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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended SEPTEMBER 30, 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,
85,455,472 shares outstanding
as of October 31, 2002
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 -
September 30, 2002 and December 31, 2001 4
Consolidated Statement of Income -
Quarter and Nine Months Ended September 30, 2002
and 2001 5
Consolidated Statement of Cash Flows -
Nine Months Ended September 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
Item 4. Controls and Procedures 22
Part II. Other Information
Item 1. Legal Proceedings 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Certifications 25
1 ALLETE Third 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.
APB Accounting Principals Board
CIP Conservation Improvement Programs
Company ALLETE, Inc. and its subsidiaries
EBITDAL Earnings Before Interest, Taxes,
Depreciation, Amortization and Lease
Expense
ESOP Employee Stock Ownership Plan
EITF Emerging Issues Task Force
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Florida Water Florida Water Services Corporation
FPSC Florida Public Service Commission
FWSA Florida Water Service Authority
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
SWL&P Superior Water, Light and Power Company
ALLETE Third 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;
- market factors affecting supply and demand for used vehicles;
- wholesale power market 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;
- 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 Third Quarter 2002 Form 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLETE
CONSOLIDATED BALANCE SHEET
Millions - Unaudited
SEPTEMBER 30, DECEMBER 31,
2002 2001
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and Cash Equivalents $ 188.2 $ 220.2
Trading Securities 43.5 155.6
Accounts Receivable (Less Allowance of $30.8 and $29.3) 439.0 431.2
Inventories 34.8 32.0
Prepayments and Other 21.7 28.7
Discontinued Operations 32.1 42.2
- ------------------------------------------------------------------------------------------------------------------
Total Current Assets 759.3 909.9
Property, Plant and Equipment 1,380.6 1,323.3
Investments 144.5 141.0
Goodwill 496.9 494.4
Other Intangible Assets 42.1 34.8
Other Assets 80.0 68.8
Discontinued Operations 334.8 310.3
- ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $3,238.2 $3,282.5
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Accounts Payable $ 297.8 $ 239.8
Accrued Taxes, Interest and Dividends 45.8 38.1
Notes Payable 81.2 267.4
Long-Term Debt Due Within One Year 31.4 6.9
Other 95.8 106.4
Discontinued Operations 38.4 45.9
- ------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 590.4 704.5
Long-Term Debt 915.5 933.8
Accumulated Deferred Income Taxes 118.9 107.0
Other Liabilities 150.0 163.5
Discontinued Operations 159.9 154.9
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities 1,934.7 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
85.4 and 83.9 Shares Outstanding 807.0 770.3
Unearned ESOP Shares (50.0) (52.7)
Accumulated Other Comprehensive Loss (22.7) (14.5)
Retained Earnings 494.2 440.7
- ------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,228.5 1,143.8
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,238.2 $3,282.5
- ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
ALLETE Third Quarter 2002 Form 10-Q 4
ALLETE
CONSOLIDATED STATEMENT OF INCOME
Millions Except Per Share Amounts - Unaudited
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
OPERATING REVENUE
Energy Services $171.2 $167.8 $ 468.2 $ 474.3
Automotive Services 211.2 206.6 643.2 626.2
Investments 7.6 8.7 29.2 64.6
- -------------------------------------------------------------------------------------------------------------------
Total Operating Revenue 390.0 383.1 1,140.6 1,165.1
- -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Fuel and Purchased Power 66.1 60.2 174.7 179.4
Operations 246.0 249.9 741.8 754.9
Interest 15.8 19.7 47.9 57.8
- -------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 327.9 329.8 964.4 992.1
- -------------------------------------------------------------------------------------------------------------------
OPERATING INCOME FROM CONTINUING OPERATIONS 62.1 53.3 176.2 173.0
DISTRIBUTIONS ON REDEEMABLE
PREFERRED SECURITIES OF ALLETE CAPITAL I 1.5 1.5 4.5 4.5
INCOME TAX EXPENSE 22.3 16.5 66.0 63.0
- -------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 38.3 35.3 105.7 105.5
INCOME FROM DISCONTINUED OPERATIONS 6.8 2.5 13.4 7.7
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 45.1 $ 37.8 $ 119.1 $ 113.2
- -------------------------------------------------------------------------------------------------------------------
AVERAGE SHARES OF COMMON STOCK
Basic 81.5 79.0 80.9 74.6
Diluted 81.9 79.8 81.5 75.3
- -------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE OF COMMON STOCK
Basic
Continuing Operations $0.47 $0.45 $1.31 $1.42
Discontinued Operations 0.08 0.03 0.16 0.10
- -------------------------------------------------------------------------------------------------------------------
$0.55 $0.48 $1.47 $1.52
- -------------------------------------------------------------------------------------------------------------------
Diluted
Continuing Operations $0.47 $0.44 $1.30 $1.40
Discontinued Operations 0.08 0.03 0.16 0.10
- -------------------------------------------------------------------------------------------------------------------
$0.55 $0.47 $1.46 $1.50
- -------------------------------------------------------------------------------------------------------------------
DIVIDENDS PER SHARE OF COMMON STOCK $0.275 $0.2675 $0.825 $0.8025
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
5 ALLETE Third Quarter 2002 Form 10-Q
ALLETE
CONSOLIDATED STATEMENT OF CASH FLOWS
Millions - Unaudited
NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
- -------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $119.1 $113.2
Depreciation and Amortization 59.9 76.6
Deferred Income Taxes 15.1 4.3
Changes In Operating Assets and Liabilities
Trading Securities 112.1 (75.1)
Accounts Receivable (2.5) (200.9)
Inventories (1.9) (4.5)
Accounts Payable 56.8 109.2
Other Current Assets and Liabilities (1.5) (5.4)
Other - Net (0.3) 21.0
- -------------------------------------------------------------------------------------------------------------------
Cash from Operating Activities 356.8 38.4
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from Sale of Investments 1.9 2.6
Additions to Investments (20.9) (10.8)
Additions to Property, Plant and Equipment (138.4) (108.4)
Acquisitions - Net of Cash Acquired (17.2) (71.5)
Other - Net (2.6) 13.3
- -------------------------------------------------------------------------------------------------------------------
Cash for Investing Activities (177.2) (174.8)
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of Common Stock 35.3 175.3
Issuance of Long-Term Debt 14.2 125.0
Changes in Notes Payable - Net (185.7) (93.4)
Reductions of Long-Term Debt (12.3) (14.9)
Dividends on Common Stock (65.5) (58.8)
- -------------------------------------------------------------------------------------------------------------------
Cash from (for) Financing Activities (214.0) 133.2
- -------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 0.4 (9.3)
- -------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS (34.0) (12.5)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 234.2 219.3
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $200.2 $206.8
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Period For
Interest - Net of Capitalized $57.8 $67.5
Income Taxes $40.2 $49.3
- -------------------------------------------------------------------------------------------------------------------
Included cash from Discontinued Operations.
The accompanying notes are an integral part of these statements.
ALLETE Third 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 store.
NOTE 1. BUSINESS SEGMENTS
Millions
INVESTMENTS
ENERGY AUTOMOTIVE AND CORPORATE
CONSOLIDATED SERVICES SERVICES CHARGES
- ----------------------------------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
Operating Revenue $390.0 $171.2 $211.2 $ 7.6
Operation and Other Expense 285.2 123.9 154.2 7.1
Depreciation and Amortization Expense 19.9 12.0 7.9 -
Lease Expense 7.0 1.1 5.9 -
Interest Expense 15.8 4.7 5.0 6.1
- ----------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) from Continuing Operations 62.1 29.5 38.2 (5.6)
Distributions on Redeemable
Preferred Securities of Subsidiary 1.5 0.6 - 0.9
Income Tax Expense (Benefit) 22.3 11.4 14.1 (3.2)
- ----------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 38.3 $ 17.5 $ 24.1 $(3.3)
---------------------------------------------------
Income from Discontinued Operations 6.8
- -----------------------------------------------------------
Net Income $ 45.1
- -----------------------------------------------------------
EBITDAL from Continuing Operations $104.8 $47.3 $57.0 $0.5
- ----------------------------------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
Operating Revenue $383.1 $167.8 $206.6 $ 8.7
Operation and Other Expense 281.6 120.7 150.8 10.1
Depreciation and Amortization Expense 21.8 11.3 10.5 -
Lease Expense 6.7 0.7 6.0 -
Interest Expense 19.7 5.0 8.7 6.0
- ----------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) from Continuing Operations 53.3 30.1 30.6 (7.4)
Distributions on Redeemable
Preferred Securities of Subsidiary 1.5 0.6 - 0.9
Income Tax Expense (Benefit) 16.5 11.5 10.0 (5.0)
- ----------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 35.3 $ 18.0 $ 20.6 $(3.3)
---------------------------------------------------
Income from Discontinued Operations 2.5
- -----------------------------------------------------------
Net Income $ 37.8
- -----------------------------------------------------------
EBITDAL from Continuing Operations $101.5 $47.1 $55.8 $(1.4)
- ----------------------------------------------------------------------------------------------------------------------
Included $34.6 million of Canadian operating revenue in 2002 ($38.0 million in 2001).
7 ALLETE Third Quarter 2002 Form 10-Q
NOTE 1. BUSINESS SEGMENTS CONTINUED
Millions
INVESTMENTS
ENERGY AUTOMOTIVE AND CORPORATE
CONSOLIDATED SERVICES SERVICES CHARGES
- ---------------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Operating Revenue $1,140.6 $ 468.2 $643.2 $ 29.2
Operation and Other Expense 835.6 352.9 456.6 26.1
Depreciation and Amortization Expense 59.7 36.1 23.5 0.1
Lease Expense 21.2 3.3 17.9 -
Interest Expense 47.9 14.1 16.4 17.4
- ---------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) from Continuing
Operations 176.2 61.8 128.8 (14.4)
Distributions on Redeemable
Preferred Securities of Subsidiary 4.5 1.8 - 2.7
Income Tax Expense (Benefit) 66.0 23.7 50.0 (7.7)
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 105.7 $ 36.3 $ 78.8 $ (9.4)
--------------------------------------------------
Income from Discontinued Operations 13.4
- -----------------------------------------------------------
Net Income $ 119.1
- -----------------------------------------------------------
EBITDAL from Continuing Operations $305.0 $115.3 $186.6 $3.1
Total Assets $3,238.2 $1,095.9 $1,581.6 $193.8
Property, Plant and Equipment $1,380.6 $898.5 $478.0 $4.1
Accumulated Depreciation and Amortization $869.5 $724.4 $142.9 $2.2
Capital Expenditures $138.4 $63.6 $39.6 -
- ---------------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
Operating Revenue $1,165.1 $ 474.3 $626.2 $ 64.6
Operation and Other Expense 848.9 354.8 452.7 41.4
Depreciation and Amortization Expense 65.2 34.3 30.6 0.3
Lease Expense 20.2 2.1 18.1 -
Interest Expense 57.8 15.2 29.3 13.3
- ---------------------------------------------------------------------------------------------------------------------
Operating Income from Continuing Operations 173.0 67.9 95.5 9.6
Distributions on Redeemable
Preferred Securities of Subsidiary 4.5 1.8 - 2.7
Income Tax Expense 63.0 25.9 36.3 0.8
- ---------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 105.5 $ 40.2 $ 59.2 $ 6.1
--------------------------------------------------
Income from Discontinued Operations 7.7
- -----------------------------------------------------------
Net Income $ 113.2
- -----------------------------------------------------------
EBITDAL from Continuing Operations $316.2 $119.5 $173.5 $23.2
Total Assets $3,277.4 $986.1 $1,626.9 $309.2
Property, Plant and Equipment $1,257.1 $794.0 $458.8 $4.3
Accumulated Depreciation and Amortization $817.1 $694.4 $120.4 $2.3
Capital Expenditures $108.4 $42.9 $43.0 -
- ---------------------------------------------------------------------------------------------------------------------
Discontinued Operations represented $366.9 million of total assets in 2002 ($355.2 million in 2001); and
$35.2 million of capital expenditures in 2002 ($22.5 million in 2001).
Included $109.1 million of Canadian operating revenue in 2002 ($111.0 million in 2001).
Included $209.1 million of Canadian assets in 2002 ($203.6 million in 2001).
ALLETE Third 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 accordance with SFAS
140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which became applicable to AFC upon amendment
of the securitization agreement, AFC, for accounting purposes, began
consolidating the subsidiary used in the securitization structure on June 1,
2002. Previously, AFC's interest in this subsidiary was recorded by ALLETE as
residual interest in other current assets ($103 million at December 31, 2001)
net of the subsidiary's allowance for doubtful accounts. The residual interest
previously reflected in prior periods has been reclassified by ALLETE to
accounts receivable to conform to current year presentations.
AFC managed total receivables of $535.2 million at September 30, 2002 ($500.2
million at December 31, 2001); $200.4 million represent receivables which were
included in accounts receivable on our consolidated balance sheet ($233.2
million at December 31, 2001) and $334.8 million represent receivables sold in
undivided interests through the securitization agreement ($267.0 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts
NET INCOME
Reported $45.1 $37.8 $119.1 $113.2
Goodwill Amortization - 2.7 - 8.3
- --------------------------------------------------------------------------------------------------
Adjusted $45.1 $40.5 $119.1 $121.5
- --------------------------------------------------------------------------------------------------
EARNINGS PER SHARE
Basic
Reported $0.55 $0.48 $1.47 $1.52
Goodwill Amortization - 0.03 - 0.11
- --------------------------------------------------------------------------------------------------
Adjusted $0.55 $0.51 $1.47 $1.63
- --------------------------------------------------------------------------------------------------
Diluted
Reported $0.55 $0.47 $1.46 $1.50
Goodwill Amortization - 0.03 - 0.11
- --------------------------------------------------------------------------------------------------
Adjusted $0.55 $0.50 $1.46 $1.61
- --------------------------------------------------------------------------------------------------
9 ALLETE Third 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. 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. Depreciation expense for the quarter ended September 30,
2001, was $2.2 million after-tax ($6.6 million after-tax for the nine months
ended September 30, 2001). During the first half of 2002 we exited our
nonregulated water subsidiaries, our auto transport business and our retail
store.
In September 2002 Florida Water entered into an agreement to sell its assets to
FWSA, a governmental authority that was established by an interlocal agreement
between the cities of Gulf Breeze and Milton, Florida. The total amount we
expect to receive in the transaction is $433 million at closing and $74 million
over the next three years. The gain on this transaction is estimated to be
approximately $100 million after taxes and related costs, and is expected to be
recognized over a four-year period as payments are received. Aggregate net cash
proceeds to ALLETE are expected to be $260 million for the entire transaction,
$190 million of which are expected to be received in 2002. Terms of the purchase
agreement call for a closing by December 15, 2002, subject to FWSA being able to
issue bonds for the purchase price and other conditions. Lawsuits seeking to
halt the sale were initiated in October 2002 by two civic associations and by
four local governments which had hoped to purchase Florida Water's assets
through a competing buyer. Florida Water maintains that these lawsuits are
without merit and will vigorously defend its pending sale to FWSA. The Company
is unable to predict the outcome of these lawsuits.
We are using an investment banking firm to facilitate the sale of Heater
Utilities and Georgia Water Services and discussions with prospective buyers are
in process. We expect to enter into agreements to sell these businesses in 2002
or 2003.
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
INCOME STATEMENT 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------
Millions
Operating Revenue $28.3 $37.1 $96.0 $111.1
- ------------------------------------------------------------------------------------------------------------------
Pre-Tax Income from Operations $11.1 $4.1 $28.5 $ 12.6
Income Tax Expense 4.3 1.6 11.2 4.9
- ------------------------------------------------------------------------------------------------------------------
6.8 2.5 17.3 7.7
- ------------------------------------------------------------------------------------------------------------------
Loss on Disposal - - (5.8) -
Income Tax Benefit - - 1.9 -
- ------------------------------------------------------------------------------------------------------------------
- - (3.9) -
- ------------------------------------------------------------------------------------------------------------------
Income from Discontinued Operations $ 6.8 $2.5 $13.4 $ 7.7
- ------------------------------------------------------------------------------------------------------------------
September 30, December 31,
BALANCE SHEET INFORMATION 2002 2001
- ------------------------------------------------------------------------------------------------------------------
Millions
Assets of Discontinued Operations
Cash and Cash Equivalents $ 12.0 $ 14.0
Other Current Assets 20.1 28.2
Property, Plant and Equipment 303.3 280.8
Other Assets 31.5 29.5
- ------------------------------------------------------------------------------------------------------------------
$366.9 $352.5
- ------------------------------------------------------------------------------------------------------------------
Liabilities of Discontinued Operations
Current Liabilities $ 38.4 $ 45.9
Long-Term Debt 126.0 128.7
Other Liabilities 33.9 26.2
- ------------------------------------------------------------------------------------------------------------------
$198.3 $200.8
- ------------------------------------------------------------------------------------------------------------------
ALLETE Third Quarter 2002 Form 10-Q 10
NOTE 5. INCOME TAX EXPENSE
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Millions
Current Tax
Federal $14.3 $15.6 $41.7 $51.5
Foreign 2.4 1.0 9.2 2.2
State 1.7 2.3 5.2 6.3
- --------------------------------------------------------------------------------------------------------------------
18.4 18.9 56.1 60.0
- --------------------------------------------------------------------------------------------------------------------
Deferred Tax
Federal 3.6 (2.4) 9.8 2.4
Foreign 0.3 (0.1) 0.5 (0.5)
State 0.6 0.6 0.8 2.2
- --------------------------------------------------------------------------------------------------------------------
4.5 (1.9) 11.1 4.1
- --------------------------------------------------------------------------------------------------------------------
Deferred Tax Credits (0.6) (0.5) (1.2) (1.1)
- --------------------------------------------------------------------------------------------------------------------
Income Tax on Continuing Operations 22.3 16.5 66.0 63.0
Income Tax on Discontinued Operations 4.3 1.6 9.3 4.9
- --------------------------------------------------------------------------------------------------------------------
Total Income Tax Expense $26.6 $18.1 $75.3 $67.9
- --------------------------------------------------------------------------------------------------------------------
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 NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
---------------------------- -----------------------------
BASIC DILUTIVE DILUTED BASIC DILUTIVE DILUTED
EPS SECURITIES EPS EPS SECURITIES EPS
Net Income $45.1 - $45.1 $119.1 - $119.1
Common Shares 81.5 0.4 81.9 80.9 0.6 81.5
Per Share $0.55 - $0.55 $1.47 - $1.46
- --------------------------------------------------------------------------------------
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
----------------------------- -----------------------------
BASIC DILUTIVE DILUTED BASIC DILUTIVE DILUTED
EPS SECURITIES EPS EPS SECURITIES EPS
Net Income $37.8 - $37.8 $113.2 - $113.2
Common Shares 79.0 0.8 79.8 74.6 0.7 75.3
Per Share $0.48 - $0.47 $1.52 - $1.50
- --------------------------------------------------------------------------------------
11 ALLETE Third Quarter 2002 Form 10-Q
NOTE 7. TOTAL COMPREHENSIVE INCOME
For the quarter ended September 30, 2002 total comprehensive income was $32.9
million ($22.2 million for the quarter ended September 30, 2001). For the nine
months ended September 30, 2002 total comprehensive income was $110.9 million
($101.4 million for the nine months ended September 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 by the Company 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.
On October 25, 2002 the FASB's Emerging Issues Task Force rescinded EITF Issue
98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management
Activities." The ruling takes effect January 1, 2003 for existing contracts and
immediately for contracts entered into after October 25, 2002. In general, EITF
98-10 required energy trading contracts to be marked-to-market with resulting
gains and losses recognized in income. Any gains or losses recognized under the
provisions of EITF 98-10 through the end of 2002 will be reversed under the
transitional provisions contained in the rescission. The Company was required to
account for the Kendall County tolling agreement under EITF 98-10 which resulted
in the recognition of $4.7 million of mark-to-market pre-tax income through the
first nine months of 2002 ($0 in 2001). This agreement will be marked-to-market
through the end of 2002.
NOTE 9. 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, 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 September 30, 2002 Square Butte had total
debt outstanding of $298.8 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 Third 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
includes 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 was
substantially liquidated during the third quarter of 2002. The liquidation
process was completed in October 2002. DISCONTINUED OPERATIONS includes our
Water Services businesses, our auto transport business and our retail store.
CONSOLIDATED OVERVIEW
Net income and earnings per share for the quarter ended September 30, 2002
increased 19 percent and 17 percent, respectively, from the same period in 2001.
For the nine months ended September 30, 2002, net income increased 5 percent and
earnings per share decreased 3 percent from the same period in 2001. The
issuance of 6.6 million shares of our common stock in the second quarter of 2001
also impacted earnings per share. EXIT CHARGES. Net income for the nine months
ended September 30, 2002 included $3.9 million of charges related to our exit
from non-strategic businesses. Excluding these charges, earnings per share would
have been $1.51 for the nine months ended September 30, 2002. GOODWILL. Earnings
for the quarter ended September 30, 2001 included $2.7 million, or $0.03 per
share, of goodwill amortization expense ($8.3 million, or $0.11 per share, for
the nine months ended September 30, 2001). REAL ESTATE TRANSACTION. Earnings for
the nine months ended September 30, 2001 included an $11.1 million, or $0.15 per
share, gain associated with the Company's largest ever single real estate
transaction.
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts
Operating Revenue
Energy Services $171.2 $167.8 $ 468.2 $ 474.3
Automotive Services 211.2 206.6 643.2 626.2
Investments 7.6 8.7 29.2 64.6
- -------------------------------------------------------------------------------------------------------------------
$390.0 $383.1 $1,140.6 $1,165.1
- -------------------------------------------------------------------------------------------------------------------
Operating Expenses
Energy Services $141.7 $137.7 $406.4 $406.4
Automotive Services 173.0 176.0 514.4 530.7
Investments and Corporate Charges 13.2 16.1 43.6 55.0
- -------------------------------------------------------------------------------------------------------------------
$327.9 $329.8 $964.4 $992.1
- -------------------------------------------------------------------------------------------------------------------
Net Income
Energy Services $17.5 $18.0 $ 36.3 $ 40.2
Automotive Services 24.1 20.6 78.8 59.2
Investments and Corporate Charges (3.3) (3.3) (9.4) 6.1
- -------------------------------------------------------------------------------------------------------------------
38.3 35.3 105.7 105.5
Discontinued Operations 6.8 2.5 13.4 7.7
- -------------------------------------------------------------------------------------------------------------------
$45.1 $37.8 $ 119.1 $ 113.2
- -------------------------------------------------------------------------------------------------------------------
Diluted Average Shares of Common Stock 81.9 79.8 81.5 75.3
- -------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share of Common Stock
Continuing Operations $0.47 $0.44 $1.30 $1.40
Discontinued Operations 0.08 0.03 0.16 0.10
- -------------------------------------------------------------------------------------------------------------------
$0.55 $0.47 $1.46 $1.50
- -------------------------------------------------------------------------------------------------------------------
13 ALLETE Third Quarter 2002 Form 10-Q
NET INCOME
The following net income discussion summarizes a comparison of the nine months
ended September 30, 2002 to the nine months ended September 30, 2001.
ENERGY SERVICES' net income in 2002 decreased $3.9 million, or 10 percent,
primarily due to weak wholesale power prices. Earnings from retail electric
operations remained strong as total retail megawatthour sales were up 4 percent
from last year. Net income in 2001 reflected partial recovery of 1998 CIP lost
margins.
AUTOMOTIVE SERVICES reported a $19.6 million, or 33 percent, increase in net
income and an 8 percent increase in EBITDAL over 2001. The continued growth in
net income was due to mandated goodwill accounting changes, lower interest
expense and improved operating efficiencies. In 2002 the number of vehicles sold
at our wholesale auction facilities was 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 2002. Vehicle sales in other higher margin categories helped
mitigate the reduction in sales of factory vehicles. Aggressive financing
incentives offered by vehicle manufacturers lowered the cost of owning a new
vehicle, which, in turn, depressed prices for late-model used vehicles. This
reduced the number of vehicles sold at auctions because car dealers restocked
their inventories from the increased volume of late-model vehicles traded in for
new vehicles, and sellers at auction tended to hold their vehicles rather than
immediately accept the lower prices. As a result, during the third quarter 2002
conversion rates (the percentage of vehicles sold from those that were offered
at auction) began to drop. The conversion rate related to wholesale vehicles
sold was 60 percent for 2002 (59 percent for 2001). Despite unseasonably dry
weather conditions in 2002 which usually means fewer total loss vehicles,
vehicles sold at our total loss vehicle auction facilities were up 27 percent in
2002 reflecting expansion into new markets, including combination sites with
some of our wholesale auctions. AFC contributed 33 percent of the net income for
Automotive Services in 2002 (36 percent in 2001) and reported a 6 percent
increase in the number of vehicles financed.
INVESTMENTS AND CORPORATE CHARGES reported $15.5 million less net income in 2002
primarily due to smaller real estate transactions in 2002. In June 2001 our real
estate operations reported an $11.1 million gain on its largest single sale
ever. The liquidation of our trading securities portfolio during the third
quarter of 2002 also resulted in less net income. Our securities portfolio
earned a negative 1.54 percent after-tax annualized return in 2002 compared to a
positive 4.52 percent in 2001.
DISCONTINUED OPERATIONS was up $5.7 million primarily due to the suspension of
depreciation on our Water Services assets. Net income in 2001 included $6.6
million after-tax of depreciation expense. Our Water Services businesses also
reported a 10 percent increase in water consumption as a result of drier weather
conditions and a 5 percent increase in customers. These increases were partially
offset by $3.9 million of exit charges associated with the auto transport
business and the retail store.
ALLETE Third Quarter 2002 Form 10-Q 14
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 2002 AND 2001
ENERGY SERVICES
OPERATING REVENUE was up $3.4 million, or 2 percent, in 2002. Revenue from power
marketing activities was $11.3 million higher in 2002 due to the inclusion of
$17.4 million of revenue from merchant generation operations (non-rate base
generation sold at market-based rates pursuant to FERC authority) which came
online in 2002. The increase in revenue from power marketing activities,
however, was negatively impacted by weak wholesale power prices in 2002. Revenue
from retail electric sales increased $2.1 million in 2002 reflecting a 7 percent
increase in total retail megawatthour sales. Revenue from our telecommunications
business was down $4.4 million in 2002 because third quarter 2001 included nine
months of operations from Enventis, Inc. which was acquired in July and
accounted for as a pooling of interests. Revenue in 2001 included the recovery
of $2.8 million of 1998 CIP lost margins.
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 11 percent of
consolidated operating revenue in 2002 (8 percent in 2001).
OPERATING EXPENSES were up $4.0 million, or 3 percent, in 2002 reflecting the
inclusion of merchant generation operations and the write off of costs
associated with a canceled power plant project. These increases were partially
offset by a $4.0 million decrease related to recoverable costs deferred in
conjunction with the fuel adjustment clause. Operating expenses for our
telecommunications business were $4.5 million lower in 2002 because third
quarter 2001 included nine months of operations from Enventis, Inc. which was
acquired in July and accounted for as a pooling of interests.
AUTOMOTIVE SERVICES
OPERATING REVENUE was up $4.6 million, or 2 percent, in 2002. At ADESA, 433,000
wholesale vehicles were sold in 2002 (429,000 in 2001). Aggressive financing
incentives offered by vehicle manufacturers continued to negatively impact the
number of vehicles coming to auction and the average auction prices of vehicles
sold at auction (see Net Income-Automotive Services). A reduction in factory
vehicles brought to auction was partially mitigated by stronger sales in other
vehicle categories. At our total loss vehicle auctions, 41,000 vehicles were
sold in 2002 (34,000 in 2001) an increase of 20 percent reflecting expansion
into new markets, including combination sites with some of our wholesale
auctions.
Operating revenue from AFC was higher in 2002 reflecting a 6 percent increase in
vehicles financed through its loan production offices. AFC financed
approximately 237,000 vehicles in 2002 (223,000 in 2001) and managed total
receivables of $535 million at September 30, 2002 ($497 million at September 30,
2001).
OPERATING EXPENSES were down $3.0 million, or 2 percent, in 2002 primarily due
to reduced interest expense ($3.7 million) as a result of lower interest rates,
the discontinuance of goodwill amortization ($3.3 million) and improved
operating efficiencies. These decreases were partially offset by an increase in
operating expenses incurred to standardize operations at all of our total loss
auction facilities and expenditures for information technology initiatives.
INVESTMENTS AND CORPORATE CHARGES
OPERATING REVENUE was down $1.1 million, or 13 percent, in 2002 primarily
because our trading securities portfolio was substantially liquidated during the
third quarter. Revenue from our real estate operations was down slightly
compared to 2001.
OPERATING EXPENSES were down $2.9 million, or 18 percent, in 2002 because in
2001 additional expenses were incurred for severance packages.
15 ALLETE Third Quarter 2002 Form 10-Q
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
ENERGY SERVICES
OPERATING REVENUE was down $6.1 million, or 1 percent, in 2002 reflecting a
$20.5 million decrease in revenue from power marketing activities due to lower
wholesale power prices in 2002. This decrease was offset by the inclusion of
$25.4 million of revenue from merchant generation operations which came online
in 2002, and $4.8 million for mark-to-market income related to energy contracts
in 2002 ($0.5 million in 2001). A $15.0 million decrease in revenue from retail
electric and gas sales was attributed to lower fuel clause recovery due to lower
fuel costs in 2002. Total retail megawatthour sales, however, were up 4 percent
in 2002 reflecting increased usage by taconite customers. In addition, retail
electric revenue in 2001 included the recovery of $2.8 million of 1998 CIP lost
margins.
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 7 percent of
consolidated operating revenue in 2002 and 2001.
OPERATING EXPENSES in 2002 were comparable to 2001. Purchased power expense was
down $14.2 million in 2002 because prices paid for purchased power were lower
and Company generation was up 5 percent. Purchased gas expense was lower in 2002
because prices paid in 2001 were at record highs. Operating expenses in 2002
also reflected a $4.0 million decrease related to recoverable costs deferred in
conjunction with the fuel adjustment clause, the inclusion of merchant
generation operations, higher expenses for our telecommunications business, and
the write off of costs associated with a canceled power plant project. In 2001
the Company had higher plant maintenance expenses and additional costs incurred
as a result of a severe ice storm.
AUTOMOTIVE SERVICES
OPERATING REVENUE was up $17.0 million, or 3 percent, in 2002. At ADESA,
1,348,000 wholesale vehicles were sold in 2002 (1,353,000 in 2001). Aggressive
financing incentives offered by vehicle manufacturers continued to negatively
impact the number of vehicles coming to auction and the average auction prices
of vehicles sold at auction (see Net Income-Automotive Services). A reduction in
factory vehicles brought to auction was partially mitigated by stronger sales in
other vehicle categories. At our total loss vehicle auctions, 131,000 vehicles
were sold in 2002 (103,000 in 2001) an increase of 27 percent reflecting
expansion into new markets, including combination sites with some of our
wholesale auctions.
Operating revenue from AFC was higher in 2002 reflecting a 6 percent increase in
vehicles financed through our loan production offices. AFC financed
approximately 715,000 vehicles in 2002 (676,000 in 2001) and managed total
receivables of $535 million at September 30, 2002 ($497 million at September 30,
2001).
OPERATING EXPENSES were down $16.3 million, or 3 percent, in 2002 primarily due
to reduced interest expense ($12.9 million) as a result of lower interest rates,
the discontinuance of goodwill amortization ($9.9 million) and improved
operating efficiencies. 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 $35.4 million, or 55 percent, in 2002 primarily due
to a large real estate transaction recorded in 2001. Four large real estate
sales in 2002 contributed $7.4 million to revenue, while in 2001 six large real
estate sales contributed $37.5 million to revenue, one of which was our real
estate operations' largest single transaction ever. Operating revenue also
reflected less income in 2002 from our trading securities portfolio which was
substantially liquidated during the third quarter and had significantly lower
returns during the year.
OPERATING EXPENSES were down $11.4 million, or 21 percent, in 2002 primarily due
to expenses associated with larger real estate sales in 2001. Also, in 2001
additional expenses were incurred for severance packages.
ALLETE Third Quarter 2002 Form 10-Q 16
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
- ------------------------------------------------------------------------------------------------------------------
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
- Wholesale power market conditions Market Risk - Power Marketing on
page 21
OUTLOOK
In September 2002 we revised our earnings per share estimate for 2002 to be in
the range of $1.80 to $1.90 including the goodwill accounting change. This
estimate excluded $0.05 per share of charges related to the exit from the auto
transport business and the retail store, and any potential gain recognized on
the sale of our Water Services businesses. Our recent adjustment in our earnings
guidance reflected the liquidation of the trading securities portfolio and year
to date weaker performance within our Energy Services segment due to continued
lower-than-expected wholesale power prices.
During the first few weeks of the fourth quarter, we experienced a notable drop
in the conversion rates at our wholesale vehicle auctions which we believe was
primarily influenced by vehicle manufacturers extending zero-percent financing
into the 2003 model year. Aggressive financing incentives lowered the cost of
owning a new vehicle, which, in turn, depressed prices for late-model used
vehicles. This reduced the number of vehicles sold at auctions because car
dealers restocked their inventories from the increased volume of late-model
vehicles traded in for new vehicles, and sellers at auction tended to hold their
vehicles rather than immediately accept the lower prices. We expect the sellers
of used vehicles to ultimately begin selling again, but timing is uncertain.
Based on current market conditions we believe Automotive Services will not
achieve our stated earnings growth goal of 30 percent this year. We now expect
ALLETE's earnings per share to be at the low end of the range with respect to
our estimate for 2002.
The cash generated from the liquidation of our trading securities portfolio as
well as from our continuing operations and the expected sale of our Water
Services' assets will be used to reduce debt and fund strategic initiatives. Our
balance sheet remains strong. We continue to focus on our two core
competencies-Energy Services and Automotive Services. We believe both are
positioned well to produce earnings growth as their individual markets improve.
ENERGY SERVICES. Earnings from our core retail electric business remain strong.
Our generation costs, including our merchant generation, are competitive in the
regions we serve. We are well positioned to recognize increased benefits from
wholesale electric sales as market conditions improve.
17 ALLETE Third Quarter 2002 Form 10-Q
AUTOMOTIVE SERVICES. The performance of our Automotive Services business for the
nine months ended September 30, 2002 has demonstrated our ability to drive
efficiencies at our auctions acquired since January 2000 and to generate
profits. We expect to continue EBITDAL and revenue improvement, and double digit
earnings growth for 2003. We have not seen factory vehicle volume at our vehicle
auctions return to normal levels as we anticipated. This, combined with the
impact of aggressive financing incentives discussed above, has resulted in an
unexpected recent drop in conversion rates making it likely we will not achieve
our stated earnings growth goal of 30 percent this year. AFC's receivable
portfolio continues to maintain its strong credit quality and contribution to
net income.
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. Our revised earnings estimate for 2002 reflects a $0.10 per share
income reduction due to minimal contribution from our trading securities
portfolio. We liquidated our trading securities portfolio to reduce our exposure
to increased volatility in the securities market. Proceeds from the liquidation
have been used to reduce debt.
DISCONTINUED OPERATIONS. In September 2002 Florida Water agreed to sell its
assets to FWSA, a governmental authority that was established by an interlocal
agreement between the cities of Gulf Breeze and Milton, Florida. The total
amount we expect to receive in the transaction is $433 million at closing and
$74 million over the next three years. The gain on this transaction is estimated
to be approximately $100 million after taxes and related costs, and is expected
to be recognized over a four-year period as payments are received. Aggregate net
cash proceeds are expected to be $260 million for the entire transaction, of
which $190 million are expected to be received in 2002. Terms of the purchase
agreement call for a closing by December 15, 2002, subject to FWSA being able to
issue bonds for the purchase price and other conditions. Lawsuits seeking to
halt the sale were initiated in October 2002 by two civic associations and by
four local governments which had hoped to purchase Florida Water's assets
through a competing buyer. Florida Water maintains that these lawsuits are
without merit and will vigorously defend its pending sale to FWSA. The Company
is unable to predict the outcome of these lawsuits.
We are using an investment banking firm to facilitate the sale of Heater
Utilities and Georgia Water Services and discussions with prospective buyers are
in process. We expect to enter into agreements to sell these businesses in 2002
or 2003.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW ACTIVITIES
During the first nine 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
liquidation of the trading securities portfolio and the timing of the collection
of certain finance receivables outstanding at December 31, 2001. Also, 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. During the third quarter of 2002 we
substantially liquidated our trading securities portfolio. The liquidation
process was completed in October 2002. Proceeds have been used to reduce our
debt. Approximately 4.8 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.
ALLETE Third Quarter 2002 Form 10-Q 18
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 short-term
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 accordance with SFAS
140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which became applicable to AFC upon amendment
of the securitization agreement, AFC, for accounting purposes, began
consolidating the subsidiary used in the securitization structure on June 1,
2002. Previously, AFC's interest in this subsidiary was recorded by ALLETE as
residual interest in other current assets ($103.0 million at December 31, 2001)
net of the subsidiary's allowance for doubtful accounts. The residual interest
previously reflected in prior periods has been reclassified by ALLETE to
accounts receivable to conform to current year presentations.
AFC managed total receivables of $535.2 million at September 30, 2002 ($500.2
million at December 31, 2001); $200.4 million represent receivables which were
included in accounts receivable on our consolidated balance sheet ($233.2
million at December 31, 2001) and $334.8 million represent receivables sold in
undivided interests through the securitization agreement ($267.0 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.
We provide up to $50 million in credit support to facilitate the power marketing
activities of Split Rock Energy, and had $31.9 million in outstanding support at
September 30, 2002 ($36.0 million at December 31, 2001).
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 direct investment in the companies that have gone
public, which we account for as available-for-sale securities, had a cost basis
of approximately $10 million at September 30, 2002 and December 31, 2001. The
aggregate market value of our investment in these companies at September 30,
2002 was $4 million ($17 million at December 31, 2001). We believe the decline
in market value that has occurred since second quarter 2002 is temporary. We
have the ability and intent to hold these investments until the market recovers.
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.
19 ALLETE Third Quarter 2002 Form 10-Q
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 nine months ended September 30, 2002
totaled $138.4 million ($108.4 million in 2001). Expenditures for 2002 included
$63.6 million for Energy Services and $39.6 million for Automotive Services.
Expenditures for 2002 also included $35.2 million related to discontinued
operations ($31.3 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 source 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 by the Company 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.
On October 25, 2002 the FASB's Emerging Issues Task Force rescinded EITF Issue
98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management
Activities." The ruling takes effect January 1, 2003 for existing contracts and
immediately for contracts entered into after October 25, 2002. In general, EITF
98-10 required energy trading contracts to be marked-to-market with resulting
gains and losses recognized in income. Any gains or losses recognized under the
provisions of EITF 98-10 through the end of 2002 will be reversed under the
transitional provisions contained in the rescission. The Company was required to
account for the Kendall County tolling agreement under EITF 98-10 which resulted
in the recognition of $4.7 million of mark-to-market pre-tax income through the
first nine months of 2002 ($0 in 2001). This agreement will be marked-to-market
through the end of 2002.
---------------------------
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SECURITIES PORTFOLIO
During the third quarter of 2002 we substantially liquidated our trading
securities portfolio. The liquidation process was completed in October 2002.
Proceeds have been used to reduce our debt. At September 30, 2002
available-for-sale securities consisted of the common stock of publicly traded
companies and a grantor trust established to fund certain employee benefits.
Our trading securities portfolio had a fair value of $43.5 million at September
30, 2002 ($155.6 million at December 31, 2001). Our available-for-sale
securities portfolio had a fair value of $15.5 million at September 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.
ALLETE Third Quarter 2002 Form 10-Q 20
POWER MARKETING
Minnesota Power purchases power for retail sales in our retail service territory
and sells excess generation in the wholesale market. At the end of the second
quarter of 2002 we 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. 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 nine months ended September 30, 2002 included $4.8 million for
mark-to-market income attributable to the power marketing activities of Split
Rock Energy and our merchant generation operations ($0.5 million for the nine
months ended September 30, 2001). Included in the $4.8 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.
On October 25, 2002 the FASB's Emerging Issues Task Force rescinded EITF Issue
98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management
Activities." The ruling takes effect January 1, 2003 for existing contracts and
immediately for contracts entered into after October 25, 2002. In general, EITF
98-10 required energy trading contracts to be marked-to-market with resulting
gains and losses recognized in income. Any gains or losses recognized under the
provisions of EITF 98-10 through the end of 2002 will be reversed under the
transitional provisions contained in the rescission. The Company was required to
account for the Kendall County tolling agreement under EITF 98-10 which resulted
in the recognition of $4.7 million of mark-to-market pre-tax income through the
first nine months of 2002 ($0 in 2001). This agreement will be marked-to-market
through the end of 2002.
21 ALLETE Third Quarter 2002 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, within 90 days prior to the filing date of this
report. 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. No significant changes were made to our
internal controls or other factors that could significantly affect these
controls subsequent to the date of their evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Material legal and regulatory proceedings are included in the discussion of
Other Information in Item 5. and are incorporated by reference herein.
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 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. Form 10-Q for the quarter ended March 31, 2002 - Page 18. - Fifth Paragraph
Ref. Form 10-Q for the quarter ended June 30, 2002 - Page 17. - Sixth Paragraph
and Page 22. - Third Paragraph
Ref. Form 8-K dated and filed September 19, 2002
Ref. Form 8-K dated and filed September 20, 2002
In September 2002 Florida Water agreed to sell its assets to FWSA, a
governmental authority that was established by an interlocal agreement between
the cities of Gulf Breeze and Milton, Florida. The total amount we expect to
receive in the transaction is $433 million at closing and $74 million over the
next three years. The gain on this transaction is estimated to be approximately
$100 million after taxes and related costs, and is expected to be recognized
over a four-year period as payments are received. Lawsuits seeking to halt the
sale were initiated in October 2002 by two civic associations and by four local
governments which had hoped to purchase Florida Water's assets through a
competing buyer. Florida Water maintains that these lawsuits are without merit
and will vigorously defend its pending sale to FWSA. The Company is unable to
predict the outcome of these lawsuits.
Ref. Page 14. - Table - Contract Status for Minnesota Power Large Power
Customers
In October 2002 Eveleth Mines LLC announced that only 30 percent of the plant's
capacity for taconite production is on order for 2003 making financing for
working capital uncertain and plant closure a possibility. For the nine months
ended September 30, 2002, Eveleth Mines represented approximately 1 percent of
ALLETE's consolidated operating revenue.
In October 2002 U.S. Steel Corp. announced the sale of 80 percent of its
taconite production facility in Mt. Iron, Minnesota to an entity formed by
Apollo Management, LP, a venture capital firm in New York. We anticipate no
effect on current taconite production estimates or Minnesota Power's large power
contract with the facility.
ALLETE Third Quarter 2002 Form 10-Q 22
Ref. Page 15. - Seventh Full Paragraph
In August 2002 Rapids Power LLC announced that it had canceled plans to pursue
construction of a state-of-the-art 225 megawatt combined-heat-and-power facility
in Grand Rapids, Minnesota, because its cost is presently too high to support
marketable electricity and lower mill steam costs. The announcement followed a
decision last spring by Rapids Power to delay seeking a Certificate of Need
permit, which would have led to further study of the project's feasibility.
Rapids Power was a partnership between Rainy River Energy Corporation, a wholly
owned subsidiary of the Company, and Blandin Paper Co., a subsidiary of
UPM-Kymmene Corporation.
Ref. Page 18. - Insert after Seventh Full Paragraph
In May 2001 SWL&P received notice from the Wisconsin Department of Natural
Resources (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's predecessors from 1889 to 1904. The WDNR requested an environmental
investigation be initiated. The WDNR also issued SWL&P a Responsible Party
letter in February 2002 to initiate tracking of the project in the WDNR database
so that progress can be monitored. The environmental investigation is underway
and the Company is unable to predict the outcome of this matter at this time.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
99(a) Certification of Periodic Report dated November 1, 2002, signed by
David G. Gartzke.
99(b) Certification of Periodic Report dated November 1, 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.
Report on Form 8-K filed August 5, 2002 with respect to Item 5. Other
Events and Regulation FD Disclosure, and Item 7. Financial Statements and
Exhibits.
Report on Form 8-K filed September 19, 2002 with respect to Item 5. Other
Events.
Report on Form 8-K filed September 20, 2002 with respect to Item 5. Other
Events and Regulation FD Disclosure, and Item 7. Financial Statements
and Exhibits.
Report on Form 8-K filed October 18, 2002 with respect to Item 7. Financial
Statements and Exhibits.
23 ALLETE Third 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.
November 1, 2002 James K. Vizanko
------------------------------------------
James K. Vizanko
Vice President,
Chief Financial Officer and Treasurer
November 1, 2002 Mark A. Schober
------------------------------------------
Mark A. Schober
Vice President and Controller
ALLETE Third Quarter 2002 Form 10-Q 24
CERTIFICATIONS
I, David G. Gartzke, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ALLETE;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 1, 2002 D.G. Gartzke
---------------- --------------------------------------------------
David G. Gartzke
Chairman, President and Chief Executive Officer
25 ALLETE Third Quarter 2002 Form 10-Q
I, James K. Vizanko, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ALLETE;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 1, 2002 James Vizanko
---------------- -------------------------------------------------
James K. Vizanko
Vice President, Chief Financial Officer and
Treasurer
ALLETE Third Quarter 2002 Form 10-Q 26
EXHIBIT INDEX
EXHIBIT
NUMBER
- --------------------------------------------------------------------------------
99(a) Certification of Periodic Report dated November 1, 2002, signed by
David G. Gartzke.
99(b) Certification of Periodic Report dated November 1, 2002, signed by
James K. Vizanko.
ALLETE Third Quarter 2002 Form 10-Q