------------------------------------------------------------------------
Total Current Assets 958.1 909.9
Property, Plant and Equipment 1,368.6 1,323.3
Investments 129.2 141.0
Goodwill 501.0 494.4
Other Intangible Assets 40.0 34.8
Other Assets 74.7 68.8
Discontinued Operations 330.3 310.3
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $3,401.9 $3,282.5
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Accounts Payable $ 373.0 $ 239.8
Accrued Taxes, Interest and Dividends 32.7 38.1
Notes Payable 209.9 267.4
Long-Term Debt Due Within One Year 8.8 6.9
Other 93.5 106.4
Discontinued Operations 36.0 45.9
- ---------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 753.9 704.5
Long-Term Debt 935.2 933.8
Accumulated Deferred Income Taxes 117.7 107.0
Other Liabilities 149.2 163.5
Discontinued Operations 160.7 154.9
- ---------------------------------------------------------------------------------------------------------------------
Total Liabilities 2,116.7 2,063.7
- ---------------------------------------------------------------------------------------------------------------------
Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary ALLETE Capital I
Which Holds Solely Company Junior Subordinated Debentures 75.0 75.0
- ---------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common Stock Without Par Value, 130.0 Shares Authorized
85.2 and 83.9 Shares Outstanding 799.9 770.3
Unearned ESOP Shares (50.9) (52.7)
Accumulated Other Comprehensive Loss (10.5) (14.5)
Retained Earnings 471.7 440.7
- ---------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,210.2 1,143.8
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,401.9 $3,282.5
- ---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
ALLETE Second Quarter 2002 Form 10-Q 4
ALLETE
CONSOLIDATED STATEMENT OF INCOME
Millions Except Per Share Amounts - Unaudited
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------
OPERATING REVENUE
Energy Services $ 154.1 $ 147.5 $ 297.0 $ 306.5
Automotive Services 217.6 214.7 431.1 419.6
Investments 5.0 42.9 21.6 55.9
- -----------------------------------------------------------------------------------------------------------------
Total Operating Revenue 376.7 405.1 749.7 782.0
- -----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Fuel and Purchased Power 59.2 56.8 108.6 119.2
Operations 244.5 262.2 495.8 505.0
Interest 16.2 18.8 32.1 38.1
- -----------------------------------------------------------------------------------------------------------------
Total Operating Expenses 319.9 337.8 636.5 662.3
- -----------------------------------------------------------------------------------------------------------------
OPERATING INCOME FROM CONTINUING OPERATIONS 56.8 67.3 113.2 119.7
DISTRIBUTIONS ON REDEEMABLE
PREFERRED SECURITIES OF ALLETE CAPITAL I 1.5 1.5 3.0 3.0
INCOME TAX EXPENSE 22.1 26.3 43.6 46.5
- -----------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 33.2 39.5 66.6 70.2
INCOME FROM DISCONTINUED OPERATIONS 5.6 3.0 7.4 5.2
- -----------------------------------------------------------------------------------------------------------------
NET INCOME $ 38.8 $ 42.5 $ 74.0 $ 75.4
- -----------------------------------------------------------------------------------------------------------------
AVERAGE SHARES OF COMMON STOCK
Basic 81.0 73.7 80.7 72.7
Diluted 81.7 74.3 81.3 73.3
- -----------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE OF COMMON STOCK
Basic
Continuing Operations $0.41 $0.54 $0.83 $0.97
Discontinued Operations 0.07 0.04 0.09 0.07
- -----------------------------------------------------------------------------------------------------------------
$0.48 $0.58 $0.92 $1.04
- -----------------------------------------------------------------------------------------------------------------
Diluted
Continuing Operations $0.40 $0.53 $0.82 $0.96
Discontinued Operations 0.07 0.04 0.09 0.07
- -----------------------------------------------------------------------------------------------------------------
$0.47 $0.57 $0.91 $1.03
- -----------------------------------------------------------------------------------------------------------------
DIVIDENDS PER SHARE OF COMMON STOCK $0.275 $0.2675 $0.55 $0.535
- -----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
5 ALLETE Second Quarter 2002 Form 10-Q
ALLETE
CONSOLIDATED STATEMENT OF CASH FLOWS
Millions - Unaudited
SIX MONTHS ENDED
JUNE 30,
2002 2001
- --------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 74.0 $ 75.4
Depreciation and Amortization 39.9 50.9
Deferred Income Taxes 9.5 5.8
Changes In Operating Assets and Liabilities
Trading Securities (1.6) (68.8)
Accounts Receivable (42.2) (164.3)
Inventories 1.8 (3.3)
Accounts Payable 130.6 110.9
Other Current Assets and Liabilities (21.8) (6.9)
Other - Net 5.0 16.4
- --------------------------------------------------------------------------------------------------------------------
Cash from Operating Activities 195.2 16.1
- --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from Sale of Investments 1.9 2.6
Additions to Investments (2.9) (9.6)
Additions to Property, Plant and Equipment (97.5) (78.3)
Acquisitions - Net of Cash Acquired (17.2) (56.4)
Other - Net (9.7) 16.3
- --------------------------------------------------------------------------------------------------------------------
Cash for Investing Activities (125.4) (125.4)
- --------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of Common Stock 28.2 164.3
Issuance of Long-Term Debt 8.6 126.1
Changes in Notes Payable - Net (57.1) (73.1)
Reductions of Long-Term Debt (5.7) (13.1)
Dividends on Common Stock (43.0) (38.0)
- --------------------------------------------------------------------------------------------------------------------
Cash from (for) Financing Activities (69.0) 166.2
- --------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 9.9 (1.6)
- --------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS 10.7 55.3
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD234.2 219.3
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD$ 244.9 $ 274.6
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Period For
Interest - Net of Capitalized $36.8 $41.7
Income Taxes $33.7 $33.1
- --------------------------------------------------------------------------------------------------------------------
Included cash from discontinued operations.
The accompanying notes are an integral part of these statements.
ALLETE Second Quarter 2002 Form 10-Q 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements and notes should be
read in conjunction with our 2001 Form 10-K. In our opinion all adjustments
necessary for a fair statement of the results for the interim periods have been
included. The results of operations for an interim period may not give a true
indication of results for the year. The financial information for prior periods
has been reclassified to reflect as discontinued operations our Water Services
businesses, our auto transport business, and our retail business-Electric
Odyssey.
NOTE 1. BUSINESS SEGMENTS
Millions
INVESTMENTS
ENERGY AUTOMOTIVE AND CORPORATE
CONSOLIDATED SERVICES SERVICES CHARGES
- ------------------------------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED JUNE 30, 2002
Operating Revenue $376.7 $154.1 $217.6$ 5.0
Operation and Other Expense 276.6 119.4 149.6 7.6
Depreciation and Amortization Expense 20.1 12.2 7.8 0.1
Lease Expense 7.0 1.1 5.9 -
Interest Expense 16.2 4.7 5.7 5.8
- ------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) from Continuing
Operations 56.8 16.7 48.6 (8.5)
Distributions on Redeemable
Preferred Securities of Subsidiary 1.5 0.6 - 0.9
Income Tax Expense (Benefit) 22.1 6.4 19.4 (3.7)
- ------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 33.2 $ 9.7 $ 29.2 $ (5.7)
-----------------------------------------------
Income from Discontinued Operations 5.6
- -----------------------------------------------------------
Net Income $ 38.8
- -----------------------------------------------------------
EBITDAL from Continuing Operations $100.1 $34.7 $68.0 $(2.6)
- ------------------------------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED JUNE 30, 2001
Operating Revenue $405.1 $147.5 $214.7$ 42.9
Operation and Other Expense 290.3 113.3 154.5 22.5
Depreciation and Amortization Expense 21.7 11.4 10.1 0.2
Lease Expense 7.0 0.8 6.2 -
Interest Expense 18.8 5.3 10.0 3.5
- ------------------------------------------------------------------------------------------------------------------
Operating Income from Continuing Operations 67.3 16.7 33.9 16.7
Distributions on Redeemable
Preferred Securities of Subsidiary 1.5 0.6 - 0.9
Income Tax Expense 26.3 6.3 13.4 6.6
- ------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 39.5 $ 9.8 $ 20.5 $ 9.2
-----------------------------------------------
Income from Discontinued Operations 3.0
- -----------------------------------------------------------
Net Income $ 42.5
- -----------------------------------------------------------
EBITDAL from Continuing Operations $114.8 $34.2 $60.2 $20.4
- ------------------------------------------------------------------------------------------------------------------
Included $40.2 million of Canadian operating revenue in 2002 ($38.2 million in 2001).
7 ALLETE Second Quarter 2002 Form 10-Q
NOTE 1. BUSINESS SEGMENTS CONTINUED
Millions
INVESTMENTS
ENERGY AUTOMOTIVE AND CORPORATE
CONSOLIDATED SERVICES SERVICES CHARGES
- ------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2002
Operating Revenue $749.7 $ 297.0 $431.1$ 21.6
Operation and Other Expense 550.4 229.0 302.4 19.0
Depreciation and Amortization Expense 39.8 24.1 15.6 0.1
Lease Expense 14.2 2.2 12.0 -
Interest Expense 32.1 9.4 11.4 11.3
- ------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) from Continuing
Operations 113.2 32.3 89.7 (8.8)
Distributions on Redeemable
Preferred Securities of Subsidiary 3.0 1.2 - 1.8
Income Tax Expense (Benefit) 43.6 12.3 35.8 (4.5)
- ------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 66.6 $ 18.8 $ 53.9 $ (6.1)
-----------------------------------------------
Income from Discontinued Operations 7.4
- -----------------------------------------------------------
Net Income $ 74.0
- -----------------------------------------------------------
EBITDAL from Continuing Operations $199.3 $68.0 $128.7 $2.6
Total Assets $3,401.9$971.2 $1,654.3 $411.5
Property, Plant and Equipment $1,368.6 $892.1 $472.4 $4.1
Accumulated Depreciation and Amortization $854.1 $715.3 $136.6 $2.2
Capital Expenditures $97.5$44.9 $26.3 -
- ------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2001
Operating Revenue $782.0 $ 306.5 $419.6$ 55.9
Operation and Other Expense 567.3 234.1 301.9 31.3
Depreciation and Amortization Expense 43.4 23.0 20.1 0.3
Lease Expense 13.5 1.4 12.1 -
Interest Expense 38.1 10.2 20.6 7.3
- ------------------------------------------------------------------------------------------------------------------
Operating Income from Continuing Operations 119.7 37.8 64.9 17.0
Distributions on Redeemable
Preferred Securities of Subsidiary 3.0 1.2 - 1.8
Income Tax Expense 46.5 14.4 26.3 5.8
- ------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 70.2 $ 22.2 $ 38.6 $ 9.4
-----------------------------------------------
Income from Discontinued Operations 5.2
- -----------------------------------------------------------
Net Income $ 75.4
- -----------------------------------------------------------
EBITDAL from Continuing Operations $214.7 $72.4 $117.7 $24.6
Total Assets $3,293.8$1,021.3 $1,619.3 $303.9
Property, Plant and Equipment $1,248.3 $791.5 $452.5 $4.3
Accumulated Depreciation and Amortization $795.8 $682.5 $111.0 $2.3
Capital Expenditures $78.3$29.3 $33.9 -
- ------------------------------------------------------------------------------------------------------------------
Discontinued Operations represented $364.9 million of total assets in 2002 ($349.3 million in 2001); and
$26.3 million of capital expenditures in 2002 ($15.1 million in 2001).
Included $74.5 million of Canadian operating revenue in 2002 ($73.0 million in 2001).
Included $228.1 million of Canadian assets in 2002 ($212.2 million in 2001).
ALLETE Second Quarter 2002 Form 10-Q 8
NOTE 2. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
AFC, through a wholly owned subsidiary, sells certain finance receivables
through a revolving private securitization structure. On May 31, 2002 AFC and
the subsidiary entered into a revised securitization agreement that allows for
the revolving sale by the subsidiary to third parties of up to $500 million in
undivided interests in eligible finance receivables. The revised agreement
expires in 2005. The securitization agreement in place prior to May 31, 2002
limited the sale of undivided interests to $325 million. In conjunction with the
revised securitization agreement and in accordance with SFAS 140 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
AFC, for accounting purposes, began consolidating the subsidiary used in the
securitization structure on June 1, 2002 and reclassified prior periods to
conform to the current year presentation. Previously, AFC's interest in this
subsidiary was recorded as residual interest in other current assets ($103.0
million at December 31, 2001) net of the subsidiary's allowance for doubtful
accounts.
AFC managed total receivables of $535.7 million at June 30, 2002; $215.9 million
represent receivables which were included in accounts receivable on our
consolidated balance sheet and $319.8 million represent receivables sold in
undivided interests through the securitization agreement ($267 million at
December 31, 2001) which are off-balance sheet. AFC's proceeds from the sale of
the receivables to third parties were used to repay borrowings from ALLETE and
fund new loans to AFC's customers. AFC and the subsidiary must each maintain
certain financial covenants such as minimum tangible net worth to comply with
the terms of the securitization agreement.
NOTE 3. GOODWILL AND OTHER INTANGIBLE ASSETS
We adopted SFAS 142, "Goodwill and Other Intangible Assets," in January 2002 and
accordingly no longer amortize goodwill. We completed the required goodwill
impairment testing in the first quarter of 2002 with no resulting impairment. No
event or change has occurred that would indicate the carrying amount has been
impaired since our annual test. SFAS 142 requires disclosure of what reported
net income and earnings per share would have been in all periods presented
exclusive of amortization expense recognized in those periods related to
goodwill or other intangible assets that are no longer being amortized. All
goodwill amortization related to continuing operations.
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts
NET INCOME
Reported $38.8 $42.5 $74.0 $75.4
Goodwill Amortization - 2.8 - 5.6
- ------------------------------------------------------------------------------------------------------------------
Adjusted $38.8 $45.3 $74.0 $81.0
- ------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE
Basic
Reported $0.48 $0.58 $0.92 $1.04
Goodwill Amortization - 0.04 - 0.08
- ------------------------------------------------------------------------------------------------------------------
Adjusted $0.48 $0.62 $0.92 $1.12
- ------------------------------------------------------------------------------------------------------------------
Diluted
Reported $0.47 $0.57 $0.91 $1.03
Goodwill Amortization - 0.04 - 0.08
- ------------------------------------------------------------------------------------------------------------------
Adjusted $0.47 $0.61 $0.91 $1.11
- ------------------------------------------------------------------------------------------------------------------
9 ALLETE Second Quarter 2002 Form 10-Q
NOTE 4. DISCONTINUED OPERATIONS
In September 2001 we began a process of systematically evaluating our businesses
to determine the strategic value of our assets and explore ways to unlock that
value. As a result, our management and Board of Directors committed to a plan to
sell our Water Services businesses and our auto transport business. Water
Services includes water and wastewater services operated by several wholly owned
subsidiaries in Florida, North Carolina and Georgia. We anticipate selling our
Water Services businesses by the end of 2002 or early 2003. During the first
half of 2002 we exited our nonregulated water subsidiaries, our auto transport
business, and our retail business-Electric Odyssey. The financial results for
all of these businesses have been accounted for as discontinued operations.
Accordingly, we ceased depreciation of assets related to these businesses in the
fourth quarter of 2001.
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
INCOME STATEMENT 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Millions
Operating Revenue $34.4 $37.9 $68.6 $74.0
- ---------------------------------------------------------------------------------------------------------------------
Pre-Tax Income from Operations $10.7 $4.9 $17.4 $8.5
Income Tax Expense 4.3 1.9 6.9 3.3
- ---------------------------------------------------------------------------------------------------------------------
6.4 3.0 10.5 5.2
- ---------------------------------------------------------------------------------------------------------------------
Loss on Disposal (1.3) - (4.9) -
Income Tax Benefit 0.5 - 1.8 -
- ---------------------------------------------------------------------------------------------------------------------
(0.8) - (3.1) -
- ---------------------------------------------------------------------------------------------------------------------
Income from Discontinued Operations $ 5.6 $3.0 $ 7.4 $5.2
- ---------------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
BALANCE SHEET INFORMATION 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Millions
Assets of Discontinued Operations
Cash and Cash Equivalents $ 12.1 $ 14.0
Other Current Assets 22.5 28.2
Property, Plant and Equipment 299.8 280.8
Other Assets 30.5 29.5
- ---------------------------------------------------------------------------------------------------------------------
$ 364.9 $ 352.5
- ---------------------------------------------------------------------------------------------------------------------
Liabilities of Discontinued Operations
Current Liabilities $ 36.0 $ 45.9
Long-Term Debt 128.0 128.7
Other Liabilities 32.7 26.2
- ---------------------------------------------------------------------------------------------------------------------
$ 196.7 $ 200.8
- ---------------------------------------------------------------------------------------------------------------------
ALLETE Second Quarter 2002 Form 10-Q 10
NOTE 5. INCOME TAX EXPENSE
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Millions
Current Tax
Federal $ 12.7 $ 17.2 $ 27.4 $ 35.9
Foreign 3.9 0.4 6.7 1.2
State 1.8 1.9 3.5 4.0
- ---------------------------------------------------------------------------------------------------------------------
18.4 19.5 37.6 41.1
- ---------------------------------------------------------------------------------------------------------------------
Deferred Tax
Federal 4.3 6.0 6.2 4.8
Foreign - (0.2) 0.2 (0.4)
State (0.3) 1.2 0.2 1.6
- ---------------------------------------------------------------------------------------------------------------------
4.0 7.0 6.6 6.0
- ---------------------------------------------------------------------------------------------------------------------
Deferred Tax Credits (0.3) (0.2) (0.6) (0.6)
- ---------------------------------------------------------------------------------------------------------------------
Income Taxes on Continuing Operations 22.1 26.3 43.6 46.5
Income Taxes on Discontinued Operations 3.8 1.9 5.1 3.3
- ---------------------------------------------------------------------------------------------------------------------
Total Income Tax Expense $ 25.9 $ 28.2 $ 48.7 $ 49.8
- ---------------------------------------------------------------------------------------------------------------------
NOTE 6. 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.
RECONCILIATION OF BASIC AND DILUTED
EARNINGS PER SHARE
- -------------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2002
------------------------------ ------------------------------
BASIC DILUTIVE DILUTED BASIC DILUTIVE DILUTED
EPS SECURITIES EPS EPS SECURITIES EPS
------------------------------ ------------------------------
Net Income $38.8 - $38.8 $74.0 - $74.0
Common Shares 81.0 0.7 81.7 80.7 0.6 81.3
Per Share $0.48 - $0.47 $0.92 - $0.91
- -------------------------------------------------------------------------------------------------------------------
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2001
------------------------------ ------------------------------
BASIC DILUTIVE DILUTED BASIC DILUTIVE DILUTED
EPS SECURITIES EPS EPS SECURITIES EPS
------------------------------ ------------------------------
Net Income $42.5 - $42.5 $75.4 - $75.4
Common Shares 73.7 0.6 74.3 72.7 0.6 73.3
Per Share $0.58 - $0.57 $1.04 - $1.03
- -------------------------------------------------------------------------------------------------------------------
11 ALLETE Second Quarter 2002 Form 10-Q
NOTE 7. TOTAL COMPREHENSIVE INCOME
For the quarter ended June 30, 2002 total comprehensive income was $44.8 million
($52.8 million for the quarter ended June 30, 2001). For the six months ended
June 30, 2002 total comprehensive income was $78.0 million ($79.2 million for
the six months ended June 30, 2001). Total comprehensive income includes net
income, unrealized gains and losses on securities classified as
available-for-sale, changes in the fair value of an interest rate swap and
foreign currency translation adjustments.
NOTE 8. NEW ACCOUNTING STANDARDS
SFAS 143, "Accounting for Asset Retirement Obligations," requires the
recognition of a liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded, the carrying
amount of the related long-lived asset is correspondingly increased. Over time,
the liability is accreted to its present value and the related capitalized
charge is depreciated over the useful life of the asset. SFAS 143 is effective
for fiscal years beginning after June 15, 2002. Currently, decommissioning
amounts collected in Minnesota Power's rates are reported in accumulated
depreciation, which upon adoption of SFAS 143 will require a reclassification to
a liability. We are reviewing what additional assets, if any, may have
associated retirement costs as defined by SFAS 143 and anticipate no material
impact on the Company's financial position and results of operations.
NOTE 9. SQUARE BUTTE POWER PURCHASED CONTRACT
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, a North
Dakota cooperative corporation whose Class A members are also members of Square
Butte. Minnkota serves as the operator of the Unit and also purchases power from
Square Butte.
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 has the option to reduce Minnesota Power's
entitlement by 5 percent annually, to a minimum of 50 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 is suspended if Square Butte fails to deliver any power, whether
produced or purchased, for a period of one year. Square Butte's fixed costs
consist primarily of debt service. At June 30, 2002 Square Butte had total debt
outstanding of $299.1 million. Total annual debt service for Square Butte is
expected to be approximately $36 million in each of the years 2002 and 2003, and
$23 million in each of the years 2004 through 2006. Variable operating costs
include the price of coal purchased from BNI Coal, Ltd., our subsidiary, under a
long-term contract. Minnesota Power's payments to Square Butte are approved as
purchased power expense for ratemaking purposes by both the MPUC and FERC.
ALLETE Second Quarter 2002 Form 10-Q 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ALLETE's core operations are focused on two business segments. ENERGY SERVICES
includes electric and gas services, coal mining and telecommunications.
AUTOMOTIVE SERVICES includes a network of wholesale and total loss vehicle
auctions, a finance company, a vehicle remarketing company, a company that
provides vehicle inspection services to the automotive industry and its lenders,
and a company that provides Internet-based automotive parts location and
insurance claim audit services nationwide. INVESTMENTS AND CORPORATE CHARGES
include our real estate operations, investments in emerging technologies related
to the electric utility industry and corporate charges. Corporate charges
represent general corporate expenses, including interest, not specifically
related to any one business segment. Also included in Investments and Corporate
Charges is our trading securities portfolio which we began liquidating in July
2002 through a process we anticipate completing by the end of September 2002.
DISCONTINUED OPERATIONS includes our Water Services businesses, our auto
transport business, and our retail business-Electric Odyssey.
CONSOLIDATED OVERVIEW
Net income and earnings per share for the quarter ended June 30, 2002 decreased
9 percent and 18 percent, respectively, from the same period in 2001. For the
six months ended June 30, 2002, net income was down 2 percent and earnings per
share were down 12 percent from the same period in 2001. EXIT CHARGES. Net
income in 2002 included charges related to our exit from non-strategic
businesses ($1.6 million for the second quarter; $3.9 million for the six
months). Excluding these charges, earnings per share would have been $0.50 for
the quarter ended June 30, 2002 ($0.96 for the six months ended June 30, 2002).
GOODWILL. Earnings for the quarter ended June 30, 2001 included $2.8 million, or
$0.04 per share, of goodwill amortization expense ($5.6 million, or $0.08 per
share for the six months ended June 30, 2001). REAL ESTATE TRANSACTION. Earnings
for the quarter and six months ended June 30, 2001 included an $11.1 million, or
$0.15 per share, gain associated with the Company's largest ever single real
estate transaction. COMMON STOCK ISSUANCE. The issuance of 6.6 million shares of
our common stock in the second quarter of 2001 also impacted earnings per share
for 2002.
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts
Operating Revenue
Energy Services $154.1 $147.5 $ 297.0 $306.5
Automotive Services 217.6 214.7 431.1 419.6
Investments 5.0 42.9 21.6 55.9
- -------------------------------------------------------------------------------------------------------------------
$376.7 $405.1 $749.7 $782.0
- -------------------------------------------------------------------------------------------------------------------
Operating Expenses
Energy Services $137.4 $130.8 $264.7 $268.7
Automotive Services 169.0 180.8 341.4 354.7
Investments and Corporate Charges 13.5 26.2 30.4 38.9
- -------------------------------------------------------------------------------------------------------------------
$319.9 $337.8 $636.5 $662.3
- -------------------------------------------------------------------------------------------------------------------
Net Income
Energy Services $ 9.7 $ 9.8 $ 18.8 $ 22.2
Automotive Services 29.2 20.5 53.9 38.6
Investments and Corporate Charges (5.7) 9.2 (6.1) 9.4
- -------------------------------------------------------------------------------------------------------------------
33.2 39.5 66.6 70.2
Discontinued Operations 5.6 3.0 7.4 5.2
- -------------------------------------------------------------------------------------------------------------------
$ 38.8 $ 42.5 $ 74.0 $ 75.4
- -------------------------------------------------------------------------------------------------------------------
Diluted Average Shares of Common Stock 81.7 74.3 81.3 73.3
- -------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share of Common Stock
Continuing Operations $0.40 $0.53 $0.82 $0.96
Discontinued Operations 0.07 0.04 0.09 0.07
- -------------------------------------------------------------------------------------------------------------------
$0.47 $0.57 $0.91 $1.03
- -------------------------------------------------------------------------------------------------------------------
13 ALLETE Second Quarter 2002 Form 10-Q
NET INCOME
The following net income discussion summarizes a comparison of the six months
ended June 30, 2002 to the six months ended June 30, 2001.
ENERGY SERVICES' net income in 2002 decreased $3.4 million, or 15 percent,
primarily due to weaker wholesale market conditions. Last year's stronger
economy and colder winter weather resulted in higher wholesale prices. Total
retail megawatthour sales were similar to last year.
AUTOMOTIVE SERVICES reported a $15.3 million, or 40 percent, increase in net
income and a 9 percent increase in EBITDAL over 2001. The continued growth in
net income was primarily due to higher conversion rates (the percentage of
vehicles sold from those that were offered at auction), improved cost
efficiencies, a mandated accounting change which resulted in the discontinuance
of goodwill amortization and lower interest rates. The conversion rate related
to wholesale vehicles sold was 63 percent for the six months ended June 30, 2002
(61 percent for the same period in 2001). In 2002 the number of vehicles sold at
our wholesale auction facilities were similar to last year. Fleet downsizing by
rental car companies after September 11, 2001 resulted in increased sales of
factory vehicles at our auction facilities during the fourth quarter of 2001 to
the detriment of the first six months of 2002. Vehicle sales in other higher
margin categories and strong conversion rates in 2002 helped mitigate the
reduction in sales of factory vehicles. Vehicles sold at our total loss vehicle
auction facilities were up 36 percent from 2001. AFC contributed 30 percent of
the net income for Automotive Services in 2002 (33 percent in 2001) and reported
a 5 percent increase in the number of vehicles financed. Net income in 2002 also
included a $0.8 million charge associated with the exit from our 44 percent
ownership in a Canadian auto transport business.
INVESTMENTS AND CORPORATE CHARGES reported $15.5 million less net income in 2002
due to smaller real estate transactions in 2002 and lower returns on our
securities portfolio. In June 2001 our real estate operations reported an $11.1
million gain on its largest single sale ever. Our securities portfolio earned a
negative 0.33 percent after-tax annualized return in 2002 compared to a positive
10.02 percent in 2001. This decrease was partially offset by more income from
our emerging technology investments.
DISCONTINUED OPERATIONS was up $2.2 million primarily due to the suspension of
depreciation on our Water Services assets. Our Water Services businesses also
reported a 12 percent increase in water consumption as a result of drier weather
conditions and a 4 percent increase in customers. These increases were partially
offset by $3.1 million of exit charges associated with the auto transport
business and the retail business-Electric Odyssey.
COMPARISON OF THE QUARTERS ENDED JUNE 30, 2002 AND 2001
ENERGY SERVICES
OPERATING REVENUE was up $6.6 million, or 4 percent, in 2002 primarily due to
increased revenue from power marketing activities and Enventis Telecom. Revenue
from power marketing activities was $9.2 million higher in 2002 reflecting the
inclusion of $8.1 million of revenue from merchant generation operations
(non-rate base generation sold at market-based rates pursuant to FERC
authority), and $5.3 million for mark-to-market income related to energy
contracts ($1.5 million in 2001). The increase in revenue from power marketing
activities, however, was negatively impacted by weak wholesale market conditions
which reduced wholesale prices in 2002. Revenue from Enventis Telecom was $3.3
million higher in 2002 reflecting the July 2001 acquisition of Enventis, Inc.
These increases were partially offset by a $5.5 million decrease in revenue from
retail electric sales which was primarily attributed to lower fuel clause
recovery because of lower fuel costs in 2002. Total retail megawatthour sales
were similar to last year.
Revenue from electric sales to taconite customers accounted for 10 percent of
consolidated operating revenue in both 2002 and 2001. Electric sales to paper
and pulp mills accounted for 4 percent of consolidated operating revenue in both
2002 and 2001. Sales to other power suppliers accounted for 4 percent of
consolidated operating revenue in 2002 (5 percent in 2001).
OPERATING EXPENSES were up $6.6 million, or 5 percent, in 2002 reflecting the
inclusion of merchant generation and Enventis, Inc. operations. These increases
were partially offset by reduced maintenance expenses. In 2001 the Company had
higher plant maintenance expenses and additional costs incurred as a result of a
severe ice storm.
ALLETE Second Quarter 2002 Form 10-Q 14
AUTOMOTIVE SERVICES
OPERATING REVENUE was up $2.9 million, or 1 percent, in 2002 reflecting strong
conversion rates at wholesale auction facilities. At ADESA, 454,000 wholesale
vehicles were sold in 2002 (458,000 in 2001). The number of vehicles sold was
impacted by a reduction in factory vehicles brought to auction. Stronger sales
in other vehicle categories helped mitigate the reduction in factory vehicles.
In addition, at our total loss vehicle auctions, 47,000 vehicles were sold in
2002 (34,000 in 2001), an increase of 38 percent.
Operating revenue from AFC was higher in 2002 reflecting a 4 percent increase in
vehicles financed through its loan production offices. AFC financed
approximately 241,000 vehicles in 2002 (232,000 in 2001) and managed total
receivables of $536 million at June 30, 2002 ($480 million at June 30, 2001).
OPERATING EXPENSES were down $11.8 million, or 7 percent, in 2002 primarily due
to improved cost efficiencies, reduced interest expense ($4.3 million) as a
result of lower interest rates, and the discontinuance of goodwill amortization
($3.3 million). These decreases were partially offset by an increase in
operating expenses incurred to standardize operations at all our total loss
auction facilities and expenditures for information technology initiatives.
INVESTMENTS AND CORPORATE CHARGES
OPERATING REVENUE was down $37.9 million, or 88 percent, in 2002 primarily due
to a large real estate transaction recorded in 2001. In 2002 our real estate
operations reported no large real estate sales, while in 2001 two large real
estate sales contributed $30.4 million to revenue, one of which was our real
estate operations' largest single transaction ever. Income from our securities
portfolio and emerging technology investments was also lower in 2002.
OPERATING EXPENSES were down $12.7 million, or 48 percent, in 2002 primarily due
to expenses associated with larger real estate sales in 2001.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
ENERGY SERVICES
OPERATING REVENUE was down $9.5 million, or 3 percent, in 2002 primarily due to
a $16.9 million decrease in revenue from retail electric and gas sales. This
decrease was attributed to warmer winter weather and lower fuel clause recovery
due to lower fuel costs in 2002. Total retail megawatthour sales were similar to
last year. Revenue from power marketing activities was down $2.1 million in 2002
due to weak wholesale market conditions which reduced wholesale prices in 2002.
This decrease was partially offset by the inclusion of $8.1 million of revenue
from merchant generation operations, and $5.3 million for mark-to-market income
related to energy contracts in 2002 ($1.5 million in 2001). Revenue in 2002 also
included $8.0 million more revenue from Enventis Telecom reflecting the July
2001 acquisition of Enventis, Inc.
Revenue from electric sales to taconite customers accounted for 10 percent of
consolidated operating revenue in both 2002 and 2001. Electric sales to paper
and pulp mills accounted for 4 percent of consolidated operating revenue in both
2002 and 2001. Sales to other power suppliers accounted for 4 percent of
consolidated operating revenue in 2002 (6 percent in 2001).
OPERATING EXPENSES were down $4.0 million, or 1 percent, in 2002 due to
decreased purchased power and maintenance expenses. Purchased power expense was
down $15.0 million in 2002 because prices paid for purchased power were lower,
Company generation was up 6 percent and 2 percent fewer megawatthours were sold.
Purchased gas expense was lower in 2002 because in 2001 prices paid were at
record highs. In 2001 the Company had higher plant maintenance expenses and
additional costs incurred as a result of a severe ice storm. These decreases
were partially offset by the inclusion of merchant generation and Enventis, Inc.
operations.
15 ALLETE Second Quarter 2002 Form 10-Q
AUTOMOTIVE SERVICES
OPERATING REVENUE was up $11.5 million, or 3 percent, in 2002 reflecting strong
conversion rates at wholesale auction facilities. At ADESA, 915,000 wholesale
vehicles were sold in 2002 (924,000 in 2001). The number of vehicles sold was
impacted by a reduction in factory vehicles brought to auction. Stronger sales
in other vehicle categories helped mitigate the reduction in factory vehicles.
In addition, at our total loss vehicle auctions, 94,000 vehicles were sold in
2002 (69,000 in 2001), an increase of 36 percent.
Operating revenue from AFC was higher in 2002 reflecting a 5 percent increase in
vehicles financed through our loan production offices. AFC financed
approximately 478,000 vehicles in 2002 (453,000 in 2001) and managed total
receivables of $536 million at June 30, 2002 ($480 million at June 30, 2001).
OPERATING EXPENSES were down $13.3 million, or 4 percent, in 2002 primarily due
to improved cost efficiencies, reduced interest expense ($9.2 million) as a
result of lower interest rates, and the discontinuance of goodwill amortization
($6.6 million). These decreases were partially offset by an increase in
operating expenses incurred to standardize operations at all our total loss
auction facilities and expenditures for information technology initiatives.
Also, operating expenses in 2001 reflected additional expenses for utility and
labor costs incurred as a result of inclement weather conditions.
INVESTMENTS AND CORPORATE CHARGES
OPERATING REVENUE was down $34.3 million, or 61 percent, in 2002 primarily due
to a large real estate transaction recorded in 2001. Two large real estate sales
in 2002 contributed $4.9 million to revenue, while in 2001 four large real
estate sales contributed $33.1 million to revenue, one of which was our real
estate operations' largest single transaction ever. Operating revenue also
reflected less income from the securities portfolio due to lower returns in
2002. Operating revenue from our emerging technology investments was up $0.5
million in 2002.
OPERATING EXPENSES were down $8.5 million, or 22 percent, in 2002 primarily due
to expenses associated with larger real estate sales in 2001.
CRITICAL ACCOUNTING POLICIES
Certain accounting measurements under applicable generally accepted accounting
principles involve management's judgment about subjective factors and estimates,
the effects of which are inherently uncertain. The following summarizes those
accounting measurements we believe are most critical to our reported results of
operations and financial condition.
ACCOUNTING JUDGMENTS/UNCERTAINTIES SEE ADDITIONAL
POLICY AFFECTING APPLICATION DISCUSSION AT
- -----------------------------------------------------------------------------------------------------------------
Uncollectible Receivables - Economic conditions affecting Liquidity and Capital Resources -
and Allowance for Doubtful customers, suppliers and market prices Working Capital on page 18
Accounts - Outcome of negotiations,
litigation and bankruptcy proceedings
- Current sales, payment and
write-off histories
Goodwill Impairment - Economic conditions affecting Note 3. Goodwill and Other
market valuations Intangible Assets on page 9
- Changes in business strategy
- Forecast of future operating cash
flows and earnings
Fair Value of Energy - Economic conditions affecting Item 3. Quantitative and
Contracts energy supply, demand and market prices Qualitative Disclosures about
Market Risk - Power Marketing on
page 20
ALLETE Second Quarter 2002 Form 10-Q 16
OUTLOOK
Based on a mid-year review of our businesses, we have revised our 2002 earnings
per share estimate to be in the range of $2.00 to $2.10, excluding $0.05 per
share of charges related to the exit from the auto transport business and the
retail business-Electric Odyssey, and any potential gain recognized on the sale
of our Water Services businesses. This estimate reflects the goodwill accounting
change and incorporates our year to date performance and our revised
expectations for the second half of 2002 which include the liquidation of our
trading securities portfolio and lower wholesale power prices.
We have decided to liquidate our trading securities portfolio to reduce our
exposure to increased volatility in the securities market. At June 30, 2002 the
fair value of our trading securities portfolio was $157.2 million. Our revised
earnings estimate for 2002 reflects a $0.10 per share income reduction due to no
contribution from our trading securities portfolio. No gain or loss on
liquidation is expected. With the proceeds we plan to reduce debt. The cash
generated from this decision as well as from our continuing operations and the
expected sale of our Water Services' assets will fuel our future growth. Our
balance sheet remains strong. We continue to focus on our two core
competencies-Energy Services and Automotive Services, and work toward
positioning each of them to continue our earnings growth track record.
ENERGY SERVICES. Our new merchant generation facilities at the Taconite Harbor
Energy Center in northern Minnesota and in Kendall County near Chicago,
Illinois, became fully operational by the second quarter of 2002. The third
quarter is typically the highest net income quarter for our Energy Services'
business, and the third quarter of 2002 is expected to follow the historical
pattern. While our base retail electric business remains stable, we do not
expect that wholesale power margins will return to the high levels of a few
years ago, but we do expect improvement during the third quarter of 2002
compared to the first half of 2002. The extent of our profitability will be
impacted by wholesale power prices during the third quarter of 2002.
AUTOMOTIVE SERVICES. The second quarter 2002 performance of our Automotive
Services business demonstrated our ability to drive efficiencies at our auctions
acquired since January 2000 and generate profits. We expect to continue EBITDAL
and revenue improvement, and double digit earnings growth into 2003. We also
expect that the factory vehicle volume at our auctions will return to normal
levels later this year. We remain on target to achieve our previously stated
goal of 30 percent earnings growth (20 percent excluding the goodwill accounting
change) over 2001. In addition, we anticipate continued growth in the number of
vehicles sold and financed at auction. We expect a 5 percent increase in total
vehicles both sold and financed over 2001.
INVESTMENTS AND CORPORATE CHARGES. We anticipate net income from Investments and
Corporate Charges to decline in 2002 due to the liquidation of our trading
securities portfolio and, as expected, a lower contribution from our real estate
operations.
DISCONTINUED OPERATIONS. We remain engaged in discussions relating to the
planned sale of our Water Services businesses. The FGUA has delayed taking any
action on the proposed purchase of Florida Water assets until September 2002.
The FGUA has stated its intent to advise Florida Water which utility systems it
desires to purchase and the purchase price for these utility systems, and to
seek finalized definitive agreements. We continue to work with them at the same
time that we explore other sales opportunities. ALLETE has hired an investment
banker to facilitate the sale of Heater Utilities and Georgia Water Services. We
expect to close these transactions in late 2002 or early 2003. In June 2002 we
completed our exit from the auto transport business.
17 ALLETE Second Quarter 2002 Form 10-Q
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW ACTIVITIES
During the first six months of 2002 cash flow from operating activities
reflected strong operating results and continued focus on working capital
management. Cash flow from operating activities was higher in 2002 due to the
timing of the collection of certain finance receivables outstanding at December
31, 2001 and changes in trading securities. In 2001 additional trading
securities were purchased with a portion of the proceeds from a common stock
issuance. Cash flow from operations was also affected by a number of factors
representative of normal operations.
WORKING CAPITAL. Additional working capital, if and when needed, generally is
provided by the sale of commercial paper. In July 2002 we began liquidating our
trading securities portfolio through a process we anticipate completing by the
end of September 2002. With the proceeds we plan to reduce debt. Approximately
5.0 million original issue shares of our common stock are available for issuance
through INVEST DIRECT, our direct stock purchase and dividend reinvestment plan.
A substantial amount of ADESA's working capital is generated internally from
payments for services provided. However, ADESA has arrangements to use proceeds
from the sale of commercial paper issued by ALLETE to meet short-term working
capital requirements arising from the timing of payment obligations to vehicle
sellers and the availability of funds from vehicle purchasers. During the sales
process, ADESA does not typically take title to vehicles.
AFC offers short-term on-site financing for dealers to purchase vehicles at
auctions in exchange for a security interest in each vehicle. The financing is
provided through the earlier of the date the dealer sells the vehicle or a
general borrowing term of 30 to 45 days. AFC has arrangements to use proceeds
from the sale of commercial paper issued by ALLETE to meet its working capital
requirements.
AFC, through a wholly owned subsidiary, sells certain finance receivables
through a revolving private securitization structure. On May 31, 2002 AFC and
the subsidiary entered into a revised securitization agreement that allows for
the revolving sale by the subsidiary to third parties of up to $500 million in
undivided interests in eligible finance receivables. The revised agreement
expires in 2005. The securitization agreement in place prior to May 31, 2002
limited the sale of undivided interests to $325 million. In conjunction with the
revised securitization agreement and in accordance with SFAS 140 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
AFC, for accounting purposes, began consolidating the subsidiary used in the
securitization structure on June 1, 2002 and reclassified prior periods to
conform to the current year presentation. Previously, AFC's interest in this
subsidiary was recorded as residual interest in other current assets ($103.0
million at December 31, 2001) net of the subsidiary's allowance for doubtful
accounts.
AFC managed total receivables of $535.7 million at June 30, 2002; $215.9 million
represent receivables which were included in accounts receivable on our
consolidated balance sheet and $319.8 million represent receivables sold in
undivided interests through the securitization agreement ($267 million at
December 31, 2001) which are off-balance sheet. AFC's proceeds from the sale of
the receivables to third parties were used to repay borrowings from ALLETE and
fund new loans to AFC's customers. AFC and the subsidiary must each maintain
certain financial covenants such as minimum tangible net worth to comply with
the terms of the securitization agreement.
Significant changes in accounts receivable and accounts payable balances at June
30, 2002 compared to December 31, 2001 were due to increased sales and financing
activity at Automotive Services. Typically auction volumes are down during the
winter months and in December because of the holidays. As a result, Automotive
Services had higher receivables and higher payables at June 30, 2002.
We provide up to $50 million in credit support to facilitate the power marketing
activities of Split Rock Energy, and had $36.1 million in outstanding support at
June 30, 2002 ($36.0 million at December 31, 2001).
ALLETE Second Quarter 2002 Form 10-Q 18
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 an aggregate amount of
$500 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, of which approximately $387 million remains
available to be issued. 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.
INVESTMENTS. As investments in emerging technology companies are sold, we
recognize a gain or loss. Our investment in the companies that have gone public
had a cost basis of approximately $12 million at June 30, 2002 and December 31,
2001. The aggregate market value of our investment in these companies at June
30, 2002 was $7 million ($24 million at December 31, 2001). At this time the
Company does not believe there is a permanent impairment. These investments
provide us with access to developing technologies before their commercial debut,
as well as potential financial returns. We view these investments as a source of
capital for redeployment in existing businesses.
CAPITAL REQUIREMENTS
As a result of new construction and expansions at Automotive Services,
consolidated capital expenditures for 2002 are now expected to be $235 million.
Consolidated capital expenditures for the quarter ended June 30, 2002 totaled
$97.5 million ($78.3 million in 2001). Expenditures for 2002 included $44.9
million for Energy Services and $26.3 million for Automotive Services.
Expenditures for 2002 also included $26.3 million related to discontinued
operations ($22.4 million to maintain our Water Services businesses while they
are in the process of being sold; $3.9 million to buy previously leased auto
transportation trucks). Internally generated funds were the primary sources of
funding for these expenditures.
NEW ACCOUNTING STANDARDS
SFAS 143, "Accounting for Asset Retirement Obligations," requires the
recognition of a liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded, the carrying
amount of the related long-lived asset is correspondingly increased. Over time,
the liability is accreted to its present value and the related capitalized
charge is depreciated over the useful life of the asset. SFAS 143 is effective
for fiscal years beginning after June 15, 2002. Currently, decommissioning
amounts collected in Minnesota Power's rates are reported in accumulated
depreciation, which upon adoption of SFAS 143 will require a reclassification to
a liability. We are reviewing what additional assets, if any, may have
associated retirement costs as defined by SFAS 143 and anticipate no material
impact on the Company's financial position and results of operations.
-----------------------
READERS ARE CAUTIONED THAT FORWARD-LOOKING STATEMENTS INCLUDING THOSE CONTAINED
ABOVE, SHOULD BE READ IN CONJUNCTION WITH 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.
19 ALLETE Second Quarter 2002 Form 10-Q
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SECURITIES PORTFOLIO
In July 2002 we began liquidating our trading securities portfolio through a
process we anticipate completing by the end of September 2002. With the proceeds
we plan to reduce our debt. At June 30, 2002 available-for-sale securities
consisted of the common stock of publicly traded companies and equity securities
in a grantor trust established to fund certain employee benefits.
Our trading securities portfolio had a fair value of $157.2 million at June 30,
2002 ($155.6 million at December 31, 2001). Our available-for-sale securities
portfolio had a fair value of $19.0 million at June 30, 2002 ($26.5 million at
December 31, 2001).
FOREIGN CURRENCY
Our foreign currency exposure is limited to the conversion of operating results
of our Canadian subsidiaries and, therefore, we have not entered into any
foreign exchange contracts to hedge the conversion of our Canadian operating
results into United States dollars.
POWER MARKETING
Minnesota Power purchases power for retail sales in our retail service territory
and occasionally sells excess generation in the wholesale market. At the end of
second quarter of 2002 we also had 500 MW of merchant generation (non-rate base
generation sold at market-based rates pursuant to FERC authority) available for
sale to the wholesale market. Our merchant generation includes 225 MW from our
Taconite Harbor Energy Center in northern Minnesota that was acquired in October
2001. It also includes 275 MW of generation secured through a 15-year tolling
agreement, which commenced in May 2002, with NRG Energy at the Kendall County
facility near Chicago, Illinois. Under the Kendall County tolling agreement, the
Company pays a fixed capacity charge for the right, but not the obligation, to
utilize one 275 MW generating unit. We are responsible for arranging the natural
gas fuel supply and are entitled to the electricity produced. Our strategy is to
sell the majority of merchant generation through long-term contracts of various
durations. The balance will be sold in the spot market, through short-term
agreements, or possibly utilized as a source of low-cost supply for our
regulated operations if the need exists. The services of Split Rock Energy may
be utilized to broker or market merchant generation. We currently have two
long-term forward capacity and energy contracts related to generation secured by
the NRG Energy tolling agreement. Each is for 50 MW, with one having a 10-year
term and the other a 15-year term.
The services of Split Rock Energy are used to fulfill purchase requirements for
retail load and to market excess generation. We own 50 percent of Split Rock
Energy which was formed in 2000 with Great River Energy to provide us with least
cost supply, maximize the value of our generation assets and maximize marketing
revenue within prescribed limits. Split Rock Energy operates in the wholesale
energy markets, and engages in marketing activities by entering into forward and
option contracts for the purchase and sale of electricity. These contracts are
primarily short-term in nature with maturities of less than one year. Although
Split Rock Energy generally attempts to balance its purchase and sale positions,
commodity price risk sometimes exists or is created. This risk is actively
managed through a risk management program that includes policies, procedures and
limits established by the Split Rock Energy Board of Governors.
Revenue for the quarter and six months ended June 30, 2002 included $5.3 million
for mark-to-market income attributable to the power marketing activities of
Split Rock Energy and our merchant generation operations ($1.5 million for the
quarter and six months ended June 30, 2001). Included in the $5.3 million of
mark-to-market income in 2002 is $5.6 million of mark-to-market income for
future fixed margins associated with the Kendall County contracts.
ALLETE Second Quarter 2002 Form 10-Q 20
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) We held our Annual Meeting of Shareholders on May 14, 2002.
(b) Included in (c) below.
(c) The election of directors, the appointment of independent accountants
and the reservation of an additional three million shares of ALLETE
common stock for issuance under the Executive Long-Term Incentive
Compensation Plan were voted on at the Annual Meeting of Shareholders.
The results were as follows:
VOTES
WITHHELD OR BROKER
VOTES FOR AGAINST ABSTENTIONS NONVOTES
- -----------------------------------------------------------------------------------------------------------------
DIRECTORS
Kathleen A. Brekken 72,931,311 924,410 - -
Wynn V. Bussmann 72,961,877 893,844 - -
Dennis E. Evans 72,945,815 909,906 - -
David G. Gartzke 73,053,319 802,402 - -
Glenda E. Hood 72,654,381 1,201,340 - -
Peter J. Johnson 72,666,159 1,189,562 - -
George L. Mayer 72,695,734 1,159,987 - -
Jack I. Rajala 73,021,920 833,801 - -
Nick Smith 72,956,767 898,954 - -
Bruce W. Stender 72,703,354 1,152,367 - -
Donald C. Wegmiller 72,948,613 907,108 - -
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP 70,418,228 2,785,483 652,010 -
ALLETE EXECUTIVE
LONG-TERM INCENTIVE
COMPENSATION PLAN
Reservation of additional
shares to be issued 59,119,239 12,804,480 1,932,002 -
- -----------------------------------------------------------------------------------------------------------------
(d) Not applicable.
21 ALLETE Second Quarter 2002 Form 10-Q
ITEM 5. OTHER INFORMATION
Reference is made to our 2001 Form 10-K for background information on the
following updates. Unless otherwise indicated, cited references are to our 2001
Form 10-K.
Ref. Page 18. - Insert after the Second Full Paragraph
In June 2002 Minnkota received a Notice of Violation from the Environmental
Protection Agency (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 should have gone through
the New Source Review process potentially resulting in new air permit operating
conditions. The Company is unable to predict the outcome of this matter.
Minnesota Power is obligated to pay its pro rata share of Square Butte's costs
based on Minnesota Power's entitlement to the Square Butte generating unit
output.
Ref. Page 11. - Sixth Paragraph
Ref. Page 30. - Third Paragraph
Ref. Form 8-K dated and filed February 28, 2002 - Second Paragraph
Ref. Form 8-K dated and filed March 28, 2002
Ref. 10-Q for the quarter ended March 31, 2002, Page 18. - Fifth Paragraph
The Company remains engaged in discussions relating to the planned sale of our
Water Services businesses. The FGUA has delayed taking any action on the
proposed purchase of Florida Water assets until September 2002. The FGUA has
stated its intent to advise Florida Water which utility systems it desires to
purchase and the purchase price for these utility systems, and to seek finalized
definitive agreements. We continue to work with them at the same time that we
explore other sales opportunities. ALLETE has hired an investment banker to
facilitate the sale of Heater Utilities and Georgia Water Services. We expect to
close these transactions in late 2002 or early 2003. In June 2002 we completed
our exit from the auto transport business.
ALLETE Second Quarter 2002 Form 10-Q 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number
-------
10(a) Receivables Purchase Agreement dated as of May 31, 2002, among
AFC Funding Corporation, as Seller, Automotive Finance
Corporation, as Servicer, Fairway Finance Corporation, as
initial Purchaser, BMO Nesbitt Burns Corp., as initial Agent
and as Purchaser Agent for Fairway Finance Corporation and XL
Capital Assurance Inc., as Insurer. [Portions of this exhibit
have been omitted pursuant to a request for confidential
treatment and filed separately with the Securities and
Exchange Commission.]
10(b) Amended and Restated Purchase and Sale Agreement dated as of
May 31, 2002, between AFC Funding Corporation and Automotive
Finance Corporation. [Portions of this exhibit have been
omitted pursuant to a request for confidential treatment and
filed separately with the Securities and Exchange Commission.]
99(a) Certification of Periodic Report dated August 5, 2002, signed
by David G. Gartzke.
99(b) Certification of Periodic Report dated August 5, 2002, signed
by James K. Vizanko.
(b) Reports on Form 8-K.
Report on Form 8-K filed July 19, 2002 with respect to Item 7. Financial
Statements and Exhibits.
23 ALLETE Second Quarter 2002 Form 10-Q
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 5, 2002 James K. Vizanko
-----------------------------------------
James K. Vizanko
Vice President,
Chief Financial Officer and Treasurer
August 5, 2002 Mark A. Schober
-----------------------------------------
Mark A. Schober
Vice President and Controller
ALLETE Second Quarter 2002 Form 10-Q 24
EXHIBIT INDEX
EXHIBIT
NUMBER
- --------------------------------------------------------------------------------
10(a) Receivables Purchase Agreement dated as of May 31, 2002, among AFC
Funding Corporation, as Seller, Automotive Finance Corporation, as
Servicer, Fairway Finance Corporation, as initial Purchaser, BMO
Nesbitt Burns Corp., as initial Agent and as Purchaser Agent for
Fairway Finance Corporation and XL Capital Assurance Inc., as
Insurer. [Portions of this exhibit have been omitted pursuant to a
request for confidential treatment and filed separately with the
Securities and Exchange Commission.]
10(b) Amended and Restated Purchase and Sale Agreement dated as of May 31,
2002, between AFC Funding Corporation and Automotive Finance
Corporation. [Portions of this exhibit have been omitted pursuant to
a request for confidential treatment and filed separately with the
Securities and Exchange Commission.]
99(a) Certification of Periodic Report dated August 5, 2002, signed by
David G. Gartzke.
99(b) Certification of Periodic Report dated August 5, 2002, signed by
James K. Vizanko.
ALLETE Second Quarter 2002 Form 10-Q