Item 1. Business.
Minnesota Power is an operating public utility incorporated under the laws of the State of Minnesota in 1906. Its principal executive office is at 30 West Superior Street, Duluth, Minnesota, 55802; and its telephone number is (218) 722-2641. Minnesota Power has operations in three business areas: (1) electric utility operations, which include electric, gas and coal mining operations; (2) water utility operations, which include water, wastewater and sanitation operations; and (3) investments and corporate services, which include investments in securities, equity ownership in a financial guaranty reinsurance company, real estate, paper and pulp production and manufacturing of truck-mounted lifting equipment. As of December 31, 1994, the Company and its subsidiaries had approximately 2,500 employees.
Since 1983 Minnesota Power has been diversifying to reduce its reliance on electricity sales to Minnesota's taconite industry and to gain additional earnings growth potential. Acquisitions have been a primary means of diversification, and this is expected to continue as the Company reinvests funds from its securities investment portfolio in additional businesses.
For a detailed discussion of results of operations and trends, see Management's Discussion and Analysis of Financial Condition and Results of Operations in the Minnesota Power 1994 Annual Report. For business segment information, see Note 1.
The information contained or incorporated by reference in this annual report on Form 10-K reflects a categorization of the Company's business which is different from the categorization used in the annual report on Form 10-K for 1993. Financial data from prior years has been reclassified in this annual report on Form 10-K to present comparable data in all periods.
Electric Utility Operations
Minnesota Power's electric utility operations generate, distribute and sell electricity in a 26,000 square mile electric service territory located in northern Minnesota. On December 31, 1994, the Company was supplying retail electric service to 119,100 customers in 135 cities, towns and communities, and outlying rural areas. The largest city served is Duluth with a population of 85,000 based on the 1990 census. Wholesale electric service for resale is supplied to 13 municipal distribution systems, a private utility and to SWL&P. Transmission service (wheeling) is provided to 7 customers.
Minnesota Power has three wholly owned subsidiary companies within its electric utility operations - SWL&P, BNI Coal and Rainy River. SWL&P provides electric, water and natural gas service in Superior, Wisconsin, and adjacent areas. As of December 31, 1994, SWL&P was supplying electric service to 13,700 customers, water service to 9,800 customers and gas service to 10,400 customers. BNI Coal owns and operates a lignite mine in North Dakota. Two electric
generating cooperatives, Minnkota and Square Butte, presently consume virtually all of BNI Coal's production of lignite coal under coal supply agreements extending to 2027. Minnkota has an option to extend its coal supply agreement to 2042. (See - Fuel.) Rainy River is exploring possibilities for participation in cogeneration projects.
Electric Sales
The Company expects that kilowatt-hour sales will remain relatively stable over the next five years. (See Regulatory Issues - Minnesota Public Utilities Commission.)
In the last five years, more than 70 percent of all iron ore consumed by iron and steel plants in the United States has originated from within the Company's Minnesota electric service territory. Taconite, an iron-bearing rock of relatively low iron content which 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. The taconite industry in Minnesota has had relatively stable production levels over the past five years. Annual production from the Minnesota taconite companies was 43 million tons in 1994, 41 million tons in 1993, 40 million tons in 1992, 41 million tons in 1991, and 44 million tons in 1990. The Company estimates that 1995 taconite production will be about 48 million tons.
Firm Large Power Customer Contracts
The Company has power contracts which require the Company to have a certain amount of capacity available at all times (Firm Power) with five large taconite and five paper producing customers, each requiring 10 MW or more (Firm Large Power Customers). Contracts with these ten Firm Large Power Customers require payment of minimum monthly demand charges that cover most of the fixed costs associated with having capacity available to serve them, including a return on common equity. Such contracts minimize the impact on earnings that otherwise would result from significant reductions in kilowatt- hour sales to such customers. These contracts, which are subject to MPUC approval, have a minimum contract term of ten years initially, with a four- year
cancellation notice required for termination of the contract at or beyond the end of the tenth year. 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. As of March 17, 1995, the minimum annual revenue the Company would collect under contracts with these Firm Large Power Customers, assuming no electric energy use by these customers, is estimated to be $113.6, $95.7, $92.8, $80.2 and $61.1 million during the years 1995, 1996, 1997, 1998 and 1999, respectively. The Company believes actual revenue received from these Firm Large Power Customers will be substantially in excess of the minimum contract amounts.
Purchased Power
Minnesota Power has contracts to purchase capacity from various entities.
Capacity Sales
Minnesota Power has contracts to sell capacity to nonaffiliated utility companies.
Fuel
The Company has experienced no difficulty in obtaining an adequate fuel supply. The Company purchases low-sulfur, sub-bituminous coal from the Powder River Basin coal field located in Montana and Wyoming to meet substantially all of its coal supply requirements. Coal consumption for electric generation at the Company's Minnesota coal-fired generating stations in 1994 was about 3.4 million tons. As of December 31, 1994, the Company had a coal inventory of about 410,000 tons. During 1994, the Company obtained its coal through both long- and short-term agreements. A long-term agreement (January 1993 through May 1997) with Big Sky Coal Company enables the Company to purchase up to 2.5 million tons of coal on an annualized basis from the Big Sky Mine. The Company also obtained coal under one-year agreements from Kennecott Energy Company's Spring Creek Mine, Western Energy Company's Rosebud Mine, and additional coal from Big Sky Coal Company's Big Sky Mine. In August 1994 the Company entered into a separate agreement (November 1994 through May 1997) with Big Sky Coal Company to purchase an additional 600,000 tons of coal on an annualized basis from the Big Sky Mine. The Company will obtain coal in 1995 under similar one-year agreements with Kennecott Energy Company and Western Energy Company and will continue to obtain coal under its long- term agreements with Big Sky Coal Company. This mix of coal supply options allows the Company to reduce market risk and to take advantage of favorable spot market prices.
The Company is exploring future coal supply options and believes that adequate supplies of low-sulfur, sub-bituminous coal will continue to be available.
Burlington Northern Railroad transports the coal by unit train from Montana or Wyoming to the Company's generating stations. The Company and Burlington Northern Railroad have two long-term coal freight-rate contracts that have been in effect since January 1, 1993. These contracts substantially lowered the delivered price of coal to Minnesota Power. The contracts provide for coal deliveries through 2002 to Laskin and through 2003 to Boswell. The Company also has a contract with the Duluth Missabe & Iron Range Railway which is the final destination short-hauler to Laskin. This contract, which has been in effect since October 15, 1992, also substantially lowered the delivered price of coal and provides for deliveries through 2002. The delivered price of coal is subject to periodic adjustments in freight rates.
The generating unit operated by Square Butte, which is capable of generating up to 455 MW, burns North Dakota lignite that is being supplied by BNI Coal, a wholly owned subsidiary of the Company, pursuant to the terms of a contract expiring in 2027. Square Butte's cost of lignite burned in 1994 was approximately 56 cents per million Btu. 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. Under the various agreements with Square Butte, the Company is unconditionally obligated to pay all costs not paid by Square Butte when due. These costs include the price of lignite purchased under a cost-plus contract from BNI Coal. (See Item 2.
Item 2. Properties.
The Company had a net peak load during 1994 of 1,338 MW on December 19, 1994. At the time of the peak the Company's capacity margin based on installed capacity and scheduled firm purchases and sales was approximately 16 percent. Information with respect to existing power supply sources is shown below.
The Company has electric transmission and distribution lines of 500 kilovolts (kV) (7.8 miles), 230 kV (606.4 miles), 161 kV (42.8 miles), 138 kV (5.8 miles), 115 kV (1,239.6 miles) and less than 115 kV (6,001.3 miles). The Company owns and operates 180 substations with a total capacity of 8,545.7 megavoltamperes. Some of the transmission and distribution lines interconnect with other utilities.
The Company owns and has a substantial investment in offices and service buildings, area headquarters, an energy control center, repair shops, motor vehicles, construction equipment and tools, office furniture and equipment, and leases offices and storerooms in various localities within the Company's service territory. It also owns miscellaneous parcels of real estate not presently used in utility operations.
Substantially all of the electric utility plant of the Company is subject to the lien of its Mortgage and Deed of Trust which secures first mortgage bonds issued by the Company. The Company's properties are held by it in fee and are free from other encumbrances, subject to minor exceptions, none of which are of such a nature as to substantially impair the usefulness to the Company of such properties. Other property, including certain offices and equipment, is utilized under leases. In general, some of the electric lines are located on land not owned in fee, but are covered by necessary consents of various governmental authorities or by appropriate rights obtained from owners of private property. These consents and rights are deemed adequate for the purposes for which the properties are being used. In September 1990 the Company sold a portion of Boswell Unit 4 to WPPI. WPPI has the right to use the Company's transmission line facilities to transport its share of generation.
Substantially all of the utility plant of SWL&P is subject to the lien of its Mortgage and Deed of Trust which secures first mortgage bonds issued by SWL&P. Substantially all of SSU's properties used in the operation of its respective water utility businesses are encumbered by mortgages. Approximately one-half of BNI Coal's equipment is leased under a leveraged lease agreement which expires in 2002. The remaining property and equipment are owned by BNI Coal.
The Mid-Continent Area Power Pool (MAPP) consists of nine investor-owned utilities including the Company, eight rural electric generation and transmission cooperatives, three public power districts, four municipal electric systems, four municipal organizations, and the Western Area Power Administration - Billings, Montana. MAPP operates pursuant to an agreement, dated March 31, 1972, as amended, among its members. This agreement provides for the members to coordinate the installation and operation of generating plants and transmission line facilities.
Manitoba Hydro has export licenses from the National Energy Board in Calgary until November 1, 2005, to export up to 16.7 billion kilowatt-hours a year of energy and short-term firm hydroelectric power to other Canadian utilities and four utility companies in the United States, including the Company. Manitoba Hydro presently exports approximately 12 billion kilowatt- hours a year. When it is available and economical, the Company purchases energy and power from Manitoba Hydro that can be delivered through Minnesota Power's transmission lines.
Item 3.
Item 3. Legal Proceedings.
Material legal and regulatory proceedings are included in the discussion of the Company's business in Item 1 and are incorporated by reference herein.
Item 4.
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 1994.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.
The Company has paid dividends without interruption on its common stock since 1948. A quarterly dividend of $.51 per share on the common stock was paid on March 1, 1995, to the holders of record on February 15, 1995. The Company's common stock is listed on The New York Stock Exchange. Dividends paid per share and the high and low prices for the Company's common stock for the periods indicated as reported by The Wall Street Journal, Midwest Edition, were as follows:
The Company's Articles of Incorporation, Mortgage and Deed of Trust and preferred stock purchase agreements contain provisions which under certain circumstances would restrict the payment of common stock dividends. As of December 31, 1994, no retained earnings were restricted as a result of these provisions. At March 1, 1995, there were 26,882 common stock shareholders of record.
Item 6.
Item 6. Selected Financial Data.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The management's discussion and analysis of financial condition and results of operations appearing on pages 6 through 23 of the Minnesota Power 1994 Annual Report are incorporated by reference in this Form 10-K Annual Report.
On March 16, 1995, Duff & Phelps lowered its ratings on the Company's first mortgage bonds from A to A-.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The financial statements appearing on pages 25 through 39, together with the report thereon of Price Waterhouse LLP dated January 24, 1995, on page 24, of the Minnesota Power 1994 Annual Report are incorporated by reference in this Form 10-K Annual Report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The information required for this Item is incorporated by reference herein from the "Election of Directors" section in the Company's Proxy Statement for the 1995 Annual Meeting of Shareholders, except for information with respect to executive officers which is set forth in Part I hereof.
Item 11.
Item 11. Executive Compensation.
The information required for this Item is incorporated by reference herein from the "Compensation of Executive Officers" section in the Company's Proxy Statement for the 1995 Annual Meeting of Shareholders.
Item 12.
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 the Company's Proxy Statement for the 1995 Annual Meeting of Shareholders.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information required for this Item is incorporated by reference herein from the "Certain Relationships and Related Transactions" section in the Company's Proxy Statement for the 1995 Annual Meeting of Shareholders.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Certain Documents Filed as Part of Form 10-K.
(1) Financial Statements Pages in Annual Report* -------------- Minnesota Power Report of Independent Accountants 24 Consolidated Balance Sheet at December 31, 1994 and 1993 25 For the three years ended December 31, 1994 Consolidated Statement of Income 26 Consolidated Statement of Retained Earnings 26 Consolidated Statement of Cash Flows 27 Notes to Consolidated Financial Statements 28-39 -------------------------- * Incorporated by reference herein from the Minnesota Power 1994 Annual Report.
(2) Financial Statement Schedules
Page ---- Report of Independent Accountants on Financial Statement Schedule 31 Minnesota Power and Subsidiaries Schedule: II - Valuation and Qualifying Accounts 32 and Reserves
All other schedules have been omitted either because the information is not required to be reported by the Company or because the information is included in the consolidated financial statements or the notes thereto.
(3) Exhibits including those incorporated by reference
Exhibit Number --------- *2 - Agreement and Plan of Merger by and among Minnesota Power & Light Company, AC Acquisition Sub, Inc., ADESA Corporation and Certain ADESA Management Shareholders dated February 23, 1995 (filed as Exhibit 2 to Form 8-K dated March 3, 1995, File No. 1-3548).
*3(a)1 - Articles of Incorporation, restated as of July 27, 1988 (filed as Exhibit 3(a), File No. 33-24936).
*3(a)2 - Certificate Fixing Terms of Serial Preferred Stock A, $7.125 Series (filed as Exhibit 3(a)2, File No. 33-50143).
*3(a)3 - Certificate Fixing Term of Serial Preferred Stock A, $6.70 Series (filed as Exhibit 3(a)3, File No. 33-50143).
*3(b) - Bylaws as amended January 23, 1991 (filed as Exhibit 3(b), File No. 33-45549).
*4(a)1 - Mortgage and Deed of Trust, dated as of September 1, 1945, between the Company and Irving Trust Company (now The Bank of New York) and Richard H. West (W. T. Cunningham, successor), Trustees (filed as Exhibit 7(c), File No. 2-5865).
*4(a)2 - Supplemental Indentures to 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)
Exhibit Number
*4(b) - Mortgage and Deed of Trust, dated as of March 1, 1943, between Superior Water, Light and Power Company and Chemical Bank & Trust Company (Chemical Bank, successor) and Howard B. Smith (Steven F. Lasher, successor), as Trustees (filed as Exhibit 7(c), File No. 2-8668), as supplemented and modified by First Supplemental Indenture thereto dated as of March 1, 1951 (filed as Exhibit 2(d)(1), File No. 2-59690), Second Supplemental Indenture thereto dated as of March 1, 1962 (filed as Exhibit 2(d)1, File No. 2-27794), Third Supplemental Indenture thereto dated July 1, 1976 (filed as Exhibit 2(e)1, File No. 2-57478) and Fourth Supplemental Indenture thereto dated as of March 1, 1985 (filed as Exhibit 4(b), File No. 2-78641), Fifth Supplemental Indenture thereto dated as of December 1, 1992 (filed as Exhibit 4(b)1 to Form 10-K for the year ended December 31, 1992, File No. 1-3548).
*4(c) - Indenture, dated as of March 1, 1993, between Southern States Utilities, Inc. and Nationsbank of Georgia, National Association, as Trustee (filed as Exhibit 4(d) to Form 10-K for the year ended December 31, 1992, File No. 1-3548).
+*10(a) - Incentive Compensation Plan, as amended and restated, effective January 1, 1994 (filed as Exhibit 10(a) to Form 10-K for the year ended December 31, 1993, File No. 1-3548).
+*10(b) - Supplemental Executive Retirement Plan, as amended and restated, effective January 1, 1990 (filed as Exhibit 10(b) to Form 10-K for the year ended December 31, 1992, File No. 1-3548).
+*10(c) - Executive Investment Plan-I, as amended and restated, effective November 1, 1988 (filed as Exhibit 10(c) to Form 10-K for the year ended December 31, 1988, File No. 1-3548).
+*10(d) - Executive Investment Plan-II, as amended and restated, effective November 1, 1988 (filed as Exhibit 10(d) to Form 10-K for the year ended December 31, 1988, File No. 1-3548).
+10(e) - Executive Long-Term Incentive Plan, as amended and restated, effective January 1, 1994.
+10(f) - Directors' Long-Term Incentive Plan, as amended and restated, effective January 1, 1994.
+*10(g) - Deferred Compensation Trust Agreement, as amended and restated, effective January 1, 1989 (filed as Exhibit 10(f) to Form 10-K for the year ended December 31, 1988, File No. 1-3548).
+10(h) - Minnesota Power Electric Utility Operations Annual Incentive Plan, effective January 1, 1995.
+10(i) - Minnesota Power Corporate Annual Incentive Plan, effective January 1, 1995.
12 - Computation of Ratios of Earnings to Fixed Charges and Supplemental Ratios of Earnings to Fixed Charges.
Exhibit Number
13 - Minnesota Power 1994 Annual Report.
*21 - Subsidiaries of the Registrant (reference is made to the Company's Form U-3A-2 for the year ended December 31, 1994, File No. 69-78).
23(a) - Consent of Independent Accountants.
23(b) - Consent of General Counsel.
*27 - Financial Data Schedule (filed as Exhibit 27 to Form 8-K dated February 27, 1995, File No. 1-3548). ------------------------ * 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 dated and filed on January 5, 1995, with respect to Item 5. Other Events. Report on Form 8-K dated and filed on February 23, 1995, with respect to Item 5. Other Events. Report on Form 8-K dated and filed on February 27, 1995, with respect to Item 7. Financial Statements and Exhibits. Report on Form 8-K dated and filed on March 3, 1995, with respect to Item 5. Other Events and Item 7. Financial Statements and Exhibits.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Minnesota Power
Our audits of the consolidated financial statements referred to in our report dated January 24, 1995, appearing on page 24 of the 1994 Annual Report to Shareholders of Minnesota Power (which report and consolidated financial statements are incorporated by reference in this Annual Report on 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.
PRICE WATERHOUSE LLP Minneapolis, Minnesota January 24, 1995
SCHEDULE II
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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.
MINNESOTA POWER & LIGHT COMPANY (Registrant)
Dated: March 24, 1995 By A. J. SANDBULTE ----------------------------------- A. J. Sandbulte 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 --------- ----- ----
A. J. SANDBULTE Chairman, President, March 24, 1995 ----------------------------- Chief Executive Officer A. J. Sandbulte and Director
D. G. GARTZKE Senior Vice President- March 24, 1995 ----------------------------- Finance and D. G. Gartzke Chief Financial Officer
MARK A. SCHOBER Corporate Controller March 24, 1995 ----------------------------- Mark A. Schober
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Signature Title Date --------- ----- ----
M. K. CRAGUN Director March 24, 1995 ----------------------------- M. K. Cragun
D. E. EVANS Director March 24, 1995 ----------------------------- D. E. Evans
SR. KATHLEEN HOFER Director March 24, 1995 ----------------------------- Sr. Kathleen Hofer
PETER J. JOHNSON Director March 24, 1995 ----------------------------- Peter J. Johnson
MARY E. JUNCK Director March 24, 1995 ----------------------------- Mary E. Junck
R. S. MARS, JR. Director March 24, 1995 ----------------------------- R. S. Mars, Jr.
PAULA F. McQUEEN Director March 24, 1995 ----------------------------- Paula F. McQueen
ROBERT S. NICKOLOFF Director March 24, 1995 ----------------------------- Robert S. Nickoloff
JACK I. RAJALA Director March 24, 1995 ----------------------------- Jack I. Rajala
C. A. RUSSELL Director March 24, 1995 ----------------------------- C. A. Russell
DONALD C. WEGMILLER Director March 24, 1995 ----------------------------- Donald C. Wegmiller
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