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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, 2004
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-3548
ALLETE, INC.
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-0418150
(State of Incorporation) (IRS Employer
Identification No.)
30 WEST SUPERIOR STREET
DULUTH, MINNESOTA 55802-2093
(Address of principal executive offices)
(Zip Code)
(218) 279-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
----- -------
Common Stock, no par value,
29,552,037 shares outstanding
as of October 31, 2004
INDEX
Page
Definitions 2
Safe Harbor Statement Under the Private Securities Litigation
Reform Act of 1995 3
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet -
September 30, 2004 and December 31, 2003 4
Consolidated Statement of Income -
Quarter and Nine Months Ended September 30, 2004
and 2003 5
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 2004 and 2003 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 28
Item 4. Controls and Procedures 29
Part II. Other Information
Item 1. Legal Proceedings 30
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits 31
Signatures 32
1 ALLETE Third Quarter 2004 Form 10-Q
DEFINITIONS
The following abbreviations or acronyms are used in the text. References in this
report to "we," "us" and "our" are to ALLETE, Inc. and its subsidiaries,
collectively.
ABBREVIATION OR ACRONYM TERM
- --------------------------------------------------------------------------------
2003 Form 10-K ALLETE's Annual Report on Form 10-K for the Year
Ended December 31, 2003
ADESA ADESA, Inc.
AICPA American Institute of Certified Public Accountants
ALLETE ALLETE, Inc.
ALLETE Properties ALLETE Properties, Inc.
APB Accounting Principles Board
Aqua America Aqua America, Inc.
BNI Coal BNI Coal, Ltd.
Company ALLETE, Inc. and its subsidiaries
EITF Emerging Issues Task Force
EPA Environmental Protection Agency
ESOP Employee Stock Ownership Plan
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Florida Water Florida Water Services Corporation
FPSC Florida Public Service Commission
FSP Financial Accounting Standards Board Staff Position
GAAP Accounting Principles Generally Accepted in the
United States
IPO Initial Public Offering
IRS Internal Revenue Service
Minnesota Power An operating division of ALLETE, Inc.
Minnkota Power Minnkota Power Cooperative, Inc.
MPUC Minnesota Public Utilities Commission
MW Megawatt(s)
Note ___ Note ___ to the consolidated financial statements
in this Form 10-Q
NYSE New York Stock Exchange
PSCW Public Service Commission of Wisconsin
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards No.
Split Rock Energy Split Rock Energy LLC
Square Butte Square Butte Electric Cooperative
SWL&P Superior Water, Light and Power Company
Taconite Harbor Taconite Harbor Energy Center
WDNR Wisconsin Department of Natural Resources
ALLETE Third Quarter 2004 Form 10-Q 2
SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, we are hereby filing cautionary statements
identifying important factors that could cause our actual results to differ
materially from those projected in forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) made by or on
behalf of ALLETE in this Quarterly Report on Form 10-Q, in presentations, in
response to questions or otherwise. Any statements that express, or involve
discussions as to, expectations, beliefs, plans, objectives, assumptions or
future events or performance (often, but not always, through the use of words or
phrases such as "anticipates," "believes," "estimates," "expects," "intends,"
"plans," "projects," "will likely result," "will continue" or similar
expressions) are not statements of historical facts and may be forward-looking.
Forward-looking statements involve estimates, assumptions, risks and
uncertainties and are qualified in their entirety by reference to, and are
accompanied by, the following important factors, which are difficult to predict,
contain uncertainties, are beyond our control and may cause actual results or
outcomes to differ materially from those contained in forward-looking
statements:
- - our ability to successfully implement our strategic objectives;
- - 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 PSCW, and various county regulators and city administrators, about
allowed rates of return, financings, industry and rate structure, acquisition
and disposal of assets and facilities, operation and construction of plant
facilities, recovery of purchased power and capital investments, present or
prospective wholesale and retail competition (including but not limited to
transmission costs), and zoning and permitting of land held for resale;
- - unanticipated effects 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;
- - natural disasters;
- - wholesale power market conditions;
- - population growth rates and demographic patterns;
- - the effects of competition, including competition for retail and wholesale
customers;
- - pricing and transportation of commodities;
- - changes in tax rates or policies or in rates of inflation;
- - unanticipated project delays or changes in project costs;
- - unanticipated changes in operating expenses and capital expenditures;
- - capital market conditions;
- - competition for economic expansion or development opportunities;
- - our ability to manage expansion and integrate acquisitions; and
- - the outcome of legal and administrative proceedings (whether civil or
criminal) and settlements that affect the business and profitability of
ALLETE.
Additional disclosures regarding factors that could cause our results and
performance to differ from results or performance anticipated by this report are
discussed in Item 7 under the heading "Factors that May Affect Future Results"
beginning on page 46 of our 2003 Form 10-K. Risk factors associated with our
Automotive Services business are no longer applicable to ALLETE as that business
was spun off as of September 20, 2004. Any forward-looking statement speaks only
as of the date on which such statement is made, and we undertake no obligation
to update any forward-looking statement to reflect events or circumstances after
the date on which that statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time and it is not
possible for management to predict all of these factors, nor can it assess the
impact of each of these factors on the businesses of ALLETE or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statement. Readers are
urged to carefully review and consider the various disclosures made by us in our
2003 Form 10-K and in our other reports filed with the SEC that attempt to
advise interested parties of the factors that may affect our business.
3 ALLETE Third Quarter 2004 Form 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLETE
CONSOLIDATED BALANCE SHEET
Millions - Unaudited
SEPTEMBER 30, DECEMBER 31,
2004 2003
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and Cash Equivalents $ 172.7 $ 113.4
Accounts Receivable (Less Allowance of $1.5 and $1.3) 72.0 63.3
Inventories 38.5 31.8
Prepayments and Other 19.4 16.5
Discontinued Operations 2.2 476.7
- ------------------------------------------------------------------------------------------------------------------
Total Current Assets 304.8 701.7
Property, Plant and Equipment - Net 885.0 919.3
Investments 190.6 170.1
Other Assets 63.1 62.9
Discontinued Operations 5.8 1,247.3
- ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,449.3 $3,101.3
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Accounts Payable $ 27.2 $ 28.3
Accrued Taxes and Interest 21.1 29.8
Notes Payable - 53.0
Long-Term Debt Due Within One Year 1.9 35.6
Other 24.5 38.8
Discontinued Operations 6.5 340.7
- ------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 81.2 526.2
Long-Term Debt 389.5 514.7
Accumulated Deferred Income Taxes 157.9 167.3
Other Liabilities 156.1 154.6
Discontinued Operations 2.2 278.3
Commitments and Contingencies
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities 786.9 1,641.1
- ------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common Stock Without Par Value, 43.3 Shares Authorized
29.5 and 29.1 Shares Outstanding 395.3 859.2
Unearned ESOP Shares (16.4) (45.4)
Accumulated Other Comprehensive Loss - Continuing Operations (8.4) (9.0)
Accumulated Other Comprehensive Gain - Discontinued Operations - 23.5
Retained Earnings 291.9 631.9
- ------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 662.4 1,460.2
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,449.3 $3,101.3
- ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
ALLETE Third Quarter 2004 Form 10-Q 4
ALLETE
CONSOLIDATED STATEMENT OF INCOME
Millions Except Per Share Amounts - Unaudited
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------
OPERATING REVENUE $183.2 $170.1 $582.7 $530.3
- -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Fuel and Purchased Power 71.9 64.9 218.0 197.2
Operating and Maintenance 69.0 55.3 221.3 194.7
Depreciation 12.3 12.6 37.2 38.4
Taxes Other than Income 6.7 7.1 21.5 22.7
- -------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 159.9 139.9 498.0 453.0
- -------------------------------------------------------------------------------------------------------------------
OPERATING INCOME FROM CONTINUING OPERATIONS 23.3 30.2 84.7 77.3
- -------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest Expense (7.5) (13.2) (25.7) (38.0)
Other (18.4) 0.5 (21.4) 2.4
- -------------------------------------------------------------------------------------------------------------------
Total Other Expense (25.9) (12.7) (47.1) (35.6)
- -------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (2.6) 17.5 37.6 41.7
INCOME TAX EXPENSE (BENEFIT) (2.0) 6.6 14.4 16.1
- -------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
CHANGE IN ACCOUNTING PRINCIPLE (0.6) 10.9 23.2 25.6
INCOME FROM DISCONTINUED OPERATIONS - NET OF TAX 13.7 36.7 79.3 110.7
CHANGE IN ACCOUNTING PRINCIPLE - NET OF TAX - - (7.8) -
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 13.1 $ 47.6 $ 94.7 $136.3
- -------------------------------------------------------------------------------------------------------------------
AVERAGE SHARES OF COMMON STOCK
Basic 28.5 27.7 28.3 27.5
Diluted 28.6 27.8 28.5 27.6
- -------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Continuing Operations $(0.03) $0.40 $0.82 $0.93
Discontinued Operations 0.48 1.32 2.80 4.02
Change in Accounting Principle - - (0.28) -
- -------------------------------------------------------------------------------------------------------------------
$0.45 $1.72 $3.34 $4.95
- -------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Continuing Operations $(0.02) $0.40 $0.82 $0.93
Discontinued Operations 0.47 1.31 2.78 4.00
Change in Accounting Principle - - (0.27) -
- -------------------------------------------------------------------------------------------------------------------
$ 0.45 $1.71 $3.33 $4.93
- -------------------------------------------------------------------------------------------------------------------
DIVIDENDS PER SHARE OF COMMON STOCK $0.8475 $0.8475 $2.5425 $2.5425
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
5 ALLETE Third Quarter 2004 Form 10-Q
ALLETE
CONSOLIDATED STATEMENT OF CASH FLOWS
Millions - Unaudited
NINE MONTHS ENDED
SEPTEMBER 30,
2004 2003
- --------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Income from Continuing Operations $ 15.4 $ 25.6
Change in Accounting Principle 7.8 -
Depreciation 37.2 38.4
Deferred Income Taxes (2.8) (2.4)
Changes in Operating Assets and Liabilities
Accounts Receivable (8.7) 19.6
Inventories (6.7) 1.9
Prepayments and Other (2.9) 1.8
Accounts Payable (1.1) (1.0)
Other Current Liabilities (23.0) (5.0)
Other Assets (0.2) (3.0)
Other Liabilities 1.5 (3.3)
Net Operating Activities from Discontinued Operations 119.9 208.3
- --------------------------------------------------------------------------------------------------------------------
Cash from Operating Activities 136.4 280.9
- --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from Sale of Available-For-Sale Securities 1.6 6.4
Changes to Investments 15.7 (1.9)
Additions to Property, Plant and Equipment (48.8) (53.6)
Other 5.1 6.9
Net Investing Activities from (for) Discontinued Operations 60.1 (84.3)
- --------------------------------------------------------------------------------------------------------------------
Cash from (for) Investing Activities 33.7 (126.5)
- --------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of Common Stock 38.5 29.3
Issuance of Long-Term Debt 8.6 26.3
Changes in Notes Payable - Net (53.0) 169.4
Reductions of Long-Term Debt (129.9) (274.0)
Dividends on Common Stock (71.3) (69.0)
Net Financing Activities from (for) Discontinued Operations (18.6) 40.5
- --------------------------------------------------------------------------------------------------------------------
Cash for Financing Activities (225.7) (77.5)
- --------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - DISCONTINUED OPERATIONS - 30.5
- --------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS (55.6) 107.4
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 229.5 203.0
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $173.9 $310.4
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Period for
Interest - Net of Capitalized $42.8 $55.1
Income Taxes $61.8 $35.3
- --------------------------------------------------------------------------------------------------------------------
Included $1.2 million of cash from Discontinued Operations at September 30, 2004 ($196.2 million at September
30, 2003) and $116.1 million at December 31, 2003 ($138.0 million at December 31, 2002).
The accompanying notes are an integral part of these statements.
ALLETE Third Quarter 2004 Form 10-Q 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements and notes should be
read in conjunction with our 2003 Form 10-K. In our opinion, all adjustments
necessary for a fair presentation of the results for the interim periods have
been included. The results of operations for an interim period may not give a
true indication of the results for the year.
NOTE 1. DISCONTINUED OPERATIONS
AUTOMOTIVE SERVICES. On September 20, 2004 the spin-off of Automotive Services
was completed by distributing to ALLETE shareholders all of ALLETE's shares of
ADESA common stock. One share of ADESA common stock was distributed for each
outstanding share of ALLETE common stock held at the close of business on
September 13, 2004, the record date. The distribution was made from ALLETE's
retained earnings to the extent of ADESA's undistributed earnings ($363.4
million) with the remainder made from common stock ($600.2 million).
In June 2004 ADESA issued 6.3 million shares of common stock through an IPO
priced at $24.00 per share which netted proceeds of $136.0 million after
transaction costs, issued $125 million of senior notes and borrowed $275 million
under a new $525 million credit facility. With these funds, ADESA repaid
previously existing debt and all intercompany debt outstanding to ALLETE. The
IPO represented 6.6 percent of ADESA's 94.9 million shares outstanding. As a
result of the IPO, we accounted for the 6.6 percent public ownership of ADESA as
a minority interest and continued to own and consolidate the remaining portion
of ADESA until the spin-off was completed on September 20, 2004.
In accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," we have reported our Automotive Services business in
Discontinued Operations.
WATER SERVICES. During 2003, we sold, under condemnation or imminent threat of
condemnation, substantially all of our water assets in Florida for a total sales
price of approximately $445 million. Income from discontinued operations for
2003 included a $71.6 million after-tax gain on the sale of substantially all
our Water Services businesses ($0.2 million first quarter; $0.2 million second
quarter; $3.0 million third quarter; $68.2 million fourth quarter). The gain was
net of all selling, transaction and employee termination benefit expenses, as
well as impairment losses on certain remaining assets.
In June 2004 we essentially concluded our strategy to exit our Water Services
businesses when we completed the sale of our North Carolina water assets and the
sale of the remaining 72 water and wastewater systems in Florida. Aqua America
purchased our North Carolina water assets for $48 million and assumed
approximately $28 million in debt, and also purchased 63 of our water and
wastewater systems in Florida for $14 million. Seminole County purchased the
remaining 9 Florida systems for a total of $4 million. The FPSC approved the
Seminole County transaction in September 2004. The transaction relating to the
sale of 63 water and wastewater systems in Florida to Aqua America remains
subject to regulatory approval by the FPSC. The approval process may result in
an adjustment to the final purchase price based on the FPSC's determination of
plant investment for the systems. Income from discontinued operations for the
nine months ended September 30, 2004 included a $5.2 million after-tax gain on
the sale of North Carolina water assets and remaining water and wastewater
systems in Florida ($0.4 million of after-tax expenses first quarter; $5.8
million net gain second quarter; $0.2 million of after-tax expenses third
quarter). We expect to sell our water assets in Georgia in 2004.
The net cash proceeds from the sale of all water assets in 2003 and 2004, after
transaction costs, retirement of most Florida Water debt and payment of income
taxes, were approximately $300 million. These net proceeds were used to retire
debt at ALLETE.
In October 2003 the FPSC voted to initiate an investigation into the ratemaking
considerations of the gain on sale of Florida Water's assets, and whether gains
should be shared with the previous customers of Florida Water. In June 2004
Florida enacted legislation which provides that gains or losses resulting from
the purchase or condemnation of a utility's assets, which results in the loss of
customers and revenue served by such assets, are to be borne by the shareholders
of the utility. In accordance with this legislation, in September 2004 the FPSC
closed all dockets related to its investigations into the ratemaking
considerations of the gain on sale of Florida Water's assets.
7 ALLETE Third Quarter 2004 Form 10-Q
NOTE 1. DISCONTINUED OPERATIONS (CONTINUED)
SUMMARY OF DISCONTINUED OPERATIONS
- -----------------------------------------------------------------------------------------------------------------
Millions
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
INCOME STATEMENT 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------
Operating Revenue
Automotive Services $201.9 $226.4 $681.7 $701.8
Water Services 1.2 28.4 16.3 88.7
- -----------------------------------------------------------------------------------------------------------------
$203.1 $254.8 $698.0 $790.5
- -----------------------------------------------------------------------------------------------------------------
Pre-Tax Income (Loss) from Operations
Automotive Services $25.8 $47.5 $132.8 $146.5
Water Services (0.7) 8.9 (0.9) 29.6
- -----------------------------------------------------------------------------------------------------------------
25.1 56.4 131.9 176.1
- -----------------------------------------------------------------------------------------------------------------
Income Tax Expense (Benefit)
Automotive Services 11.4 19.2 54.0 58.7
Water Services (0.3) 3.5 (0.3) 11.4
- -----------------------------------------------------------------------------------------------------------------
11.1 22.7 53.7 70.1
- -----------------------------------------------------------------------------------------------------------------
Total Net Income from Operations 14.0 33.7 78.2 106.0
- -----------------------------------------------------------------------------------------------------------------
Gain (Loss) on Disposal
Automotive Services (0.1) - (6.7) 2.0
Water Services (0.3) 4.5 14.4 5.6
- -----------------------------------------------------------------------------------------------------------------
(0.4) 4.5 7.7 7.6
- -----------------------------------------------------------------------------------------------------------------
Income Tax Expense (Benefit)
Automotive Services - - (2.6) 0.7
Water Services (0.1) 1.5 9.2 2.2
- -----------------------------------------------------------------------------------------------------------------
(0.1) 1.5 6.6 2.9
- -----------------------------------------------------------------------------------------------------------------
Net Gain (Loss) on Disposal (0.3) 3.0 1.1 4.7
- -----------------------------------------------------------------------------------------------------------------
Income from Discontinued Operations $13.7 $36.7 $ 79.3 $110.7
- -----------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
BALANCE SHEET INFORMATION 2004 2003
- -----------------------------------------------------------------------------------------------------------------
Assets of Discontinued Operations
Cash and Cash Equivalents $1.2 $116.1
Other Current Assets 1.0 360.6
Property, Plant and Equipment 5.8 660.9
Investments - 34.5
Goodwill - 511.0
Other Intangibles - 33.3
Other Assets - 7.6
Liabilities of Discontinued Operations
Current Liabilities 6.5 340.7
Long-Term Debt - 252.8
Other Liabilities 2.2 25.5
Foreign Currency Translation Adjustment - 23.5
- -----------------------------------------------------------------------------------------------------------------
ALLETE Third Quarter 2004 Form 10-Q 8
NOTE 2. REVERSE STOCK SPLIT
On September 20, 2004 our one-for-three reverse common stock split became
effective. All common share and per share amounts have been adjusted for all
periods to reflect the one-for-three reverse stock split.
NOTE 3. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING FOR STOCK-BASED COMPENSATION. We have elected to account for
stock-based compensation in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, we recognize expense for performance
share awards granted and do not recognize expense for employee stock options
granted. The after-tax expense recognized in net income for performance share
awards was approximately $0.8 million for the first nine months of 2004 ($1.2
million for the first nine months of 2003). The following table illustrates the
effect on net income and earnings per share if we had applied the fair value
recognition provisions of SFAS 123, "Accounting for Stock-Based Compensation."
QUARTER ENDED NINE MONTHS ENDED
EFFECT OF SFAS 123 SEPTEMBER 30, SEPTEMBER 30,
ACCOUNTING FOR STOCK-BASED COMPENSATION 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts
Net Income
As Reported $13.1 $47.6 $94.7 $136.3
Less: Employee Stock Compensation Expense
Determined Under SFAS 123 - Net of Tax - 0.1 0.2 0.3
- ------------------------------------------------------------------------------------------------------------------
Pro Forma $13.1 $47.5 $94.5 $136.0
- ------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
As Reported $0.45 $1.72 $3.34 $4.95
Pro Forma $0.45 $1.72 $3.34 $4.94
Diluted Earnings Per Share
As Reported $0.45 $1.71 $3.33 $4.93
Pro Forma $0.45 $1.71 $3.32 $4.92
- ------------------------------------------------------------------------------------------------------------------
In the previous table, the expense for employee stock options granted determined
under SFAS 123 was calculated using the Black-Scholes option pricing model and
the following assumptions:
2004 2003
- ------------------------------------------------------------------------------------------------------------------
Risk-Free Interest Rate 3.3% 3.1%
Expected Life - Years 5 5
Expected Volatility 28.1% 25.2%
Dividend Growth Rate 2% 2%
- ------------------------------------------------------------------------------------------------------------------
NEW ACCOUNTING STANDARDS. In the third quarter of 2004 we adopted both FSP
106-2, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003" (see Note 14) and
EITF 03-16, "Accounting for Investments in Limited Liability Companies" (see
Note 10).
9 ALLETE Third Quarter 2004 Form 10-Q
NOTE 4. BUSINESS SEGMENTS
As a result of the spin-off of our Automotive Services business in September
2004 (see Note 1), we redefined our business into four segments. REGULATED
UTILITY includes our rate regulated electric, water and gas services in
northeastern Minnesota and northwestern Wisconsin. NONREGULATED ENERGY
OPERATIONS includes our coal mining activities in North Dakota and nonregulated
generation consisting primarily of generation from Taconite Harbor in northern
Minnesota and generation secured through the Kendall County power purchase
agreement. REAL ESTATE includes our Florida real estate operations. OTHER
includes our telecommunications activities, investments in emerging
technologies, and general corporate charges and interest not specifically
related to any one business segment. General corporate charges include employee
salaries and benefits as well as legal and other outside service fees.
DISCONTINUED OPERATIONS includes our Automotive Services business that was spun
off on September 20, 2004, our Water Services businesses, the majority of which
were sold in 2003, and spin-off costs incurred by ALLETE. (See Note 1.)
NONREGULATED
REGULATED ENERGY REAL
CONSOLIDATED UTILITY OPERATIONS ESTATE OTHER
- ---------------------------------------------------------------------------------------------------------------------
Millions
FOR THE QUARTER ENDED SEPTEMBER 30, 2004
Operating Revenue $183.2 $136.1 $31.1 $5.2 $ 10.8
Fuel and Purchased Power 71.9 63.4 8.5 - -
Operating and Other Expense 75.7 42.0 18.3 2.4 13.0
Depreciation Expense 12.3 9.7 1.9 - 0.7
- ---------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) from
Continuing Operations 23.3 21.0 2.4 2.8 (2.9)
Interest Expense (7.5) (5.0) (0.4) (0.1) (2.0)
Other Income (Expense) (18.4) - 0.2 - (18.6)
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
Before Income Taxes (2.6) 16.0 2.2 2.7 (23.5)
Income Tax Expense (Benefit) (2.0) 6.5 0.7 1.1 (10.3)
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations (0.6) $ 9.5 $ 1.5 $1.6 $(13.2)
---------------------------------------------------
Income from Discontinued Operations -
Net of Tax 13.7
- ------------------------------------------------------------
Net Income $ 13.1
- ------------------------------------------------------------
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
Operating Revenue $170.1 $127.1 $30.2 $6.1 $ 6.7
Fuel and Purchased Power 64.9 52.8 12.1 - -
Operating and Other Expense 62.4 38.6 11.7 2.8 9.3
Depreciation Expense 12.6 10.2 1.9 - 0.5
- ---------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) from
Continuing Operations 30.2 25.5 4.5 3.3 (3.1)
Interest Expense (13.2) (5.2) (0.4) - (7.6)
Other Income (Expense) 0.5 (0.1) - - 0.6
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
Before Income Taxes 17.5 20.2 4.1 3.3 (10.1)
Income Tax Expense (Benefit) 6.6 8.0 1.3 1.4 (4.1)
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 10.9 $ 12.2 $ 2.8 $1.9 $(6.0)
---------------------------------------------------
Income from Discontinued Operations - Net of Tax 36.7
- ------------------------------------------------------------
Net Income $ 47.6
- ------------------------------------------------------------
ALLETE Third Quarter 2004 Form 10-Q 10
NOTE 4. BUSINESS SEGMENTS (CONTINUED)
NONREGULATED
REGULATED ENERGY REAL
CONSOLIDATED UTILITY OPERATIONS ESTATE OTHER
- -----------------------------------------------------------------------------------------------------------------
Millions
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
Operating Revenue $582.7 $414.3 $91.0 $39.6 $ 37.8
Fuel and Purchased Power 218.0 186.4 31.6 - -
Operating and Other Expense 242.8 132.3 50.5 14.2 45.8
Depreciation Expense 37.2 29.5 5.6 - 2.1
- -----------------------------------------------------------------------------------------------------------------
Operating Income (Loss) from
Continuing Operations 84.7 66.1 3.3 25.4 (10.1)
Interest Expense (25.7) (14.3) (1.2) (0.2) (10.0)
Other Income (Expense) (21.4) 0.1 1.2 - (22.7)
- -----------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
Before Income Taxes 37.6 51.9 3.3 25.2 (42.8)
Income Tax Expense (Benefit) 14.4 19.8 0.7 10.4 (16.5)
- -----------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
Before Change in Accounting Principle 23.2 $ 32.1 $ 2.6 $14.8 $(26.3)
--------------------------------------------------
Income from Discontinued Operations -
Net of Tax 79.3
Change in Accounting Principle (7.8)
- --------------------------------------------------------
Net Income $ 94.7
- --------------------------------------------------------
Total Assets $1,449.3 $1,081.6 $161.3 $74.8 $123.6
Property, Plant and Equipment - Net $885.0 $729.6 $117.1 - $38.3
Accumulated Depreciation $766.6 $717.6 $40.1 - $8.9
Capital Expenditures $65.0 $38.4 $6.6 - $3.8
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
Operating Revenue $530.3 $385.8 $85.1 $34.3 $ 25.1
Fuel and Purchased Power 197.2 165.6 31.6 - -
Operating and Other Expense 217.4 128.2 42.7 14.6 31.9
Depreciation Expense 38.4 30.9 5.6 0.1 1.8
- -----------------------------------------------------------------------------------------------------------------
Operating Income (Loss) from
Continuing Operations 77.3 61.1 5.2 19.6 (8.6)
Interest Expense (38.0) (15.4) (1.4) (0.1) (21.1)
Other Income (Expense) 2.4 5.0 0.5 - (3.1)
- -----------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
Before Income Taxes 41.7 50.7 4.3 19.5 (32.8)
Income Tax Expense (Benefit) 16.1 20.2 1.1 8.2 (13.4)
- -----------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 25.6 $ 30.5 $ 3.2 $11.3 $(19.4)
--------------------------------------------------
Income from Discontinued Operations -
Net of Tax 110.7
- -------------------------------------------------------
Net Income $136.3
- -------------------------------------------------------
Total Assets $3,478.7 $1,007.0 $182.3 $81.0 $89.8
Property, Plant and Equipment - Net $911.5 $729.0 $144.8 - $37.7
Accumulated Depreciation $735.9 $694.2 $35.3 - $6.4
Capital Expenditures $98.7 $33.1 $17.8 - $2.7
- -----------------------------------------------------------------------------------------------------------------
Discontinued Operations represented $8.0 million of total assets in 2004 ($2,118.6 million in 2003) and
$16.2 million of capital expenditures in 2004 ($45.1 million in 2003).
11 ALLETE Third Quarter 2004 Form 10-Q
NOTE 5. INVESTMENTS
At September 30, 2004 Investments included the real estate assets of ALLETE
Properties, debt and equity securities consisting primarily of securities held
for employee benefits, and our emerging technology investments. We account for
our emerging technology investments under the equity method. (See Note 10.)
SEPTEMBER 30, DECEMBER 31,
INVESTMENTS 2004 2003
- ----------------------------------------------------------------------------------------------
Millions
Real Estate Assets $ 74.8 $ 78.5
Debt and Equity Securities 100.2 54.1
Emerging Technology Investments 15.6 37.5
- ----------------------------------------------------------------------------------------------
$190.6 $170.1
- ----------------------------------------------------------------------------------------------
Debt and equity securities included $54.9 million of ADESA stock held by an ESOP
as part of our Retirement Savings and Stock Ownership Plan. The ESOP received
the ADESA shares as a result of the spin-off of ADESA on September 20, 2004. The
ADESA shares relate to unearned ESOP shares of ALLETE common stock that have not
yet been allocated to participants. We report ADESA stock held by the ESOP as
available-for-sale under SFAS 115, "Accounting for Certain Investments in Debt
and Equity Securities." Available-for-sale securities are recorded at fair value
with unrealized gains and losses included in accumulated other comprehensive
income, net of tax; gains and losses are recognized in earnings when securities
are sold. In October 2004 the ESOP sold 2.7 million shares of ADESA stock
related to unearned ESOP shares for total proceeds of $54.0 million. This
resulted in an after-tax gain of $9.2 million which will be recognized in the
fourth quarter of 2004. (See Note 13.)
NOTE 6. SHORT-TERM BORROWINGS
In April 2004 ALLETE used internally generated funds and proceeds from the sale
of water assets to repay the remaining $53.0 million outstanding on a $250
million credit agreement which would have expired in July 2004.
NOTE 7. LONG-TERM DEBT
In January 2004 we used internally generated funds to retire approximately $3.5
million in principal amount of Industrial Development Revenue Bonds Series
1994-A, due January 1, 2004.
In July 2004 we repaid $125 million in principal amount of 7.80% Senior Notes
due 2008. Proceeds from the sale of our water assets and proceeds received from
ADESA were used to repay this debt. As a result of the redemption, we recognized
an expense of $18.5 million in the third quarter of 2004 comprised of an early
redemption premium and the write-off of unamortized debt issuance costs.
In August 2004 we issued $111 million in principal amount of 4.95%
Collateralized Pollution Control Refunding Revenue Bonds Series 2004 due 2022.
Proceeds were used to redeem $111 million in principal amount of 6%
Collateralized Pollution Control Refunding Revenue Bonds Series E due 2022.
ALLETE Third Quarter 2004 Form 10-Q 12
NOTE 8. OTHER INCOME (EXPENSE)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------
Millions
Debt Prepayment Premium and Unamortized
Debt Issuance Costs $(18.5) - $(18.5) -
Loss on Emerging Technology Investments (1.0) - (6.9) $(3.8)
Split Rock Energy Equity Income (Loss) - $(0.2) - 5.0
Investments and Other Income 1.1 0.7 4.0 1.2
- -------------------------------------------------------------------------------------------------------------------
$(18.4) $ 0.5 $(21.4) $ 2.4
- -------------------------------------------------------------------------------------------------------------------
NOTE 9. INCOME TAX EXPENSE
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------
Millions
Current Tax Expense
Federal $ 0.4 $ 3.7 $ 11.7 $ 12.8
State 1.1 2.4 5.5 4.5
- -------------------------------------------------------------------------------------------------------------------
1.5 6.1 17.2 17.3
- -------------------------------------------------------------------------------------------------------------------
Deferred Tax Expense (Benefit)
Federal (2.2) 1.3 (0.5) 0.2
State (1.1) (0.3) (1.3) (0.3)
- -------------------------------------------------------------------------------------------------------------------
(3.3) 1.0 (1.8) (0.1)
- -------------------------------------------------------------------------------------------------------------------
Deferred Tax Credits (0.2) (0.5) (1.0) (1.1)
- -------------------------------------------------------------------------------------------------------------------
Income Tax Expense on Continuing Operations (2.0) 6.6 14.4 16.1
Income Tax Expense on Discontinued Operations 11.0 24.2 60.3 73.0
Income Tax Benefit on Change in Accounting Principle - - (5.5) -
- -------------------------------------------------------------------------------------------------------------------
Total Income Tax Expense $ 9.0 $ 30.8 $ 69.2 $ 89.1
- -------------------------------------------------------------------------------------------------------------------
13 ALLETE Third Quarter 2004 Form 10-Q
NOTE 10. ADOPTION OF NEW ACCOUNTING PRINCIPLES
In the third quarter of 2004, we adopted EITF 03-16, "Accounting for Investments
in Limited Liability Companies," which requires the use of the equity method of
accounting for investments in all limited liability companies, including
investments we have in venture capital funds included in our emerging technology
portfolio. EITF 03-16 was issued in the second quarter of 2004. We had
previously accounted for these investments under the cost method of accounting.
EITF 03-16 is effective for reporting periods beginning after June 15, 2004.
Pursuant to EITF 03-16, the effect of adoption is reported as the cumulative
effect of a change in accounting principle.
The cumulative effect of this change on prior years was an after-tax loss of
$7.8 million, which was recorded as a change in accounting principle and
reflected in income for the nine months ended September 30, 2004. The effect of
the change on the quarter ended September 30, 2004 decreased net income by $0.6
million (increased net income by $1.1 million for the nine months ended
September 30, 2004). If the equity method of accounting had been used in 2003,
net income for the quarter ended September 30, 2003 would have increased $0.1
million and net income for the nine months ended September 30, 2003 would have
decreased $0.8 million, or $0.03 per share.
The effect of the change to equity accounting for our venture capital funds and
the impact of adoption of FSP 106-2 (see Note 14) on the first and second
quarters of 2004 is as follows:
QUARTER ENDED
MARCH 31, JUNE 30,
EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLE 2004 2004
- ---------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts
Net Income
As Reported $52.5 $34.7
Effect of Change in Accounting for Venture Capital Funds 0.2 1.5
Effect of Adoption of FSP 106-2 - 0.5
- ---------------------------------------------------------------------------------------------------------------
Before Cumulative Effect of Change in Accounting Principle 52.7 36.7
Cumulative Effect on Prior Years (to December 31, 2003) of
Change in Accounting for Venture Capital Funds (7.8) -
- ---------------------------------------------------------------------------------------------------------------
As Restated $44.9 $36.7
- ---------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
As Reported $1.87 $1.22
Effect of Change in Accounting for Venture Capital Funds 0.01 0.05
Effect of Adoption of FSP 106-2 - 0.02
- ---------------------------------------------------------------------------------------------------------------
Before Cumulative Effect of Change in Accounting Principle 1.88 1.29
Cumulative Effect on Prior Years (to December 31, 2003) of
Change in Accounting for Venture Capital Funds (0.28) -
- ---------------------------------------------------------------------------------------------------------------
As Restated $1.60 $1.29
- ---------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share
As Reported $1.86 $1.22
Effect of Change in Accounting for Venture Capital Funds - 0.05
Effect of Adoption of FSP 106-2 - 0.02
- ---------------------------------------------------------------------------------------------------------------
Before Cumulative Effect of Change in Accounting Principle 1.86 1.29
Cumulative Effect on Prior Years (to December 31, 2003) of
Change in Accounting for Venture Capital Funds (0.27) -
- ---------------------------------------------------------------------------------------------------------------
As Restated $1.59 $1.29
- ---------------------------------------------------------------------------------------------------------------
ALLETE Third Quarter 2004 Form 10-Q 14
NOTE 11. EARNINGS PER SHARE
The difference between basic and diluted earnings per share arises from
outstanding stock options and performance share awards granted under our
Executive and Director Long-Term Incentive Compensation Plans.
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------------------------
RECONCILIATION OF BASIC AND DILUTED DILUTIVE DILUTIVE
EARNINGS PER SHARE BASIC SECURITIES DILUTED BASIC SECURITIES DILUTED
- -------------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts
2004
Net Income (Loss) from Continuing Operations
Before Change in Accounting Principle $(0.6) - $(0.6) $23.2 - $23.2
Common Shares 28.5 0.1 28.6 28.3 0.2 28.5
Per Share from Continuing Operations $(0.03) - $(0.02) $0.82 - $0.82
2003
Net Income (Loss) from Continuing Operations
Before Change in Accounting Principle $10.9 - $10.9 $25.6 - $25.6
Common Shares 27.7 0.1 27.8 27.5 0.1 27.6
Per Share from Continuing Operations $0.40 - $0.40 $0.93 - $0.93
- -------------------------------------------------------------------------------------------------------------------
NOTE 12. COMPREHENSIVE INCOME
For the quarter ended September 30, 2004 total comprehensive income was a $3.7
million loss ($47.4 million of income for the quarter ended September 30, 2003).
For the nine months ended September 30, 2004 total comprehensive income was
$71.8 million ($170.3 million for the nine months ended September 30, 2003).
Total comprehensive income includes net income, unrealized gains and losses on
securities classified as available-for-sale, additional pension liability and
foreign currency translation adjustments.
SEPTEMBER 30, DECEMBER 31,
ACCUMULATED OTHER COMPREHENSIVE GAIN (LOSS) 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Millions
Unrealized Gain on Securities $ 1.4 $ 0.8
Additional Pension Liability (9.8) (9.8)
Foreign Currency Translation Adjustment - Discontinued Operations - 23.5
- ------------------------------------------------------------------------------------------------------------------
$(8.4) $ 14.5
- ------------------------------------------------------------------------------------------------------------------
NOTE 13. EMPLOYEE STOCK AND INCENTIVE PLANS
We sponsor a leveraged ESOP as part of our Retirement Savings and Stock
Ownership Plan. On September 20, 2004 the ESOP received ADESA shares as a result
of the spin-off of ADESA. At September 30, 2004 the ESOP held 3.3 million shares
of ADESA related to unearned ESOP shares that have not yet been allocated to
participants. The ESOP is required to sell the ADESA stock, and will use the
proceeds to purchase ALLETE common stock on the open market. We expect to
receive an IRS letter ruling that will allow us up to approximately 600 days
from September 20, 2004 to complete the sale of the ADESA shares and the
purchase of ALLETE stock. Pursuant to AICPA Statement of Position 93-6,
"Employers' Accounting for Employee Stock Ownership Plans," unallocated ALLETE
common stock currently held and purchased by the ESOP will be treated as
unearned ESOP shares and not considered as outstanding for earnings per share
computations. ESOP shares are included in earnings per share computations after
they are allocated to participants. In October 2004 the ESOP sold 2.7 million
shares of ADESA stock related to unearned ESOP shares for total proceeds of
$54.0 million. Approximately 0.6 million shares of ADESA stock related to
unearned ESOP shares remain in the ESOP and will be sold under the direction of
an independent trustee.
15 ALLETE Third Quarter 2004 Form 10-Q
NOTE 13. EMPLOYEE STOCK AND INCENTIVE PLANS (CONTINUED)
The employee stock options outstanding at the date of the spin-off were
converted to reflect the spin-off and one-for-three reverse stock split. This
conversion was done to preserve the noncompensatory nature of the options under
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation."
NOTE 14. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
POSTRETIREMENT HEALTH
PENSION AND LIFE
----------------------- ----------------------
COMPONENTS OF PERIODIC BENEFIT EXPENSE 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Millions
FOR THE QUARTER ENDED SEPTEMBER 30,
Service Cost $ 2.1 $ 1.7 $0.9 $ 0.9
Interest Cost 5.2 4.8 1.6 1.7
Expected Return on Plan Assets (6.9) (7.2) (1.2) (1.0)
Amortization of Prior Service Costs 0.2 0.2 - -
Amortization of Net Loss 0.4 - 0.1 -
Amortization of Transition Obligation 0.1 0.1 0.6 0.6
- ------------------------------------------------------------------------------------------------------------------
Periodic Benefit Expense (Benefit) $ 1.1 $(0.4) $2.0 $ 2.2
- ------------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
Service Cost $ 6.3 $ 5.1 $3.0 $ 2.7
Interest Cost 15.6 14.6 5.0 5.1
Expected Return on Plan Assets (20.7) (21.6) (3.4) (3.0)
Amortization of Prior Service Costs 0.6 0.6 - -
Amortization of Net Loss 1.2 - 0.4 -
Amortization of Transition Obligation 0.2 0.2 1.8 1.8
- ------------------------------------------------------------------------------------------------------------------
Periodic Benefit Expense (Benefit) $ 3.2 $ (1.1) $6.8 $ 6.6
- ------------------------------------------------------------------------------------------------------------------
In May 2004 the FASB issued FSP 106-2, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003" (Act), which provides accounting and disclosure guidance for employers
that sponsor postretirement health care plans that provide prescription drug
benefits. FSP 106-2 requires that the accumulated postretirement benefit
obligation and postretirement benefit cost reflect the impact of the Act upon
adoption. We provide postretirement health benefits that include prescription
drug benefits, and expect our postretirement prescription drug benefits to
qualify us for the federal subsidy to be provided for under the Act. We adopted
FSP 106-2 in the third quarter of 2004. The impact of adoption reduced our
after-tax postretirement medical expense by $0.5 million for the three months
ended September 30, 2004 and $1.0 million for the nine months ended September
30, 2004. In addition, our accumulated postretirement benefit obligation has
been reduced by $12.3 million.
ALLETE Third Quarter 2004 Form 10-Q 16
NOTE 15. COMMITMENTS, GUARANTEES AND CONTINGENCIES
SQUARE BUTTE POWER PURCHASE AGREEMENT. Minnesota Power has a power purchase
agreement with Square Butte that extends through 2026 (Agreement). It provides a
long-term supply of low-cost energy to customers in our electric service
territory and enables Minnesota Power to meet power pool reserve requirements.
Square Butte, a North Dakota cooperative corporation, owns a 455-MW coal-fired
generating unit (Unit) near Center, North Dakota. The Unit is adjacent to a
generating unit owned by Minnkota Power, a North Dakota cooperative corporation
whose Class A members are also members of Square Butte. Minnkota Power serves as
the operator of the Unit and also purchases power from Square Butte.
Minnesota Power is entitled to approximately 71 percent of the Unit's output
under the Agreement. After 2005 and upon compliance with a two-year advance
notice requirement, Minnkota Power has the option to reduce Minnesota Power's
entitlement by 5 percent annually, to a minimum of 50 percent. In December 2003
we received notice from Minnkota Power that they will reduce our output
entitlement, effective January 1, 2006, by 5 percent to approximately 66
percent. Minnesota Power is obligated to pay its pro rata share of Square
Butte's costs based on Minnesota Power's entitlement to Unit output. Minnesota
Power's payment obligation will be suspended if Square Butte fails to deliver
any power, whether produced or purchased, for a period of one year. Square
Butte's fixed costs consist primarily of debt service. At September 30, 2004
Square Butte had total debt outstanding of $297.4 million. Total annual debt
service for Square Butte is expected to be approximately $23 million in each of
the years 2004 through 2008. Variable operating costs include the price of coal
purchased from BNI Coal, our subsidiary, under a long-term contract. Minnesota
Power's payments to Square Butte are approved as a purchased power expense for
ratemaking purposes by both the MPUC and the FERC.
LEASING AGREEMENTS. In September 2004 BNI Coal entered into an operating lease
agreement for a new dragline that was placed in service at BNI Coal's mine on
September 30, 2004. BNI Coal is obligated to make lease payments totaling $2.8
million annually for the lease term which expires in 2027. BNI Coal has the
option at the end of the lease term to renew the lease at a fair market rental,
to purchase the dragline at fair market value, or to surrender the dragline and
pay a $3.0 million termination fee.
We lease other properties and equipment under operating lease agreements with
terms expiring through 2013. The aggregate amount of minimum lease payments for
all of these other operating leases is $3.2 million in 2005, $3.1 million in
2006, $2.7 million in 2007, $1.9 million in 2008 and $4.2 million thereafter.
KENDALL COUNTY POWER PURCHASE AGREEMENT. We have 275 MW of nonregulated
generation (non rate-base generation sold at market-based rates to the wholesale
market) through an agreement with an independent power producer that extends
through September 2017. Under the agreement we pay a fixed capacity charge for
the right, but not the obligation, to capacity and energy from a 275-MW
generating unit at a facility in Kendall County near Chicago, Illinois. The
annual fixed capacity charge is approximately $21 million. We are also
responsible for arranging the natural gas fuel supply. Our strategy is to enter
into long-term contracts to sell a significant portion of the 275 MW from the
Kendall County facility; the balance will be sold in the spot market through
short-term agreements. We currently have 130 MW (100 MW in 2003) of long-term
capacity sales contracts for the Kendall County generation, with 50 MW expiring
in April 2012 and 80 MW expiring in September 2017. Neither the Kendall County
agreement nor the related sales contracts are derivatives under SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." To date, the
Kendall County facility has operated at a loss due to negative spark spreads
(the differential between electric and natural gas prices) in the wholesale
power market and our resulting inability to cover the fixed capacity charge on
unsold capacity (currently 145 MW). We expect the facility to continue to
generate losses until such time as spark spreads improve or we are able to enter
into additional long-term capacity sales contracts. We are currently exploring
options to minimize or eliminate these ongoing losses.
COAL AND SHIPPING CONTRACTS. We have three coal supply agreements with various
expiration dates ranging from December 2006 to December 2009. We also have rail
and shipping agreements for transportation of all of our coal with various
expiration dates ranging from December 2005 to December 2011. Our minimum annual
obligation under these coal and shipping agreements ranges from approximately
$28 million in 2004 to $10 million in 2008.
EMERGING TECHNOLOGY INVESTMENTS. We have investments in emerging technologies
through minority investments in venture capital funds structured as limited
liability companies, and direct investments in privately-held start-up
companies. We have committed to make additional investments in certain emerging
technology holdings. The total future commitment was $4.6 million at September
30, 2004 ($4.8 million at December 31, 2003) and is expected to be invested at
various times through 2007.
17 ALLETE Third Quarter 2004 Form 10-Q
NOTE 15. COMMITMENTS, GUARANTEES AND CONTINGENCIES (CONTINUED)
ENVIRONMENTAL MATTERS. Our businesses are subject to regulation by various
federal, state and local authorities concerning environmental matters. We do not
currently anticipate that potential expenditures for environmental matters will
be material; however, we are unable to predict the outcome of the issues
discussed below.
We review environmental matters on a quarterly basis. Accruals for environmental
matters are recorded when it is probable that a liability has been incurred and
the amount of the liability can be reasonably estimated, based on current law
and existing technologies. These accruals are adjusted periodically as
assessment and remediation efforts progress or as additional technical or legal
information becomes available. Accruals for environmental liabilities are
included in the balance sheet at undiscounted amounts and exclude claims for
recoveries from insurance or other third parties. Costs related to environmental
contamination treatment and cleanup are charged to expense unless recoverable in
rates from customers.
SWL&P MANUFACTURED GAS PLANT. In May 2001 SWL&P received notice from the WDNR
that the City of Superior had found soil contamination on property adjoining a
former Manufactured Gas Plant (MGP) site owned and operated by SWL&P from 1889
to 1904. The WDNR requested SWL&P to initiate an environmental investigation.
The WDNR also issued SWL&P a Responsible Party letter in February 2002. The
environmental investigation is underway. In February 2003 SWL&P submitted a
Phase II environmental site investigation report to the WDNR. This report
identified some MGP-like chemicals that were found in the soil near the former
plant site. During March and April 2003 sediment samples were taken from nearby
Superior Bay. The report on the results of this sampling was completed and sent
to the WDNR during the first quarter of 2004. The next phase of the
investigation is to determine any impact to soil or ground water between the
former MGP site and Superior Bay. The site work for this phase of the
investigation was performed during October 2004. Although it is not possible to
quantify the potential clean-up cost until the investigation is completed, a
$0.5 million liability was recorded in December 2003 to address the known areas
of contamination. We have recorded a corresponding dollar amount as a regulatory
asset to offset this liability. The PSCW has approved SWL&P's deferral of these
MGP environmental investigation and potential clean-up costs for future recovery
in rates, subject to a regulatory prudency review. ALLETE maintains pollution
liability insurance coverage that includes coverage for SWL&P. A claim has been
filed with respect to this matter. The insurance carrier has issued a
reservation of rights letter and we continue to work with the insurer to
determine the availability of insurance coverage.
MINNESOTA POWER COAL-FIRED GENERATING FACILITIES. During 2002 Minnesota Power
received and responded to a third request from the EPA, under Section 114 of the
federal Clean Air Act Amendments of 1990 (Clean Air Act), seeking additional
information regarding capital expenditures at all of its coal-fired generating
stations. This action is part of an industry-wide investigation assessing
compliance with the New Source Review and the New Source Performance Standards
(emissions standards that apply to new and changed units) of the Clean Air Act
at electric generating stations. We have received no feedback from the EPA based
on the information we submitted. There is, however, ongoing litigation involving
the EPA and other electric utilities for alleged violations of these rules. It
is expected that the outcome of some of the cases could provide the utility
industry direction on this topic. We are unable to predict what actions, if any,
may be required as a result of the EPA's request for information. As a result,
we have not accrued any liability for this environmental matter.
SQUARE BUTTE GENERATING FACILITY. In June 2002 Minnkota Power, the operator of
Square Butte, received a Notice of Violation from the EPA regarding alleged New
Source Review violations at the M.R. Young Station which includes the Square
Butte generating unit. The EPA claims certain capital projects completed by
Minnkota Power should have been reviewed pursuant to the New Source Review
regulations potentially resulting in new air permit operating conditions.
Minnkota Power has held several meetings with the EPA to discuss the alleged
violations. Discussions with the EPA are ongoing and we are unable to predict
the outcome or cost impacts. If Square Butte is required to make significant
capital expenditures to comply with EPA requirements, we expect such capital
expenditures to be debt financed. Our future cost of purchased power would
include our pro rata share of this additional debt service.
OTHER. We are involved in litigation arising in the normal course of business.
Also in the normal course of business, we are involved in tax, regulatory and
other governmental audits, inspections, investigations and other proceedings
that involve state and federal taxes, safety, compliance with regulations, rate
base and cost of service issues, among other things. While the resolution of
such matters could have a material effect on earnings and cash flows in the year
of resolution, none of these matters are expected to change materially our
present liquidity position, nor have a material adverse effect on our financial
condition.
ALLETE Third Quarter 2004 Form 10-Q 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ALLETE's operations are comprised of four business segments. REGULATED UTILITY
includes retail and wholesale rate regulated electric, water and gas services in
northeastern Minnesota and northwestern Wisconsin under the jurisdiction of
state and federal regulatory authorities. NONREGULATED ENERGY OPERATIONS
includes nonregulated generation (non-rate base generation sold at market-based
rates to the wholesale market) consisting primarily of generation from Taconite
Harbor in northern Minnesota and generation secured through the Kendall County
power purchase agreement. Nonregulated Energy Operations also includes our coal
mining activities in North Dakota. REAL ESTATE includes our Florida real estate
operations. OTHER includes our telecommunications activities, investments in
emerging technologies, and general corporate charges and interest not
specifically related to any one business segment. General corporate charges
include employee salaries and benefits as well as legal and other outside
service fees. DISCONTINUED OPERATIONS includes our Automotive Services business
that was spun off on September 20, 2004, our Water Services businesses, the
majority of which were sold in 2003, and spin-off costs incurred by ALLETE.
On September 20, 2004 the spin-off of Automotive Services was completed by
distributing to ALLETE shareholders all of ALLETE's shares of ADESA common
stock. Through a June 2004 IPO our Automotive Services business, doing business
as ADESA, Inc. (NYSE: KAR), issued 6.3 million shares of common stock. This
represented 6.6 percent of ADESA's common stock outstanding. ALLETE owned the
remaining 93.4 percent of ADESA until the spin-off was completed. (See Note 1.)
ADESA's SEC filings are available through the SEC's website at www.sec.gov.
CONSOLIDATED OVERVIEW
Net income for the quarter and nine months ended September 30, 2004 decreased 72
percent and 31 percent, respectively, from the same periods in 2003 and diluted
earnings per share for the quarter and nine months ended September 30, 2004
decreased 74 percent and 32 percent, respectively, from the same periods in
2003. The decrease was primarily attributable to reduced earnings from
discontinued operations which include both Water and Automotive Services, a
$10.9 million after-tax debt prepayment cost at ALLETE, and a $7.8 million
non-cash after-tax charge for a change in accounting principle related to
investments in our emerging technology portfolio (see Note 10).
Income from continuing operations represents the activities that are part of
ALLETE subsequent to the spin-off of ADESA. For the quarter ended September 30,
2004, income (loss) from continuing operations before the change in accounting
principle was a $0.6 million, or $0.02 per diluted share, loss ($10.9 million,
or $0.40 per diluted share, of income for the quarter ended September 30, 2003).
For the nine months ended September 30, 2004, income from continuing operations
before the change in accounting principle was $23.2 million, or $0.82 per
diluted share ($25.6 million, or $0.93 per diluted share, for the nine months
ended September 30, 2003). Both the quarter and nine months ended September 30,
2004 included the $10.9 million, or $0.38 per share, after-tax debt prepayment
cost incurred in July as part of ALLETE's financial restructuring in preparation
for the spin-off of ADESA.
19 ALLETE Third Quarter 2004 Form 10-Q
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts
Operating Revenue
Regulated Utility $136.1 $127.1 $414.3 $385.8
Nonregulated Energy Operations 31.1 30.2 91.0 85.1
Real Estate 5.2 6.1 39.6 34.3
Other 10.8 6.7 37.8 25.1
- -----------------------------------------------------------------------------------------------------------------
$183.2 $170.1 $582.7 $530.3
- -----------------------------------------------------------------------------------------------------------------
Operating Expenses
Regulated Utility $115.1 $101.6 $348.2 $324.7
Nonregulated Energy Operations 28.7 25.7 87.7 79.9
Real Estate 2.4 2.8 14.2 14.7
Other 13.7 9.8 47.9 33.7
- -----------------------------------------------------------------------------------------------------------------
$159.9 $139.9 $498.0 $453.0
- -----------------------------------------------------------------------------------------------------------------
Total Interest and Other Income (Expense)
Regulated Utility $ (5.0) $ (5.3) $(14.2) $(10.4)
Nonregulated Energy Operations (0.2) (0.4) - (0.9)
Real Estate (0.1) - (0.2) (0.1)
Other (20.6) (7.0) (32.7) (24.2)
- -----------------------------------------------------------------------------------------------------------------
$(25.9) $(12.7) $(47.1) $(35.6)
- -----------------------------------------------------------------------------------------------------------------
Net Income (Loss)
Regulated Utility $ 9.5 $12.2 $32.1 $30.5
Nonregulated Energy Operations 1.5 2.8 2.6 3.2
Real Estate 1.6 1.9 14.8 11.3
Other (13.2) (6.0) (26.3) (19.4)
- -----------------------------------------------------------------------------------------------------------------
Continuing Operations (0.6) 10.9 23.2 25.6
Discontinued Operations 13.7 36.7 79.3 110.7
Change in Accounting Principle - - (7.8) -
- -----------------------------------------------------------------------------------------------------------------
$ 13.1 $47.6 $94.7 $136.3
- -----------------------------------------------------------------------------------------------------------------
Diluted Average Shares of Common Stock 28.6 27.8 28.5 27.6
- -----------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share of Common Stock
Continuing Operations $(0.02) $0.40 $0.82 $0.93
Discontinued Operations 0.47 1.31 2.78 4.00
Change in Accounting Principle - - (0.27) -
- -----------------------------------------------------------------------------------------------------------------
$0.45 $1.71 $3.33 $4.93
- -----------------------------------------------------------------------------------------------------------------
Kilowatthours Sold
Regulated Utility
Retail and Municipals
Residential 233.7 250.2 772.8 787.0
Commercial 334.7 347.5 960.9 963.5
Industrial 1,736.9 1,535.6 5,273.7 4,909.2
Municipals 211.1 231.8 613.9 636.9
Other 19.9 20.5 57.9 59.3
- -----------------------------------------------------------------------------------------------------------------
2,536.3 2,385.6 7,679.2 7,355.9
Other Power Suppliers 260.2 504.4 645.8 1,012.5
- -----------------------------------------------------------------------------------------------------------------
2,796.5 2,890.0 8,325.0 8,368.4
Nonregulated Energy Operations 349.4 400.4 1,198.0 1,100.6
- -----------------------------------------------------------------------------------------------------------------
3,145.9 3,290.4 9,523.0 9,469.0
- -----------------------------------------------------------------------------------------------------------------
ALLETE Third Quarter 2004 Form 10-Q 20
NET INCOME
The following net income discussion summarizes a comparison of the nine months
ended September 30, 2004 to the nine months ended September 30, 2003.
REGULATED UTILITY net income in 2004 was up $1.6 million reflecting a 7 percent
increase in kilowatthour sales to our industrial customers partially offset by
higher pension expense, and increased costs associated with maintenance outages
at Company generating facilities and a scheduled outage at Square Butte.
Overall, regulated utility kilowatthour sales were similar to last year (down 1
percent) as a 4 percent increase in sales to retail and municipal customers
reduced the energy available for sale to other power suppliers.
NONREGULATED ENERGY OPERATIONS net income in 2004 was down $0.6 million as a 9
percent increase in nonregulated generation kilowatthour sales was more than
offset by higher operating expenses. Operating expenses in 2004 reflected
increased costs for sulfur dioxide emission allowances, while 2003 reflected a
$0.5 million reduction in costs accrued in 2002 related to the deferral of a
generation project in Superior, Wisconsin.
REAL ESTATE net income was $3.5 million higher in 2004 reflecting an increase in
the number as well as the profitability of real estate sales closing during the
first nine months of 2004. The timing of real estate sales varies from quarter
to quarter.
OTHER reflected $6.9 million of additional expense in 2004. The additional
expense resulted primarily from a $10.9 million debt prepayment cost associated
with the retirement of long-term debt as a part of our financial restructuring
in preparation for the spin-off of ADESA. Unallocated interest expense, however,
was $6.5 million less in 2004 due to the retirement of long-term debt in 2003
and early 2004 with the proceeds from the sale of our Water Services businesses
and the early retirement of $125 million of long-term debt in July 2004.
Earnings on invested proceeds from the sale of our Water Services businesses and
cash received from ADESA after the IPO partially offset less income from our
emerging technology investments and additional costs incurred as a result of the
reverse stock split.
DISCONTINUED OPERATIONS net income decreased $31.4 million in 2004.
Automotive Services net income was down $14.4 million, or 16 percent, primarily
due to an $8.5 million debt prepayment cost related to the early redemption of
ADESA debt in August 2004, costs associated with the business separation, and
additional corporate charges and separation expenses incurred as ADESA prepared
to be a stand-alone publicly traded company. Net income for 2004 was also down
because of a 6.6 percent reduction in our ownership of ADESA since the June 2004
IPO and a partial month of operations for September due to the spin-off. The
total number of vehicles sold at ADESA's vehicle auction facilities decreased 2
percent in 2004. Conversion rates, however, continued to exceed last year (63.2
percent in 2004; 61.5 percent in 2003). A 13 percent increase in the number of
loan transactions resulted from an increase in the number of active dealers
combined with an increase in floorplan utilization by the existing dealer base.
Net income also included $4.1 million of charges in 2004 in connection with a
lawsuit related to ADESA's vehicle import business and a $1.3 million recovery
in 2003 from the settlement of a lawsuit associated with ADESA's vehicle
transport business.
Water Services net income decreased $17.0 million, primarily because 2003
included nine months of operations, or $18.2 million, from water and wastewater
systems sold. The majority of Florida systems were sold in the fourth quarter of
2003. North Carolina assets were sold in June 2004. Net income in 2004 included
a $5.2 million gain on the sale of water assets ($3.4 million in 2003).
CHANGE IN ACCOUNTING PRINCIPLE reflected the cumulative effect on prior years
(to December 31, 2003) of changing to the equity method of accounting for
investments in limited liability companies included in our emerging technology
portfolio. (See Note 10.)
21 ALLETE Third Quarter 2004 Form 10-Q
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 2004 AND 2003
REGULATED UTILITY
OPERATING REVENUE was up $9.0 million, or 7 percent, in 2004 primarily due
to higher fuel clause recoveries resulting from increased purchased power
costs (see operating expenses below). Overall, regulated utility
kilowatthour sales were down 3 percent as a 6 percent increase in sales to
retail and municipal customers was more than offset by decreased sales to
other power suppliers. Much of the increase in retail and municipal
electric sales was attributable to large industrial customers due to higher
production levels in 2004. Sales to other power suppliers decreased
primarily due to the increased requirements of our retail customers.
Scheduled maintenance outages at one of our generating facilities and
Square Butte (see Outlook - Regulated Utility) also contributed to less
energy being available for sale to other power suppliers.
Revenue from electric sales to taconite customers accounted for 24 percent
of consolidated operating revenue in 2004 (19 percent in 2003). Electric
sales to paper and pulp mills accounted for 9 percent of consolidated
operating revenue in both 2004 and 2003.
OPERATING EXPENSES were up $13.5 million, or 13 percent, in 2004 primarily
reflecting increased purchased power expense necessitated by scheduled
maintenance outages at one of our generating facilities and Square Butte
(see Outlook - Regulated Utility). In addition, 2004 included higher
pension expense, and increased costs associated with the scheduled
maintenance outages.
NONREGULATED ENERGY OPERATIONS
OPERATING REVENUE was up $0.9 million, or 3 percent, in 2004 primarily due
to an increase in revenue from contract services as a result of work being
done for American Transmission Company on the Duluth-to-Wausau transmission
line. These services do not result in any profit margin. (See operating
expenses below.) The increase in contract services was mostly offset by
reduced nonregulated kilowatthour sales. Nonregulated kilowatthour sales in
total were down 13 percent in 2004 primarily due to lower kilowatthour
sales at the Kendall County facility.
OPERATING EXPENSES were up $3.0 million, or 12 percent, in 2004 primarily
due to expenses related to the contract services being done for American
Transmission Company. Fuel and purchased power expense was down compared to
last year due to lower kilowatthour sales in 2004. Operating expenses in
2003 reflected a $0.9 million reduction in costs accrued in 2002 related to
the deferral of a generation project in Superior, Wisconsin.
REAL ESTATE
OPERATING REVENUE and OPERATING EXPENSES were both down in 2004 primarily
due to fewer land sales. Operating revenue was down $0.9 million, or 15
percent, and operating expenses were down $0.4 million, or 14 percent.
OTHER
OPERATING REVENUE was up $4.1 million, or 61 percent, in 2004 reflecting
increased revenue from our telecommunications business due to more
equipment sales.
OPERATING EXPENSES were up $3.9 million, or 40 percent, in 2004 mostly due
to higher cost of goods sold associated with increased sales at our
telecommunications business. Corporate charges increased $0.1 million ($3.8
million in 2004; $3.7 million in 2003) reflecting reverse stock split
expenses.
TOTAL INTEREST AND OTHER INCOME (EXPENSE) reflected $13.6 million of
additional expense in 2004. In 2004 we incurred an $18.5 million debt
prepayment cost related to the early redemption of $125 million in senior
notes and recorded $1.0 million of equity losses related to our emerging
technology investments. These additional expenses were partially offset by
a $5.6 million decrease in interest expense not specifically related to any
one business segment ($2.0 million in 2004; $7.6 million in 2003). With
proceeds from the sale of our Water Services businesses and internally
generated cash in 2003 and 2004, we redeemed our quarterly income preferred
securities and various long-term debt issuances which lowered interest
expense in 2004.
ALLETE Third Quarter 2004 Form 10-Q 22
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
REGULATED UTILITY
OPERATING REVENUE was up $28.5 million, or 7 percent, in 2004 primarily due
to higher fuel clause recoveries resulting from increased purchased power
costs (see operating expenses below). Overall, regulated utility
kilowatthour sales were similar to last year (down 1 percent) as a 4
percent increase in sales to retail and municipal customers reduced the
energy available for sale to other power suppliers. Much of the increase in
retail and municipal electric sales was attributable to large industrial
customers due to higher production levels in 2004. Outages at Company
generating facilities and a scheduled maintenance outage at Square Butte
(see Outlook - Regulated Utility) also contributed to less energy being
available for sale to other power suppliers.
Revenue from electric sales to taconite customers accounted for 23 percent
of consolidated operating revenue in 2004 (21 percent in 2003). Electric
sales to paper and pulp mills accounted for 8 percent of consolidated
operating revenue in both 2004 and 2003.
OPERATING EXPENSES in total were up $23.5 million, or 7 percent, in 2004
primarily reflecting increased purchased power expense necessitated by
outages at Company generating facilities and Square Butte (see Outlook -
Regulated Utility). In addition, 2004 included higher pension expense, and
increased costs associated with the outages. These increases were partially
offset by the absence of a power marketing demand payment associated with a
purchased power agreement that expired in October 2003.
TOTAL INTEREST AND OTHER INCOME (EXPENSE) reflected $3.8 million less
income in 2004 primarily due to the loss of equity in net income from Split
Rock Energy. Minnesota Power withdrew from Split Rock Energy trading
activities effective November 1, 2003 and all participation in February
2004.
NONREGULATED ENERGY OPERATIONS
OPERATING REVENUE was up $5.9 million, or 7 percent, in 2004 primarily due
to an increase in revenue from contract services as a result of work being
done for American Transmission Company on the Duluth-to-Wausau transmission
line. These services do not result in any profit margin (see operating
expenses below). Revenue was also higher in 2004 due to a 9 percent
increase in nonregulated generation kilowatthour sales.
OPERATING EXPENSES were up $7.8 million, or 10 percent, in 2004 primarily
due to expenses related to the contract services being done for American
Transmission Company. In addition, 2004 operating expenses reflected
increased costs for sulfur dioxide emission allowances, while 2003
reflected a $0.9 million reduction in costs accrued in 2002 related to the
deferral of a generation project in Superior, Wisconsin.
TOTAL INTEREST AND OTHER INCOME (EXPENSE) reflected $0.9 million of
additional income in 2004 primarily due to more Minnesota land sales and
less interest expense in 2004.
REAL ESTATE
OPERATING REVENUE was up $5.3 million, or 15 percent, in 2004 as a result
of more land sales. In 2004 12 large real estate sales contributed $24.4
million to revenue, while in 2003 nine large real estate sales contributed
$15.9 million to revenue.
OPERATING EXPENSES were down $0.5 million, or 3 percent, in 2004 because
the cost basis of property sold in 2004 was lower than in 2003.
23 ALLETE Third Quarter 2004 Form 10-Q
OTHER
OPERATING REVENUE was up $12.7 million, or 51 percent, in 2004 reflecting
increased revenue from our telecommunications business due to more
equipment sales.
OPERATING EXPENSES were up $14.2 million, or 42 percent, in 2004 mostly due
to higher cost of goods sold associated with increased sales at our
telecommunications business. Corporate charges increased $2.2 million
($11.9 million in 2004; $9.7 million in 2003) reflecting higher incentive
compensation and benefit costs, and expenses related to the reverse stock
split.
TOTAL INTEREST AND OTHER INCOME (EXPENSE) reflected $8.5 million of
additional expense in 2004 primarily due to an $18.5 million debt
prepayment cost related to the early redemption of $125 million in senior
notes in 2004 and $5.5 million of impairment losses recorded related to our
emerging technology investments. These additional expenses were partially
offset by an $11.1 million decrease in interest expense not specifically
related to any one business segment ($10.0 million in 2004; $21.1 million
in 2003). With proceeds from the sale of our Water Services businesses and
internally generated cash in 2003 and 2004, we redeemed our quarterly
income preferred securities and various long-term debt issuances which
lowered interest expense in 2004. In 2003 we recognized $3.5 million of
losses related to the sale of shares we held directly in publicly-traded
emerging technology investments.
CRITICAL ACCOUNTING POLICIES
Certain accounting measurements under applicable GAAP involve management's
judgment about subjective factors and estimates, the effects of which are
inherently uncertain. Accounting measurements that we believe are most critical
to our reported results of operations and financial condition include:
impairment of long-lived assets, pension and postretirement health and life
actuarial assumptions, valuation of investments and provisions for environmental
remediation. These policies are reviewed with the Audit Committee of our Board
of Directors on a regular basis and summarized in our 2003 Form 10-K.
OUTLOOK
2004 EARNINGS GUIDANCE. Following the spin-off of our Automotive Services in
September 2004 (see Note 1), our remaining operations are comprised of Regulated
Utility, Nonregulated Energy Operations, Real Estate and Other (formerly
classified as (1) Energy Services, and (2) Investments and Corporate Charges).
In 2003 net income from these operations totaled $29.8 million, excluding $1.5
million of spin-off related costs reclassified to Discontinued Operations. Based
on our performance for the nine months ended September 30, 2004 and fourth
quarter projections, our expectation for income from continuing operations
before change in accounting principle (excluding the $10.9 million debt
prepayment cost incurred in 2004) is approximately $38 million for 2004, an
increase of 28 percent over 2003. Earnings for the nine months ended September
30, 2004 have benefited from the improved performance of the taconite industry.
Minnesota taconite production is projected to be approximately 40 million tons
in 2004 as compared to 35 million in 2003.
The above guidance does not include any gains or losses resulting from the
ESOP's sale of ADESA stock received in the spin-off. (See Note 13.) In October
2004 the ESOP sold 2.7 million shares of ADESA stock related to unearned ESOP
shares for total proceeds of $54.0 million; 2.5 million of the shares were sold
directly to ADESA. This resulted in an after-tax gain of $9.2 million which will
be recognized in the fourth quarter of 2004. Approximately 0.6 million shares of
ADESA stock related to unearned ESOP shares remain in the ESOP and will be sold
under the direction of an independent trustee.
The ESOP will use proceeds from the sale of ADESA stock to purchase ALLETE
common stock on the open market. We expect to receive an IRS letter ruling that
will allow us up to approximately 600 days from September 20, 2004 to complete
the sale of the ADESA shares and the purchase of ALLETE stock. Pursuant to AICPA
Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership
Plans," unallocated ALLETE common stock currently held and purchased by the ESOP
will be treated as unearned ESOP shares and not considered as outstanding for
earnings per share computations. ESOP shares are included in earnings per share
computations after they are allocated to participants. Also in October 2004,
ADESA purchased 0.7 million shares of ADESA stock held by ALLETE's pension plan.
ALLETE Third Quarter 2004 Form 10-Q 24
REGULATED UTILITY. In February 2004 we experienced a generator failure at our
534-MW Boswell Energy Center Unit 4 (Unit 4). Unit 4 came back into service in
June. As a result of the failure, we replaced significant components of the
generator at a capital cost of approximately $6 million. The majority of the
replacement cost was covered by insurance, subject to a deductible of $1
million. We entered into power purchase agreements to replace the power lost
during the Unit 4 outage. The cost of this additional power was recovered
through the regulated utility fuel adjustment clause in Minnesota. While Unit 4
was down, some work originally planned for 2005 and 2006 was done during the
outage to minimize future outages. This outage did not have a material impact on
our results of operations. Wisconsin Public Power, Inc. owns 20 percent of Unit
4. Because of the outage at our Boswell Energy Center, a multi-week scheduled
maintenance outage on Unit 1 at our Laskin Energy Center was deferred until
third quarter 2004. The 55-MW Unit 1 was back in service in early October.
In September 2004 Square Butte began a scheduled multi-week maintenance outage
which was completed at the end of October. Our pro rata share of the cost is
expected to be approximately $6 million pretax.
In September 2004 we filed an integrated resource plan (Resource Plan) with the
MPUC detailing our retail energy demand projections and our energy sourcing
options to meet the projected demand over the next 15 years. In the Resource
Plan we predict energy demand by customers in our service territory will
increase at an average annual rate of 1.7 percent to 2019. The Resource Plan
includes growth of 20 to 30 megawatts per year primarily from residential and
smaller commercial expansion, and a sustainable positive outlook from large
power customers in northeastern Minnesota, such as taconite processing
facilities and paper mills. We expect to realize a reduction in generating
resource supply over the next few years under the terms of a long-term energy
supply contract with Square Butte. The combination of increased demands and
reduced supply means we will need to secure additional base load energy to serve
our customers in future years.
The Resource Plan sets forth several options designed to meet the predicted
growing base load energy demand in the region. The options range from purchasing
additional power to building new base load energy generation facilities. We will
work with state regulators and stakeholders over the next several months to
discuss the Resource Plan. We anticipate that the MPUC will formally consider
the Resource Plan by mid-2005.
NONREGULATED ENERGY OPERATIONS. The Kendall County facility has operated at a
loss due to negative spark spreads (the differential between electric and
natural gas prices) in the wholesale power market and our resulting inability to
cover the fixed capacity charge on unsold capacity (currently 145 MW). We expect
the facility to continue to generate losses until such time as spark spreads
improve or we are able to enter into additional long-term capacity sales
contracts. This may result in annual after-tax losses of up to approximately $8
million depending on demand for unit output and spark spreads. We are currently
exploring options to minimize or eliminate these ongoing losses.
In October 2004 our 75-MW (rated capacity) Taconite Harbor Unit 1 began a
scheduled outage which is expected to be completed by mid-November 2004.
REAL ESTATE. ALLETE Properties, our Florida real estate operations, owns
approximately 18,000 acres of land near Fort Myers, Palm Coast and Ormond Beach,
Florida, as well as Winter Haven Citi Centre, a retail shopping center in Winter
Haven, Florida. We add value to the land through entitlements and infrastructure
improvements, and then sell it at current market prices. Historically, proceeds
from land sales have been three to four times our carrying value. Rental income
at the retail shopping center in Winter Haven provides a recurring stream of
revenue. At September 30, 2004 our basis in land held by ALLETE Properties was
$46.9 million. ALLETE Properties occasionally provides seller financing, and
outstanding finance receivables were $9.7 million at September 30, 2004 with
maturities ranging up to ten years. Outstanding finance receivables accrue
interest at market-based rates. At September 30, 2004 ALLETE Properties also had
$18.2 million of other assets which consisted primarily of Winter Haven Citi
Centre. We may selectively acquire additional land if it meets our strategy of
adding value through entitlement and infrastructure improvements.
SALE OF REMAINING WATER ASSETS. In June 2004 we essentially concluded our
strategy to exit our Water Services businesses when we completed the sale of our
North Carolina water assets and the sale of the remaining 72 water and
wastewater systems in Florida. The net cash proceeds from the sale of all water
assets in 2003 and 2004, after transaction costs, retirement of most Florida
Water debt and payment of income taxes, were approximately $300 million. These
net proceeds were used to strengthen our balance sheet and retire debt. We
continue to expect to sell our water assets in Georgia in 2004.
25 ALLETE Third Quarter 2004 Form 10-Q
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW ACTIVITIES
A primary goal of our strategic plan is to improve cash flow from operations.
Our strategy includes growing our businesses both internally by expanding
facilities, services and operations (see Capital Requirements), and externally
through acquisitions.
Excluding Discontinued Operations, consolidated cash and cash equivalents was
$172.7 million at September 30, 2004, an increase of $59.3 million since
December 31, 2003.
During the first nine months of 2004 we repaid $182.9 million in outstanding
debt using a combination of internally generated funds, proceeds from the sale
of our Water Services assets and proceeds received from ADESA. (See Note 1.) We
also refinanced $111 million in long-term debt at a lower interest rate. See
Notes 6 and 7 for additional detail on debt repaid.
During the first nine months of 2004 and 2003, cash flow from operating
activities was affected by a number of factors representative of normal
operations.
WORKING CAPITAL. Additional working capital, if and when needed, generally is
provided by the sale of commercial paper. Approximately 1.1 million original
issue shares of our common stock are available for issuance through INVEST
DIRECT, our direct stock purchase and dividend reinvestment plan.
DIVIDENDS. On October 20, 2004 our Board of Directors declared a dividend of 30
cents per share on ALLETE common stock payable December 1, 2004 to shareholders
of record at the close of business November 15, 2004.
SECURITIES
In March 2001 ALLETE, ALLETE Capital II and ALLETE Capital III, jointly filed a
registration statement with the SEC pursuant to Rule 415 under the Securities
Act of 1933. The registration statement, which has been declared effective by
the SEC, relates to the possible issuance of a remaining aggregate amount of
$387 million of securities which may include ALLETE common stock, first mortgage
bonds and other debt securities, and ALLETE Capital II and ALLETE Capital III
preferred trust securities. ALLETE also previously filed a registration
statement, which has been declared effective by the SEC, relating to the
possible issuance of $25 million of first mortgage bonds and other debt
securities. We may sell all or a portion of the remaining registered securities
if warranted by market conditions and our capital requirements. Any offer and
sale of the above mentioned securities will be made only by means of a
prospectus meeting the requirements of the Securities Act of 1933 and the rules
and regulations thereunder.
OFF-BALANCE SHEET ARRANGEMENTS
Off-balance sheet arrangements are discussed in Note 15.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Our long-term debt obligations, including long-term debt due within one year,
represent the principal amount of bonds, notes and loans which are recorded on
our consolidated balance sheet plus interest.
Unconditional purchase obligations represent our Square Butte and Kendall County
power purchase agreements, and minimum purchase commitments under coal and rail
contracts.
Under our power purchase agreement with Square Butte that extends through 2026,
we are obligated to pay our pro rata share of Square Butte's costs based on our
entitlement to the output of Square Butte's 455 MW coal-fired generating unit
near Center, North Dakota. Our payment obligation is suspended if Square Butte
fails to deliver any power, whether produced or purchased, for a period of one
year. Square Butte's fixed costs consist primarily of debt service. The
following table reflects our share of future debt service based on our current
output entitlement of 71 percent through 2005, 66 percent thereafter. In
December 2003 we received notice from Minnkota Power that they will reduce our
output entitlement,
ALLETE Third Quarter 2004 Form 10-Q 26
effective January 1, 2006, by 5 percent to approximately 66 percent. Minnkota
Power has the option to reduce our entitlement by 5 percent annually, to a
minimum of 50 percent. (See Note 15.)
Under the Kendall County agreement, we pay a fixed capacity charge for the
right, but not the obligation, to utilize one 275-MW generating unit near
Chicago, Illinois. We are responsible for arranging the natural gas fuel supply
and are entitled to the electricity produced. (See Note 15.)
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL 2005-2007 2008-2009 2010 AND AFTER
- ------------------------------------------------------------------------------------------------------------------
Millions
Long-Term Debt $ 585.3 $183.5 $ 79.1 $322.7
Operating Lease Obligations 78.3 17.4 9.0 51.9
Unconditional Purchase Obligations 657.0 146.2 89.1 421.7
- ------------------------------------------------------------------------------------------------------------------
$1,320.6 $347.1 $177.2 $796.3
- ------------------------------------------------------------------------------------------------------------------
CAPITAL REQUIREMENTS
CONTINUING OPERATIONS. Capital expenditures for continuing operations are
expected to be $62.6 million for 2004. Capital expenditures for continuing
operations for the nine months ended September 30, 2004 totaled $48.8 million
($53.6 million in 2003). Expenditures for the nine months ended September 30,
2004 included $38.4 million for Regulated Utility, $6.6 million for Nonregulated
Energy Operations and $3.8 million for Other which consisted of $3.5 million for
our telecommunications business and $0.3 million for general corporate purposes.
Internally generated funds were the primary source of funding for these
expenditures.
DISCONTINUED OPERATIONS. Capital expenditures for discontinued operations for
the nine months ended September 30, 2004 totaled $16.2 million ($45.1 million in
2003). Expenditures for the nine months ended September 30, 2004 included $13.1
million for Automotive Services capital expenditures incurred prior to the
September 2004 spin-off and $3.1 million to maintain our remaining Water
Services businesses while they were in the process of being sold.
ENVIRONMENTAL MATTERS AND OTHER
Our businesses are subject to regulation by various federal, state and local
authorities concerning environmental matters. We do not currently anticipate
that potential expenditures for environmental matters will be material; however,
we are unable to predict the outcome of the issues discussed in Note 15.
NEW ACCOUNTING STANDARDS
New accounting standards are discussed in Note 3.
-------------------------
READERS ARE CAUTIONED THAT FORWARD-LOOKING STATEMENTS INCLUDING THOSE CONTAINED
ABOVE, SHOULD BE READ IN CONJUNCTION WITH OUR DISCLOSURES UNDER THE HEADING:
"SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995" LOCATED ON PAGE 3 OF THIS FORM 10-Q.
27 ALLETE Third Quarter 2004 Form 10-Q
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SECURITIES INVESTMENTS
Investments include certain securities held for an indefinite period of time
which are accounted for as available-for-sale securities. Available-for-sale
securities are recorded at fair value with unrealized gains and losses included
in accumulated other comprehensive income, net of tax. Unrealized losses that
are other than temporary are recognized in earnings. At September 30, 2004 our
available-for-sale securities portfolio consisted of ADESA common stock held in
our Retirement Savings and Stock Ownership Plan (see Note 13) and securities in
a grantor trust established to fund certain employee benefits. Our
available-for-sale securities portfolio had a fair value of $76.0 million at
September 30, 2004 ($20.2 million at December 31, 2003) and a total unrealized
after-tax gain of $1.4 million at September 30, 2004 ($0.8 million at December
31, 2003).
As part of our emerging technology portfolio, we have several minority
investments in venture capital funds and direct investments in privately-held
start-up companies. We account for our investment in venture capital funds under
the equity method and account for our direct investment in privately-held
companies under the cost method. The total carrying value of our emerging
technology portfolio was $15.6 million at September 30, 2004, down $21.9 million
from December 31, 2003. The decline was primarily due to a change to the equity
method of accounting for the venture capital funds (see Note 10) and impairments
related to investments in privately-held companies. Our policy is to review
these investments quarterly for impairment by assessing such factors as
continued commercial viability of products, cash flow and earnings. Any
impairment would reduce the carrying value of the investment. During the second
quarter of 2004 we recorded $5.5 million ($3.2 million after taxes) of
impairment losses primarily related to direct investments in certain
privately-held start-up companies whose future business prospects have
diminished significantly. Recent developments at these companies indicated that
future commercial viability is unlikely, as is new financing necessary to
continue development.
INTEREST RATE SENSITIVE FINANCIAL INSTRUMENTS
PRINCIPAL CASH FLOW BY EXPECTED MATURITY DATE
----------------------------------------------------------------------------
SEPTEMBER 30, 2004 2004 2005 2006 2007 2008 THEREAFTER TOTAL
- --------------------------------------------------------------------------------------------------------------------
Dollars in Millions
Long-Term Debt
Fixed Rate $0.2 $0.8 $1.5 $115.8 $56.5 $155.9 $330.7
Average Interest Rate - % 7.0 7.3 6.3 7.1 7.0 5.4 6.3
Variable Rate $0.5 $1.0 $0.8 $3.3 $0.8 $54.3 $60.7
Average Interest Rate - % 2.8 3.0 3.0 1.7 3.0 1.6 1.6
- --------------------------------------------------------------------------------------------------------------------
Assumes rate in effect at September 30, 2004 remains constant through remaining term.
COMMODITY PRICE RISK
Our regulated utility operations in Minnesota and Wisconsin incur costs for fuel
(primarily coal), power and natural gas purchased for resale in our regulated
service territories, and related transportation. Our regulated utilities'
exposure to price risk for these commodities is significantly mitigated by the
current ratemaking process and regulatory environment which generally allows a
fuel clause surcharge if costs are in excess of those in our last rate filing.
Conversely, costs below those in our last rate filing result in a rate credit.
We seek to prudently manage our customers' exposure to price risk by entering
into contracts of various durations and terms for the purchase of coal and power
(in Minnesota), power and natural gas (in Wisconsin), and related transportation
costs.
ALLETE Third Quarter 2004 Form 10-Q 28
POWER MARKETING
Our power marketing activities consist of (i) purchasing energy in the wholesale
market for resale in our regulated service territories when retail energy
requirements exceed generation output, and (ii) selling excess available
regulated utility generation and purchased power, as well as selling
nonregulated generation.
From time-to-time, our regulated utility operations may have excess generation
that is temporarily not required by retail and municipal customers in our
regulated service territory. We actively sell this generation to the wholesale
market to optimize the value of our generating facilities. This generation is
generally sold in the spot market or under short-term contracts at market
prices.
We have approximately 500 MW of nonregulated generation available for sale to
the wholesale markets. This primarily consists of about 200 MW at our Taconite
Harbor facility in northern Minnesota and 275 MW obtained through a 15-year
power purchase agreement with an independent power producer at a facility in
Kendall County near Chicago, Illinois.
Taconite Harbor's capability of approximately 200 MW has been sold through
various short-term and long-term capacity and energy contracts. Short term, we
have approximately 116 MW of capacity and energy sales contracts, all of which
expire on April 30, 2005. Long term, we have entered into two capacity and
energy sales contracts totaling 175 MW (201 MW including a 15 percent reserve)
which are effective May 1, 2005 and expire on April 30, 2010. Both contracts
contain fixed monthly capacity charges and fixed minimum energy charges. One
contract provides for an annual escalator to the energy charge based on
increases in our cost of coal, subject to a small minimum annual escalation. The
other contract provides that the energy charge will be the greater of a fixed
minimum charge or an amount based on the variable production cost of a combined
cycle natural gas unit. Our exposure in the event of a full or partial outage at
our Taconite Harbor facility is significantly limited under both contracts. When
the buyer is notified at least two months prior to an outage, there is no
exposure. Outages with less than two months notice are subject to an annual
duration limitation typical of this type of contract. We also have a 50 MW
capacity and energy sales contract that extends through April 2008 and a 15 MW
energy sales contract that extends through May 2007. The 50 MW capacity and
energy sales contract has fixed pricing through January 2006 and market-based
pricing thereafter.
Under the Kendall County agreement, which expires in September 2017, we pay a
fixed capacity charge for the right, but not the obligation, to capacity and
energy from a 275-MW generating unit. We are responsible for arranging the
natural gas fuel supply. Our strategy is to sell a significant portion of this
generation through long-term contracts of various durations. The balance will be
sold in the daily spot market or through short-term contracts. We currently have
long-term capacity sales contracts for 130 MW, with 50 MW expiring in April 2012
and the balance expiring in September 2017. To date, the Kendall County facility
has operated at a loss due to negative spark spreads (the differential between
electric and natural gas prices) in the wholesale power market and our resulting
inability to cover the fixed capacity charge on the unsold capacity (currently
145 MW). We expect the facility to continue to generate losses until such time
as spark spreads improve or we are able to enter into additional long-term
capacity sales contracts. This may result in annual after-tax losses of up to
approximately $8 million depending on demand for unit output and spark spreads.
We are currently exploring options to minimize or eliminate these ongoing
losses.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a system of controls and procedures designed to provide reasonable
assurance as to the reliability of the financial statements and other
disclosures included in this report, as well as to safeguard assets from
unauthorized use or disposition. We evaluated the effectiveness of the design
and operation of our disclosure controls and procedures under the supervision
and with the participation of management, including our chief executive officer
and chief financial officer, as of the end of the period covered by this Form
10-Q. Based upon that evaluation, our chief executive officer and chief
financial officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information required to be
included in our periodic SEC filings. There has been no change in our internal
control over financial reporting that occurred during our most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
29 ALLETE Third Quarter 2004 Form 10-Q
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Material legal and regulatory proceedings are included in the discussion of
Other Information in Item 5 and are incorporated by reference herein.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
TOTAL NUMBER MAXIMUM
OF SHARES NUMBER OF
PURCHASED AS SHARES THAT
PART OF MAY YET BE
TOTAL PUBLICLY PURCHASED
ALLETE COMMON STOCK REPURCHASES NUMBER OF AVERAGE ANNOUNCED UNDER THE
FOR THE QUARTER ENDED SHARES PRICE PAID PLANS OR PLANS OR
SEPTEMBER 30, 2004 PURCHASED PER SHARE PROGRAMS PROGRAMS
- ----------------------------------------------------------------------------------------------------------------
For the Calendar Month
July - - - -
August 62,001 $80.25 - -
September 8,015 $81.71 - -
- ----------------------------------------------------------------------------------------------------------------
70,016 $80.41 - -
- ----------------------------------------------------------------------------------------------------------------
ADJUSTED FOR THE ONE-FOR-THREE REVERSE STOCK SPLIT EFFECTIVE SEPTEMBER 20, 2004.
REFLECTED SHARES OF ALLETE COMMON STOCK REPURCHASED TO COMPLETE THE SPIN-OFF OF ADESA. THERE WERE NO
SHARES REPURCHASED PURSUANT TO STOCK-FOR-STOCK EXERCISES OF EMPLOYEE OPTIONS GRANTED UNDER THE ALLETE
EXECUTIVE LONG-TERM INCENTIVE COMPENSATION PLAN DURING THE THIRD QUARTER OF 2004.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Reference is made to our 2003 Form 10-K for background information on the
following updates. Unless otherwise indicated, cited references are to our 2003
Form 10-K.
Ref. Page 14. - Table - Minimum Revenue and Demand Under Contract
MINIMUM REVENUE AND DEMAND UNDER CONTRACT MINIMUM MONTHLY
AS OF NOVEMBER 1, 2004 ANNUAL REVENUE MEGAWATTS
- ----------------------------------------------------------------------------------------------------------------
2004 $108.2 693
2005 $69.6 417
2006 $38.1 202
2007 $33.3 181
2008 $23.5 133
- ----------------------------------------------------------------------------------------------------------------
BASED ON PAST EXPERIENCE, WE BELIEVE REVENUE FROM OUR LARGE POWER CUSTOMERS WILL BE SUBSTANTIALLY IN EXCESS
OF THE MINIMUM CONTRACT AMOUNTS.
ALLETE Third Quarter 2004 Form 10-Q 30
Ref. Page 18 - First Paragraph
Ref. Form 10-Q for the quarter ended March 31, 2004, Page 26 - Fourth Paragraph
Ref. Form 10-Q for the quarter ended June 30, 2004, Page 32 - Second Paragraph
In August 2004 Minnesota Power and American Transmission Company entered into a
Design and Construction Services Agreement for Transmission Facilities governing
Minnesota Power's work on the Minnesota portion of the Duluth-to-Wausau
transmission line. Petitions addressing the regulatory jurisdiction over the
agreement are currently being drafted. Construction on the transmission line in
Minnesota is expected to be completed in 2005.
On September 9, 2004 the MPUC dismissed a complaint that alleged that American
Transmission Company is the ultimate beneficiary and owner of the transmission
line in Minnesota and is not a jurisdictional utility under Minnesota law, and
that American Transmission Company lacks the power of eminent domain and the
ability to conduct business in Minnesota. The dismissed complaint alleged that
ultimate ownership of the line was not clear and that the technical aspects of
the line have changed significantly since the Minnesota Environmental Quality
Board approved Minnesota Power's exemption request to build the 12 miles of line
in Minnesota. The MPUC chose to assert jurisdiction over the issue of the
transfer of ownership of the Minnesota portion of the line to American
Transmission Company and directed Minnesota Power to make a filing that either
requests MPUC approval under state regulations or identifies why such approval
is not required.
ITEM 6. EXHIBITS
EXHIBIT
NUMBER
3(a)1 Articles of Incorporation, amended and restated as of May 8, 2001
(filed as Exhibit 3(b) to the March 31, 2001 Form 10-Q, File No.
1-3548).
3(a)2 Amendment to Articles of Incorporation, effective 12:00 p.m.
Eastern Time on September 20, 2004 (filed as Exhibit 3 to
the September 21, 2004 Form 8-K, File No. 1-3548).
4(a) Twenty-third Supplemental Indenture, dated as of August 1, 2004,
between ALLETE and The Bank of New York and Douglas J. MacInnes, as
Trustees.
4(b) Indenture of Trust, dated as of August 1, 2004, between the City of
Cohasset, Minnesota and U.S. Bank National Association, as Trustee
relating to $111 Million Collateralized Pollution Control Refunding
Revenue Bonds.
4(c) Loan Agreement, dated as of August 1, 2004, between the City of
Cohasset, Minnesota and ALLETE relating to $111 Million
Collateralized Pollution Control Refunding Revenue Bonds.
4(d) Certificate of Adjustment to the Rights Agreement as amended, dated
as of July 24, 1996, between Minnesota Power & Light Company (now
ALLETE) and the Corporate Secretary of the Company, as Rights
Agent.
+10(a) ALLETE Director Compensation Trust Agreement, effective October 11,
2004.
31(a) Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b) Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Section 1350 Certification of Periodic Report by the Chief
Executive Officer and Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
- ---------------
+ MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT.
31 ALLETE Third Quarter 2004 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 4, 2004 James K. Vizanko
-------------------------------------------------
James K. Vizanko
Senior Vice President and Chief Financial Officer
November 4, 2004 Mark A. Schober
-------------------------------------------------
Mark A. Schober
Senior Vice President and Controller
ALLETE Third Quarter 2004 Form 10-Q 32
EXHIBIT INDEX
EXHIBIT
NUMBER
- --------------------------------------------------------------------------------
4(a) Twenty-third Supplemental Indenture, dated as of August 1, 2004,
between ALLETE and The Bank of New York and Douglas J. MacInnes, as
Trustees.
4(b) Indenture of Trust, dated as of August 1, 2004, between the City of
Cohasset, Minnesota and U.S. Bank National Association, as Trustee
relating to $111 Million Collateralized Pollution Control Refunding
Revenue Bonds.
4(c) Loan Agreement, dated as of August 1, 2004, between the City of
Cohasset, Minnesota and ALLETE relating to $111 Million
Collateralized Pollution Control Refunding Revenue Bonds.
4(d) Certificate of Adjustment to the Rights Agreement as amended, dated
as of July 24, 1996, between Minnesota Power & Light Company (now
ALLETE) and the Corporate Secretary of the Company, as Rights Agent.
10(a) ALLETE Director Compensation Trust Agreement, effective October 11,
2004.
31(a) Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b) Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Section 1350 Certification of Periodic Report by the Chief Executive
Officer and Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
ALLETE Third Quarter 2004 Form 10-Q