Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 2001
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 1-3548
ALLETE, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0418150
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
30 WEST SUPERIOR STREET, DULUTH, MINNESOTA 55802-2093
(Address of principal executive offices including zip code)
(218) 279-5000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH STOCK EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------------
Common Stock, without par value New York Stock Exchange
8.05% Cumulative Quarterly Income
Preferred Securities of ALLETE
Capital I, a subsidiary of ALLETE New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of voting stock held by nonaffiliates on January 28,
2002 was $2,205,233,476.
As of January 28, 2002 there were 84,060,127 shares of ALLETE Common Stock,
without par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2002 Annual Meeting of Shareholders are
incorporated by reference in Part III.
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ALLETE 2001 Form 10-K 7
TABLE OF CONTENTS
PAGE
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DEFINITIONS ............................................................... 9
SAFE HARBOR STATEMENT ..................................................... 10
PART I
Item 1. Business ......................................................... 11
Energy Services .................................................. 12
Retail Electric Sales ....................................... 13
Purchased Power and Capacity Sales .......................... 14
Fuel ........................................................ 14
Wholesale Electric Sales .................................... 15
Regulatory Issues ........................................... 16
Competition ................................................. 17
Franchises .................................................. 17
Environmental Matters ....................................... 17
Automotive Services .............................................. 19
Competition ................................................. 21
Environmental Matters ....................................... 21
Investments and Corporate Charges ................................ 22
Environmental Matters ....................................... 22
Executive Officers of the Registrant ............................. 23
Item 2. Properties ....................................................... 24
Item 3. Legal Proceedings ................................................ 24
Item 4. Submission of Matters to a Vote of Security
Holders .......................................................... 24
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters .................................. 24
Item 6. Selected Financial Data .......................................... 25
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ....................................................... 27
Consolidated Overview ............................................ 27
Net Income ....................................................... 27
2001 Compared to 2000 ............................................ 28
2000 Compared to 1999 ............................................ 29
Outlook .......................................................... 29
Liquidity and Capital Resources .................................. 31
Capital Requirements ............................................. 33
Market Risk ...................................................... 34
New Accounting Standards ......................................... 34
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk ................................................ 35
Item 8. Financial Statements and Supplementary
Data ............................................................. 35
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure ....................................................... 35
PART III
Item 10. Directors and Executive Officers
of the Registrant ................................................ 35
Item 11. Executive Compensation ........................................... 35
Item 12. Security Ownership of Certain Beneficial
Owners and Management ............................................ 35
Item 13. Certain Relationships and Related
Transactions ..................................................... 35
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K .............................................. 36
SIGNATURES ................................................................ 40
CONSOLIDATED FINANCIAL STATEMENTS ......................................... 41
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8 ALLETE 2001 Form 10-K
DEFINITIONS
DEFINITIONS
The following abbreviations or acronyms are used in the text.
ABBREVIATION
OR ACRONYM TERM
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ACE ACE Limited
ADESA ADESA Corporation
ADESA Canada ADESA Canada Inc.
ADESA Importation ADESA Importation Services, Inc.
AFC Automotive Finance Corporation
ALLETE ALLETE, Inc. and its subsidiaries
APC Auto Placement Center
AutoVIN AutoVIN, Inc.
Blandin Paper Blandin Paper Company
BNI Coal BNI Coal, Ltd.
Boswell Boswell Energy Center
CAG Canadian Auction Group
Cape Coral Holdings Cape Coral Holdings, Inc.
Capital Re Capital Re Corporation
CIP Conservation Improvement Program(s)
Cleveland-Cliffs Cleveland-Cliffs Inc.
Company ALLETE, Inc. and its subsidiaries
ComSearch ComSearch, Inc.
EBITDAL Earnings Before Interest, Taxes,
Depreciation, Amortization and
Lease Expense
EndTrust EndTrust Lease End Services, LLC
Enventis Telecom Enventis Telecom, Inc.
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
Form 8-K ALLETE Current Report on Form 8-K
Form 10-K ALLETE Annual Report on Form 10-K
Form 10-Q ALLETE Quarterly Report on Form 10-Q
FPSC Florida Public Service Commission
Great River Great River Energy
Heater Heater Utilities, Inc.
Hibbard M.L. Hibbard Station
Impact Auto Impact Auto Auctions Ltd. and
Suburban Auto Parts Inc., collectively
Invest Direct ALLETE's Direct Stock Purchase and
Dividend Reinvestment Plan
kWh Kilowatthour(s)
kV Kilovolt(s)
Laskin Laskin Energy Center
Lehigh Lehigh Acquisition Corporation
LTV LTV Steel Mining Co.
Manheim Manheim Auctions, Inc.
MAPP Mid-Continent Area Power Pool
MBtu Million British thermal units
Minnesota Power An operating division of ALLETE, Inc.
Minnkota Power Minnkota Power Cooperative, Inc.
MISO Midwest Independent Transmission
System Operator Inc.
MP Telecom Minnesota Power Telecom, Inc.
MPUC Minnesota Public Utilities Commission
MW Megawatt(s)
MWh Megawatthour(s)
NCUC North Carolina Utilities Commission
Note___ Note___ to the consolidated financial
statements indexed in Item 14(a) of
this Form 10-K
NPDES National Pollutant Discharge
Elimination System
PAR PAR, Inc.
PSCW Public Service Commission of
Wisconsin
Rainy River Energy Rainy River Energy Corporation
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
WPPI Wisconsin Public Power, Inc.
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ALLETE 2001 Form 10-K 9
SAFE HARBOR STATEMENT
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 Annual Report on Form 10-K, 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:
- war and acts of terrorism;
- prevailing governmental policies and regulatory actions, including
those of the United States Congress, state legislatures, the FERC, the
MPUC, the FPSC, the NCUC, the PSCW and various county regulators, about
allowed rates of return, financings, industry and rate structure,
acquisition and disposal of assets and facilities, operation and
construction of plant facilities, recovery of purchased power and
capital investments, and present or prospective wholesale and retail
competition (including but not limited to transmission costs) as well
as general vehicle-related laws, including vehicle brokerage and
auction laws;
- unanticipated impacts of restructuring initiatives in the electric
industry;
- economic and geographic factors, including political and economic
risks;
- changes in and compliance with environmental and safety laws and
policies;
- weather conditions;
- population growth rates and demographic patterns;
- the effects of competition, including competition for retail and
wholesale customers, as well as suppliers and purchasers of
automobiles;
- pricing and transportation of commodities;
- market demand, including structural market changes;
- changes in tax rates or policies or in rates of inflation;
- unanticipated project delays or changes in project costs;
- unanticipated changes in operating expenses and capital expenditures;
- capital market conditions;
- competition for economic expansion or development opportunities;
- our ability to manage expansion and integrate recent acquisitions; and
- legal and administrative proceedings (whether civil or criminal) and
settlements that affect the business and profitability of ALLETE.
Any forward-looking statement speaks only as of the date on which 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.
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10 ALLETE 2001 Form 10-K
PART I
ITEM 1. BUSINESS
ALLETE is a diversified company incorporated under the laws of Minnesota since
1906. References in this report to "we" and "our" are to ALLETE and its
subsidiaries, collectively.
Our core operations in 42 states and nine Canadian provinces focus on two
segments:
ENERGY SERVICES includes electric and gas services, coal mining and
telecommunications; and
AUTOMOTIVE SERVICES includes a network of wholesale and "total loss" vehicle
auctions, a finance company, a vehicle remarketing company, a company that
provides vehicle inspection services to the automotive industry and its lenders,
and a company that provides Internet-based parts location and insurance claim
audit services nationwide.
Under INVESTMENTS AND CORPORATE CHARGES we capture our real estate operations,
investments in emerging technologies related to the electric utility industry, a
securities portfolio and corporate charges. Corporate charges represent general
corporate expenses, including interest, not specifically related to any one
business segment.
In September 2001 we initiated a strategic review of all of the Company's
businesses to identify ways of unlocking shareholder value not reflected in the
price of our common stock. During the review process certain businesses were
identified as having more value to potential purchasers than to us and have been
included in discontinued operations. Discontinued operations include water and
wastewater services in Florida, North Carolina and Georgia and our auto
transport company.
We anticipate selling our auto transport company by the end of first quarter
2002 and our Water Services businesses before the end of 2002. We anticipate
selling our Water Services businesses at a significant gain, providing us with
additional liquidity and financial strength. Net proceeds from these sales will
be used to fund growth initiatives and may be used to pay down debt.
As of December 31, 2001 we had approximately 14,000 employees, 4,000 of which
were part time.
In 2001 Energy Services purchased the electric generating facilities of LTV
(Taconite Harbor Energy Center) and is working to complete maintenance
activities and restart 225 MW of generation in the first half of 2002. In 2001
we initiated permitting for a planned 225-MW co-generation energy facility
adjacent to the Blandin Paper facility in Grand Rapids, Minnesota and the
proposed addition of 160 MW of generation in Wisconsin. Energy Services also
received significant regulatory approvals during 2001 to construct in
partnership with Wisconsin Public Service Corporation a 220-mile, 345-kV
transmission line from Duluth, Minnesota to Wausau, Wisconsin. In July 2001
Energy Services added Enventis Telecom, an integrated data services provider, to
its telecommunications business. (See Energy Services.)
In 2001 Automotive Services acquired one wholesale auction facility and
increased its "total loss" vehicle auctions by 13. These additions combined with
the acquisition of ComSearch, which provides Internet-based parts location and
insurance claim audit services, established ADESA as the third largest provider
of "total loss" vehicle services in North America.
In 2001 Investments reported record sales by its real estate operations.
YEAR ENDED DECEMBER 31 2001 2000 1999
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CONSOLIDATED OPERATING
REVENUE - Millions $1,528 $1,190 $996
PERCENTAGE OF CONSOLIDATED
OPERATING REVENUE
ENERGY SERVICES
Retail
Industrial
Taconite Producers 10% 14% 15%
Paper and Wood Products 4 5 6
Pipelines and Other Industries 3 3 3
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Total Industrial 17 22 24
Residential 5 6 6
Commercial 5 6 7
Sales to Other Power Suppliers 4 5 8
Other Revenue 10 10 11
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Total Energy Services 41 49 56
AUTOMOTIVE SERVICES 54 44 38
INVESTMENTS 5 7 6
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100% 100% 100%
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For a detailed discussion of results of operations and trends, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations. For business segment information, see Notes 1 and 2.
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ALLETE 2001 Form 10-K 11
ENERGY SERVICES
The businesses we include in Energy Services generate, transmit, distribute,
market and trade electricity. Coal mining and telecommunications are also
included. The discussion below summarizes the major businesses we include in
Energy Services. Statistical information is presented as of December 31, 2001.
All subsidiaries are wholly owned unless otherwise specifically indicated.
MINNESOTA POWER, a division of ALLETE, provides electricity in a 26,000 square
mile electric service territory located in northeastern Minnesota. Minnesota
Power supplies retail electric service to 131,000 customers and wholesale
electric service to 16 municipalities. SWL&P sells electricity and natural gas,
and provides water service in northwestern Wisconsin. SWL&P has 14,000 electric
customers, 12,000 natural gas customers and 10,000 water customers.
Minnesota Power had an annual net peak load of 1,376 MW on January 2, 2001. Our
power supply sources are shown below.
We have electric transmission and distribution lines of 500 kV (8 miles), 230 kV
(606 miles), 161 kV (43 miles), 138 kV (66 miles), 115 kV (1,259 miles) and less
than 115 kV (6,550 miles). We own and operate 178 substations with a total
capacity of 8,550 megavoltamperes. Some of our transmission and distribution
lines interconnect with other utilities.
We own offices and service buildings, an energy control center, and repair
shops, and lease offices and storerooms in various localities. Substantially all
of our electric plant is subject to mortgages which collateralize our
outstanding first mortgage bonds. Generally, our properties are held by the
Company in fee and are free from other encumbrances, subject to minor
exceptions. Some of our electric lines are located on land not owned in fee, but
are covered by necessary permits of governmental authorities or by appropriate
easement rights. WPPI owns 20% of Boswell Unit 4. WPPI has the right to use our
transmission line facilities to transport its share of generation. (See Note
14.)
In January 2002 Minnesota Power announced MPEX, our power marketing and trading
division which buys and sells capacity and energy in the wholesale power market,
will be transferred to Split Rock Energy. The transfer, which is expected to
occur in March 2002, will facilitate Split Rock Energy's plans to grow by adding
new members and providing trading and related services to others. Split Rock
Energy currently contracts for wholesale power marketing and trading services
exclusively from MPEX. During 2000 Minnesota Power and Great River formed Split
Rock Energy. With headquarters in Elk River, Minnesota, Great River is a
consumer-owned generation and transmission cooperative and is Minnesota's second
largest utility in terms of generating capacity. Split Rock Energy combines the
two companies' power supply capabilities and customer loads for power pool
operations and generation outage protection. Ownership of generation assets and
current customer supply arrangements have not changed for either company. Split
Rock Energy will continue to have access to members' resources, assets and
financial support.
FOR THE YEAR ENDED
UNIT YEAR NET WINTER DECEMBER 31, 2001
POWER SUPPLY NO. INSTALLED CAPABILITY ELECTRIC REQUIREMENTS
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MW MWh %
Steam
Coal-Fired
Boswell Energy Center
near Grand Rapids, MN 1 1958 69
2 1960 69
3 1973 351
4 1980 425
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914 6,154,537 52.9%
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Laskin Energy Center in Hoyt Lakes, MN 1 1953 55
2 1953 55
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110 659,278 5.7
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Purchased Steam
M.L. Hibbard in Duluth, MN 3 & 4 1949, 1951 49 58,802 0.5
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Total Steam 1,073 6,872,617 59.1
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Hydro
Group consisting of ten stations in MN Various 115 511,341 4.4
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Purchased Power
Square Butte burns lignite coal near Center, ND 322 1,933,302 16.6
All Other - Net - 2,310,849 19.9
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Total Purchased Power 322 4,244,151 36.5
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Total 1,510 11,628,109 100.0%
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12 ALLETE 2001 Form 10-K
BNI COAL owns and operates a lignite mine in North Dakota. Two electric
generating cooperatives, Minnkota Power and Square Butte, presently consume
virtually all of BNI Coal's production of lignite coal under cost-plus coal
supply agreements expiring in 2027. (See Fuel and Note 13.) A large dragline,
shop complex and other property at BNI Coal are leased under a leveraged lease
agreement that expires in 2002. During 2000 BNI Coal entered into an agreement
to purchase in 2002 all property and equipment subject to this lease for $4.7
million.
ENVENTIS TELECOM. Our telecommunications subsidiaries, MP Telecom and Enventis,
Inc. (acquired in July 2001), are being merged to operate as Enventis Telecom.
Enventis Telecom is an integrated data services provider offering fiber
optic-based communication and advanced data services to businesses and
communities in Minnesota and Wisconsin. Enventis Telecom provides converged IP
(or Internet protocol) services that allow all communications (voice, video and
data) to use the same delivery technology. Enventis Telecom owns or has rights
to approximately 1,500 route miles of fiber optic cable. These route miles
contain multiple fibers that total approximately 47,500 fiber miles. Enventis
Telecom also owns optronic and data switching equipment that is used to "light
up" the fiber optic cable and provides customer bandwidth services. Enventis
Telecom services customers from facilities that are primarily leased from third
parties.
RAINY RIVER ENERGY is engaged in the acquisition and development of merchant
generation and wholesale power marketing. Merchant generation is non-rate base
generation sold at wholesale at market-based rates, pursuant to authority from
the FERC.
RETAIL ELECTRIC SALES
Approximately 62% of the ore consumed by integrated steel facilities in the
United States originates from five taconite customers of Minnesota Power.
Taconite, an iron-bearing rock of relatively low iron content that is abundantly
available in Minnesota, is an important domestic source of raw material for the
steel industry. Taconite processing plants use large quantities of electric
power to grind the ore-bearing rock, and agglomerate and pelletize the iron
particles into taconite pellets. Annual taconite production in Minnesota was 33
million tons in 2001 (47 million tons in 2000; 43 million tons in 1999). The
decrease in 2001 taconite production was due to the closing of LTV, which was
not a Large Power Customer (defined below), and reduced demand for iron ore from
the operating mines as a result of high steel import levels and a softer
economy. Based on our research of the taconite industry, Minnesota taconite
production for 2002 is anticipated to be about 36 million tons. While taconite
production is currently expected to continue at annual levels of about 35
million tons, the longer-term outlook of this cyclical industry is less certain.
We expect any excess energy not used by our Large Power Customers will be
marketed through Split Rock Energy.
LARGE POWER CUSTOMER CONTRACTS. Minnesota Power has large power customer
contracts with 12 customers (Large Power Customers), each of which requires 10
MW or more of generating capacity. Large Power Customer contracts require
Minnesota Power to have a certain amount of generating capacity available. (See
table on next page.) In turn, each Large Power Customer is required to pay a
minimum monthly demand charge that covers the fixed costs associated with having
this capacity available to serve the customer, including a return on common
equity. Most contracts allow customers to establish the level of megawatts
subject to a demand charge on a bi-annual (power pool season) basis and require
that a portion of their megawatt needs be committed on a take-or-pay basis for
the entire term of the agreement. In addition to the demand charge, each Large
Power Customer is billed an energy charge for each kilowatthour used that
recovers the variable costs incurred in generating electricity. Six of the Large
Power Customers have interruptible service for a portion of their needs which
provides a discounted demand rate and energy priced at Minnesota Power's
incremental cost after serving all firm power obligations. Minnesota Power also
provides incremental production service for customer demand levels above the
contract take-or-pay levels. There is no demand charge for this service and
energy is priced at an increment above Minnesota Power's cost. Incremental
production service is interruptible. Contracts with 10 of the 12 Large Power
Customers provide for deferral without interest of one-half of demand charge
obligations incurred during the first three months of a strike or illegal
walkout at a customer's facilities, with repayment required over the 12-month
period following resolution of the work stoppage.
Each contract continues past the contract termination date unless the required
four-year advance notice of cancellation has been given. Such contracts minimize
the impact on earnings that otherwise would result from significant reductions
in kilowatthour sales to such customers. Large Power Customers are required to
purchase any electric service requirements from Minnesota Power for the duration
of their contracts. The rates and corresponding revenue associated with capacity
and energy provided under these contracts are subject to change through the same
regulatory process governing all retail electric rates. (See Regulatory Issues -
Electric Rates.)
MINIMUM REVENUE AND DEMAND UNDER CONTRACT
AS OF FEBRUARY 1, 2002
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MINIMUM MONTHLY
ANNUAL REVENUE MEGAWATTS
--------------------------------------------------------------
2002 $79.3 million 523
2003 $65.2 million 385
2004 $58.3 million 344
2005 $41.9 million 250
2006 $30.9 million 183
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BASED ON PAST EXPERIENCE AND PROJECTED OPERATING LEVELS, WE
BELIEVE REVENUE FROM LARGE POWER CUSTOMERS WILL BE
SUBSTANTIALLY IN EXCESS OF THE MINIMUM CONTRACT AMOUNTS.
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ALLETE 2001 Form 10-K 13
CONTRACT STATUS FOR MINNESOTA POWER LARGE POWER CUSTOMERS
AS OF FEBRUARY 1, 2002
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EARLIEST
CUSTOMER INDUSTRY LOCATION OWNERSHIP TERMINATION DATE
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Eveleth Mines LLC Taconite Eveleth, MN 45% Rouge Steel Co. October 31, 2008
40% AK Steel Co.
15% Stelco Inc.
Hibbing Taconite Co. Taconite Hibbing, MN 70.3% Bethlehem Steel Corp. December 31, 2008
15% Cleveland-Cliffs Inc.
14.7% Stelco Inc.
Ispat Inland Mining Company Taconite Virginia, MN Ispat Inland Steel Company December 31, 2007
National Steel Pellet Co. Taconite Keewatin, MN National Steel Corp. December 31, 2005
USX Corporation Taconite Mt. Iron, MN USX Corporation December 31, 2007
Blandin Paper Company Paper Grand Rapids, MN UPM-Kymmene Corporation April 30, 2006
Boise Cascade Corporation Paper International Falls, MN Boise Cascade Corporation December 31, 2002
Potlatch Corporation Paper, Pulp and Cloquet, MN Potlatch Corporation December 31, 2008
Wood Products Brainerd, MN
Grand Rapids, MN
Stora Enso North America, Paper and Pulp Duluth, MN Stora Enso July 31, 2008
Duluth Paper Mill and
Duluth Recycled Pulp Mill
USG Interiors, Inc. Manufacturer Cloquet, MN USG Corporation December 31, 2005
Enbridge Energy Company, Pipeline Deer River, MN Enbridge Energy Company, May 31, 2004
Limited Partnership Floodwood, MN Limited Partnership
Minnesota Pipeline Company Pipeline Staples, MN 60% Koch Pipeline Co. L.P. September 30, 2002
Little Falls, MN 40% Marathon Ashland
Park Rapids, MN Petroleum LLC
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PURCHASED POWER AND CAPACITY SALES
A purchase or sale is generally made to balance the supply or demand, thereby
capping the cost of power or fixing a margin. Minnesota Power's risk management
policy, contract provisions, operational flexibility, credit policy and
procedures for purchasing power to cap cost or fix margins are designed to
minimize Minnesota Power's risk and exposure in a market with volatile prices.
Minnesota Power has contracts to purchase capacity and energy from various
entities. The largest contract is with Square Butte. Under an agreement with
Square Butte, expiring at the end of 2026, Minnesota Power is currently entitled
to approximately 71% of the output of a 455-MW coal-fired generating unit
located near Center, North Dakota. (See Note 13.)
In October 2000 Minnesota Power entered into a power purchase agreement with
Great River. Under this agreement Minnesota Power purchased 240 MW beginning
June 2001 until April 2003 and 80 MW from May 2003 to April 2004 from Lakefield
Junction Station, a natural gas-fired peaking plant located in southern
Minnesota.
For capacity sales see Wholesale Electric Sales.
FUEL
Minnesota Power purchases low-sulfur, sub-bituminous coal from the Powder River
Basin coal field located in Montana and Wyoming. Coal consumption in 2001 for
electric generation at Minnesota Power's Minnesota coal-fired generating
stations was about 4.5 million tons. As of December 31, 2001 Minnesota Power had
a coal inventory of about 535,000 tons. Minnesota Power has four coal supply
agreements with Montana suppliers. Under these agreements Minnesota Power has
the tonnage flexibility to procure 70% to 100% of its total coal requirements.
Minnesota Power will obtain coal in 2002 under these agreements and in the spot
market. This mix of coal supply options allows Minnesota Power to manage market
price and supply risk and to take advantage of favorable spot market prices.
Minnesota Power is exploring future coal supply options and believes that
adequate supplies of low-sulfur, sub-bituminous coal will continue to be
available.
The Burlington Northern and Santa Fe Railway Company transports coal by unit
train from the Powder River Basin to Minnesota Power's generating stations. In
2001 Minnesota Power and Burlington Northern entered into a 10-year agreement
under which Burlington Northern will ship all of Minnesota Power's coal needs to
the Boswell Energy Center
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14 ALLETE 2001 Form 10-K
near Grand Rapids, Minnesota, to the Laskin Energy Center in Hoyt Lakes,
Minnesota, and to Taconite Harbor Energy Center near Schroeder, Minnesota,
through 2011.
COAL DELIVERED TO MINNESOTA POWER
YEAR ENDED DECEMBER 31 2001 2000 1999
---------------------------------------------------------------
Average Price Per Ton $20.52 $21.19 $20.60
Average Price Per MBtu $1.18 $1.16 $1.14
---------------------------------------------------------------
The Square Butte generating unit operated by Minnkota Power burns North Dakota
lignite coal supplied by BNI Coal, in accordance with the terms of a contract
expiring in 2027. Square Butte's cost of lignite burned in 2001 was
approximately 76 cents per MBtu. The lignite acreage that has been dedicated to
Square Butte by BNI Coal is located on lands essentially all of which are under
private control and presently leased by BNI Coal. This lignite supply is
sufficient to provide the fuel for the anticipated useful life of the generating
unit.
WHOLESALE ELECTRIC SALES
Minnesota Power has wholesale contracts with a number of municipal customers.
See Regulatory Issues - Federal Energy Regulatory Commission.)
In an increasingly volatile wholesale marketplace, Minnesota Power's Split Rock
Energy alliance mitigates marketplace risk while creating additional marketing
opportunities for both Minnesota Power and Great River. MPEX, which is expected
to transfer its operations to Split Rock Energy by March 2002, provides power
trading and marketing, energy sourcing and risk management services to Split
Rock Energy. Split Rock Energy's risk management policies are consistent with
Minnesota Power's.
In September 1999 Rainy River Energy entered into an amended 15-year power
purchase agreement with a company that was subsequently purchased by NRG Energy,
Inc., an independent power producer. The agreement includes the purchase of the
output of one entire unit (approximately 275 MW) of a four unit (approximately
1,100 MW) natural gas-fired combined cycle generation facility located near
Chicago, Illinois. Construction of the generation facility began in 2000 and
completion is expected in April 2002. Rainy River Energy will be obligated to
pay fixed capacity related charges beginning May 1, 2002. Rainy River Energy has
entered into a 15-year agreement to sell approximately 50 MW, has a 10-year
agreement to sell another 50 MW and is engaged in wholesale marketing of the
remaining electrical power. Under the terms of the resale agreements, the buyers
will pay a charge for capacity made available and energy delivered starting May
1, 2002 and procure their own fuel. Rainy River Energy plans to arrange for its
fuel supply through a blend of purchases including spot market and hedges
structured to match the wholesale marketing of the remaining electrical power.
It is currently expected that the agreement with NRG Energy, Inc. and resale
contracts will be transferred to Minnesota Power, which will market the
remaining wholesale power produced by this unit through Split Rock Energy.
Minnesota Power expects the agreement will enhance its ability to serve an
expanding customer base within the MISO region (See Regulatory Issues - Federal
Energy Regulatory Commission), as well as enable additional participation in the
wholesale bulk power marketplace.
In June 1999 Minnesota Power announced plans to build a natural gas-fired,
combustion turbine power plant near Superior, Wisconsin. Unavailability of
combustion turbines led to a decision to purchase near-term peaking capacity
from Great River's new Lakefield Junction Station for 2001 to 2004. In August
2001 Minnesota Power announced that its subsidiary, Rainy River Energy
Corporation - Wisconsin was proceeding with the permitting for a 160-MW merchant
peaking plant in Superior expected to be in service in late 2003. Rainy River
Energy Corporation - Wisconsin has sold 100 MW of the plant output under a
long-term contract.
In August 2001 Minnesota Power and UPM-Kymmene, the owner of Blandin Paper,
proposed a state-of-the-art energy facility adjacent to Blandin Paper in Grand
Rapids, Minnesota, through a partnering arrangement. A new company, Rapids Power
LLC, was created to own the facility. Rainy River Energy owns 71.5% of Rapids
Power and Blandin Paper owns 28.5%. Rapids Power plans to build a low-sulfur
sub-bituminous coal-fired generating facility designed to satisfy up to 40% of
its fuel requirements by burning renewable biomass fuel, such as wood waste. The
project, which is expected to cost Minnesota Power $200 million, is contingent
on timely receipt of necessary federal and state approvals and permits and final
approval by Blandin Paper and Minnesota Power.
In October 2001 Rainy River Energy completed a transaction with LTV and
Cleveland-Cliffs to acquire the 225-MW Taconite Harbor Energy Center and other
non-mining assets for $75 million. One of the three 75-MW units in this facility
was re-started for commercial operation in January 2002. The other units are
expected to be on-line by May 2002. Rainy River Energy has filed the necessary
market-based rate tariff applications with FERC to sell in the wholesale market
by Split Rock Energy. In December 2001 Minnesota Power requested approval from
the MPUC to acquire the ownership of the facility. Under Minnesota Power
ownership, the generation output would still be sold in the wholesale market and
it is anticipated that only in limited circumstances could some of the energy be
allocated to Minnesota Power customers through Split Rock Energy.
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ALLETE 2001 Form 10-K 15
REGULATORY ISSUES
We are exempt from regulation under the Public Utility Holding Company Act of
1935, except as to Section 9(a)(2) which relates to acquisition of securities of
public utility companies.
We are subject to the jurisdiction of various regulatory authorities. The MPUC
has regulatory authority over Minnesota Power's service area in Minnesota,
retail rates, retail services, issuance of securities and other matters. The
FERC has jurisdiction over the licensing of hydroelectric projects, the
establishment of rates and charges for the sale of electricity for resale and
transmission of electricity in interstate commerce, and certain accounting and
record keeping practices. The PSCW has regulatory authority over the retail
sales of electricity, water and gas by SWL&P. The MPUC, FERC and PSCW had
regulatory authority over 25%, 3% and 3%, respectively, of our 2001 consolidated
operating revenue.
ELECTRIC RATES. Minnesota Power has historically designed its electric service
rates based on cost of service studies under which allocations are made to the
various classes of customers. Nearly all retail sales include billing adjustment
clauses which adjust electric service rates for changes in the cost of fuel and
purchased energy, and recovery of current and deferred CIP expenditures.
In addition to Large Power Customer contracts, Minnesota Power also has
contracts with large industrial and commercial customers with monthly demands of
more than 2 MW but less than 10 MW of capacity. The terms of these contracts
vary depending upon the customer's demand for power and the cost of extending
Minnesota Power's facilities to provide electric service.
Minnesota Power requires that all large industrial and commercial customers
under contract specify the date when power is first required, and thereafter the
customer is billed for at least the minimum power for which they contracted.
These conditions are part of all contracts covering power to be supplied to new
large industrial and commercial customers and to current customers as their
contracts expire or are amended. All contracts provide that new rates which have
been approved by appropriate regulatory authorities will be substituted
immediately for existing rates, without regard to any unexpired term of the
existing contract. All rates and other contract terms are subject to approval by
appropriate regulatory authorities.
FEDERAL ENERGY REGULATORY COMMISSION. The FERC has jurisdiction over our
wholesale electric service and open access transmission service. Minnesota
Power's hydroelectric facilities, which are located in Minnesota, are licensed
by the FERC. (See Environmental Matters - Water.)
Minnesota Power has long-term contracts with 16 Minnesota municipalities
receiving wholesale electric service. Three contracts are for service through
2002 and 2005, while the other 13 are for service through at least 2007. The
contracts limit rate increases (including fuel costs) to about 2% per year on a
cumulative basis. In 2001 municipal customers purchased 688,000 MWh from
Minnesota Power.
Effective February 28, 2001 Minnesota Power and SWL&P became members of the MISO
pursuant to FERC's Order No. 2000 and Wisconsin state law. Minnesota Power and
SWL&P retain ownership of their respective transmission assets and control area
functions, but will operate their transmission network under the regional
operational control of the MISO and take and provide transmission service under
the MISO tariff. On December 19, 2001 FERC approved MISO as the nation's first
regional transmission organization (RTO) under Order No. 2000 criteria, noting
that it believes the MISO will benefit the public interest by enhancing the
reliability of the Midwest electric grid and facilitating and enhancing
wholesale competition. The MISO will accomplish this primarily through
standardization of rates, terms and conditions of transmission service over a
broad region encompassing all or parts of 20 states and one Canadian province,
and over 120,000 MW of generating capacity MISO operations are phasing in during
the first half of 2002.
Minnesota Power also participates in MAPP, a power pool operating in parts of
eight states in the Upper Midwest and in three provinces in Canada. MAPP
functions include a regional reliability council that maintains generation
reserve sharing requirements and a wholesale power and energy market committee.
MINNESOTA PUBLIC UTILITIES COMMISSION. Minnesota Power's retail rates are based
on a 1994 MPUC retail rate order that allows for an 11.6% return on common
equity dedicated to utility plant.
Minnesota requires investor owned electric utilities to spend a minimum of 1.5%
of gross annual retail electric revenue on conservation improvement programs
(CIP) each year. These investments are recovered from retail customers through a
billing adjustment and amounts included in retail base rates. The MPUC allows
utilities to accumulate, in a deferred account for future recovery, all CIP
expenditures as well as a carrying charge on the deferred account balance, which
was $0.3 million at December 31, 2001. During 1999 the Minnesota legislature
enacted Minnesota Power-supported legislation allowing customers with 20 MW or
more of connected load at one service point to opt out of the CIP minimum
spending requirements, and associated expense recovery, upon showing the MPUC
that they had implemented all reasonably available conservation measures. Opt
outs were approved in early 2000 for seven of Minnesota Power's industrial
customers. The 2000/2001 CIP investment goal was $2.7 million each year with
actual spending at $1.9 million and $2.6 million, respectively. Minnesota Power
has addressed the shortfall with the Minnesota Department of Commerce, the
agency with authority over CIP spending programs, and expects to resolve the
spending shortfall during 2002.
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16 ALLETE 2001 Form 10-K
Until 1999 the MPUC approved Minnesota Power's request to recover lost margins.
Lost margins represented energy sales lost over a five-year period due to
Minnesota Power's efforts to assist customers in conserving energy. Lost margin
recovery compensated utilities for reduced sales resulting from CIP activities.
In 1999 the MPUC denied Minnesota Power's request to recover $3.5 million of
lost margins related to 1998 CIP activities. Minnesota Power appealed the
decision to the Minnesota Court of Appeals. In December 2000 the court reversed
the MPUC's denial of Minnesota Power's 1998 lost margin claim. The court found
that the MPUC's action constituted retroactive ratemaking and was arbitrary and
capricious. The MPUC appealed the court's decision to the Minnesota Supreme
Court, which denied the appeal in February 2001. Minnesota Power subsequently
requested and was granted approval to recover the 1998 lost margins and
associated carrying charges during 2001. The recovery was completed in 2001.
PUBLIC SERVICE COMMISSION OF WISCONSIN. SWL&P's current retail rates are based
on a September 2001 PSCW retail rate order that allows for a 12.25% return on
common equity.
In 1999 Minnesota Power and Wisconsin Public Service Corporation (WPS) announced
plans to construct a 220-mile, 345-kV Duluth-to-Wausau electric transmission
line. The proposal, called "Power Up Wisconsin," is a direct response to former
Wisconsin Governor Thompson's call to address the pressing need for more
dependable electricity in Wisconsin and the Upper Midwest. In March 2001 the
Minnesota Environmental Quality Board (MEQB) approved the Minnesota portion of
the line. In August 2001 the PSCW unanimously agreed that construction of the
line is necessary and in October 2001 issued its written order that outlines the
details and route specifics of the line. Appeals are pending in Wisconsin.
Depending on the outcome of the pending appeals, the new transmission line could
be in service in 2005 at an estimated cost of $200 million. Approximately $30
million to $40 million of the estimated cost is for facilities in Minnesota that
may be owned by Minnesota Power.
The PSCW must approve the ownership, control and operation of any affiliated
wholesale merchant generating plants in Wisconsin. (See Wholesale Electric
Sales.)
COMPETITION
INDUSTRY RESTRUCTURING. The electric utility industry continues to restructure
itself in response to growing competition at both the wholesale and retail
levels. This restructuring has primarily affected Minnesota Power's wholesale
power marketing and trading activity through Split Rock Energy, discussed above.
New legislation and regulation that aims to maintain reliability, assure
adequate energy supply, and address wholesale price volatility while encouraging
wholesale competition is being considered at the federal level. Over one-half
the states representing approximately 70% of the United States population have
passed either legislation or regulation that initiates a process which may lead
to retail customer choice. These initiatives lack momentum in Minnesota and
Wisconsin. Legislative and regulatory activity, as well as the actions of
competitors affect the way Minnesota Power strategically plans for its future.
We cannot predict the timing or substance of any future legislation or
regulation.
FRANCHISES
Minnesota Power holds franchises to construct and maintain an electric
distribution and transmission system in 90 cities and towns located within its
electric service territory. SWL&P holds franchises in 15 cities and towns within
its service territory. The remaining cities and towns served do not require a
franchise to operate within their boundaries.
ENVIRONMENTAL MATTERS
Certain businesses included in our Energy Services segment are subject to
regulation by various federal, state and local authorities about air quality,
water quality, solid wastes and other environmental matters. We consider these
businesses to be in substantial compliance with those environmental regulations
currently applicable to their operations and believe all necessary permits to
conduct such operations have been obtained. We do not currently anticipate that
potential capital expenditures for environmental matters will be material.
However, because environmental laws and regulations are constantly evolving, the
character, scope and ultimate costs of environmental compliance cannot be
estimated.
AIR. Minnesota Power's generating facilities in Minnesota burn mainly low-sulfur
western coal and Square Butte, located in North Dakota, burns lignite coal. All
of these facilities are equipped with pollution control equipment such as
scrubbers, baghouses or electrostatic precipitators. The federal Clean Air Act
Amendments of 1990 (Clean Air Act) created emission allowances for sulfur
dioxide. Each allowance is an authorization to emit one ton of sulfur dioxide,
and each utility must have sufficient allowances to cover its annual emissions.
Sulfur dioxide emission requirements are currently being met by all of Minnesota
Power's generating facilities, creating a surplus allowance situation for
Minnesota Power. Square Butte anticipates meeting its sulfur dioxide
requirements through increased use of existing scrubbers and by annually
purchasing additional allowances as necessary.
In accordance with the Clean Air Act, the EPA has established nitrogen oxide
limitations for electric generating units. To meet nitrogen oxide limitations,
Minnesota Power installed advanced low-emission burner technology and associated
control equipment to operate the Boswell and Laskin facilities at or below the
compliance emission limits. Nitrogen oxide limitations at Square Butte are being
met by
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ALLETE 2001 Form 10-K 17
combustion tuning. Minnesota Power has obtained all necessary Title V air
operating permits from the Minnesota Pollution Control Agency for its applicable
facilities to conduct electric operations.
In December 2000 the EPA announced their decision to regulate mercury emissions
from coal and oil-fired power plants under Section 112 of the Clean Air Act.
Section 112 will require all such power plants in the United States to adhere to
the EPA maximum achievable control technology (MACT) standards for mercury. The
EPA's announcements clarified that the EPA will establish applicable mercury
MACT standards through a four-year rule-making and public comment period, giving
consideration to factors such as a facility's installed design and operation.
Final regulations defining control requirements are planned for December 2004.
Cost estimates are premature at this time.
In December 2000 Minnesota Power received a request from the EPA, under Section
114 of the Clean Air Act, seeking 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 are
unable to predict whether the EPA will take any further action on this matter or
whether Minnesota Power will be required to incur any costs as a result. An EPA
statement on prospective New Source Review revisions is expected in early 2002.
WATER. The Federal Water Pollution Control Act of 1972 (FWPCA), as amended by
the Clean Water Act of 1977 and the Water Quality Act of 1987, established the
National Pollutant Discharge Elimination System (NPDES) permit program. The
FWPCA requires NPDES permits to be obtained from the EPA (or, when delegated,
from individual state pollution control agencies) for any wastewater discharged
into navigable waters. Minnesota Power has obtained all necessary NPDES permits,
including NPDES storm water permits for applicable facilities, to conduct its
electric operations.
Minnesota Power holds FERC licenses authorizing the ownership and operation of
seven hydroelectric generating projects with a total generating capacity of
about 118 MW. In June 1996 Minnesota Power filed in the U.S. Court of Appeals
for the District of Columbia Circuit a petition for review of the license as
issued by the FERC for Minnesota Power's St. Louis River Hydro Project. Separate
petitions for review were also filed by the U.S. Department of the Interior and
the Fond du Lac Band of Lake Superior Chippewa (Fond du Lac Band), two
intervenors in the licensing proceedings. The court consolidated the three
petitions for review and suspended the briefing schedule while Minnesota Power
and the Fond du Lac Band negotiate the reasonable fee for use of tribal lands as
mandated by the new license. Both parties informed the court that these
negotiations may resolve other disputed issues, and they are obligated to report
to the court periodically the status of these discussions. Beginning in 1996,
and most recently in January 2002, Minnesota Power filed requests with the FERC
for extensions of time to comply with certain plans and studies required by the
license that might conflict with the settlement discussions. In 2001 the Fond du
Lac Band and Minnesota Power reached a confidential settlement agreement for the
St. Louis River Hydro Project. The Fond du Lac Band and Minnesota Power have
included the U.S. Department of Interior in the settlement process in an effort
to achieve a comprehensive agreement with all intervening parties to the project
license. Any final settlement must be approved by the FERC, who would then amend
the project license in accordance with the settlement agreement.
SOLID AND HAZARDOUS WASTE. The Resource Conservation and Recovery Act of 1976
regulates the management and disposal of solid wastes and hazardous wastes. As a
result of this legislation, the EPA has promulgated various hazardous waste
rules. Minnesota Power is required to notify the EPA of hazardous waste activity
and routinely submits the necessary annual reports to the EPA.
Rainy River Energy is in the permitting process to construct, in early 2002, a
dry ash disposal landfill to handle ash generated from the Taconite Harbor
Energy Center at a cost estimated to be $800,000.
In response to EPA Region V's request for utilities to participate in the Great
Lakes Initiative by voluntarily removing remaining polychlorinated biphenyl
(PCB) inventories, Minnesota Power has scheduled replacement of PCB-contaminated
oil by the end of 2004. The total cost is expected to be between $2.5 million
and $3 million, of which $1.1 million was spent through December 31, 2001.
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18 ALLETE 2001 Form 10-K
AUTOMOTIVE SERVICES
Automotive Services includes several subsidiaries that are integral parts of the
vehicle redistribution business. Vehicle sales within the auto auction industry
are expected to rise at a rate of 2% to 3% annually through 2003. Automotive
Services plans to grow through increased sales at existing businesses, selective
acquisitions in both wholesale and "total loss" vehicle auction facilities,
integration of "total loss" vehicle services at certain wholesale vehicle
auction facilities and expansion of services to customers. The discussion below
summarizes the major businesses we include in Automotive Services. Statistical
information is presented as of December 31, 2001. All subsidiaries are wholly
owned.
ADESA is the second largest wholesale vehicle auction network in North America.
Headquartered in Indianapolis, Indiana, ADESA owns (or leases) and operates 53
wholesale vehicle auction facilities in the United States and Canada through
which used cars and other vehicles are sold to franchised automobile dealers and
licensed used car dealers. Sellers at ADESA's auctions include domestic and
foreign auto manufacturers, car dealers, automotive fleet/lease companies, banks
and finance companies.
The table on the next page lists the vehicle auctions owned or leased by ADESA.
Each auction has a multi-lane, drive-through auction facility, as well as
additional buildings for reconditioning, registration, maintenance, bodywork,
and other ancillary and administrative services. Each auction also has secure
parking areas to store vehicles for auction.
ADESA IMPACT in the U.S. and IMPACT AUTO in Canada, collectively ADESA Impact,
represent the third largest "total loss" vehicle service business in North
America. They provide "total loss" vehicle services to the property and casualty
insurance industry, and vehicle leasing and rental car companies. ADESA Impact
provides "total loss" vehicle claim services such as vehicle appraisals,
inspections, evaluations, titling and settlement administration to its clients.
Auto imaging, Internet bidding and vehicle enhancement services are provided
through an array of "total loss" management programs. ADESA Impact has 23 "total
loss" auction facilities in the United States and Canada. United States
operations are based in Rhode Island and Canadian operations are headquartered
in Toronto.
COMSEARCH provides professional claim outsourcing services to the property and
casualty insurance industry and is the nation's largest automobile recycled part
locating service, processing over 100,000 part searches a month. Our locating
service has over 2,300 customers. ComSearch's services compliment ADESA Impact's
business. ComSearch is headquartered in Warren, Rhode Island.
AFC provides inventory financing for wholesale and retail automobile dealers who
purchase vehicles from ADESA auctions, independent auctions, other auction
chains and outside sources. AFC is headquartered in Indianapolis, Indiana, and
has 82 loan production offices at or near auto auctions across North America.
These offices provide qualified dealers credit to purchase vehicles at any of
the 400 plus auctions approved by AFC. AFC's computer-based system follows each
loan from origination to payoff and allows AFC to better manage its business,
while expediting services through its branch network to 18,000 registered
dealers.
PAR, which is doing business as PAR North America, provides customized vehicle
remarketing services to various companies such as banks, non-prime finance
companies, captive finance, leasing companies, commercial fleets and rental car
companies throughout the United States. PAR's services include nationwide
repossessions, remarketing, pre- and post-term lease-end management, 50-state
titling services and Canadian registrations turned to U.S. titles. PAR offers
its telemarketing service through its affiliate company, EndTrust. PAR, together
with another affiliate company ADESA Importation, offer a complete range of
vehicle importation services. PAR has its headquarters in Carmel, Indiana.
AUTOVIN provides technology-enabled vehicle inspection services and inventory
auditing to the automotive industry and the industry's secured lenders.
AutoVIN's services include vehicle condition reporting, inventory verification
auditing, program compliance auditing and facility inspection. AutoVIN works
closely with AFC to offer auto dealers one-stop shopping for financial and
information services.
ADESA IMPORTATION is headquartered in Holly, Michigan, with additional
facilities in Buffalo, New York; Grand Forks, North Dakota; Sweetgrass, Montana;
and Blaine, Washington. ADESA Importation is the largest independent, commercial
registered importer of vehicles in the United States. It provides a full range
of importation services, including marshalling, transportation, brokerage,
titling, tax processing and speedometer/odometer conversions from metric to the
U.S. measuring system.
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ALLETE 2001 Form 10-K 19
YEAR NUMBER OF
STATE/ OPERATIONS AUCTION
ADESA AUCTIONS CITY PROVINCE COMMENCED LANES
------------------------------------------------------------------------------------------------------------------------------
UNITED STATES
ADESA Birmingham Moody Alabama 1987 10
ADESA Phoenix Chandler Arizona 1988 12
ADESA Central Arkansas Beebe Arkansas 1987 6
ADESA Little Rock Little Rock Arkansas 1984 10
ADESA Los Angeles Mira Loma California 2000 6
ADESA Sacramento Fremont California 1997 5
ADESA San Diego San Diego California 1982 6
ADESA Golden Gate San Francisco California 1985 6
ADESA Colorado Springs Colorado Springs Colorado 1982 5
ADESA Clearwater Clearwater Florida 1972 4
ADESA Jacksonville Jacksonville Florida 1996 6
ADESA Ocala Ocala Florida 1996 5
ADESA Orlando-Sanford Sanford Florida 1987 8
ADESA Tampa Tampa Florida 1989 8
ADESA Atlanta Newnan Georgia 1986 6
ADESA Southern Indiana Edinburgh Indiana 1997 3
ADESA Indianapolis Plainfield Indiana 1983 10
ADESA Des Moines Grimes Iowa 1967 5
ADESA Lexington Lexington Kentucky 1982 6
ADESA Ark-La-Tex Shreveport Louisiana 1979 5
ADESA Concord Acton Massachusetts 1947 5
ADESA Boston Framingham Massachusetts 1995 11
ADESA Lansing Dimondale Michigan 1976 5
ADESA St. Louis Barnhart Missouri 1987 3
ADESA Kansas City Lee's Summit Missouri 1963 7
ADESA New Jersey Manville New Jersey 1996 8
ADESA Buffalo Akron New York 1992 10
ADESA Charlotte Charlotte North Carolina 1994 10
ADESA Cincinnati/Dayton Franklin Ohio 1986 8
ADESA Cleveland Northfield Ohio 1994 8
ADESA Tulsa Tulsa Oklahoma 1987 6
ADESA Pittsburgh Mercer Pennsylvania 1971 7
ADESA Knoxville Lenoir City Tennessee 1984 6
ADESA Memphis Memphis Tennessee 1990 6
ADESA Austin Austin Texas 1990 6
ADESA Houston Houston Texas 1995 8
ADESA Dallas Mesquite Texas 1990 8
ADESA San Antonio San Antonio Texas 1989 8
ADESA Seattle Auburn Washington 1984 4
ADESA Wisconsin Portage Wisconsin 1984 5
CANADA
ADESA Calgary Airdrie Alberta 2000 4
ADESA Edmonton Edmonton Alberta 1988 3
ADESA Vancouver New Westminster British Columbia 1972 7
CAG Vancouver Surrey British Columbia 1986 2
ADESA Winnipeg Winnipeg Manitoba 1987 4
ADESA Moncton Moncton New Brunswick 1987 2
ADESA St. John's St. John's Newfoundland 1994 1
ADESA Halifax Enfield Nova Scotia 1993 5
ADESA Kitchener Ayr Ontario 1988 4
ADESA Toronto Brampton Ontario 1987 6
ADESA Ottawa Vars Ontario 1990 5
ADESA Montreal St. Eustache Quebec 1974 12
ADESA Saskatoon Saskatoon Saskatchewan 1980 2
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LEASED AUCTION FACILITIES. (SEE NOTE 7.)
ADESA OWNS 51% OF THIS AUCTION BUSINESS.
ADESA OWNS 80% OF THIS AUCTION BUSINESS.
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20 ALLETE 2001 Form 10-K
COMPETITION
Within the automobile auction industry, ADESA's competition includes
independently owned auctions, as well as a major chain and associations with
auctions in geographic proximity. ADESA competes with these other auctions for a
supply of vehicles to be sold on consignment for automobile dealers, financial
institutions and other sellers. ADESA also competes for a supply of rental
repurchase vehicles from automobile manufacturers for auction at factory sales.
Automobile manufacturers often choose between auctions across multi-state areas
in distributing rental repurchase vehicles. ADESA competes for these customers
by attempting to attract a large number of dealers to purchase vehicles, which
ensures competitive prices and supports the volume of vehicles auctioned. ADESA
is also competitive by providing a full range of automotive services, including
dealer inventory financing, reconditioning services that prepare vehicles for
auction and processing of sales transactions.
ADESA utilizes e-commerce as another component in its array of services. Dealers
are provided training on how to use on-line products, including the purchase of
vehicles on-line. The dealers can also access auction runlists and other market
report information offered on ADESA's website, www.ADESA.com. ADESA believes it
has a competitive advantage in a small but growing segment of the used vehicle
market combining on-line services with auction facilities and knowledgeable
auction personnel located across North America.
AFC is the largest provider of dealer floorplan financing to independent
automobile dealers in North America. AFC's competition includes other specialty
lenders, banks and other financial institutions. AFC has distinguished itself
from its competitors by convenience of payment, quality of service and scope of
services offered.
PAR provides customized remarketing services throughout North America. Although
other providers are larger in size and volume, PAR's competition comes from a
handful of similar service providers, none of which offer as many diverse
services. PAR offers an interactive website, electronically connecting customers
with its services. In 2001 PAR included interactive connection with repossession
agents and auction vendor networks. PAR's affiliation with EndTrust gives it a
competitive edge in gaining market share in the lease-end management services
arena. Another area that distinguishes PAR from its competition is ADESA
Importation.
ADESA Impact's competition is primarily two major investor owned "total loss"
auction businesses that are located across the United States. We believe through
strategic acquisitions, shared facilities with ADESA, and greenfield expansion
that ADESA Impact can become a prominent "total loss" services provider to the
insurance industry in the United States. In Canada, ADESA Impact is the largest
provider of "total loss" vehicle services. Its competitors include auto
recyclers and dismantlers, independent auto auctions, brokers and Internet
auction companies. ADESA Impact believes it is strategically positioned in this
niche market in providing a full array of value-added services to its insurance
clients including Internet programs, data analyses, consultation and "total
loss" vehicle services throughout North America.
ENVIRONMENTAL MATTERS
Certain businesses in our Automotive Services segment are subject to regulation
by various federal, state and local authorities concerning air quality, water
quality, solid wastes and other environmental matters. We consider these
businesses to be in substantial compliance with those environmental regulations
currently applicable to their operations and believe all necessary permits to
conduct such operations have been obtained. We do not currently anticipate that
potential capital expenditures for environmental matters will be material.
However, because environmental laws and regulations are constantly evolving, the
character, scope and ultimate costs of environmental compliance cannot be
estimated.
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ALLETE 2001 Form 10-K 21
INVESTMENTS AND CORPORATE CHARGES
Our Investments and Corporate Charges segment consists of real estate
operations, investments in emerging technologies related to the electric utility
industry, a securities portfolio and corporate charges. Corporate Charges
represent general corporate expenses, including interest, not specifically
related to any one business segment. The discussion below summarizes the major
components of Investments. Statistical information is presented as of December
31, 2001 unless otherwise noted. All subsidiaries are wholly owned unless
otherwise specifically indicated.
REAL ESTATE OPERATIONS. Our real estate operations include CAPE CORAL HOLDINGS;
PALM COAST LAND, LLC; PALM COAST FOREST, LLC; WINTER HAVEN CITI CENTRE, LLC; and
an 80% ownership in LEHIGH. Through subsidiaries, we own Florida real estate
operations in five different locations:
- Lehigh Acres with 1,000 acres of land and approximately 400 home sites
adjacent to Fort Myers, Florida;
- Sugarmill Woods with 420 home sites in Citrus County, Florida;
- Palm Coast with 1,300 home sites and 16,000 acres of residential,
commercial and industrial land at Palm Coast, Florida. Palm Coast is a
planned community between St. Augustine and Daytona Beach;
- Winter Haven, located in central Florida, with a retail shopping center
located on a 30-acre site and three out parcels of land that are
available for sale; and
- Cape Coral, also located adjacent to Fort Myers, Florida, with 325
acres of commercial and residential zoned land, including home sites
and commercial buildings.
Our real estate operations may, from time to time, acquire packages of
diversified properties at low cost, add value through entitlements and
infrastructure enhancements and sell the properties at current market prices.
EMERGING TECHNOLOGY INVESTMENTS. Since 1985 we have invested $46.4 million in
start-up companies which are developing technologies that may be utilized by the
electric utility industry. We are committed to invest an additional $11.0
million through 2008. The investments were first made through emerging
technology funds (Funds) initiated by other electric utilities and us. More
recently, we have made investments directly in privately held companies. The
majority of our direct investments relate to distributed generation technology,
such as micro generation and fuel cell technology. Many of these direct
investments are also in the Funds' portfolios.
The Funds have also made investments in companies that develop advanced
technologies to be used by the utility industry, including electrotechnologies,
renewable energy technologies, and software and communications technologies
related to utility customer support systems.
Several of the companies in the Funds' portfolios completed initial public
offerings (IPOs) in 2000. Subsequent to the public trading of the IPO companies,
the Funds will, in some instances, distribute publicly tradable shares to us.
Some restrictions on sale may apply, including, but not limited to, underwriter
lock-up periods that typically extend for 180 days following an IPO. As
companies included in our emerging technology investments are sold, we will
recognize a gain or loss. Portions of any proceeds received on these investments
may be reinvested back into companies to encourage development of future
technology.
Since going public, the market value of the publicly traded investments has
experienced significant volatility. Our investment in the companies that have
gone public had a cost basis of approximately $12 million at December 31, 2001
($12 million at December 31, 2000). The aggregate market value of these
investments at December 31, 2001 was approximately $24 million ($52 million at
December 31, 2000).
SECURITIES PORTFOLIO. Our securities portfolio is managed by selected outside
managers as well as internal managers. It is intended to provide stable earnings
and liquidity. Proceeds from the securities portfolio are available for
investment in existing businesses, to fund strategic initiatives and for other
corporate purposes. Our investment in the securities portfolio at December 31,
2001 was $156 million ($91 million at December 31, 2000).
ENVIRONMENTAL MATTERS
Certain businesses included in our Investments and Corporate Charges segment are
subject to regulation by various federal, state and local authorities concerning
air quality, water quality, solid wastes and other environmental matters. We
consider these businesses to be in substantial compliance with those
environmental regulations currently applicable to their operations and believe
all necessary permits to conduct such operations have been obtained. We do not
currently anticipate that potential capital expenditures for environmental
matters will be material. However, because environmental laws and regulations
are constantly evolving, the character, scope and ultimate costs of
environmental compliance cannot be estimated.
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22 ALLETE 2001 Form 10-K
EXECUTIVE OFFICERS OF THE REGISTRANT
INITIAL
EXECUTIVE OFFICERS EFFECTIVE DATE
---------------------------------------------------------------------------------------------------------------------------
DAVID G. GARTZKE, Age 58
Chairman, President and Chief Executive Officer January 23, 2002
President August 28, 2001
Senior Vice President - Finance and Chief Financial Officer December 1, 1994
DONNIE R. CRANDELL, Age 58
Executive Vice President - ALLETE;
President - ALLETE Water Services, Inc.; and
President and Chief Executive Officer - Florida Water September 6, 2001
Executive Vice President - ALLETE and President - ALLETE Properties, Inc. January 15, 1999
Senior Vice President - ALLETE and President - ALLETE Properties, Inc. January 1, 1996
ROBERT D. EDWARDS, Age 57
Executive Vice President - ALLETE and
Chief Executive Officer - Minnesota Power December 19, 2001
Executive Vice President - ALLETE and President - Minnesota Power July 26, 1995
BRENDA J. FLAYTON, Age 46
Vice President - Human Resources July 22, 1998
JAMES P. HALLETT, Age 48
Executive Vice President - ALLETE and
President and Chief Executive Officer - ALLETE Automotive Services, Inc. November 5, 2001
Executive Vice President - ALLETE and Chief Executive Officer - ADESA October 1, 2001
Executive Vice President - ALLETE and President and Chief Executive Officer - ADESA April 23, 1997
President and Chief Executive Officer - ADESA August 21, 1996
President - ADESA Canada Inc. May 26, 1994
PHILIP R. HALVERSON, Age 53
Vice President, General Counsel and Secretary January 1, 1996
DAVID P. JERONIMUS, Age 59
Vice President - Environmental Services - ALLETE and
Senior Vice President - Environmental Services - Minnesota Power January 1, 2002
Vice President - Environmental Services - ALLETE February 1, 1999
MARK A. SCHOBER, Age 46
Vice President and Controller April 18, 2001
Controller March 1, 1993
TIMOTHY J. THORP, Age 47
Vice President - Investor Relations and Corporate Communications November 16, 2001
JAMES K. VIZANKO, Age 48
Vice President, Chief Financial Officer and Treasurer August 28, 2001
Vice President and Treasurer April 18, 2001
Treasurer March 1, 1993
CLAUDIA SCOTT WELTY, Age 49
Vice President - Information Technology February 1, 1999
Vice President - Support Services July 1, 1995
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ALLETE 2001 Form 10-K 23
All of the executive officers have been employed by us for more than five years
in executive or management positions. In the five years prior to election to the
positions shown on the previous page, Ms. Flayton was director of human
resources, Mr. Jeronimus was director of environmental resources and Mr. Thorp
was director of investor relations.
There are no family relationships between any of the executive officers. All
officers and directors are elected or appointed annually.
The present term of office of the executive officers listed on the previous page
extends to the first meeting of our Board of Directors after the next annual
meeting of shareholders. Both meetings are scheduled for May 14, 2002.
ITEM 2. PROPERTIES
Properties are included in the discussion of our business in Item 1. and are
incorporated by reference herein.
ITEM 3. LEGAL PROCEEDINGS
Material legal and regulatory proceedings are included in the discussion of our
business in Item 1. and are incorporated by reference herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2001.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
We have paid dividends without interruption on our common stock since 1948. A
quarterly dividend of $0.275 per share on our common stock will be paid on March
1, 2002 to the holders of record on February 15, 2002. Our common stock is
listed on the New York Stock Exchange under the symbol ALE. Dividends paid per
share, and the high and low prices for our common stock for the periods
indicated as reported by the New York Stock Exchange on its NYSEnet website, are
in the accompanying chart.
The amount and timing of dividends payable on our common stock are within the
sole discretion of our Board of Directors. In 2001 we paid out 59% of our per
share earnings in dividends.
Our Articles of Incorporation, and Mortgage and Deed of Trust contain provisions
which under certain circumstances would restrict the payment of common stock
dividends. As of December 31, 2001 no retained earnings were restricted as a
result of these provisions. At January 31, 2002 there were approximately 39,000
common stock shareholders of record.
Price Range
------------------------- Dividends
Quarter High Low Paid
------------------------------------------------------------------------------
2001 - First $26.00 $20.19 $0.2675
Second 26.13 22.04 0.2675
Third 26.89 21.50 0.2675
Fourth 25.85 21.14 0.2675
------------------------------------------------------------------------------
Annual Total $1.07
------------------------------------------------------------------------------
2000 - First $18.06 $14.75 $0.2675
Second 20.75 16.00 0.2675
Third 24.25 17.31 0.2675
Fourth 25.50 20.13 0.2675
------------------------------------------------------------------------------
Annual Total $1.07
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24 ALLETE 2001 Form 10-K
ITEM 6. SELECTED FINANCIAL DATA
Operating results of our Water Services businesses and auto transport company
are included in discontinued operations and, accordingly, amounts have been
adjusted for all periods presented. Common share and per share amounts have also
been adjusted for all periods to reflect our March 2, 1999 two-for-one common
stock split.
BALANCE SHEET 2001 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------------------------
Millions
ASSETS
Current Assets $ 869.5 $ 692.2 $ 521.6 $ 459.4 $ 363.9 $ 319.6
Discontinued Operations - Current 40.4 38.8 42.9 28.1 21.4 14.8
Property, Plant and Equipment 1,324.0 1,201.9 1,003.4 955.6 948.3 959.4
Investments 141.0 116.4 197.2 263.5 252.9 236.5
Goodwill 494.4 472.8 181.0 169.8 158.9 167.0
Other Assets 103.6 87.3 82.4 91.2 98.9 103.4
Discontinued Operations - Other 309.6 304.6 284.1 241.3 242.0 249.6
-----------------------------------------------------------------------------------------------------------------------------------
$3,282.5 $2,914.0 $2,312.6 $2,208.9 $2,086.3 $2,050.3
-----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities $ 658.7 $ 661.6 $ 366.1 $ 326.3 $ 317.8 $ 319.0
Discontinued Operations - Current 45.8 45.4 32.2 19.7 24.8 20.7
Long-Term Debt 933.8 817.2 577.9 540.6 553.0 605.4
Other Liabilities 270.3 257.5 265.2 286.0 288.9 287.5
Discontinued Operations - Other 155.1 156.5 158.9 144.2 145.3 100.4
Mandatorily Redeemable Preferred
Securities of ALLETE Capital I 75.0 75.0 75.0 75.0 75.0 75.0
Redeemable Preferred Stock - - 20.0 20.0 20.0 20.0
Stockholders' Equity 1,143.8 900.8 817.3 797.1 661.5 622.3
-----------------------------------------------------------------------------------------------------------------------------------
$3,282.5 $2,914.0 $2,312.6 $2,208.9 $2,086.3 $2,050.3
-----------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
-----------------------------------------------------------------------------------------------------------------------------------
Millions
OPERATING REVENUE
Energy Services $ 620.8 $ 589.5 $ 554.5 $ 559.8 $ 541.9 $ 529.2
Automotive Services 832.1 522.6 383.2 305.5 242.4 171.9
Investments 74.8 77.4 57.8 55.5 60.7 48.6
-----------------------------------------------------------------------------------------------------------------------------------
1,527.7 1,189.5 995.5 920.8 845.0 749.7
-----------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Fuel and Purchased Power 233.1 229.0 200.2 205.7 194.1 190.9
Operations 1,012.1 730.6 598.8 541.0 495.3 435.7
Interest Expense 74.7 58.8 49.5 54.6 53.2 49.6
-----------------------------------------------------------------------------------------------------------------------------------
1,319.9 1,018.4 848.5 801.3 742.6 676.2
-----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME BEFORE CAPITAL RE AND ACE 207.8 171.1 147.0 119.5 102.4 73.5
INCOME (LOSS) FROM INVESTMENT IN CAPITAL RE
AND RELATED DISPOSITION OF ACE - 48.0 (34.5) 15.2 14.8 11.8
-----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME FROM CONTINUING OPERATIONS 207.8 219.1 112.5 134.7 117.2 85.3
DISTRIBUTIONS ON REDEEMABLE PREFERRED
SECURITIES OF ALLETE CAPITAL I 6.0 6.0 6.0 6.0 6.0 4.7
INCOME TAX EXPENSE 73.2 76.2 50.3 48.6 42.0 16.9
-----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 128.6 136.9 56.2 80.1 69.2 63.7
INCOME FROM DISCONTINUED OPERATIONS 10.1 11.7 11.8 8.4 8.4 5.5
-----------------------------------------------------------------------------------------------------------------------------------
NET INCOME 138.7 148.6 68.0 88.5 77.6 69.2
PREFERRED DIVIDENDS - 0.9 2.0 2.0 2.0 2.4
-----------------------------------------------------------------------------------------------------------------------------------
EARNINGS AVAILABLE FOR COMMON STOCK 138.7 147.7 66.0 86.5 75.6 66.8
COMMON STOCK DIVIDENDS 81.8 74.5 73.0 65.0 62.5 59.6
-----------------------------------------------------------------------------------------------------------------------------------
RETAINED (DEFICIT) IN THE BUSINESS $ 56.9 $ 73.2 $ (7.0) $ 21.5 $ 13.1 $ 7.2
-----------------------------------------------------------------------------------------------------------------------------------
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ALLETE 2001 Form 10-K 25
2001 2000 1999 1998 1997 1996
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SHARES OUTSTANDING - Millions
Year-End 83.9 74.7 73.5 72.3 67.1 65.5
Average
Basic 75.8 69.8 68.4 64.0 61.2 58.6
Diluted 76.5 70.1 68.7 64.2 61.2 58.6
DILUTED EARNINGS PER SHARE
Continuing Operations $1.68 $1.94 $0.80 $1.22 $1.10 $1.05
Discontinued Operations 0.13 0.17 0.17 0.13 0.14 0.09
-----------------------------------------------------------------------------------------------------------------------------------
$1.81 $2.11 $0.97 $1.35 $1.24 $1.14
-----------------------------------------------------------------------------------------------------------------------------------
RETURN ON COMMON EQUITY 13.3% 17.1% 8.3% 12.4% 12.1% 11.3%
COMMON EQUITY RATIO 49.9% 46.3% 49.3% 49.9% 44.9% 43.1%
DIVIDENDS PAID PER SHARE $1.07 $1.07 $1.07 $1.02 $1.02 $1.02
DIVIDEND PAYOUT 59.1% 50.7% 110% 76% 83% 89%
BOOK VALUE PER SHARE AT YEAR-END $13.63 $12.06 $10.97 $10.86 $9.69 $9.32
MARKET PRICE PER SHARE
High $26.89 $25.50 $22.09 $23.13 $22.00 $14.88
Low $20.19 $14.75 $16.00 $19.03 $13.50 $13.00
Close $25.20 $24.81 $16.94 $22.00 $21.78 $13.75
MARKET/BOOK AT YEAR-END 1.85 2.06 1.54 2.03 2.25 1.48
PRICE EARNINGS RATIO AT YEAR-END 13.9 11.8 17.5 16.3 17.6 12.1
DIVIDEND YIELD AT YEAR-END 4.2% 4.3% 6.3% 4.6% 4.7% 7.4%
EMPLOYEES 13,763 12,633 8,246 7,003 6,817 6,537
NET INCOME
Energy Services $ 50.0 $ 43.1 $45.0 $47.4 $43.1 $39.4
Automotive Services 74.8 49.9 40.3 24.6 13.8 3.6
Investments and Corporate Charges 3.8 43.9 (29.1) 8.1 12.3 20.7
-----------------------------------------------------------------------------------------------------------------------------------
128.6 136.9 56.2 80.1 69.2 63.7
Discontinued Operations 10.1 11.7 11.8 8.4 8.4 5.5
-----------------------------------------------------------------------------------------------------------------------------------
$138.7 $148.6 $68.0 $88.5 $77.6 $69.2
-----------------------------------------------------------------------------------------------------------------------------------
ELECTRIC CUSTOMERS - Thousands 145.0 144.0 139.7 138.1 135.8 135.1
ELECTRIC SALES - Millions of MWh 10.9 11.7 11.3 12.0 12.4 13.2
POWER SUPPLY - Millions of MWh
Steam Generation 6.9 6.4 6.2 6.3 6.1 6.4
Hydro Generation 0.5 0.5 0.7 0.6 0.6 0.7
Long-Term Purchase - Square Butte 1.9 2.4 2.3 2.1 2.3 2.4
Purchased Power 2.3 3.1 2.6 3.2 3.8 4.4
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11.6 12.4 11.8 12.2 12.8 13.9
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COAL SOLD - Millions of Tons 4.1 4.4 4.5 4.2 4.2 4.5
VEHICLES SOLD - Thousands 1,909 1,319 1,037 897 769 637
VEHICLES FINANCED - Thousands 904 795 695 531 323 140
CAPITAL EXPENDITURES - Millions $153.0 $168.7 $99.7 $80.8 $72.2 $101.5
-----------------------------------------------------------------------------------------------------------------------------------
EXCLUDES UNALLOCATED ESOP SHARES.
INCLUDED A $4.4 MILLION, OR $0.06 PER SHARE, CHARGE TO EXIT THE AUTO TRANSPORT COMPANY.
IN MAY 2000 WE RECORDED A $30.4 MILLION, OR $0.44 PER SHARE, AFTER-TAX GAIN ON THE SALE OF 4.7 MILLION SHARES OF ACE THAT WE
RECEIVED IN DECEMBER 1999 WHEN CAPITAL RE MERGED WITH ACE. AS A RESULT OF THE MERGER, IN 1999 WE RECORDED A $36.2 MILLION, OR
$0.52 PER SHARE, AFTER-TAX CHARGE. EXCLUDING THE CAPITAL RE AND ACE TRANSACTIONS, DILUTED EARNINGS PER SHARE WERE $1.67 IN 2000
($1.49 IN 1999), THE RETURN ON COMMON EQUITY WAS 13.6% IN 2000 (12.9% IN 1999), THE DIVIDEND PAYOUT WAS 64.1% IN 2000 (72% IN
1999), THE PRICE EARNINGS RATIO WAS 14.9 IN 2000 (11.4 IN 1999) AND NET INCOME FROM INVESTMENTS AND CORPORATE CHARGES WAS
$29.3 MILLION IN 2000 ($26.8 MILLION IN 1999).
---------------------------------------------------------------------------
26 ALLETE 2001 Form 10-K
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CONSOLIDATED OVERVIEW
2001 2000 1999
--------------------------------------------------------------------------------------------------------------------
Dollars in millions except per share amounts
OPERATING REVENUE
Energy Services $ 620.8 $ 589.5 $554.5
Automotive Services 832.1 522.6 383.2
Investments 74.8 77.4 57.8
--------------------------------------------------------------------------------------------------------------------
$1,527.7 $1,189.5 $995.5
--------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Energy Services $ 537.0 $ 516.0 $479.0
Automotive Services 713.1 438.6 313.5
Investments and
Corporate Charges 69.8 63.8 56.0
--------------------------------------------------------------------------------------------------------------------
$1,319.9 $1,018.4 $848.5
--------------------------------------------------------------------------------------------------------------------
NET INCOME
Energy Services $ 50.0 $ 43.1 $45.0
Automotive Services 74.8 49.9 40.3
Investments and
Corporate Charges 3.8 13.5 7.1
--------------------------------------------------------------------------------------------------------------------
128.6 106.5 92.4
Capital Re and ACE
Transactions - 30.4 (36.2)
--------------------------------------------------------------------------------------------------------------------
128.6 136.9 56.2
Discontinued Operations 10.1 11.7 11.8
--------------------------------------------------------------------------------------------------------------------
$138.7 $148.6 $68.0
--------------------------------------------------------------------------------------------------------------------
DILUTED AVERAGE SHARES
OF COMMON STOCK 76.5 70.1 68.7
--------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
OF COMMON STOCK
Continuing Operations
Before Capital Re and
ACE Transactions $1.68 $1.50 $1.32
Capital Re and
ACE Transactions - 0.44 (0.52)
--------------------------------------------------------------------------------------------------------------------
1.68 1.94 0.80
Discontinued Operations 0.13 0.17 0.17
--------------------------------------------------------------------------------------------------------------------
$1.81 $2.11 $0.97
--------------------------------------------------------------------------------------------------------------------
RETURN ON COMMON EQUITY 13.3% 13.6% 12.9%
--------------------------------------------------------------------------------------------------------------------
INCLUDED A $4.4 MILLION, OR $0.06 PER SHARE, CHARGE TO EXIT THE AUTO
TRANSPORT COMPANY.
INCLUDING THE $30.4 MILLION GAIN ASSOCIATED WITH THE ACE TRANSACTION,
2000 NET INCOME FROM INVESTMENTS AND CORPORATE CHARGES WAS $43.9 MILLION
FOR 2000 AND THE RETURN ON EQUITY WAS 17.1%. (SEE NOTE 15.)
INCLUDING THE $36.2 MILLION CHARGE ASSOCIATED WITH THE CAPITAL RE
TRANSACTION, 1999 NET INCOME FROM INVESTMENTS AND CORPORATE CHARGES WAS A
$29.1 MILLION LOSS AND THE RETURN ON EQUITY WAS 8.3%. (SEE NOTE 15.)
Each of our operating segments continued to produce solid financial results
during 2001, reflecting the success of ALLETE's growth initiatives. Even though
the events of September 11, 2001 and their aftermath negatively impacted results
for Automotive Services, performance from this segment remained strong in 2001.
Excluding a charge to exit our auto transport company in 2001 and the ACE
transaction in 2000 (see net income discussion), net income increased $24.9
million, or 21%, and earnings per share increased $0.20, or 12%, over 2000. The
2001 earnings per share calculation was impacted by our second quarter common
stock issuance.
An evaluation of strategic and financial alternatives with respect to all our
various businesses resulted in the decision to discontinue our Water Services
businesses and our auto transport company. Our Investments and Corporate Charges
segment captures the results of our real estate operations, our investments in
emerging technologies, our securities portfolio, and general corporate expenses,
including interest, not specifically related to any one business segment.
We measure performance of our operations through careful budgeting and
monitoring of EBITDAL and contributions to consolidated net income by each
business segment.
NET INCOME
ENERGY SERVICES. In 2001 net income from Energy Services was up $6.9 million, or
16%, over 2000. Our wholesale marketing and trading activities were more
profitable due to warmer summer weather and overall market conditions.
Megawatthour sales declined in 2001 reflecting decreased sales to our taconite
customers because of planned shutdowns and reduced taconite production. Net
income in 2001 also reflected recovery of 1998 CIP lost margins and additional
costs incurred as a result of a severe spring ice storm and planned maintenance
outages. In 2000 net income from Energy Services was down slightly from 1999 as
strong megawatthour sales primarily from large industrial customers were more
than offset by lower margins on wholesale power marketing and trading
activities. Lower demand in the region's wholesale power market as a result of
more moderate summer weather led to the decrease in wholesale margins in 2000.
In 1999 megawatthour sales to large industrial customers were impacted by lower
demand for domestic steel, stronger competition in the paper markets and lower
pipeline pumping levels. A one-time property tax levy associated with an
industrial development project was also reflected in 1999. Total megawatthour
sales were 10.9 million in 2001 (11.7 million in 2000; 11.3 million in 1999).
AUTOMOTIVE SERVICES. Net income from Automotive Services increased $24.9
million, or 50%, over 2000. As in 2000, recent acquisitions and increased sales
at both ADESA and AFC were the contributing factors.
At ADESA wholesale auction facilities 1.8 million vehicles were sold in 2001
(1.3 million in 2000; 1.0 million in 1999). In
---------------------------------------------------------------------------
ALLETE 2001 Form 10-K 27
addition, at our "total loss" vehicle auctions 148,000 vehicles were sold in
2001 (33,000 in 2000). During 2001 ADESA acquired or opened 13 auction
facilities (10 in 2000) that provide "total loss" vehicle services to insurance
companies and added one wholesale vehicle auction facility (28 in 2000; two in
1999). Same store EBITDAL at ADESA's wholesale auction facilities increased 13%
in 2001 (12% in 2000). Increased costs and reduced sales volumes because of
inclement weather and a depressed used vehicle market in early 2001 hampered
financial results, as did the events of September 11 and aggressive financing
incentives offered by vehicle manufacturers since October 2001. Conversion
rates, the percentage of vehicles sold from those that were run through auction
lanes, were also impacted by these events. Dealer attendance at auctions
declined as a result of a disruption in air travel. Wholesale prices were
further depressed by the events of September 11 and the offering of aggressive
financing incentives by vehicle manufacturers. Sellers were reluctant to accept
these lower wholesale prices. The conversion rate related to wholesale vehicles
sold was 58% for 2001 (59% for 2000; 62% for 1999). For 2001 we estimated that
the impact of the events of September 11 resulted in a $3.5 million decrease to
net income. Costs of assimilating the 28 wholesale vehicle auction facilities
acquired or opened in 2000 also impacted 2001 results.
AFC contributed 40% of the net income from Automotive Services in 2001 (47% in
2000; 46% in 1999). AFC had 82 loan production offices in 2001 (86 in 2000; 84
in 1999). The growth of AFC's dealer/customer base from 15,000 in 1999 to 18,000
in 2001 has enabled AFC to finance more vehicles, 904,000 vehicles in 2001
(795,000 in 2000; 695,000 in 1999).
INVESTMENTS AND CORPORATE CHARGES. Stronger sales from our real estate
operations in 2001, including its largest sale ever, helped to offset lower
earnings from our securities portfolio and emerging technology funds. Our
securities portfolio earned an after-tax annualized return of 5.6% in 2001 (7.0%
in 2000; 3.3% in 1999) on a lower average balance. During 2000 we reduced the
size of our securities portfolio to partially fund significant acquisitions made
by Automotive Services. Income from our emerging technology investments was
lower in 2001 as a result of fewer sales of these investments. In 2001 Corporate
Charges reflected more interest expense as a result of debt issued to fund
strategic initiatives and additional expenses for incentive compensation. In
2000 financial results reflected the resolution of various federal and state tax
issues which increased net income.
CAPITAL RE AND ACE TRANSACTIONS. In May 2000 we recorded a $30.4 million, or
$0.44 per share, after-tax gain on the sale of 4.7 million shares of ACE that we
received in December 1999 when Capital Re merged with ACE. As a result of the
merger, in 1999 we recorded a $36.2 million, or $0.52 per share, after-tax
charge.
DISCONTINUED OPERATIONS included the operating results of our Water Services
businesses and our auto transport company, which are currently held for sale.
Income from discontinued operations was down $1.6 million in 2001 primarily due
to a $4.4 million charge to exit the auto transport company. Operating results
from our Water Services businesses were up $3.9 million from 2000. Strategic
acquisitions and customer growth since 1999 within our Water Services businesses
helped temper the negative financial impact of above-average rainfall in Florida
and North Carolina during the majority of 2001 and conservation efforts in
Florida. Water consumption was up in 2000 as a result of dry weather conditions.
In addition, operating results for Water Services reflected gains related to the
disposal of certain assets in 2001, an October 2000 rate increase implemented by
Heater and regulatory relief granted in Florida in 2000.
2001 COMPARED TO 2000
ENERGY SERVICES
OPERATING REVENUE was up $31.3 million, or 5%, in 2001. Wholesale power
marketing and trading revenue was higher in 2001 due to warmer summer weather
and overall market conditions. Retail megawatthour sales were down 6% from 2000
because of planned shutdowns and reduced production by taconite customers.
Operating revenue from retail sales, however, was up in 2001 due to additional
demand revenue from Large Power Customers who converted a portion of their
interruptible power to firm power and fuel clause recoveries for higher
purchased power and gas prices. Operating revenue in 2001 also included recovery
of 1998 CIP lost margins and Enventis, Inc. operations. Enventis, Inc. was
acquired in July 2001 and accounted for as a pooling of interests.
OPERATING EXPENSES were up $21.0 million, or 4%, in 2001 because of a planned
maintenance outage at Square Butte, the inclusion of Enventis, Inc. operations
and additional costs incurred as a result of a severe spring ice storm.
AUTOMOTIVE SERVICES
Both operating revenue and expenses for Automotive Services were up in 2001 due
to significant acquisitions made in 2000 and early 2001. Financial results for
2001 included 12 full months of operations from 28 wholesale and 10 "total loss"
vehicle auction facilities acquired or opened primarily in the second half of
2000 and results from acquisitions made in January and May 2001.
OPERATING REVENUE was up $309.5 million, or 59%, in 2001 reflecting a 37%
increase in vehicles sold at ADESA wholesale auction facilities, the inclusion
of revenue related to "total loss" vehicle services and a 14% increase in
vehicles financed at AFC's loan production offices. Sales volumes in
---------------------------------------------------------------------------
28 ALLETE 2001 Form 10-K
2001, however, were negatively impacted by the events of September 11 as dealer
attendance and already depressed wholesale prices both dropped suddenly during
the last half of September and remained soft through year end, reflecting the
impact of aggressive financing incentives offered by vehicle manufacturers.
Also, inclement weather earlier in the year resulted in both low attendance at
and canceled auctions.
OPERATING EXPENSES were up $274.5 million, or 63%, in 2001 reflecting additional
expenses associated with having more auctions and increased financing activity.
Expenses in 2001 included increased direct costs associated with processing
vehicles multiple times that did not sell as a result of the events of September
11. The events of September 11 caused low auction attendance, and further
depressed wholesale prices as did financing incentives offered by vehicle
manufacturers. Operating expenses in 2001 also included integration costs,
additional amortization of goodwill, additional interest expense related to debt
issued in late 2000 to finance acquisitions, higher utility expense and more
labor costs incurred as a result of inclement weather in early 2001.
INVESTMENTS AND CORPORATE CHARGES
OPERATING REVENUE was down $2.6 million, or 3%, in 2001 reflecting less revenue
from our securities portfolio, partially due to a lower average balance for most
of the year. The decrease in revenue was also attributed to $4.9 million less
from our emerging technology investments as a result of fewer sales of these
investments in 2001. Our real estate operations, however, reported stronger
sales in 2001, including its largest sale ever. Six large real estate sales in
2001 contributed $37.5 million to revenue, while in 2000 seven large real estate
sales contributed $31.9 million to revenue.
OPERATING EXPENSES in 2001 were up $6.0 million, or 9%, as a result of increased
interest expense and additional expenses for incentive compensation. These
increases were tempered by lower expenses at our real estate operations.
2000 COMPARED TO 1999
ENERGY SERVICES
OPERATING REVENUE was up $35.0 million, or 6%, in 2000 due to a 6% increase in
retail megawatthour sales because of higher demand from large industrial
customers. This increase was partially offset by fewer sales from wholesale
power marketing and trading activities. Wholesale prices and volumes were down
from 1999 because of lower demand for electricity in the region's wholesale
power market as a result of more moderate summer weather and transmission
constraints.
OPERATING EXPENSES were up $37.0 million, or 8%, in 2000 primarily due to
increased fuel and purchased power expenses. Fuel expense was $5.7 million
higher in 2000 because we paid higher prices for coal and generated 247,000, or
4%, more megawatthours to meet the higher requirements of our industrial
customers. In 2000 purchased power expense was up $23.1 million because of
higher prices. In 1999 Energy Services reflected a one-time property tax levy
associated with an industrial development project.
AUTOMOTIVE SERVICES
Both operating revenue and expenses related to Automotive Services were up in
2000 due to significant acquisitions made during that year. Financial results
for 2000 included a partial year of operations for the 28 wholesale and 10
"total loss" vehicle auction facilities acquired or opened primarily in the
second half of 2000 and 12 full months of operations for two wholesale auction
facilities acquired in 1999.
OPERATING REVENUE was up $139.4 million, or 36%, in 2000 reflecting a 24%
increase in vehicles sold through ADESA wholesale auction facilities, the
inclusion of revenue related to "total loss" vehicle services and a 14% increase
in the number of vehicles financed by AFC. The increase in vehicles sold was
primarily attributable to new auctions acquired or opened in 1999 and 2000.
OPERATING EXPENSES were up $125.1 million, or 40%, in 2000 primarily due to the
inclusion of new wholesale and "total loss" vehicle auction facilities acquired
or opened in 1999 and 2000. Increased sales activity at the auction facilities
and increased financing activity at AFC also contributed to higher operating
expenses in 2000.
INVESTMENTS AND CORPORATE CHARGES
OPERATING REVENUE was up $19.6 million, or 34%, in 2000. Significant sales by
our real estate operations were the primary reason for the increase. In 2000
seven large sales contributed $31.9 million to revenue, while in 1999 five large
sales contributed $17.1 million to revenue. Despite a lower average balance in
2000, income from our securities portfolio was higher due to improved returns.
Income from our emerging technology investments was $4.6 million lower in 2000
because in 1999 we reported gains received from one of our emerging technology
investments.
OPERATING EXPENSES were up $7.8 million, or 14%, in 2000 due to the cost of
property sold by our real estate operations.
OUTLOOK
CORPORATE. Our businesses in 42 states and nine Canadian provinces employ 14,000
employees. Since 1980 our annual total shareholder return (TSR) averaged 17%.
For the five-year and two-year periods ending December 31, 2001, our TSR has
averaged 19% and 28% per year, respectively. In order to continue this record of
TSR growth, we will focus on year-over-year earnings performance, maintain
strong cash flow discipline and focus on our core competencies which are Energy
Services and Automotive Services.
---------------------------------------------------------------------------
ALLETE 2001 Form 10-K 29
We expect earnings growth for 2002 to be between 8% and 10%, resulting in per
share earnings in the range of $2.01 to $2.05, as compared to our 2001 pro forma
earnings per share of $1.87. This projection excludes the $0.06 per share charge
to exit our auto transport company in 2001 and a $0.12 per share increase from
an accounting change related to the amortization of goodwill in 2002. Including
the accounting change our anticipated 2002 earnings growth is expected to be
between 14% and 16%, resulting in per share earnings in the range of $2.13 to
$2.17, as compared to our 2001 pro forma earnings per share of $1.87. These
projections do not reflect any potential gain recognized on the sales of our
Water Services businesses. We plan to achieve this growth in earnings per share
through internal growth within our businesses.
Other factors that could affect net income or earnings per share for 2002
include any gains or losses from the sale of our auto transport company or other
businesses and acquisitions.
Our decision to sell our Water Services businesses and our auto transport
company allows us to focus on strengthening and growing our Energy Services and
Automotive Services segments. We anticipate selling our Water Services
businesses at a significant gain providing us with additional liquidity and
financial strength. Net proceeds from these sales will be used to fund growth
initiatives and may be used to pay down debt. We anticipate selling our auto
transport company by the end of first quarter 2002 and our Water Services
businesses before the end of 2002. We are currently entertaining offers for both
Florida Water and Heater.
We will also look at eliminating other businesses that have little or no growth
potential for us, are not strategic or significant, or have more value by being
monetized than by continuing to operate.
ENERGY SERVICES. Energy Services continues to generate strong cash flow from
operations and we anticipate net income from Energy Services to remain stable.
The accomplishments of 2001 will position Minnesota Power to generate more
electricity, move it more readily, manage more transactions with less risk and
benefit system reliability. Our access to and ownership of low-cost power are
Energy Services' greatest strengths and we will continue to look for
opportunities to add to our low-cost energy portfolio. We have more than
adequate generation to serve our native load. Power over and above our
customers' requirements is and will continue to be marketed through Split Rock
Energy.
Since approximately half of the electricity Minnesota Power sells is to large
industrial customers, primarily taconite producers, which have long-term
all-requirements contracts, the livelihood of the taconite industry is important
to us. The economic health of the taconite industry continues to be adversely
impacted by foreign steel imports. With the closure of LTV (which was not a
Large Power Customer) in January 2001 and various temporary shutdowns at other
Minnesota taconite facilities, the annual taconite production in Minnesota was
33 million tons in 2001 (47 million tons in 2000; 43 million tons in 1999).
Based on our research of the taconite industry, Minnesota taconite production
for 2002 is anticipated to be about 36 million tons. While taconite production
is currently expected to continue at annual levels of about 35 million tons, the
longer-term outlook for this cyclical industry is less certain. Long-term
contracts with our Large Power Customers help minimize the impact on earnings
that otherwise would result from such decreases in taconite production.
In addition to our 2001 acquisition of three 75-MW generating units at Taconite
Harbor, Minnesota, we have announced plans for 595 MW of low-cost merchant
generation (non-rate base generation sold at wholesale at market-based rates,
pursuant to authority from the FERC). If permitted and built, these additions
will increase our generation portfolio by over 50% between now and 2006.
Beginning in May 2002, we will have another 275 MW available for sale through
our 15-year power purchase agreement with a subsidiary of NRG Energy, Inc. The
permitting process has also been started for a 160-MW merchant peaking plant in
Superior, Wisconsin and a 225-MW energy facility at Blandin Paper in Grand
Rapids, Minnesota. Our ownership of the planned energy facility at Blandin Paper
is approximately 160 MW. While there has been recent publicity about excess
generating capacity in parts of the United States, the MAPP region within which
we operate has not seen the same major generation development. The latest MAPP
Load and Capability forecast indicates a deficit in reserve generation capacity
by 2006.
Depending on the outcome of pending appeals, a 220-mile, 345-kV Duluth-to-Wausau
electric transmission line proposed by Minnesota Power in partnership with
Wisconsin Public Service Corporation could be in service in 2005. The new line
addresses the pressing need for more dependable electricity in Wisconsin and the
Upper Midwest.
The merger of our telecommunication subsidiaries, MP Telecom and Enventis, Inc.
(acquired in July 2001), into Enventis Telecom will position the company to be a
leading integrated data services provider in the Upper Midwest.
Energy Services intends to seek additional cost-saving alternatives and
efficiencies, and expand its non-regulated services to increase its contribution
to consolidated net income. Overall, we believe Energy Services is well
positioned for future growth opportunities.
AUTOMOTIVE SERVICES. Automotive Services continues to be our largest contributor
to net income. We anticipate earnings from Automotive Services to increase by
over 30% in 2002, 20% excluding the impact of the accounting change for
amortization of goodwill.
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30 ALLETE 2001 Form 10-K
Since 1995 when we first entered the automotive industry, we have transformed
and expanded our Automotive Services operations. Significant acquisitions over
the past few years have established ADESA as the second largest and the fastest
growing wholesale vehicle auction business in North America and the third
largest provider of "total loss" vehicle services in North America. ADESA is
also the premier automotive remarketing company in Canada. AFC is the leading
provider of independent auto dealer inventory financing. By offering an
expanding circle of customers new levels of service in the vehicle remarketing
industry, Automotive Services expects to expand its presence in the North
American auto industry. We believe further consolidation of the "total loss"
vehicle auction industry will occur, not unlike what has happened in the
wholesale vehicle auction business. In addition to internally growing our
existing auctions and dealer floorplan financing business, we will continue to
look for accretive acquisitions not only in the wholesale vehicle auction
business, but also in the "total loss" vehicle auction business. We will also
consider greenfield sites as appropriate and the integration of "total loss"
vehicle services at certain wholesale vehicle auction facilities.
The vehicle remarketing industry has been challenged by the events of September
11, by a softening economy and by lower wholesale prices resulting from high
used vehicle inventories and zero-percent financing on new vehicles. With
wholesale prices beginning to improve in 2002, we view these challenges as
short-term. We believe that used vehicle sales within the auto auction industry
will rise at a rate of 2% to 3% annually through 2003.
Automotive Services continue to focus on growth in the volume of vehicles sold
and financed, increased ancillary services, and operating and technological
efficiencies.
INVESTMENTS AND CORPORATE CHARGES. We anticipate net income from Investments and
Corporate Charges to remain stable in 2002. An expected lower contribution from
our real estate operations should be offset by better returns from our emerging
technology investments and securities portfolio, and lower corporate charges.
Revenue from property sales by real estate operations continues to be three to
four times more than the acquisition cost, creating strong cash generation and
profitability. Our real estate operations may, from time to time, acquire
packages of diversified properties at low cost, add value through entitlements
and infrastructure enhancements and sell the properties at current market
prices.
Our investments in emerging technologies make capital available to companies
developing products and services critical to the future of the electric utility
industry. Our focus has been primarily on micro generation and fuel cell
technology. We view our investments as a source of capital for redeployment into
existing businesses and additional business opportunities. We expect these
investments to add to income in the future.
With respect to our securities portfolio, we plan to continue to concentrate on
market-neutral investment strategies designed to provide stable and acceptable
returns without sacrificing needed liquidity. Our portfolio is hedged against
market downturns with the objective to maintain corporate liquidity.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW ACTIVITIES
A primary goal of the strategic plan is to improve cash flow from operations.
Our strategy includes growing the businesses both internally with expanded
facilities, services and operations (see Capital Requirements) and externally
through acquisitions.
During 2001 cash flow from operations reflected strong operating results and
continued focus on working capital management. The decrease in cash flow from
operations in 2001 was primarily attributable to changes in trading securities.
In 2001 additional trading securities were purchased with a portion of the
proceeds from our second quarter common stock issuance (see Securities), while
in 2000 trading securities were sold to partially fund the acquisition of
Auction Finance Group, Inc. Cash flow from operations was also affected by a
number of factors representative of normal operations.
WORKING CAPITAL. Additional working capital, if and when needed, generally is
provided by the sale of commercial paper. Our securities investments can be
liquidated to provide funds for reinvestment in existing businesses or
acquisition of new businesses. Approximately 5.3 million original issue shares
of our common stock are available for issuance through INVEST DIRECT, our direct
stock purchase and dividend reinvestment plan. ALLETE's $205 million bank line
of credit provides credit support for our commercial paper program. The amount
and timing of future sales of our securities will depend upon market conditions
and our specific needs. We may sell securities to meet capital requirements, to
provide for the retirement or early redemption of issues of long-term debt, to
reduce short-term debt and for other corporate purposes.
A substantial amount of ADESA's working capital is generated internally from
payments for services provided. However, ADESA has arrangements to use proceeds
from the sale of commercial paper issued by ALLETE to meet short-term working
capital requirements arising from the timing of payment obligations to vehicle
sellers and the availability of funds from vehicle purchasers. During the sales
process, ADESA does not typically take title to vehicles.
AFC offers short-term on-site financing for dealers to purchase vehicles at
auctions in exchange for a security interest in those vehicles. The financing is
provided through the earlier of the date the dealer sells the vehicle or a
general borrowing term of 30 to 45 days. AFC has arrangements to
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ALLETE 2001 Form 10-K 31
use proceeds from the sale of commercial paper issued by ALLETE to meet its
operational requirements. In addition, AFC has entered into an arrangement with
a manufacturer to floorplan up to $110 million of certain vehicles located at
auctions awaiting resale. AFC is fully collateralized as the manufacturer has
granted a security interest to AFC in these vehicles. To fund a portion of these
receivables, AFC has entered into a revolving line of credit with a bank for the
lesser of $55 million or 50% of the eligible receivables generated under this
floorplan. This agreement expires in June 2002. Borrowing under the line of
credit is collateralized by substantially all of AFC's assets. The outstanding
balance under this agreement was $29.1 million at December 31, 2001.
At December 31, 2001 approximately 81% of AFC's finance receivables were
securitized. AFC sells certain finance receivables on a revolving basis to a
wholly owned, unconsolidated, qualified special purpose subsidiary. This
subsidiary in turn sells, on a revolving basis, an undivided interest in
eligible finance receivables, up to a maximum at any one time outstanding of
$300 million, to third party purchasers under an agreement that expires at the
end of 2002. At December 31, 2001 AFC had sold $381.2 million of finance
receivables to the special purpose subsidiary ($335.7 million at December 31,
2000). Third party purchasers had purchased an undivided interest in finance
receivables of $267.0 million from this subsidiary at December 31, 2001 ($239.0
million at December 31, 2000). Unsold finance receivables held by the special
purpose subsidiary are recorded by AFC as residual interest at fair value. Fair
value is based upon estimates of future cash flows, using assumptions that
market participants would use to value such instruments, including estimates of
anticipated credit losses over the life of the receivables sold without
application of a discount rate due to the short-term nature of the receivables
sold. The fair value of AFC's residual interest was $103.0 million at December
31, 2001 ($106.2 million at December 31, 2000). Proceeds from the sale of the
receivables were used to repay borrowings from ALLETE and fund vehicle inventory
purchases for AFC's customers. AFC must maintain certain financial covenants
such as minimum tangible net worth to comply with the terms of the
securitization agreement.
Significant changes in accounts receivable balance at December 31, 2001 compared
to December 31, 2000 were due to increased sales and financing activity at
Automotive Services.
We provide credit support to facilitate the power marketing and trading
activities of Split Rock Energy, and had $36.0 million in outstanding support at
December 31, 2001 ($30.1 million at December 31, 2000). The support generally
expires one year from the date of issuance.
ACQUISITIONS AND DIVESTITURES. In January 2001 we acquired all of the
outstanding stock of ComSearch in exchange for ALLETE common stock and paid cash
to purchase all of the assets of Auto Placement Center (now ADESA Impact) in
transactions with an aggregate value of $62.4 million. ADESA Impact was funded
with internally generated funds and short-term debt which was refinanced with
long-term debt. (See Securities.) ADESA Impact is a provider of "total loss"
vehicle recovery services with 12 auction facilities in the United States.
ComSearch provides Internet-based parts location and insurance claim audit
services nationwide.
In May 2001 ADESA purchased the assets of the I-44 Auto Auction in Tulsa,
Oklahoma. The I-44 Auto Auction, which is located on 75 acres, was renamed ADESA
Tulsa and has six auction lanes, storage for over 3,000 vehicles and a five-bay
reconditioning and detail facility. The transaction was funded with internally
generated funds.
In July 2001 we acquired Enventis, Inc., a data network systems provider
headquartered in the Minneapolis-St. Paul area. In connection with this
acquisition, we issued 310,878 shares of ALLETE common stock. This transaction
complements our existing infrastructure and fiber optics network in Minnesota
and Wisconsin, and helps position our telecommunications business as one of the
leading integrated data service providers in the Upper Midwest.
In October 2001 we acquired certain non-mining properties from LTV and
Cleveland-Cliffs for $75 million. The non-mining properties include a 225-MW
electric generating facility and existing coal inventory at Taconite Harbor, a
60-mile transmission line, railroad trackage rights, and approximately 30,000
acres of forest and recreation land in northeast Minnesota. The transaction was
funded with short-term debt.
Proceeds from the June 2001 sale of Tarpon Point Marina and the surrounding 150
acres of development property in Cape Coral, Florida, to the Grosse Point
Development Company for $29 million in cash were invested in additional real
estate property in Florida. Winter Haven Citi Centre, which was acquired in
September 2001 from Faison-Winter Haven, LLC, is a 187,000 square foot retail
shopping center located on a 30-acre site and includes three out parcels for
sale. Approximately 6,000 acres of additional land in Palm Coast, Florida, were
purchased in December 2001 and January 2002. In aggregate, these transactions
totaled approximately $31 million.
We anticipate selling our auto transport company by the end of the first quarter
of 2002 and our Water Services businesses before the end of 2002. We anticipate
selling our Water Services businesses at a significant gain providing us with
additional liquidity and financial strength. Net proceeds from these sales will
be used to fund growth initiatives and may be used to pay down debt.
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32 ALLETE 2001 Form 10-K
SECURITIES. In February 2001 we issued $125 million of 7.80% Senior Notes, due
February 15, 2008. Proceeds were used to repay a portion of ALLETE's short-term
bank borrowings incurred for the acquisition of vehicle auction facilities in
2000 and early 2001 and for general corporate purposes.
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, from time to time when market
conditions and the needs of ALLETE warrant, of an aggregate amount of $500
million of securities which may include ALLETE common stock, first mortgage
bonds, and other debt securities and ALLETE Capital II and ALLETE Capital III
preferred trust securities, of which approximately $387 million remains
available to be issued. ALLETE also previously filed a registration statement,
which has been declared effective by the SEC, relating to the possible issuance,
from time to time when market conditions and the needs of ALLETE warrant, 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.
On May 30, 2001 we issued and sold in an underwritten public offering 6.5
million shares of common stock at $23.68 per share. In addition, an
over-allotment option for 100,000 shares at $23.68 per share was exercised by
the underwriters and sold on June 7, 2001. Total net proceeds of $150 million
were used to repay a portion of our short-term borrowings with the remainder
invested in short-term instruments. The increase in the number of shares of our
common stock outstanding as of December 31, 2001 had an immaterial impact on
2001 earnings per share.
INVESTMENTS. As companies included in our emerging technology investments are
sold, we will recognize a gain or loss. Our investment in the companies that
have gone public has a cost basis of approximately $12 million. The aggregate
market value of our investment in these companies at December 31, 2001 was $24
million ($52 million at December 31, 2000). These investments provide us with
access to developing technologies before their commercial debut, as well as
potential financial returns and diversification opportunities. We view these
investments as a source of capital for redeployment in existing businesses.
BOND RATINGS. ALLETE's first mortgage bonds and secured pollution control bonds
are currently rated Baa1 by Moody's Investors Service, Inc. (Moody's) and A by
Standard and Poor's Rating Group (Standard and Poor's). ALLETE's senior notes
and unsecured debt are rated Baa2 by Moody's and BBB by Standard and Poor's. The
disclosure of these securities ratings is not a recommendation to buy, sell or
hold our securities. Ratings may be subject to revision or withdrawal at any
time by the assigning rating organization. Each rating should be evaluated
independently of any other rating.
PAYOUT RATIO. In 2001 we paid out 59% (51% in 2000; 110% in 1999) of our per
share earnings in dividends. Excluding the gain related to the ACE transaction,
in 2000 we paid out 64% of our per share earnings in dividends. Excluding the
charge related to the Capital Re transaction, in 1999 we paid out 72% of our per
share earnings in dividends.
CAPITAL REQUIREMENTS
Consolidated capital expenditures totaled $153.0 million in 2001 ($168.7 million
in 2000; $99.7 million in 1999). Expenditures in 2001 included $59.9 million for
Energy Services, $61.0 million for Automotive Services, and $32.1 million for
Water Services. Internally generated funds and the proceeds from the issuance of
long-term debt were the primary sources of funding these capital expenditures.
Capital expenditures are expected to be $184 million in 2002 and total about
$714 million for 2003 through 2006. The 2002 amount includes $78 million for
Energy Services, $55 million for Automotive Services and $5 million for
Investments and Corporate Charges. Energy Services' expenditures are for
electric co-generation, system component replacement and upgrades,
telecommunication fiber and coal handling equipment. Automotive Services'
expenditures are for new auctions currently under construction, expansions and
on-going improvements at existing vehicle auction facilities and associated
computer systems. The 2002 amount also includes $46 million to expand water and
wastewater treatment facilities to accommodate customer growth, to meet
environmental standards and for water conservation initiatives. We expect to use
internally generated funds and the proceeds from the 2001 issuance of equity
securities to fund these capital expenditures.
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ALLETE 2001 Form 10-K 33
MARKET RISK
Our securities portfolio has exposure to both price and interest rate risk.
Investments held principally for near-term sale are classified as trading
securities and recorded at fair value. Trading securities consist primarily of
the common stock of publicly traded companies. In strategies designed to hedge
overall market risks, we also sell common stock short. Short stock sales
outstanding at December 31, 2001 had a contract amount of $19.8 million and an
associated fair value loss of $0.8 million (contract amount of $5.3 million and
associated fair value loss of $0.5 million at December 31, 2000). Investments
held for an indefinite period of time are classified as available-for-sale
securities and also recorded at fair value. At December 31, 2001
available-for-sale securities consisted of the common stock of publicly traded
companies and equity securities in a grantor trust established to fund certain
employee benefits.
Our trading securities portfolio had a fair value of $155.6 million at December
31, 2001 ($90.8 million at December 31, 2000). Our available-for-sale securities
portfolio had a fair value of $26.5 million at December 31, 2001 ($25.3 million
at December 31, 2000).
In October 2001 we entered into an interest rate swap agreement with a notional
amount of $250 million to hedge $250 million of floating rate debt issued in
October 2000. Under the 15-month swap agreement, we make fixed quarterly
payments based on a fixed rate of 3.2% and receive payments at a floating rate
based on LIBOR (2.4% at December 31, 2001).
Our foreign currency exposure is limited to the conversion of operating results
of our Canadian subsidiaries and, therefore, we have not entered into any
foreign exchange contracts to hedge the conversion of our Canadian operating
results into United States dollars.
PRINCIPAL CASH FLOW BY EXPECTED MATURITY DATE
INTEREST RATE SENSITIVE ------------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS FAIR
DECEMBER 31, 2001 2002 2003 2004 2005 2006 THEREAFTER TOTAL VALUE
------------------------------------------------------------------------------------------------------------------------------------
Dollars in Millions
Long-Term Debt
Fixed Rate $3.5 $30.3 $6.5 $0.7 $91.3 $494.0 $626.3 $652.5
Average Interest Rate - % 9.6 6.7 7.2 7.8 7.7 7.2 7.2 -
Variable Rate $3.4 $250.9 $3.2 $0.2 - $49.8 $307.5 $307.5
Average Interest Rate - % 4.6 4.1 4.8 5.2 - 2.0 3.8 -
Mandatorily Redeemable Preferred
Securities of Subsidiary - - - - - $75.0 $75.0 $74.7
Average Distribution Rate - % - - - - - 8.05 8.05 -
Interest Rate Swaps
Variable to Fixed $(2.1) $(0.5) - - - - $(2.6) $(2.5)
Average Pay Rate - % 3.2 3.2 - - - - - -
Average Receive Rate - % 2.4 2.4 - - - - - -
------------------------------------------------------------------------------------------------------------------------------------
ASSUMES VARIABLE RATE IN EFFECT AT DECEMBER 31, 2001 REMAINS CONSTANT THROUGH REMAINING TERM.
NEW ACCOUNTING STANDARDS
In July 2001 the FASB issued SFAS 141, 142 and 143. SFAS 141, "Business
Combinations," requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Use of the pooling of
interests method of accounting is prohibited.
SFAS 142, "Goodwill and Other Intangible Assets," changes the accounting for
goodwill from an amortization method to an impairment-only approach. Effective
January 1, 2002 goodwill is no longer amortized. We had $536 million of goodwill
as of December 31, 2001 and after-tax goodwill amortization expense of
approximately $11 million in 2001. As required by SFAS 142, we will perform
impairment testing within the first six months of 2002. We do not believe we
have any goodwill impairment at this time.
SFAS 143, "Accounting for Asset Retirement Obligations," requires the
recognition of a liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded, the carrying
amount of the related long-lived asset is correspondingly increased. Over time,
the liability is accreted to its present value and the related capitalized
charge is depreciated over the useful life of the asset. SFAS 143 is effective
for fiscal years beginning after June 15, 2002. We are currently reviewing the
impact of SFAS 143 on the Company.
In August 2001 the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144
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34 ALLETE 2001 Form 10-K
establishes a single accounting model for long-lived assets that are impaired or
are to be disposed. We adopted SFAS 144 in the fourth quarter of 2001. Under the
provisions of SFAS 144, we reported the results of our Water Services businesses
and our auto transport company as discontinued operations, and ceased
depreciation of assets related to these businesses in the fourth quarter of
2001.
--------------------------------------
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 10 OF THIS FORM 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition - Market Risk for information related to quantitative and
qualitative disclosure about market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See our consolidated financial statements as of December 31, 2001 and 2000 and
for each of the three years in the period ended December 31, 2001, and
supplementary data, also included, which are indexed in Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required for this Item is incorporated by reference herein and
will be set forth under the "Election of Directors" section in our Proxy
Statement for the 2002 Annual Meeting of Shareholders, except for information
with respect to executive officers which is set forth in Part I hereof. The 2002
Proxy Statement will be filed with the Securities and Exchange Commission within
120 days after the end of our 2001 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required for this Item is incorporated by reference herein from
the "Compensation of Executive Officers" section in our Proxy Statement for the
2002 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required for this Item is incorporated by reference herein from
the "Security Ownership of Certain Beneficial Owners and Management" section in
our Proxy Statement for the 2002 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
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ALLETE 2001 Form 10-K 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Certain Documents Filed as Part of this Form 10-K.
(1) Financial Statements PAGES
ALLETE
Report of Independent Accountants ............................... 42
Consolidated Balance Sheet at
December 31, 2001 and 2000 .................................. 43
For the Three Years Ended December 31, 2001
Consolidated Statement of Income ............................ 44
Consolidated Statement of Cash Flows ........................ 45
Consolidated Statement of Stockholders' Equity............... 46
Notes to Consolidated Financial Statements.................... 47-61
(2) Financial Statement Schedules
Report of Independent Accountants on
Financial Statement Schedule ................................ 62
Schedule II - ALLETE Valuation and Qualifying
Accounts and Reserves ....................................... 62
All other schedules have been omitted either because the information is
not required to be reported by ALLETE or because the information is
included in the consolidated financial statements or the notes.
(3) Exhibits including those incorporated by reference
EXHIBIT NUMBER
--------------------------------------------------------------------------------
*2 - Agreement and Plan of Merger by and among Minnesota Power & Light
Company (now ALLETE), AC Acquisition Sub, Inc., ADESA Corporation and
Certain ADESA Management Shareholders dated February 23, 1995 (filed
as Exhibit 2 to the March 3, 1995 Form 8-K, File No. 1-3548).
*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 Certificate of Assumed Name, filed with the
Minnesota Secretary of State on May 8, 2001 (filed as Exhibit 3(a) to
the March 31, 2001 Form 10-Q, File No. 1-3548).
*3(b) - Bylaws, as amended effective May 8, 2001 (filed as Exhibit 3(c) to
the March 31, 2001 Form 10-Q, File No. 1-3548).
*4(a)1 - Mortgage and Deed of Trust, dated as of September 1, 1945, between
Minnesota Power & Light Company (now ALLETE) and The Bank of New York
(formerly Irving Trust Company) and Douglas J. MacInnes (successor to
Richard H. West), Trustees (filed as Exhibit 7(c), File No. 2-5865).
*4(a)2 - Supplemental Indentures to ALLETE's Mortgage and Deed of Trust:
NUMBER DATED AS OF REFERENCE FILE EXHIBIT
--------------------------------------------------------------------------------
First March 1, 1949 2-7826 7(b)
Second July 1, 1951 2-9036 7(c)
Third March 1, 1957 2-13075 2(c)
Fourth January 1, 1968 2-27794 2(c)
Fifth April 1, 1971 2-39537 2(c)
Sixth August 1, 1975 2-54116 2(c)
Seventh September 1, 1976 2-57014 2(c)
Eighth September 1, 1977 2-59690 2(c)
Ninth April 1, 1978 2-60866 2(c)
Tenth August 1, 1978 2-62852 2(d)2
Eleventh December 1, 1982 2-56649 4(a)3
Twelfth April 1, 1987 33-30224 4(a)3
Thirteenth March 1, 1992 33-47438 4(b)
Fourteenth June 1, 1992 33-55240 4(b)
Fifteenth July 1, 1992 33-55240 4(c)
Sixteenth July 1, 1992 33-55240 4(d)
Seventeenth February 1, 1993 33-50143 4(b)
Eighteenth July 1, 1993 33-50143 4(c)
Nineteenth February 1, 1997 1-3548
(1996 Form 10-K) 4(a)3
Twentieth November 1, 1997 1-3548
(1997 Form 10-K) 4(a)3
Twenty-first October 1, 2000 333-54330 4(c)3
*4(b)1 - Indenture (for Unsecured Debt Securities), dated as of February
1, 2001, between ALLETE and LaSalle Bank National Association, as
Trustee (filed as Exhibit 4(d)1, File Nos. 333-57104, 333-57104-01 and
333-57104-02).
*4(b)2 - Officer's Certificate, dated February 21, 2001, establishing the terms
of the 7.80% Senior Notes, due February 15, 2008, of ALLETE (filed as
Exhibit 4(d)2, File Nos. 333-57104, 333-57104-01 and 333-57104-02).
*4(c)1 - Mortgage and Deed of Trust, dated as of March 1, 1943, between
Superior Water, Light and Power Company and Chemical Bank & Trust
Company and Howard B. Smith, as Trustees, both succeeded by U.S. Bank
Trust N.A., as Trustee (filed as Exhibit 7(c), File No. 2-8668).
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36 ALLETE 2001 Form 10-K
EXHIBIT NUMBER
--------------------------------------------------------------------------------
*4(c)2 - Supplemental Indentures to Superior Water, Light and Power Company's
Mortgage and Deed of Trust:
NUMBER DATED AS OF REFERENCE FILE EXHIBIT
--------------------------------------------------------------------------------
First March 1, 1951 2-59690 2(d)(1)
Second March 1, 1962 2-27794 2(d)1
Third July 1, 1976 2-57478 2(e)1
Fourth March 1, 1985 2-78641 4(b)
Fifth December 1, 1992 1-3548
(1992 Form 10-K) 4(b)1
Sixth March 24, 1994 1-3548
(1996 Form 10-K) 4(b)1
Seventh November 1, 1994 1-3548
(1996 Form 10-K) 4(b)2
Eighth January 1, 1997 1-3548
(1996 Form 10-K) 4(b)3
*4(d)1 - Indenture, dated as of March 1, 1993, between Southern States
Utilities, Inc. (now Florida Water Services Corporation) and
Nationsbank of Georgia, National Association (now SunTrust Bank,
Central Florida, N.A.), as Trustee (filed as Exhibit 4(d) to the 1992
Form 10-K, File No. 1-3548).
*4(d)2 - Supplemental Indentures to Florida Water Services Corporation's
Indenture:
NUMBER DATED AS OF REFERENCE FILE EXHIBIT
--------------------------------------------------------------------------------
First March 1, 1993 1-3548
(1996 Form 10-K) 4(c)1
Second March 31, 1997 1-3548
(March 31, 1997
Form 10-Q) 4
Third May 28, 1997 1-3548
(June 30, 1997
Form 10-Q) 4
*4(e) - Amended and Restated Trust Agreement, dated as of March 1, 1996,
relating to MP&L (now ALLETE) Capital I's 8.05% Cumulative Quarterly
Income Preferred Securities, between the Company, as Depositor, and
The Bank of New York, The Bank of New York (Delaware), Philip R.
Halverson, David G. Gartzke and James K. Vizanko, as Trustees (filed
as Exhibit 4(a) to the March 31, 1996 Form 10-Q, File No. 1-3548), as
modified by Amendment No. 1, dated April 11, 1996 (filed as Exhibit
4(b) to the March 31, 1996 Form 10-Q, File No. 1-3548 and First
Amendment [2000] dated August 23, 2000 (filed as Exhibit 4(f)2, File
No. 333-54330).
*4(f) - Indenture, dated as of March 1, 1996, relating to Minnesota Power &
Light Company's (now ALLETE) 8.05% Junior Subordinated Debentures,
Series A, Due 2015, between the Company and The Bank of New York, as
Trustee (filed as Exhibit 4(c) to the March 31, 1996 Form 10-Q, File
No. 1-3548).
*4(g) - Guarantee Agreement, dated as of March 1, 1996, relating to MP&L (now
ALLETE) Capital I's 8.05% Cumulative Quarterly Income Preferred
Securities, between Minnesota Power & Light Company (now ALLETE), as
Guarantor, and The Bank of New York, as Trustee (filed as Exhibit 4(d)
to the March 31, 1996 Form 10-Q, File No. 1-3548).
*4(h) - Agreement as to Expenses and Liabilities, dated as of March 20, 1996,
relating to MP&L (now ALLETE) Capital I's 8.05% Cumulative Quarterly
Income Preferred Securities, between Minnesota Power & Light Company
(now ALLETE) and MP&L (now ALLETE) Capital I (filed as Exhibit 4(e) to
the March 31, 1996 Form 10-Q, File No. 1-3548).
*4(i) - Officer's Certificate, dated March 20, 1996, establishing the terms of
the 8.05% Junior Subordinated Debentures, Series A, Due 2015 issued in
connection with the 8.05% Cumulative Quarterly Income Preferred
Securities of MP&L (now ALLETE) Capital I (filed as Exhibit 4(i) to
the 1996 Form 10-K, File No. 1-3548).
*4(j) - Rights Agreement, dated as of July 24, 1996, between Minnesota
Power & Light Company (now ALLETE) and the Corporate Secretary of the
Company, as Rights Agent (filed as Exhibit 4 to the August 2, 1996
Form 8-K, File No. 1-3548).
*4(k) - Indenture (for Unsecured Debt Securities), dated as of May 15, 1996,
between ADESA Corporation and The Bank of New York, as Trustee
relating to the ADESA Corporation's 7.70% Senior Notes, Series A, Due
2006, and its 8.10% Senior Notes, Series B, Due 2010 (filed as Exhibit
4(k) to the 1996 Form 10-K, File No. 1-3548).
*4(l) - Guarantee of the Company, dated as of May 30, 1996, relating to the
ADESA Corporation's 7.70% Senior Notes, Series A, Due 2006 (filed as
Exhibit 4(l) to the 1996 Form 10-K, File No. 1-3548).
*4(m) - ADESA Corporation Officer's Certificate 1-D-1, dated May 30, 1996,
relating to the ADESA Corporation's 7.70% Senior Notes, Series A, Due
2006 (filed as Exhibit 4(m) to the 1996 Form 10-K, File No. 1-3548).
*4(n) - Guarantee of Minnesota Power, Inc. (now ALLETE), dated as of March 30,
2000, relating to ADESA Corporation's 8.10% Senior Notes, Series B,
Due 2010 (filed as Exhibit 4(a) to the March 31, 2000 Form 10-Q, File
No. 1-3548).
---------------------------------------------------------------------------
ALLETE 2001 Form 10-K 37
EXHIBIT NUMBER
--------------------------------------------------------------------------------
*4(o) - ADESA Corporation Officer's Certificate 2-D-2, dated as of March 30,
2000, relating to ADESA Corporation's 8.10% Senior Notes, Series B,
Due 2010 (filed as Exhibit 4(b) to the March 31, 2000 Form 10-Q, File
No. 1-3548).
*10(a) - Participation Agreement, dated as of March 31, 2000, among Asset
Holdings III, L.P., as Lessor, ADESA Corporation, as Lessee, SunTrust
Bank, as Credit Bank, and Cornerstone Funding Corporation I, as Issuer
(filed as Exhibit 10(a) to the March 31, 2000 Form 10-Q, File No.
1-3548).
*10(b) - Lease Agreement, dated as of March 31, 2000, between Asset Holdings
III, L.P., as Lessor and ADESA Corporation, as Lessee (filed as
Exhibit 10(b) to the March 31, 2000 Form 10-Q, File No. 1-3548).
*10(c) - Reimbursement Agreement, dated as of March 31, 2000, between SunTrust
Bank, as Credit Bank, and Asset Holdings III, L.P., as Lessor (filed
as Exhibit 10(c) to the March 31, 2000 Form 10-Q, File No. 1-3548).
*10(d) - Appendix I to Participation Agreement, Lease Agreement and
Reimbursement Agreement, all which are dated as of March 31, 2000,
relating to the Lease Financing for ADESA Corporation Auto Auction
Facilities (filed as Exhibit 10(d) to the March 31, 2000 Form 10-Q,
File No. 1-3548).
*10(e) - Assignment of Lease and Rents (without Exhibit A) entered into as of
March 31, 2000, by and between Asset Holdings III, L.P., as Lessor and
SunTrust Bank, as Credit Bank (filed as Exhibit 10(e) to the March 31,
2000 Form 10-Q, File No. 1-3548).
*10(f) - Limited Guaranty of Minnesota Power, Inc. (now ALLETE), dated as of
March 31, 2000, relating to the Lease Financing for ADESA Corporation
Auto Auction Facilities (filed as Exhibit 10(f) to the March 31, 2000
Form 10-Q, File No. 1-3548).
10(g) - Master Agreement (without Exhibits), dated as of July 30, 2001, among
ADESA Corporation, as a Guarantor, ADESA California, Inc. and certain
subsidiaries of ADESA Corporation that may hereafter become party
hereto, as Lessees, Atlantic Financial Group, Ltd., as Lessor, certain
financial institutions parties hereto, as Lenders, and SunTrust Bank,
as Agent.
10(h) - Master Lease Agreement (without Exhibits), dated as of July 30, 2001,
between Atlantic Financial Group, Ltd., as Lessor, and ADESA
California, Inc. and certain other subsidiaries of ADESA Corporation,
as Lessees.
10(i) - Loan Agreement, dated as of July 30, 2001, among Atlantic Financial
Group, Ltd., as Lessor and Borrower, the financial institutions party
hereto, as Lenders, and SunTrust Bank, as Agent.
10(j) - Guaranty Agreement from ALLETE, dated as of July 30, 2001, relating to
the Master Agreement, dated as of July 30, 2001.
*10(k) - Wholesale Power Coordination and Dispatch Operating Agreement, dated
April 14, 2000, between Minnesota Power, Inc. (now ALLETE) and Split
Rock Energy LLC (filed as Exhibit 10(a) to the June 30, 2000 Form
10-Q, File No. 1-3548).
*10(l) - Letter addressed to the Federal Energy Regulatory Commission, dated
April 21, 2000, amending the Wholesale Power Coordination and Dispatch
Operating Agreement, dated April 14, 2000, between Minnesota Power,
Inc. (now ALLETE) and Split Rock Energy LLC (filed as Exhibit 10(b) to
the June 30, 2000 Form 10-Q, File No. 1-3548).
*10(m) - Guarantee Agreement, dated August 16, 2000, made by and among
Minnesota Power, Inc. (now ALLETE), CoBank, ACB and ABN AMRO Bank,
N.V. (filed as Exhibit 10 to the September 30, 2000 Form 10-Q, File
No. 1-3548).
*10(n)1 - Receivables Purchase Agreement, dated as of December 31, 1996, among
AFC Funding Corporation, as Seller, Automotive Finance Corporation, as
Servicer, Pooled Accounts Receivable Capital Corporation, as
Purchaser, and Nesbitt Burns Securities Inc., as Agent (filed as
Exhibit 10(f) to the 1996 Form 10-K, File No. 1-3548).
*10(n)2 - Amendments to Receivables Purchase Agreement:
NUMBER DATED AS OF REFERENCE FILE EXHIBIT
--------------------------------------------------------------------------------
First February 28, 1997 1-3548
(1996 Form 10-K) 10(g)
Second August 15, 1997 1-3548
(September 30, 1997
Form 10-Q) 10
Third October 30, 1998 1-3548
(September 30, 1999
Form 10-Q) 10(a)
Fourth September 22, 1999 1-3548
(September 30, 1999
Form 10-Q) 10(b)
*10(o) - Purchase and Sale Agreement, dated as of December 31, 1996, between
AFC Funding Corporation and Automotive Finance Corporation (filed as
Exhibit 10(h) to the 1996 Form 10-K, File No. 1-3548).
---------------------------------------------------------------------------
38 ALLETE 2001 Form 10-K
EXHIBIT NUMBER
--------------------------------------------------------------------------------
*10(p) - Power Purchase and Sale Agreement, dated as of May 29, 1998, between
Minnesota Power, Inc. (now ALLETE) and Square Butte Electric
Cooperative (filed as Exhibit 10 to the June 30, 1998 Form 10-Q, File
No. 1-3548).
+*10(q) - Minnesota Power (now ALLETE) Executive Annual Incentive Plan,
effective January 1, 1996 (filed as Exhibit 10(a) to the 1995 Form
10-K, File No. 1-3548).
+*10(r) - Minnesota Power (now ALLETE) and Affiliated Companies Supplemental
Executive Retirement Plan, as amended and restated, effective August
1, 1994 (filed as Exhibit 10(b) to the 1995 Form 10-K, File No.
1-3548).
+*10(s) - Executive Investment Plan-I, as amended and restated, effective
November 1, 1988 (filed as Exhibit 10(c) to the 1988 Form 10-K, File
No. 1-3548).
+*10(t) - Executive Investment Plan-II, as amended and restated, effective
November 1, 1988 (filed as Exhibit 10(d) to the 1988 Form 10-K, File
No. 1-3548).
+*10(u) - Deferred Compensation Trust Agreement, as amended and restated,
effective January 1, 1989 (filed as Exhibit 10(f) to the 1988 Form
10-K, File No. 1-3548).
+*10(v) - Minnesota Power (now ALLETE) Executive Long-Term Incentive
Compensation Plan, effective January 1, 1996 (filed as Exhibit 10(a)
to the June 30, 1996 Form 10-Q, File No. 1-3548).
+*10(w) - Minnesota Power (now ALLETE) Director Stock Plan, effective January 1,
1995 (filed as Exhibit 10 to the March 31, 1995 Form 10-Q, File No.
1-3548).
+*10(x) - Minnesota Power (now ALLETE) Director Long-Term Stock Incentive Plan,
effective January 1, 1996 (filed as Exhibit 10(b) to the June 30, 1996
Form 10-Q, File No. 1-3548).
+*10(y) - Retirement Agreement, dated August 28, 2001, between ALLETE and Edwin
L. Russell (filed as Exhibit 10 to the September 30, 2001 Form 10-Q,
File No. 1-3548).
12 - Computation of Ratios of Earnings to Fixed Charges and Supplemental
Ratios of Earnings to Fixed Charges. (Included as page 63 of this
document.)
*21 - Subsidiaries of the Registrant (reference is made to ALLETE's Form
U-3A-2 for the year ended December 31, 2001, File No. 69-78).
23(a) - Consent of Independent Accountants.
23(b) - Consent of General Counsel.
----------------------------------------
* INCORPORATED HEREIN BY REFERENCE AS INDICATED.
+ MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED
AS AN EXHIBIT TO THIS REPORT PURSUANT TO ITEM 14(C) OF FORM 10-K.
(b) Reports on Form 8-K.
Report on Form 8-K filed October 10, 2001 with respect to Item 5. Other
Events.
Report on Form 8-K filed October 18, 2001 with respect to Item 7.
Financial Statements and Exhibits.
Report on Form 8-K filed December 21, 2001 with respect to Item 5. Other
Events.
Report on Form 8-K filed January 14, 2002 with respect to Item 5. Other
Events.
Report on Form 8-K filed January 24, 2002 with respect to Item 7.
Financial Statements and Exhibits.
Report on Form 8-K filed January 25, 2002 with respect to Item 5. Other
Events.
---------------------------------------------------------------------------
ALLETE 2001 Form 10-K 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: February 8, 2002 By David G. Gartzke
------------------------------------------------
David G. Gartzke
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
David G. Gartzke Chairman, President and February 8, 2002
----------------------------------- Chief Executive Officer
David G. Gartzke
James K. Vizanko Vice President, February 8, 2002
----------------------------------- Chief Financial Officer and Treasurer
James K. Vizanko
Mark A. Schober Vice President and Controller February 8, 2002
-----------------------------------
Mark A. Schober
Kathleen A. Brekken Director February 8, 2002
-----------------------------------
Kathleen A. Brekken
Dennis E. Evans Director February 8, 2002
-----------------------------------
Dennis E. Evans
Glenda E. Hood Director February 8, 2002
-----------------------------------
Glenda E. Hood
Peter J. Johnson Director February 8, 2002
-----------------------------------
Peter J. Johnson
George L. Mayer Director February 8, 2002
-----------------------------------
George L. Mayer
Jack I. Rajala Director February 8, 2002
-----------------------------------
Jack I. Rajala
Arend J. Sandbulte Director February 8, 2002
-----------------------------------
Arend J. Sandbulte
Nick Smith Director February 8, 2002
-----------------------------------
Nick Smith
Bruce W. Stender Director February 8, 2002
-----------------------------------
Bruce W. Stender
Donald C. Wegmiller Director February 8, 2002
-----------------------------------
Donald C. Wegmiller
---------------------------------------------------------------------------
40 ALLETE 2001 Form 10-K
FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2001, 2000 AND 1999
WITH REPORT OF INDEPENDENT ACCOUNTANTS
AND REPORT OF MANAGEMENT
---------------------------------------------------------------------------
ALLETE 2001 Form 10-K 41
REPORTS
INDEPENDENT ACCOUNTANTS [PRICEWATERHOUSECOOPERS LLP LOGO]
To the Shareholders and
Board of Directors of ALLETE, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of stockholders' equity
present fairly, in all material respects, the financial position of ALLETE, Inc.
and its subsidiaries at December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of ALLETE, Inc.'s management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 21, 2002
--------------------------------------------------------------------------------
MANAGEMENT
The consolidated financial statements and other financial information were
prepared by management, who is responsible for their integrity and objectivity.
The financial statements have been prepared in conformity with generally
accepted accounting principles and necessarily include some amounts that are
based on informed judgments and best estimates and assumptions of management.
To meet management's responsibilities with respect to financial information, we
maintain and enforce a system of internal accounting controls designed to
provide assurance, on a cost effective basis, that transactions are carried out
in accordance with management's authorizations and that assets are safeguarded
against loss from unauthorized use or disposition. The system includes an
organizational structure that provides an appropriate segregation of
responsibilities, careful selection and training of personnel, written policies
and procedures, and periodic reviews by our internal audit department. In
addition, we have personnel policies that require all employees to maintain a
high standard of ethical conduct. Management believes the system is effective
and provides reasonable assurance that all transactions are properly recorded
and have been executed in accordance with management's authorization. Management
modifies and improves our system of internal accounting controls in response to
changes in business conditions. Our internal audit staff is charged with the
responsibility for determining compliance with our procedures.
Four of our directors, not members of management, serve as the Audit Committee.
Our Board of Directors, through the Audit Committee, oversees management's
responsibilities for financial reporting. The Audit Committee meets regularly
with management, the internal auditors and the independent accountants to
discuss auditing and financial matters and to assure that each is carrying out
their responsibilities. The internal auditors and the independent accountants
have full and free access to the Audit Committee without management present.
PricewaterhouseCoopers LLP, independent accountants, are engaged to express an
opinion on the financial statements. Their audit is conducted in accordance with
generally accepted auditing standards and includes a review of internal controls
and tests of transactions to the extent necessary to allow them to report on the
fairness of our operating results and financial condition.
David G. Gartzke
David G. Gartzke
Chairman, President and Chief Executive Officer
James K. Vizanko
James K. Vizanko
Chief Financial Officer
---------------------------------------------------------------------------
42 ALLETE 2001 Form 10-K
REPORTS
CONSOLIDATED FINANCIAL STATEMENTS
ALLETE CONSOLIDATED BALANCE SHEET
DECEMBER 31 2001 2000
---------------------------------------------------------------------------------------------------------------------
Millions
ASSETS
Current Assets
Cash and Cash Equivalents $ 221.1 $ 208.0
Trading Securities 155.6 90.8
Accounts Receivable 328.4 242.3
Inventories 32.7 25.1
Prepayments and Other 131.7 126.0
Discontinued Operations 40.4 38.8
---------------------------------------------------------------------------------------------------------------------
Total Current Assets 909.9 731.0
Property, Plant and Equipment 1,324.0 1,201.9
Investments 141.0 116.4
Goodwill 494.4 472.8
Other Assets 103.6 87.3
Discontinued Operations 309.6 304.6
---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $3,282.5 $2,914.0
---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Accounts Payable $ 239.8 $ 260.3
Accrued Taxes, Interest and Dividends 38.1 45.2
Notes Payable and Long-Term Debt Due Within One Year 274.3 271.6
Other 106.5 84.5
Discontinued Operations 45.8 45.4
---------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 704.5 707.0
Long-Term Debt 933.8 817.2
Accumulated Deferred Income Taxes 106.9 111.8
Other Liabilities 163.4 145.7
Discontinued Operations 155.1 156.5
Commitments and Contingencies
---------------------------------------------------------------------------------------------------------------------
Total Liabilities 2,063.7 1,938.2
---------------------------------------------------------------------------------------------------------------------
Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary ALLETE Capital I Which Holds Solely Company Junior
Subordinated Debentures 75.0 75.0
---------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common Stock Without Par Value, 130.0 Shares Authorized
83.9 and 74.7 Shares Outstanding 770.3 576.9
Unearned ESOP Shares (52.7) (55.7)
Accumulated Other Comprehensive Loss (14.5) (4.2)
Retained Earnings 440.7 383.8
---------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 1,143.8 900.8
---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,282.5 $2,914.0
---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
---------------------------------------------------------------------------
ALLETE 2001 Form 10-K 43
ALLETE CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31 2001 2000 1999
---------------------------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts
OPERATING REVENUE
Energy Services $ 620.8 $ 589.5 $554.5
Automotive Services 832.1 522.6 383.2
Investments 74.8 77.4 57.8
---------------------------------------------------------------------------------------------------------------------------------
Total Operating Revenue 1,527.7 1,189.5 995.5
---------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Fuel and Purchased Power 233.1 229.0 200.2
Operations 1,012.1 730.6 598.8
Interest 74.7 58.8 49.5
---------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 1,319.9 1,018.4 848.5
---------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME BEFORE CAPITAL RE AND ACE 207.8 171.1 147.0
INCOME (LOSS) FROM INVESTMENT IN CAPITAL RE AND
RELATED DISPOSITION OF ACE - 48.0 (34.5)
---------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME FROM CONTINUING OPERATIONS 207.8 219.1 112.5
DISTRIBUTIONS ON REDEEMABLE
PREFERRED SECURITIES OF ALLETE CAPITAL I 6.0 6.0 6.0
INCOME TAX EXPENSE 73.2 76.2 50.3
---------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 128.6 136.9 56.2
INCOME FROM DISCONTINUED OPERATIONS 10.1 11.7 11.8
---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 138.7 $ 148.6 $ 68.0
---------------------------------------------------------------------------------------------------------------------------------
AVERAGE SHARES OF COMMON STOCK
BASIC 75.8 69.8 68.4
DILUTED 76.5 70.1 68.7
---------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE OF COMMON STOCK
BASIC
Continuing Operations $1.70 $1.95 $0.80
Discontinued Operations 0.13 0.17 0.17
---------------------------------------------------------------------------------------------------------------------------------
$1.83 $2.12 $0.97
---------------------------------------------------------------------------------------------------------------------------------
DILUTED
Continuing Operations $1.68 $1.94 $0.80
Discontinued Operations 0.13 0.17 0.17
---------------------------------------------------------------------------------------------------------------------------------
$1.81 $2.11 $0.97
---------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS PER SHARE OF COMMON STOCK $1.07 $1.07 $1.07
---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
---------------------------------------------------------------------------
44 ALLETE 2001 Form 10-K
ALLETE CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
Millions
OPERATING ACTIVITIES
Net Income $ 138.7 $ 148.6 $ 68.0
Loss (Income) from Investment in Capital Re and Related
Disposition of ACE - Net of Dividends Received - (48.0) 34.5
Depreciation and Amortization 101.6 86.7 76.9
Deferred Income Taxes 10.3 (6.6) (12.8)
Changes in Operating Assets and Liabilities - Net of the
Effects of Acquisitions
Trading Securities (64.8) 88.9 16.1
Accounts Receivable (85.7) (29.1) (20.3)
Inventories (3.0) (2.2) (0.2)
Accounts Payable (23.9) 92.7 1.4
Other Current Assets and Liabilities 10.5 (75.1) 0.3
Other - Net 19.9 19.6 9.9
-----------------------------------------------------------------------------------------------------------------------------------
Cash from Operating Activities 103.6 275.5 173.8
-----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from Sale of Investments 2.6 146.0 67.6
Additions to Investments (11.2) (42.5) (27.5)
Additions to Property, Plant and Equipment (153.0) (168.7) (99.7)
Acquisitions - Net of Cash Acquired (157.1) (453.0) (93.6)
Other - Net 21.3 24.4 (16.9)
-----------------------------------------------------------------------------------------------------------------------------------
Cash for Investing Activities (297.4) (493.8) (170.1)
-----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of Long-Term Debt 125.2 306.3 51.5
Issuance of Common Stock 189.2 23.6 21.8
Changes in Notes Payable - Net 5.5 177.8 15.5
Reductions of Long-Term Debt (18.1) (58.8) (9.9)
Redemption of Preferred Stock - (31.5) -
Dividends on Preferred and Common Stock (81.8) (75.4) (75.0)
-----------------------------------------------------------------------------------------------------------------------------------
Cash from Financing Activities 220.0 342.0 3.9
-----------------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (11.3) (5.9) 4.5
-----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS 14.9 117.8 12.1
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 219.3 101.5 89.4
-----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 234.2 $219.3 $101.5
-----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Period for
Interest - Net of Capitalized $84.2 $66.3 $61.3
Income Taxes $60.5 $107.1 $60.3
-----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
---------------------------------------------------------------------------
ALLETE 2001 Form 10-K 45
ALLETE CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
ACCUMULATED
TOTAL OTHER UNEARNED CUMULATIVE
STOCKHOLDERS' RETAINED COMPREHENSIVE ESOP COMMON PREFERRED
EQUITY EARNINGS INCOME (LOSS) SHARES STOCK STOCK
------------------------------------------------------------------------------------------------------------------------------------
Millions
BALANCE AT DECEMBER 31, 1998 $ 797.1 $317.6 $ 1.5 $(62.5) $529.0 $11.5
COMPREHENSIVE INCOME
Net Income 68.0 68.0
Other Comprehensive Income-- Net of Tax
Unrealized Losses on Securities-- Net (3.6) (3.6)
Foreign Currency Translation Adjustments 4.5 4.5
--------
Total Comprehensive Income 68.9
COMMON STOCK ISSUED - NET 23.0 23.0
DIVIDENDS DECLARED (75.0) (75.0)
ESOP SHARES EARNED 3.3 3.3
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 817.3 310.6 2.4 (59.2) 552.0 11.5
COMPREHENSIVE INCOME
Net Income 148.6 148.6
Other Comprehensive Income - Net of Tax
Unrealized Losses on Securities - Net (0.7) (0.7)
Foreign Currency Translation Adjustments (5.9) (5.9)
--------
Total Comprehensive Income 142.0
COMMON STOCK ISSUED - NET 24.9 24.9
REDEMPTION OF CUMULATIVE PREFERRED STOCK (11.5) (11.5)
DIVIDENDS DECLARED (75.4) (75.4)
ESOP SHARES EARNED 3.5 3.5
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 900.8 383.8 (4.2) (55.7) 576.9 -
COMPREHENSIVE INCOME
Net Income 138.7 138.7
Other Comprehensive Income - Net of Tax
Unrealized Gains on Securities - Net 2.5 2.5
Interest Rate Swap (1.5) (1.5)
Foreign Currency Translation Adjustments (11.3) (11.3)
--------
Total Comprehensive Income 128.4
COMMON STOCK ISSUED - NET 193.4 193.4
DIVIDENDS DECLARED (81.8) (81.8)
ESOP SHARES EARNED 3.0 3.0
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 $1,143.8 $440.7 $(14.5) $(52.7) $770.3 -
------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
---------------------------------------------------------------------------
46 ALLETE 2001 Form 10-K
NOTES TO FINANCIAL STATEMENTS
1 BUSINESS SEGMENTS
Millions INVESTMENTS
AND
ENERGY AUTOMOTIVE CORPORATE
FOR THE YEAR ENDED DECEMBER 31 CONSOLIDATED SERVICES SERVICES CHARGES
----------------------------------------------------------------------------------------------------------------------------
2001
Operating Revenue $1,527.7 $620.8 $832.1 $74.8
Operation and Other Expense 1,129.3 468.2 610.9 50.2
Depreciation and Amortization Expense 89.0 46.0 42.7 0.3
Lease Expense 26.9 2.7 24.2 -
Interest Expense 74.7 20.1 35.3 19.3
----------------------------------------------------------------------------------------------------------------------------
Operating Income 207.8 83.8 119.0 5.0
Distributions on Redeemable
Preferred Securities of Subsidiary 6.0 2.4 - 3.6
Income Tax Expense (Benefit) 73.2 31.4 44.2 (2.4)
----------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 128.6 $ 50.0 $ 74.8 $ 3.8
--------------------------------------------
Income from Discontinued Operations 10.1
----------------------------------------------------------------------
Net Income $ 138.7
EBITDAL from Continuing Operations $398.4 $152.6 $221.2 $24.6
Total Assets $3,282.5 $1,055.8 $1,515.4 $361.3
Property, Plant and Equipment $1,324.0 $877.3 $446.7 -
Accumulated Depreciation and Amortization $829.2 $693.5 $133.4 $2.3
Capital Expenditures $153.0 $59.9 $61.0 -
----------------------------------------------------------------------------------------------------------------------------
2000
Operating Revenue $1,189.5 $589.5 $522.6 $77.4
Operation and Other Expense 865.5 445.8 370.8 48.9
Depreciation and Amortization Expense 73.0 46.3 26.2 0.5
Lease Expense 21.1 2.8 18.3 -
Interest Expense 58.8 21.1 23.3 14.4
----------------------------------------------------------------------------------------------------------------------------
Operating Income Before ACE 171.1 73.5 84.0 13.6
Income from Disposition of ACE 48.0 - - 48.0
Distributions on Redeemable
Preferred Securities of Subsidiary 6.0 2.0 - 4.0
Income Tax Expense 76.2 28.4 34.1 13.7
----------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 136.9 $ 43.1 $ 49.9 $43.9
--------------------------------------------
Income from Discontinued Operations 11.7
----------------------------------------------------------------------
Net Income $ 148.6
EBITDAL from Continuing Operations $324.0 $143.7 $151.8 $28.5
Total Assets $2,914.0 $950.7 $1,339.0 $280.9
Property, Plant and Equipment $1,201.9 $792.5 $409.4 -
Accumulated Depreciation and Amortization $746.0 $661.9 $81.9 $2.2
Capital Expenditures $168.7 $64.7 $74.2 $0.2
----------------------------------------------------------------------------------------------------------------------------
1999
Operating Revenue $995.5 $554.5 $383.2 $ 57.8
Operation and Other Expense 719.8 409.4 272.3 38.1
Depreciation and Amortization Expense 63.1 45.2 17.4 0.5
Lease Expense 16.1 3.2 12.9 -
Interest Expense 49.5 21.2 10.9 17.4
----------------------------------------------------------------------------------------------------------------------------
Operating Income Before Capital Re 147.0 75.5 69.7 1.8
Loss from Investment in Capital Re (34.5) - - (34.5)
Distributions on Redeemable
Preferred Securities of Subsidiary 6.0 1.7 - 4.3
Income Tax Expense (Benefit) 50.3 28.8 29.4 (7.9)
----------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 56.2 $ 45.0 $ 40.3 $(29.1)
--------------------------------------------
Income from Discontinued Operations 11.8
----------------------------------------------------------------------
Net Income $ 68.0
EBITDAL from Continuing Operations $275.7 $145.1 $110.9 $19.7
Total Assets $2,312.6 $995.7 $661.9 $328.0
Property, Plant and Equipment $1,003.4 $770.0 $233.4 -
Accumulated Depreciation and Amortization $688.7 $629.7 $57.1 $1.9
Capital Expenditures $99.7 $47.7 $23.8 $1.3
----------------------------------------------------------------------------------------------------------------------------
INCLUDED $139.4 MILLION OF CANADIAN OPERATING REVENUE IN 2001 ($107.4 MILLION IN 2000; $56.8 MILLION IN 1999).
INCLUDED $187.6 MILLION OF CANADIAN ASSETS IN 2001 ($215.6 MILLION IN 2000; $119.3 MILLION IN 1999).
DISCONTINUED OPERATIONS REPRESENTED $350.0 MILLION OF TOTAL ASSETS IN 2001 ($343.4 MILLION IN 2000; $327.0 MILLION IN 1999)
AND $32.1 MILLION OF CAPITAL EXPENDITURES IN 2001 ($29.6 MILLION IN 2000; $26.9 MILLION IN 1999).
---------------------------------------------------------------------------
ALLETE 2001 Form 10-K 47
2 OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PREPARATION. References in this report to "we" and "our" are
to ALLETE and its subsidiaries, collectively. We prepare our financial
statements in conformity with generally accepted accounting principles. These
principles require management to make informed judgments, best estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION. Our consolidated financial statements include the
accounts of ALLETE and all of our majority owned subsidiary companies. All
material intercompany balances and transactions have been eliminated in
consolidation. Information for prior periods has been reclassified to present
comparable information for all periods.
BUSINESS SEGMENTS. Energy Services and Automotive Services segments were
determined based on products and services provided. The Investment and Corporate
Charges segment was determined based on short-term corporate liquidity needs and
the need to provide financial flexibility to pursue strategic initiatives in the
other business segments. We measure performance of our operations through
careful budgeting and monitoring of EBITDAL and contributions to consolidated
net income by each business segment. Discontinued operations included operating
results of businesses within our Water Services segment and our auto transport
company.
ENERGY SERVICES. Energy Services generate, transmit, distribute, market and
trade electricity. Native load electric service is provided to 145,000 customers
in northeastern Minnesota and northwestern Wisconsin. Large Power Customers,
which include five taconite producers, four paper and pulp mills, two pipeline
companies and one manufacturer, purchase about half of the electricity Minnesota
Power sells under all-requirements contracts with expiration dates extending
from September 2002 through December 2008. (See Item 1. - Energy Services -
Large Power Customers in this Form 10-K.) MPEX, a division of Minnesota Power,
markets power across the Midwest and Canada. Split Rock Energy LLC, formed as an
alliance between Minnesota Power and Great River Energy, combines power supply
capabilities and customer loads to share market and supply risks and to optimize
power trading opportunities. Split Rock Energy contracts for exclusive services
from MPEX. It was announced in January 2002 that MPEX will be transferred to
Split Rock Energy. The transfer is expected to occur in March 2002. We account
for our 50% ownership interest in Split Rock Energy under the equity method of
accounting. For the year ended December 31, 2001 Split Rock Energy's total net
income was $6.9 million (net loss of $27,000 in 2000). We purchase power from
Split Rock Energy to serve native load requirements and sell generation to Split
Rock Energy. Purchases and sales are at market rates. In 2001 we made power
purchases from Split Rock Energy of $56.1 million ($25.1 million in 2000) and
power sales to Split Rock Energy of $13.3 million ($11.7 million in 2000). BNI
Coal, a wholly owned subsidiary, mines and sells lignite coal to two North
Dakota mine-mouth generating units, one of which is Square Butte. Square Butte
supplies approximately 71% (322 MW) of its output to Minnesota Power under a
long-term contract. (See Note 13.)
Electric rates are under the jurisdiction of various state and federal
regulatory authorities. Billings are rendered on a cycle basis. Revenue is
accrued for service provided but not billed. Electric rates include adjustment
clauses that bill or credit customers for fuel and purchased energy costs above
or below the base levels in rate schedules and bill retail customers for the
recovery of CIP expenditures not collected in base rates.
AUTOMOTIVE SERVICES. Automotive Services include several wholly owned
subsidiaries operating as integral parts of the vehicle redistribution business.
ADESA is the second largest wholesale vehicle auction network in North America.
ADESA owns or leases, and operates 53 wholesale vehicle auctions in the United
States and Canada through which used cars and other vehicles are sold to
franchised automobile dealers and licensed used car dealers. Sellers at ADESA's
auctions include domestic and foreign auto manufacturers, car dealers,
automotive fleet/lease companies, banks and finance companies. ADESA Impact has
23 auction facilities in the United States and Canada that provide "total loss"
vehicle services to insurance, vehicle leasing and rental car companies. AFC
provides inventory financing for wholesale and retail automobile dealers who
purchase vehicles at auctions. AFC has 82 loan production offices located across
the United States and Canada. These offices provide qualified dealers credit to
purchase vehicles at any of the 400 plus auctions approved by AFC. PAR provides
customized vehicle remarketing services, including nationwide repossessions and
the liquidation of off-lease vehicles, to various businesses with fleet
operations. AutoVIN provides technology-enabled vehicle inspection services and
inventory auditing to the automotive industry. ADESA, ADESA Impact, PAR and
AutoVIN recognize revenue when services are performed. AFC's revenue is
comprised of gains on sales of receivables, and interest, fee and servicer
income. As is customary for finance companies, AFC's revenue is reported net of
interest expense of $3.4 million in 2001 ($2.7 million in 2000; $2.0 million in
1999). AFC generally sells its United States dollar denominated finance
receivables through a private securitization structure. Gains and losses on such
sales are generally recognized at the time of settlement based on the difference
between the sales proceeds and the allocated basis of the finance receivables
sold, adjusted for transaction
---------------------------------------------------------------------------
48 ALLETE 2001 Form 10-K
fees and residual interest retained. AFC also retains the right to service
receivables sold through securitization and receives a fee for doing so.
INVESTMENTS AND CORPORATE CHARGES. Investments and Corporate Charges include
real estate operations, investments in emerging technologies related to the
electric utility industry, a securities portfolio and general corporate
expenses, including interest, not specifically related to any other segment. Our
real estate operations include several wholly owned subsidiaries and an 80%
ownership in Lehigh. All are Florida companies which through their subsidiaries
own real estate in Florida. Real estate revenue is recognized on the accrual
basis.
DEPRECIATION. Property, plant and equipment are recorded at original cost and
are reported on the balance sheet net of accumulated depreciation. Expenditures
for additions and significant replacements and improvements are capitalized;
maintenance and repair costs are expensed as incurred. Expenditures for major
plant overhauls are also accounted for using this same policy. When non-utility
property, plant and equipment are retired or otherwise disposed of, gains or
losses are recognized in revenue. When utility property, plant and equipment are
retired or otherwise disposed of, no gain or loss is recognized.
Depreciation is computed using the estimated useful lives of the various classes
of plant. In 2001 average depreciation rates for the energy and automotive
services segments were 3.0% and 4.0% (3.3% and 3.7% in 2000; 3.3% and 3.9% in
1999).
ASSET IMPAIRMENTS. The Company periodically reviews its long-lived assets
whenever events indicate the carrying amount of the assets may not be
recoverable. As of December 31, 2001 and 2000 no significant write-downs were
required.
ACCOUNTS RECEIVABLE. Accounts receivable are reported on the balance sheet net
of an allowance for doubtful accounts. The allowance is based on our evaluation
of the receivable portfolio under current conditions, the size of the portfolio,
overall portfolio quality, review of specific problems and such other factors
that in our judgment deserve recognition in estimating losses.
AFC sells certain finance receivables on a revolving basis to a wholly owned,
unconsolidated, qualified special purpose subsidiary. This subsidiary in turn
sells, on a revolving basis, an undivided interest in eligible finance
receivables, up to a maximum at any one time outstanding of $300 million, to
third party purchasers under an agreement that expires at the end of 2002. At
December 31, 2001 AFC had sold $381.2 million of finance receivables to the
special purpose subsidiary ($335.7 million at December 31, 2000). Third party
purchasers had purchased an undivided interest in finance receivables of $267
million from this subsidiary at December 31, 2001 ($239 million at December 31,
2000). At December 31, 2000 AFC had $53.5 million of finance receivables sold to
another wholly owned, unconsolidated, qualified special purpose subsidiary under
an agreement that expired in June 2001. Unsold finance receivables held by the
special purpose subsidiary are recorded by AFC as residual interest at fair
value. Fair value is based upon estimates of future cash flows, using
assumptions that market participants would use to value such instruments,
including estimates of anticipated credit losses over the life of the
receivables sold without application of a discount rate due to the short-term
nature of the receivables sold. The fair value of AFC's residual interest was
$103.0 million at December 31, 2001 ($106.2 million at December 31, 2000).
Proceeds from the sale of the receivables were used to repay borrowings from
ALLETE and fund vehicle inventory purchases for AFC's customers. AFC must
maintain certain financial covenants such as minimum tangible net worth to
comply with the terms of the securitization agreement.
ACCOUNTS RECEIVABLE
DECEMBER 31 2001 2000
--------------------------------------------------------------------------------
Millions
Trade Accounts Receivable $198.5 $184.8
Less: Allowance for Doubtful Accounts 5.8 4.8
--------------------------------------------------------------------------------
192.7 180.0
--------------------------------------------------------------------------------
Finance Receivables 522.8 458.0
Less: Amount Sold 381.2 389.2
Allowance for Doubtful Accounts 5.9 6.5
--------------------------------------------------------------------------------
135.7 62.3
--------------------------------------------------------------------------------
Total Accounts Receivable $328.4 $242.3
--------------------------------------------------------------------------------
INVENTORIES. Inventories, which include fuel, material and supplies, are stated
at the lower of cost or market. Cost is determined by the average cost method.
GOODWILL. Goodwill relates to the Automotive Services segment and represents the
excess of cost over identifiable net assets of businesses acquired. Amortization
was computed on a straight-line basis over a 40 year period. Operating expenses
in 2001 included $13.8 million of goodwill amortization ($8.2 million in 2000;
$5.1 million in 1999).
In July 2001 the FASB issued SFAS 142, "Goodwill and Other Intangible Assets."
SFAS 142 changes the accounting for goodwill from an amortization method to an
impairment-only approach. Effective January 1, 2002 goodwill is no longer
amortized. We had $535.8 million of goodwill as of December 31, 2001. As
required by SFAS 142, we will perform impairment testing within the first six
months of 2002. We do not believe we have any goodwill impairment at this time.
UNAMORTIZED EXPENSE, DISCOUNT AND PREMIUM ON DEBT. Expense, discount and premium
on debt are deferred and amortized over the lives of the related issues.
CASH AND CASH EQUIVALENTS. We consider all investments purchased with maturities
of three months or less to be cash equivalents.
---------------------------------------------------------------------------
ALLETE 2001 Form 10-K 49
FOREIGN CURRENCY TRANSLATION. Results of operations for our Canadian
subsidiaries are translated into United States dollars using the average
exchange rates during the period. Assets and liabilities are translated into
United States dollars using the exchange rate on the balance sheet date, except
for intangibles and fixed assets, which are translated at historical rates.
NEW ACCOUNTING STANDARDS. In July 2001 the FASB issued SFAS 141 and 143. SFAS
141, "Business Combinations," requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. Use of the
pooling of interests method of accounting is prohibited.
SFAS 143, "Accounting for Asset Retirement Obligations," requires the
recognition of a liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded, the carrying
amount of the related long-lived asset is correspondingly increased. Over time,
the liability is accreted to its present value and the related capitalized
charge is depreciated over the useful life of the asset. SFAS 143 is effective
for fiscal years beginning after June 15, 2002. We are currently reviewing the
impact of SFAS 143 on the Company.
In August 2001 the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 establishes a single accounting model
for long-lived assets that are impaired or are to be disposed. We adopted SFAS
144 in the fourth quarter of 2001. Under the provisions of SFAS 144, we reported
the results of our Water Services businesses and the auto transport company as
discontinued operations and ceased depreciation of assets related to these
businesses in the fourth quarter of 2001.
3 ACQUISITIONS AND DIVESTITURES
ADESA AUCTION FACILITIES. In January 2001 we acquired all of the outstanding
stock of ComSearch in exchange for ALLETE common stock and paid cash to purchase
all of the assets of Auto Placement Center (now ADESA Impact) in transactions
with an aggregate value of $62.4 million. In May 2001 ADESA purchased the assets
of the I-44 Auto Auction in Tulsa, Oklahoma. ADESA Impact and ADESA Tulsa were
accounted for using the purchase method and financial results have been included
in our consolidated financial statements since the date of purchase. Pro forma
financial results were not material. ComSearch was accounted for as a pooling of
interests. Financial results for prior periods have not been restated to reflect
this pooling due to immateriality.
In February 2000 ADESA purchased the Mission City Auto Auction in San Diego,
California. In May 2000 ADESA Canada purchased the remaining 27% of Impact Auto.
ADESA Canada acquired 20% of Impact Auto on October 1, 1995, 27% in March 1999
and another 26% in January 2000. In June 2000 ADESA acquired all of the
outstanding common shares of Auction Finance Group, Inc. (AFG). AFG owned CAAG
Auto Auction Holdings Ltd., which was doing business as Canadian Auction Group.
In August 2000 ADESA acquired Beebe Auto Exchange, Inc. and 51% of Interstate
Auto Auction. In October 2000 ADESA purchased nine auction facilities from
Manheim. These transactions had a combined purchase price of approximately $438
million and resulted in goodwill of $298 million. We used the purchase method of
accounting for these transactions. Financial results have been included in our
consolidated financial statements since the date of each purchase. Pro forma
financial results were not material.
In April 1999 ADESA acquired Des Moines Auto Auction and in July 1999 ADESA
Canada Inc. purchased the Vancouver Auto Auction. The two transactions had a
combined purchase price of $31.3 million and were accounted for using the
purchase method of accounting resulting in goodwill of $11.9 million. Financial
results for each facility have been included in our consolidated financial
statements since the date of purchase. Financial results prior to the
acquisition were not material.
ACQUISITION OF ENVENTIS, INC. In July 2001 we acquired Enventis, Inc., a data
network systems provider headquartered in the Minneapolis-St. Paul area. In
connection with this acquisition, we issued 310,878 shares of ALLETE common
stock. Enventis was accounted for as a pooling of interests. Financial results
for prior periods have not been restated to reflect this pooling due to
immateriality.
ACQUISITION OF GENERATING FACILITY. In October 2001 we acquired certain non-
mining properties from LTV and Cleveland-Cliffs for $75 million. The non-mining
properties include a 225-MW electric generating facility.
REAL ESTATE ACQUISITIONS. In September 2001 our real estate subsidiary purchased
Winter Haven Citi Centre, a retail shopping center. In December 2001 and January
2002 real estate subsidiaries purchased additional land in Palm Coast, Florida.
These transactions had a combined purchase price of approximately $31 million
and were accounted for using the purchase method.
ACQUISITION OF CAPE CORAL. In June 1999 Cape Coral Holdings, a subsidiary of
ALLETE Properties, purchased, for $36.2 million, certain real estate properties
located in Cape Coral, Florida. The transaction was accounted for using the
purchase method of accounting. Financial results have been included in our
consolidated financial statements since the date of purchase. Financial results
prior to the acquisition were not material..
---------------------------------------------------------------------------
50 ALLETE 2001 Form 10-K
4 DISCONTINUED OPERATIONS
In September 2001 we began a process of systematically evaluating our businesses
to determine the strategic value of our assets and explore ways to unlock that
value. As a result, our management and Board of Directors have committed to a
plan to sell our Water Services businesses and the auto transport company. Water
Services includes water and wastewater services operated by several wholly owned
subsidiaries in Florida, North Carolina and Georgia. We anticipate selling our
auto transport company by the end of the first quarter 2002 and our Water
Services businesses before the end of 2002. The financial results of these
businesses have been accounted for as discontinued operations. In accordance
with SFAS 144, we ceased depreciation of assets related to these businesses in
the fourth quarter of 2001.
During the fourth quarter of 2001 we recognized a $4.4 million, or $0.06 per
share, charge to exit the auto transport company. When this company is actually
sold this amount may be adjusted. The final amount is not expected to be
material.
SUMMARY OF DISCONTINUED OPERATIONS
INCOME STATEMENT
YEAR ENDED DECEMBER 31 2001 2000 1999
--------------------------------------------------------------------------------
Millions
Operating Revenue $140.4 $142.4 $136.3
--------------------------------------------------------------------------------
Pre-Tax Income $17.4 $20.0 $19.2
Income Tax Expense 7.3 8.3 7.4
--------------------------------------------------------------------------------
Income from
Discontinued Operations $10.1 $11.7 $11.8
--------------------------------------------------------------------------------
BALANCE SHEET INFORMATION
DECEMBER 31 2001 2000
--------------------------------------------------------------------------------
Millions
Assets of Discontinued Operations
Current Assets $ 40.4 $ 38.8
Property, Plant and Equipment 280.1 277.8
Other Assets 29.5 26.8
--------------------------------------------------------------------------------
$350.0 $343.4
--------------------------------------------------------------------------------
Liabilities of Discontinued Operations
Current Liabilities $ 45.8 $ 45.4
Long-Term Debt 128.7 135.1
Other Liabilities 26.4 21.4
--------------------------------------------------------------------------------
$200.9 $201.9
--------------------------------------------------------------------------------
5 REGULATORY MATTERS
We file for periodic rate revisions with the Minnesota Public Utilities
Commission (MPUC), the Federal Energy Regulatory Commission and other state
regulatory authorities. Interim rates in Minnesota are placed into effect,
subject to refund with interest, pending a final decision by the appropriate
commission. In 2001 31% of our consolidated operating revenue (41% in 2000; 44%
in 1999) was under regulatory authority. The MPUC had regulatory authority over
approximately 25% in 2001 (33% in 2000; 36% in 1999) of our consolidated
operating revenue.
ELECTRIC RATES. The electric utility industry continues to restructure itself in
response to growing competition at both the wholesale and retail levels. This
restructuring has primarily affected Minnesota Power's wholesale power marketing
and trading activity through MPEX and Split Rock Energy. New legislation and
regulation that aims to maintain reliability, assure adequate energy supply, and
address wholesale price volatility while encouraging wholesale competition is
being considered at the federal level. Over one-half the states, representing
approximately 70% of the United States population, have passed either
legislation or regulation that initiates a process which may lead to retail
customer choice. These initiatives lack momentum in Minnesota and Wisconsin.
Legislative and regulatory activity as well as the actions of competitors affect
the way Minnesota Power strategically plans for its future. We cannot predict
the timing or substance of any future legislation or regulation.
DEFERRED REGULATORY CHARGES AND CREDITS. Our utility operations are subject to
the provisions of SFAS 71, "Accounting for the Effects of Certain Types of
Regulation." We capitalize as deferred regulatory charges incurred costs which
are probable of recovery in future utility rates. Deferred regulatory credits
represent amounts expected to be credited to customers in rates. Deferred
regulatory charges and credits are included in other assets and other
liabilities on our consolidated balance sheet.
DEFERRED REGULATORY CHARGES AND CREDITS
DECEMBER 31 2001 2000
------------------------------------------------------------------------------
Millions
Deferred Charges
Income Taxes $ 12.8 $ 13.9
Conservation Improvement Programs 0.3 1.1
Premium on Reacquired Debt 4.5 5.0
Other 0.4 1.0
------------------------------------------------------------------------------
18.0 21.0
Deferred Credits
Income Taxes 63.2 53.9
------------------------------------------------------------------------------
Net Deferred Regulatory Charges (Credits) $(45.2) $(32.9)
------------------------------------------------------------------------------
---------------------------------------------------------------------------
ALLETE 2001 Form 10-K 51
6 FINANCIAL INSTRUMENTS
SECURITIES INVESTMENTS. Our securities portfolio is managed internally and by
selected outside managers. Securities held principally for near-term sale are
classified as trading securities and included in current assets at fair value.
Changes in the fair value of trading securities are recognized in earnings.
Trading securities consist primarily of the common stock of publicly traded
companies. Securities held for an indefinite period of time are classified as
available-for-sale securities and included in investments at fair value.
Unrealized gains and losses on available-for-sale securities are included in
accumulated other comprehensive income, net of tax. Unrealized losses on
available-for-sale securities that are other than temporary are recognized in
earnings. Realized gains and losses are computed on each specific investment
sold. Available-for-sale securities consisted of equity securities in a grantor
trust established to fund certain employee benefits and the common stock of
publicly traded companies. At December 31, 1999 available-for-sale securities
also included 4.7 million shares of ACE Limited (which were sold in 2000).
AVAILABLE-FOR-SALE SECURITIES
----------------------------------------------------------------------
Millions
GROSS
UNREALIZED FAIR
AT DECEMBER 31 COST GAIN (LOSS) VALUE
----------------------------------------------------------------------
2001 $18.1 $10.3 $(1.9) $26.5
2000 $10.8 $14.5 - $25.3
1999 $87.8 $6.3 $(0.3) $93.8
----------------------------------------------------------------------
NET
UNREALIZED
GAIN (LOSS)
GROSS IN OTHER
SALES REALIZED COMPREHENSIVE
AT DECEMBER 31 PROCEEDS GAIN (LOSS) INCOME
----------------------------------------------------------------------
2001 - - - $3.6
2000 $129.9 $49.1 - $(0.5)
1999 $0.2 - - $1.6
----------------------------------------------------------------------
The net unrealized gain included in earnings for trading securities in 2001 was
$0.9 million ($2.3 million loss in 2000; $1.6 million loss in 1999).
We also have several minority investments in venture capital funds and
privately-held start-up companies. These investments are accounted for under the
cost method. The total carrying value was $40.6 million at December 31, 2001
($38.5 million at December 31, 2000). We cannot estimate the fair value of these
investments as there is no public market or other practicable means of
estimation.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS AND RISKS. In portfolio strategies
designed to reduce market risks, we sell common stock securities short.
Unrealized gains and losses on short sales are recognized in earnings.
In October 2001 we entered into an interest rate swap agreement with a notional
amount of $250 million to hedge $250 million of floating rate debt issued in
October 2000. Under the 15-month swap agreement, we make fixed quarterly
payments based on a fixed rate of 3.2% and receive payments at a floating rate
based on LIBOR (2.4% at December 31, 2001). The agreement is subject to market
risk due to interest rate fluctuation. The swap is recorded on the balance sheet
at fair value and treated as a cash flow hedge with unrealized gains and losses
included in accumulated other comprehensive income.
The fair value of off-balance sheet financial instruments reflected the
estimated amounts that we would receive or pay if the contracts were terminated
at December 31. This fair value represents the difference between the estimated
future receipts and payments under the terms of each instrument, and is
estimated by obtaining quoted market prices or by using common pricing models.
These fair values should not be viewed in isolation, but rather in relation to
the fair value of the underlying hedged transaction.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
---------------------------------------------------------------------------
Millions
FAIR VALUE
CONTRACT RECEIVABLE
DECEMBER 31 AMOUNT (PAYABLE)
---------------------------------------------------------------------------
2001
Short Stock Sales Outstanding $19.8 $(0.8)
Interest Rate Swap $250.0 $(2.5)
---------------------------------------------------------------------------
2000
Short Stock Sales Outstanding $5.3 $(0.5)
Interest Rate Swap $250.0 $(1.1)
---------------------------------------------------------------------------
We provide credit support to facilitate the power marketing and trading
activities of Split Rock Energy, and had $36.0 million in outstanding support at
December 31, 2001 ($30.1 million at December 31, 2000). The support generally
expires one year from the date of issuance.
FAIR VALUE OF FINANCIAL INSTRUMENTS. With the exception of the items listed
below, the estimated fair values of all financial instruments approximate the
carrying amount. The fair values for the items below were based on quoted market
prices for the same or similar instruments.
FINANCIAL INSTRUMENTS CARRYING FAIR
DECEMBER 31 AMOUNT VALUE
-------------------------------------------------------------------------
Millions
Long-Term Debt
2001 $933.8 $960.0
2000 $817.2 $825.3
Quarterly Income Preferred Securities
2001 $75.0 $74.7
2000 $75.0 $72.8
-------------------------------------------------------------------------
---------------------------------------------------------------------------
52 ALLETE 2001 Form 10-K
CONCENTRATION OF CREDIT RISK. Financial instruments that subject us to
concentrations of credit risk consist primarily of accounts receivable.
Minnesota Power sells electricity to about 15 customers in northern Minnesota's
taconite, pipeline, paper and wood products industries. Receivables from these
customers totaled approximately $9 million at December 31, 2001 ($12 million at
December 31, 2000). Minnesota Power does not obtain collateral to support
utility receivables, but monitors the credit standing of major customers.
Our Automotive Services have trade receivables from fees to be collected from
the buyers and finance receivables created by financing dealer purchases of
automobiles in exchange for a security interest in those automobiles.
Substantially all trade and finance receivables are due from automobile dealers.
We have possession of automobiles or automobile titles collateralizing a
significant portion of the trade and finance receivables.
7 LEASING AGREEMENTS
In April 2000 leases for three ADESA auction facilities (Boston, Charlotte and
Knoxville) were refinanced in a $28.4 million leveraged lease transaction. The
new lease is treated as an operating lease for financial reporting purposes and
expires in April 2010 with no renewal options. ADESA is required to guarantee up
to $23 million of any deficiency in sales proceeds that the lessor realizes in
disposing of the leased properties. ADESA receives any sales proceeds in excess
of $29.3 million.
ADESA has guaranteed the payment of principal and interest up to $23 million on
the lessor's indebtedness, which consists of $28.4 million mortgage notes
payable, due April 1, 2020. Terms of the mortgage notes payable require, among
other things, that ADESA maintain certain minimum financial ratios. Interest on
the notes varies and is payable monthly. It is not practical to estimate the
fair value of the guarantee; however, ADESA does not anticipate that it will
incur losses as a result of this guarantee. We have guaranteed ADESA's
obligations under the lease.
ADESA has signed an agreement to lease a new auction facility in suburban San
Francisco to replace an existing facility. Construction on the new facility is
expected to be complete in the second half of 2002.
We lease other properties and equipment in addition to those listed above under
operating and capital lease agreements with terms expiring through 2010. The
aggregate amount of future minimum lease payments for capital and operating
leases during 2002 is $15.7 million ($11.9 million in 2003; $7.3 million in
2004; $6.3 million in 2005; and $5.2 million in 2006). Total rent expense was
$26.9 million in 2001 ($21.1 million in 2000; $16.1 million in 1999).
8 MANDITORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
ALLETE Capital I (Trust) was established as a wholly owned business trust of the
Company for the purpose of issuing common and preferred securities (Trust
Securities). In March 1996 the Trust publicly issued three million 8.05%
Cumulative Quarterly Income Preferred Securities (QUIPS), representing preferred
beneficial interests in the assets held by the Trust. The proceeds from the sale
of the QUIPS, and from common securities of the Trust issued to us, were used by
the Trust to purchase from us $77.5 million of 8.05% Junior Subordinated
Debentures, Series A, Due 2015 (Subordinated Debentures), resulting in net
proceeds to us of $72.3 million. Holders of the QUIPS are entitled to receive
quarterly distributions at an annual rate of 8.05% of the liquidation preference
value of $25 per security. We have the right to defer interest payments on the
Subordinated Debentures which would result in the similar deferral of
distributions on the QUIPS during extension periods up to 20 consecutive
quarters. We are the owner of all the common trust securities, which constitute
approximately 3% of the aggregate liquidation amount of all the Trust
Securities. The sole asset of the Trust is Subordinated Debentures, interest on
which is deductible by us for income tax purposes. The Trust will use interest
payments received on the Subordinated Debentures it holds to make the quarterly
cash distributions on the QUIPS.
The QUIPS are subject to mandatory redemption upon repayment of the Subordinated
Debentures at maturity or upon redemption. We have the option to redeem the
Subordinated Debentures at any time.
We have guaranteed, on a subordinated basis, payment of the Trust's obligations.
---------------------------------------------------------------------------
ALLETE 2001 Form 10-K 53
9 LONG-TERM DEBT
LONG-TERM DEBT
DECEMBER 31 2001 2000
--------------------------------------------------------------------------
Millions
First Mortgage Bonds
Floating Rate Due 2003 $250.0 $250.0
6 1/4% Series Due 2003 25.0 25.0
6.68% Series Due 2007 20.0 20.0
7% Series Due 2007 60.0 60.0
7 1/2% Series Due 2007 35.0 35.0
7 3/4% Series Due 2007 50.0 55.0
7% Series Due 2008 50.0 50.0
6% Pollution Control Series E Due 2022 111.0 111.0
7.70% Senior Notes, Series A Due 2006 90.0 90.0
7.80% Senior Notes Due 2008 125.0 -
8.10% Senior Notes, Series B Due 2010 35.0 35.0
Variable Demand Revenue Refunding
Bonds Series 1997 A, B, C and D
Due 2007 - 2020 39.0 39.0
Other Long-Term Debt, 3.7 - 9.0%
Due 2002 - 2026 50.7 58.7
Less Due Within One Year (6.9) (11.5)
--------------------------------------------------------------------------
Total Long-Term Debt $933.8 $817.2
--------------------------------------------------------------------------
The aggregate amount of long-term debt maturing during 2002 is $6.9 million
($281.2 million in 2003; $9.7 million in 2004; $0.9 million in 2005; and $91.3
million in 2006). Substantially all of our electric plant is subject to the lien
of the mortgages securing various first mortgage bonds.
At December 31, 2001 we had long-term bank lines of credit aggregating $5.0
million ($8.1 million at December 31, 2000). Drawn portions on these lines of
credit were zero at December 31, 2001 and 2000.
In February 2001 we issued $125 million of 7.80% Senior Notes due February 2008.
Proceeds were used to repay a portion of ALLETE's short-term borrowings incurred
for the acquisition of vehicle auction facilities purchased in 2000 and early
2001, and for general corporate purposes. These Senior Notes are unsecured.
In October 2000 we issued $250 million of Floating Rate First Mortgage Bonds due
October 2003. We have the option to redeem these bonds in whole or in part from
time to time, on any interest payment date prior to their maturity. The interest
rate is equal to LIBOR plus .85%. In October 2001 we entered into an interest
rate swap agreement to hedge the floating rate. We make fixed payments at 3.2%
and receive payments at a variable rate based on LIBOR. Including the impact of
the swap, the overall effective interest rate on this debt at December 31, 2001
was 4.1% (7.6% at December 31, 2000).
The 7 1/2% Series Due 2007 are redeemable after August 1, 2005; the 7 3/4%
Series Due 2007 are redeemable after June 1, 2002; the 7% Series Due 2008 are
redeemable after March 1, 2006; and the 6% Pollution Control Series E Due 2022
are redeemable after July 1, 2002. These bonds may be redeemed in whole or in
part at our option according to the terms of the obligations.
10 SHORT-TERM BORROWINGS AND COMPENSATING BALANCES
We have bank lines of credit aggregating $264.5 million ($210.5 million at
December 31, 2000), which make financing available through short-term bank loans
and provide credit support for commercial paper. At December 31, 2001, $234.4
million was available for use ($209 million at December 31, 2000). At December
31, 2001 we had issued commercial paper with a face value of $238.2 million
($260.6 million in 2000), with support provided by bank lines of credit and our
securities portfolio.
Certain lines of credit require a commitment fee of 0.0150%. Interest rates on
commercial paper and borrowings under the lines of credit ranged from 2.75% to
3.10% at December 31, 2001 (7.28% to 7.9% at December 31, 2000). The weighted
average interest rate on short-term borrowings at December 31, 2001 was 2.96%
(7.57% at December 31, 2000). The total amount of compensating balances at
December 31, 2001 and 2000, was immaterial.
11 PREFERRED STOCK
In 2000 we redeemed all of our outstanding Preferred Stock and Preferred Stock A
with proceeds from the sale of a portion of our securities portfolio and
internally generated funds.
All 100,000 shares of Serial Preferred Stock A, $7.125 Series were redeemed in
April 2000 for an aggregate of $10 million. All 100,000 shares of Serial
Preferred Stock A, $6.70 Series were redeemed in July 2000 for an aggregate of
$10 million. All 113,358 shares of 5% Preferred Stock were redeemed in August
2000 at $102.50 per share plus accrued and unpaid dividends of $0.75 per share
for an aggregate of $11.7 million.
---------------------------------------------------------------------------
54 ALLETE 2001 Form 10-K
12 COMMON STOCK AND EARNINGS PER SHARE
Our Articles of Incorporation and mortgages contain provisions that, under
certain circumstances, would restrict the payment of common stock dividends. As
of December 31, 2001 no retained earnings were restricted as a result of these
provisions.
COMMON STOCK SPLIT. On March 2, 1999 our common stock was split two-for-one. All
common share and per share amounts in our financial statements and notes to the
financial statements have been adjusted for all periods to reflect the
two-for-one stock split.
SUMMARY OF COMMON STOCK SHARES EQUITY
-------------------------------------------------------------------------
Millions
Balance at December 31, 1998 72.3 $529.0
1999 Employee Stock Purchase Plan 0.1 1.3
Invest Direct 0.9 17.4
Other 0.2 4.3
-------------------------------------------------------------------------
Balance at December 31, 1999 73.5 552.0
2000 Employee Stock Purchase Plan 0.1 1.1
Invest Direct 1.0 18.8
Other 0.1 5.0
-------------------------------------------------------------------------
Balance at December 31, 2000 74.7 576.9
2001 Public Offering 6.6 150.0
Employee Stock Purchase Plan 0.1 1.4
Invest Direct 0.8 18.9
Other 1.7 23.1
-------------------------------------------------------------------------
Balance at December 31, 2001 83.9 $770.3
-------------------------------------------------------------------------
INVEST DIRECT IS ALLETE'S DIRECT STOCK PURCHASE AND DIVIDEND REINVESTMENT
PLAN.
COMMON STOCK ISSUANCE. In May and June 2001 we sold 6.6 million shares of our
common stock in a public offering at $23.68 per share. Total net proceeds of
approximately $150 million were used to repay a portion of our short-term
borrowings with the remainder invested in short-term instruments.
SHAREHOLDER RIGHTS PLAN. In 1996 we adopted a rights plan that provides for a
dividend distribution of one preferred share purchase right (Right) to be
attached to each share of common stock.
The Rights, which are currently not exercisable or transferable apart from our
common stock, entitle the holder to purchase one two-hundredth of a share of
ALLETE's Junior Serial Preferred Stock A, without par value, at an exercise
price of $45. These Rights would become exercisable if a person or group
acquires beneficial ownership of 15% or more of our common stock or announces a
tender offer which would increase the person's or group's beneficial ownership
interest to 15% or more of our common stock, subject to certain exceptions. If
the 15% threshold is met, each Right entitles the holder (other than the
acquiring person or group) to purchase common stock (or, in certain
circumstances, cash, property or other securities of ours) having a market price
equal to twice the exercise price of the Right. If we are acquired in a merger
or business combination, or 50% or more of our assets or earning power are sold,
each exercisable Right entitles the holder to purchase common stock of the
acquiring or surviving company having a value equal to twice the exercise price
of the Right. Certain stock acquisitions will also trigger a provision
permitting the Board of Directors to exchange each Right for one share of our
common stock.
The Rights which expire on July 23, 2006, are nonvoting and may be redeemed by
us at a price of $.005 per Right at any time they are not exercisable. One
million shares of Junior Serial Preferred Stock A have been authorized and are
reserved for issuance under the plan.
EARNINGS PER SHARE. The difference between basic and diluted earnings per share
arises from outstanding stock options and performance share awards granted under
our Executive and Director Long-Term Incentive Compensation Plans.
RECONCILIATION OF
BASIC AND DILUTED BASIC DILUTIVE DILUTED
EARNINGS PER SHARE EPS SECURITIES EPS
--------------------------------------------------------------------------------
Millions Except Per Share Amounts
2001
Income from Continuing Operations $128.6 - $128.6
Common Shares 75.8 0.7 76.5
Per Share from Continuing Operations $1.70 - $1.68
--------------------------------------------------------------------------------
2000
Income from Continuing Operations $136.9 - $136.9
Less: Dividends on Preferred Stock 0.9 - 0.9
--------------------------------------------------------------------------------
$136.0 - $136.0
Common Shares 69.8 0.3 70.1
Per Share from Continuing Operations $1.95 - $1.94
--------------------------------------------------------------------------------
There was no difference between basic and diluted earnings per share for 1999.
We paid dividends on preferred stock of $0.9 million in 2000 ($2.0 million in
1999).
---------------------------------------------------------------------------
ALLETE 2001 Form 10-K 55
13 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-megawatt coal-fired generating unit (Unit) near Center,
North Dakota. The Unit is adjacent to a generating unit owned by Minnkota Power
Cooperative, Inc. (Minnkota), a North Dakota cooperative corporation whose Class
A members are also members of Square Butte. Minnkota serves as the operator of
the Unit and also purchases power from Square Butte.
Minnesota Power is entitled to approximately 71% of the Unit's output under the
Agreement. After 2005 and upon compliance with a two-year advance notice
requirement, Minnkota has the option to reduce Minnesota Power's entitlement by
5% annually, to a minimum of 50%. Minnesota Power is obligated to pay its pro
rata share of Square Butte's costs based on Minnesota Power's entitlement to
Unit output. Minnesota Power's payment obligation is suspended if Square Butte
fails to deliver any power, whether produced or purchased, for a period of one
year. Square Butte's fixed costs consist primarily of debt service. At December
31, 2001 Square Butte had total debt outstanding of $298.8 million. Total annual
debt service for Square Butte is expected to be approximately $36 million in
both 2002 and 2003 and $23 million in each of the years 2004 through 2006.
Variable operating costs include the price of coal purchased from BNI Coal, our
subsidiary, under a long-term contract.
Minnesota Power's cost of power purchased from Square Butte during 2001 was
$63.3 million ($58.7 million in 2000 and in 1999). This reflects Minnesota
Power's pro rata share of total Square Butte costs based on the 71% output
entitlement in 2001, 2000 and 1999. Included in this amount was Minnesota
Power's pro rata share of interest expense of $14.2 million in 2001 ($14.8
million in 2000; $15.5 million in 1999). Minnesota Power's payments to Square
Butte are approved as purchased power expense for ratemaking purposes by both
the MPUC and FERC.
14 JOINTLY OWNED ELECTRIC FACILITY
We own 80% of the 531-megawatt Boswell Energy Center Unit 4 (Boswell Unit 4).
While we operate the plant, certain decisions about the operations of Boswell
Unit 4 are subject to the oversight of a committee on which we and Wisconsin
Public Power, Inc. (WPPI), the owner of the other 20% of Boswell Unit 4, have
equal representation and voting rights. Each of us must provide our own
financing and is obligated to pay our ownership share of operating costs. Our
share of direct operating expenses of Boswell Unit 4 is included in operating
expense on our consolidated statement of income. Our 80% share of the original
cost included in electric plant at December 31, 2001 was $309 million ($309
million at December 31, 2000). The corresponding provision for accumulated
depreciation was $163 million at December 31, 2001 ($157 million at December 31,
2000).
15 INVESTMENTS IN CAPITAL RE AND ACE
In May 2000 we recorded a $30.4 million, or $0.44 per share, after-tax gain on
the sale of 4.7 million shares of ACE Limited. We received 4.7 million shares of
ACE plus $25.1 million in December 1999 when Capital Re merged with ACE. At the
time of the merger we owned 7.3 million shares, or 20%, of Capital Re.
As a result of the merger, in 1999 we recorded a $36.2 million, or $0.52 per
share, after-tax charge as follows: a $24.1 million, or $0.35 per share, charge
in the second quarter following the merger agreement and discontinuance of our
equity accounting for Capital Re and a $12.1 million, or $0.17 per share, charge
in the fourth quarter upon completion of the merger.
---------------------------------------------------------------------------
56 ALLETE 2001 Form 10-K
16 INCOME TAX EXPENSE
INCOME TAX EXPENSE
YEAR ENDED DECEMBER 31 2001 2000 1999
-------------------------------------------------------------------------------
Millions
Current Tax Expense
Federal $51.3 $69.1 $56.0
Foreign 7.6 8.0 6.9
State 7.7 6.4 5.8
-------------------------------------------------------------------------------
66.6 83.5 68.7
Deferred Tax Expense (Benefit)
Federal 6.9 (5.9) (11.1)
Foreign 0.2 0.9 (0.4)
State (0.1) (2.7) (6.0)
-------------------------------------------------------------------------------
7.0 (7.7) (17.5)
Change in Valuation Allowance 1.0 1.8 0.6
-------------------------------------------------------------------------------
Deferred Tax Credits (1.4) (1.4) (1.5)
-------------------------------------------------------------------------------
Income Taxes on
Continuing Operations 73.2 76.2 50.3
Income Taxes on
Discontinued Operations 7.3 8.3 7.4
-------------------------------------------------------------------------------
Total Income Tax Expense $80.5 $84.5 $57.7
-------------------------------------------------------------------------------
RECONCILIATION OF TAXES FROM
FEDERAL STATUTORY RATE TO
TOTAL INCOME TAX EXPENSE
YEAR ENDED DECEMBER 31 2001 2000 1999
-------------------------------------------------------------------------------
Millions
Tax Computed at Federal
Statutory Rate $76.7 $81.6 $44.0
Increase (Decrease) in Tax
State Income Taxes -- Net of
Federal Income Tax Benefit 8.3 4.4 6.5
Capital Re Transaction - - 10.8
Foreign Taxes 0.5 1.2 2.3
Tax Credits (1.7) (1.4) (3.3)
Other (3.3) (1.3) (2.6)
-------------------------------------------------------------------------------
Total Income Tax Expense $80.5 $84.5 $57.7
-------------------------------------------------------------------------------
DEFERRED TAX ASSETS AND LIABILITIES
DECEMBER 31 2001 2000
-----------------------------------------------------------------------------
Millions
Deferred Tax Assets
Deferred Compensation Plans $19.1 $14.7
Depreciation 18.2 13.9
Investment Tax Credits 16.8 17.7
Allowance for Bad Debts 11.3 9.2
Employee Stock Ownership Plan 9.8 9.4
Postemployment Benefits 8.8 9.2
Lehigh Basis Difference 8.2 7.9
State NOL Carryover 7.2 1.9
Conservation Improvement Programs 5.4 5.5
Other 27.4 28.2
-----------------------------------------------------------------------------
Gross Deferred Tax Assets 132.2 117.6
Deferred Tax Asset Valuation Allowance (6.0) (5.0)
-----------------------------------------------------------------------------
Total Deferred Tax Assets 126.2 112.6
-----------------------------------------------------------------------------
Deferred Tax Liabilities
Depreciation 168.7 177.2
Investment Tax Credits 23.7 25.1
Allowance for Funds Used During
Construction 11.7 12.8
Prepaid Pension 7.8 3.9
Like-Kind Exchange 7.3 -
Goodwill 5.6 1.5
Other 8.3 3.9
-----------------------------------------------------------------------------
Total Deferred Tax Liabilities 233.1 224.4
-----------------------------------------------------------------------------
Accumulated Deferred Income Taxes $106.9 $111.8
-----------------------------------------------------------------------------
UNDISTRIBUTED EARNINGS. Undistributed earnings of our foreign subsidiaries were
approximately $36.3 million at December 31, 2001 ($27.9 million at December 31,
2000). Since this amount has been or will be reinvested in property, plant and
working capital, it is not practicable to calculate the deferred taxes
associated with the remittance of these investments.
---------------------------------------------------------------------------
ALLETE 2001 Form 10-K 57
17 OTHER COMPREHENSIVE INCOME
OTHER COMPREHENSIVE INCOME PRE-TAX TAX EXPENSE NET-OF-TAX
YEAR ENDED DECEMBER 31 AMOUNT (BENEFIT) AMOUNT
------------------------------------------------------------------------------------------------------------------
Millions
2001
Unrealized Gain (Loss) on Securities
Gain During the Year $ 3.6 $ 1.1 $ 2.5
Less: Gain Included in Net Income - - -
------------------------------------------------------------------------------------------------------------------
Net Unrealized Gain on Securities 3.6 1.1 2.5
Interest Rate Swap (2.5) (1.0) (1.5)
Foreign Currency Translation Adjustments (11.3) - (11.3)
------------------------------------------------------------------------------------------------------------------
Other Comprehensive Loss $(10.2) $ 0.1 $(10.3)
------------------------------------------------------------------------------------------------------------------
2000
Unrealized Gain (Loss) on Securities
Gain During the Year $ 47.8 $17.4 $ 30.4
Less: Gain Included in Net Income 49.1 18.0 31.1
------------------------------------------------------------------------------------------------------------------
Net Unrealized Loss on Securities (1.3) (0.6) (0.7)
Foreign Currency Translation Adjustments (5.9) - (5.9)
------------------------------------------------------------------------------------------------------------------
Other Comprehensive Loss $ (7.2) $(0.6) $ (6.6)
------------------------------------------------------------------------------------------------------------------
1999
Unrealized Gain (Loss) on Securities
Gain During the Year $ 1.6 $0.7 $ 0.9
Add: Loss Included in Net Income 1.7 0.7 1.0
Less: Unrealized Gains of Disposed Equity Investee 6.7 1.2 5.5
------------------------------------------------------------------------------------------------------------------
Net Unrealized Loss on Securities (3.4) 0.2 (3.6)
Foreign Currency Translation Adjustments 4.5 - 4.5
------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income $ 1.1 $ 0.2 $ 0.9
------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income at December 31, 2001 consisted of $3.8
million ($2.8 million at December 31, 2000) in net unrealized gains on
securities and $(18.3) million ($(7.0) million at December 31, 2000) in foreign
currency translation adjustments. The gain included in net income for the year
2000 included the gain from our sale of ACE shares.
---------------------------------------------------------------------------
58 ALLETE 2001 Form 10-K
18 PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Certain eligible employees of ALLETE are covered by noncontributory defined
benefit pension plans. At December 31, 2001 approximately 10% of the defined
benefit pension plan assets were invested in our common stock. We have defined
contribution pension plans covering eligible employees, for which the aggregate
annual cost was $7.1 million in 2001 ($5.7 million in 2000; $4.7 million in
1999). We provide certain health care and life insurance benefits for eligible
retired employees.
The assumed health care cost trend rate declines gradually to an ultimate rate
of 5.0% by 2007. For postretirement health and life benefits, a 1% increase in
the assumed health care cost trend rate would result in a $9.4 million and a
$1.2 million increase in the benefit obligation and total service and interest
costs, respectively; a 1% decrease would result in a $7.9 million and $1.0
million decrease in the benefit obligation and total service and interest costs,
respectively.
PENSION
--------------------------------------------------------------------------
Millions
PLAN STATUS
AT SEPTEMBER 30 2001 2000
--------------------------------------------------------------------------
Change in Benefit Obligation
Obligation, Beginning of Year $228.5 $220.0
Service Cost 4.2 4.1
Interest Cost 17.7 16.5
Actuarial Loss 13.6 2.4
Benefits Paid (14.8) (14.5)
--------------------------------------------------------------------------
Obligation, End of Year 249.2 228.5
Change in Plan Assets
Fair Value, Beginning of Year 309.8 283.3
Actual Return on Assets (14.7) 40.3
Benefits Paid (14.8) (14.5)
Other 1.6 0.7
--------------------------------------------------------------------------
Fair Value, End of Year 281.9 309.8
Funded Status 32.7 81.3
Unrecognized Amounts
Net Gain (19.5) (76.4)
Prior Service Cost 5.2 3.8
Transition Obligation 0.7 0.8
--------------------------------------------------------------------------
Prepaid Pension Cost $ 19.1 $ 9.5
--------------------------------------------------------------------------
BENEFIT EXPENSE
YEAR ENDED DECEMBER 31 2001 2000 1999
--------------------------------------------------------------------------
Service Cost $ 4.2 $ 4.1 $ 4.7
Interest Cost 17.6 16.5 15.8
Expected Return on Assets (29.6) (27.5) (24.7)
Amortized Amounts
Unrecognized Gain (2.5) (2.3) (0.4)
Prior Service Cost 0.5 0.5 0.5
Transition Obligation 0.2 0.2 0.2
--------------------------------------------------------------------------
Net Pension Credit $(9.6) $(8.5) $(3.9)
--------------------------------------------------------------------------
ACTUARIAL ASSUMPTIONS 2001 2000
--------------------------------------------------------------------------
Discount Rate 7.75% 8.0%
Expected Return on Plan Assets 10.0% 10.25%
Rate of Compensation Increase 3.5 - 4.5% 3.5 - 4.5%
HEALTH AND LIFE
--------------------------------------------------------------------------
Millions
PLAN STATUS
AT SEPTEMBER 30 2001 2000
--------------------------------------------------------------------------
Change in Benefit Obligation
Obligation, Beginning of Year $ 66.2 $ 61.3
Service Cost 2.7 2.7
Interest Cost 5.2 4.7
Actuarial (Gain) Loss 5.8 (0.2)
Participant Contributions 0.9 0.7
Benefits Paid (3.6) (3.0)
--------------------------------------------------------------------------
Obligation, End of Year 77.2 66.2
Change in Plan Assets
Fair Value, Beginning of Year 39.9 29.7
Actual Return on Assets (2.3) 3.1
Employer Contribution 1.8 9.4
Participant Contributions 0.9 0.7
Benefits Paid (3.6) (3.0)
--------------------------------------------------------------------------
Fair Value, End of Year 36.7 39.9
Funded Status (40.5) 26.3)
Unrecognized Amounts
Net Gain (4.9) (17.7)
Transition Obligation 27.1 29.5
--------------------------------------------------------------------------
Accrued Cost $(18.3) $(14.5)
--------------------------------------------------------------------------
BENEFIT EXPENSE
YEAR ENDED DECEMBER 31 2001 2000 1999
--------------------------------------------------------------------------
Service Cost $2.7 $2.7 $2.7
Interest Cost 5.2 4.7 3.7
Expected Return on Assets (3.4) (2.7) (2.3)
Amortized Amounts
Unrecognized Gain (0.9) (0.9) (0.9)
Transition Obligation 2.4 2.4 2.4
--------------------------------------------------------------------------
6.0 6.2 5.6
Amortization of Deferred Charge - - 2.8
--------------------------------------------------------------------------
Net Expense $6.0 $6.2 $8.4
--------------------------------------------------------------------------
ACTUARIAL ASSUMPTIONS 2001 2000
--------------------------------------------------------------------------
Discount Rate 7.75% 8.0%
Expected Return on Plan Assets 8.0 - 10.0% 6.0 - 10.0%
Rate of Compensation Increase 3.5 - 4.5% 3.5 - 4.5%
Health Care Cost Trend Rate 10% 6.9%
---------------------------------------------------------------------------
ALLETE 2001 Form 10-K 59
19 EMPLOYEE STOCK AND INCENTIVE PLANS
EMPLOYEE STOCK OWNERSHIP PLAN. We sponsor a leveraged employee stock ownership
plan (ESOP) that covers certain eligible employees. In 1989 the ESOP used the
proceeds from a $16.5 million third-party loan (15-year term at 9.125%),
guaranteed by us, to purchase 1.2 million shares of our common stock on the open
market. In 1990 the ESOP issued a $75 million note (term not to exceed 25 years
at 10.25%) to us as consideration for 5.6 million shares of our newly issued
common stock. The Company makes annual contributions to the ESOP equal to the
ESOP's debt service less available dividends received by the ESOP. The majority
of dividends received by the ESOP are used to pay debt service, with the balance
distributed to certain participants. The ESOP shares were initially pledged as
collateral for its debt. As the debt is repaid, shares are released from
collateral and allocated to participants, based on the proportion of debt
service paid in the year. The third-party debt of the ESOP is recorded as
long-term debt and the shares pledged as collateral are reported as unearned
ESOP shares in the Balance Sheet. As shares are released from collateral, the
Company reports compensation expense equal to the current market price of the
shares, and the shares become outstanding for earnings-per-share computations.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings; available dividends on unallocated ESOP shares are recorded as a
reduction of debt and accrued interest. ESOP compensation expense was $2.6
million in 2001 ($2.3 million in 2000; $2.2 million in 1999).
YEAR ENDED DECEMBER 31 2001 2000 1999
------------------------------------------------------------------------
Millions
Shares
Allocated Shares 3.9 3.9 3.8
Unreleased Shares 4.0 4.2 4.4
------------------------------------------------------------------------
Total ESOP Shares 7.9 8.1 8.2
------------------------------------------------------------------------
Fair Value of Unreleased Shares $100.3 $104.6 $75.8
------------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLAN. We have an Employee Stock Purchase Plan that
permits eligible employees to buy up to $23,750 per year of our common stock at
95% of the market price. At December 31, 2001, 1.2 million shares had been
issued under the plan and 97,380 shares were held in reserve for future
issuance.
STOCK OPTION AND AWARD PLANS. We have an Executive Long-Term Incentive
Compensation Plan (Executive Plan) and a Director Long-Term Stock Incentive Plan
(Director Plan). The Executive Plan allows for the grant of up to 6.7 million
shares of our common stock to key employees. To date, these grants have taken
the form of stock options, performance share awards and restricted stock awards.
The Director Plan allows for the grant of up to 0.3 million shares of our common
stock to nonemployee directors. Each nonemployee director receives an annual
grant of 1,500 stock options and a biennial grant of performance shares equal to
$10,000 in value of common stock at the date of grant. Stock options are
exercisable at the market price of common shares on the date the options are
granted, and vest in equal annual installments over two years with expiration
ten years from the date of grant. Performance shares are earned over multi-year
time periods and are contingent upon the attainment of certain performance goals
of ALLETE. Restricted stock vests once certain periods of time have elapsed. At
December 31, 2001 2.4 million and 0.2 million shares were held in reserve for
future issuance under the Executive Plan and Director Plan, respectively.
We have elected to account for our stock-based compensation plans in accordance
with the Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued
to Employees," and accordingly, compensation expense has not been recognized for
stock options granted. Compensation expense is recognized over the vesting
periods for performance and restricted share awards based on the market value of
our common stock, and was approximately $9 million in 2001 ($5 million in 2000;
$3 million in 1999). Pro forma net income and earnings per share under SFAS 123
"Accounting for Stock-Based Compensation" have not been presented because such
amounts are not materially different from actual amounts reported. This may not
be representative of the pro forma effects for future years if additional awards
are granted.
AVERAGE
EXERCISE
STOCK OPTION ACTIVITY OPTIONS PRICE
------------------------------------------------------------------------------
Options in Millions
2001
Outstanding, Beginning of Year 2.4 $18.52
Granted 0.8 $23.63
Exercised (0.8) $18.39
Canceled (0.1) $21.05
------------------------------------------------------------------------------
Outstanding, End of Year 2.3 $20.18
------------------------------------------------------------------------------
Exercisable, End of Year 1.2 $19.55
Fair Value of Options Granted
During the Year $5.39
------------------------------------------------------------------------------
2000
Outstanding, Beginning of Year 1.6 $19.77
Granted 1.0 $16.33
Exercised (0.1) $14.91
Canceled (0.1) $18.85
------------------------------------------------------------------------------
Outstanding, End of Year 2.4 $18.52
------------------------------------------------------------------------------
Exercisable, End of Year 1.1 $19.42
Fair Value of Options Granted
During the Year $3.20
------------------------------------------------------------------------------
1999
Outstanding, Beginning of Year 1.0 $17.31
Granted 0.9 $21.77
Exercised (0.2) $13.91
Canceled (0.1) $21.25
------------------------------------------------------------------------------
Outstanding, End of Year 1.6 $19.77
------------------------------------------------------------------------------
Exercisable, End of Year 0.6 $16.38
Fair Value of Options Granted
During the Year $3.38
------------------------------------------------------------------------------
---------------------------------------------------------------------------
60 ALLETE 2001 Form 10-K
At December 31, 2001 options outstanding consisted of 0.8 million with an
exercise price of $13.69 to $16.25, and 1.5 million with an exercise price of
$21.63 to $23.63. The options with an exercise price of $13.69 to $16.25 have an
average remaining contractual life of 7.3 years with 0.4 million exercisable on
December 31, 2001 at an average price of $15.26. The options with an exercise
price of $21.63 to $23.63 have an average remaining contractual life of 7.8
years with 0.8 million exercisable on December 31, 2001 at an average price of
$21.91.
A total of 0.6 million performance share grants were awarded in 2000 and 2001
for the performance period ended December 31, 2001. The grant date fair value of
the share grants was $9.6 million. The shares will be issued in 2002 and 2003.
A total of 0.3 million performance share grants were awarded during 1999 and
1998 for the performance period ended December 31, 1999. The grant date fair
value of the share grants was $6.5 million. At December 31, 2001 75% of the
shares had already been issued, with the balance to be issued in 2002.
In January 2002 we granted stock options to purchase approximately 0.8 million
shares of common stock (exercise price of $25.68 per share), and 0.3 million
performance share grants. The ultimate issuance of performance share grants is
contingent upon the attainment of certain future performance goals of ALLETE.
The grant date fair value of the share grants was $8.5 million.
20 QUARTERLY FINANCIAL DATA (UNAUDITED)
Information for any one quarterly period is not necessarily indicative of the
results which may be expected for the year. Financial results for the fourth
quarter of 2001 included a $4.4 million, or $0.06 per share, after-tax charge to
exit the auto transport company. Financial results for 2000 included a $30.4
million, or $0.44 per share, after-tax gain on the sale of 4.7 million shares of
ACE in the second quarter. (See Note 15.)
QUARTER ENDED MAR. 31 JUN. 30 SEPT. 30 DEC. 31
--------------------------------------------------------------------------------------------
Millions Except Earnings Per Share
2001
Operating Revenue $377.3 $405.5 $383.3 $361.6
Operating Income from
Continuing Operations $51.6 $66.8 $52.1 $37.3
Net Income
Continuing Operations $30.2 $39.2 $34.5 $24.7
Discontinued Operations 2.7 3.3 3.3 0.8
--------------------------------------------------------------------------------------------
$32.9 $42.5 $37.8 $25.5
Earnings Available for
Common Stock $32.9 $42.5 $37.8 $25.5
Earnings Per Share of Common Stock
Basic
Continuing Operations $0.42 $0.54 $0.44 $0.30
Discontinued Operations 0.04 0.04 0.04 0.01
--------------------------------------------------------------------------------------------
$0.46 $0.58 $0.48 $0.31
Diluted
Continuing Operations $0.42 $0.53 $0.43 $0.30
Discontinued Operations 0.04 0.04 0.04 0.01
--------------------------------------------------------------------------------------------
$0.46 $0.57 $0.47 $0.31
2000
Operating Revenue $288.7 $289.3 $287.6 $323.9
Operating Income from
Continuing Operations $48.6 $98.7 $43.8 $28.0
Net Income
Continuing Operations $28.3 $60.3 $31.6 $16.7
Discontinued Operations 2.1 3.9 3.4 2.3
--------------------------------------------------------------------------------------------
$30.4 $64.2 $35.0 $19.0
Earnings Available for
Common Stock $29.9 $63.9 $34.9 $19.0
Earnings Per Share of Common Stock
Basic
Continuing Operations $0.40 $0.86 $0.45 $0.24
Discontinued Operations 0.03 0.06 0.05 0.03
--------------------------------------------------------------------------------------------
$0.43 $0.92 $0.50 $0.27
Diluted
Continuing Operations $0.40 $0.86 $0.45 $0.24
Discontinued Operations 0.03 0.06 0.05 0.03
--------------------------------------------------------------------------------------------
$0.43 $0.92 $0.50 $0.27
---------------------------------------------------------------------------
ALLETE 2001 Form 10-K 61
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE [PRICEWATERHOUSECOOPERS LLP LOGO]
To the Board of Directors
of ALLETE, Inc.
Our audits of the consolidated financial statements referred to in our report
dated January 21, 2002 appearing on page 42 of this Form 10-K also included an
audit of the Financial Statement Schedule listed in Item 14(a) of this Form
10-K. In our opinion, the Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 21, 2002
--------------------------------------------------------------------------------
SCHEDULE II
ALLETE
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ADDITIONS
BALANCE AT ------------------------ DEDUCTIONS BALANCE AT
BEGINNING CHARGED OTHER FROM END OF
FOR THE YEAR ENDED DECEMBER 31 OF YEAR TO INCOME CHANGES RESERVES PERIOD
--------------------------------------------------------------------------------------------------------------------------
Millions
Reserve Deducted from Related Assets
Reserve For Uncollectible Accounts
2001 Trade Accounts Receivable $4.8 $4.4 - $3.4 $5.8
Finance Receivables 6.5 2.4 - 3.0 5.9
2000 Trade Accounts Receivable 6.9 2.3 - 4.4 4.8
Finance Receivables 6.3 0.8 - 0.6 6.5
1999 Trade Accounts Receivable 5.5 3.3 - 1.9 6.9
Finance Receivables 3.6 3.8 - 1.1 6.3
Deferred Asset Valuation Allowance
2001 Deferred Tax Assets 5.0 1.0 - - 6.0
2000 Deferred Tax Assets 3.2 1.8 - - 5.0
1999 Deferred Tax Assets 2.6 0.6 - - 3.2
Reserve for uncollectible accounts includes bad debts written off.
---------------------------------------------------------------------------
62 ALLETE 2001 Form 10-K
EXHIBIT INDEX
EXHIBIT
NUMBER
--------------------------------------------------------------------------------
10(g) - Master Agreement (without Exhibits), dated as of July 30, 2001, among
ADESA Corporation, as a Guarantor, ADESA California, Inc. and certain
subsidiaries of ADESA Corporation that may hereafter become party
hereto, as Lessees, Atlantic Financial Group, Ltd., as Lessor, certain
financial institutions parties hereto, as Lenders, and SunTrust Bank,
as Agent.
10(h) - Master Lease Agreement (without Exhibits), dated as of July 30, 2001,
between Atlantic Financial Group, Ltd., as Lessor, and ADESA
California, Inc. and certain other subsidiaries of ADESA Corporation,
as Lessees.
10(i) - Loan Agreement, dated as of July 30, 2001, among Atlantic Financial
Group, Ltd., as Lessor and Borrower, the financial institutions party
hereto, as Lenders, and SunTrust Bank, as Agent.
10(j) - Guaranty Agreement from ALLETE, dated as of July 30, 2001, relating to
the Master Agreement, dated as of July 30, 2001.
12 - Computation of Ratios of Earnings to Fixed Charges and Supplemental
Ratios of Earnings to Fixed Charges.
23(a) - Consent of Independent Accountants.
23(b) - Consent of General Counsel.