Minnesota Power, Inc. History

Address:

30 West Superior Street
Duluth, Minnesota 55802-2093
U.S.A.

Telephone: (218) 722-2641
Fax: (218) 723-3996

Public Company
Incorporated: 1906 as Duluth Edison Electric Company
Employees: 8,000
Sales: $1.13 billion (1999)
Stock Exchanges:New York
Ticker Symbol: MPL
NAIC: 221122 Electric Power Distribution

Company Perspectives:

Minnesota Power, Inc. is an unusual blend of regulated utilities and entrepreneurial spirit. We've extended our reach outside Minnesota and diversified far beyond the selling of electricity to market some of the basic essentials of modern life&mdash-ergy, water, transportation and land. Key Dates:

Key Dates:

1906:: Duluth Edison Electric Company is formed.
1917:: Minnesota Utilities Company is created to serve mining industry.
1923:: Four regional electric utilities consolidate as Minnesota Power & Light (MP & L).
1932:: Election of FDR marks period of increased scrutiny and regulation of electric utilities, including MP & L.
1950:: Minnesota Power terminates affiliation with American Power and Light as its holding company.
1968:: Embarks on period of extensive plant construction.

1979-82:Taconite industry recession drives utility to near insolvency.
1985:: Investment portfolio boosts market returns well above industry average.
1995:: Buys automobile auction company.
1998:: Revenues top $1 billion for first time.

Company History:

Minnesota Power, Inc., a broadly diversified utility, remains one of the lowest-cost electric producers in the country. Throughout its long history, the company's fortunes have been closely linked to the development of the considerable natural resources in the Arrowhead region of Minnesota. Approximately half of the company's total electric sales go to big industrial customers, particularly taconite and wood products plants. Proportionally, Minnesota Power holds the greatest number of industrial customers among investor-owned electric utilities. To offset this historically beneficial yet potentially limiting dependency, the utility entered into a variety of non-regulated ventures beginning in the 1980s and gained national attention in the process. Minnesota Power's holdings range from ADESA Corporation, one of the country's largest vehicle auction networks, to Lehigh Acquisition Corp., a Florida-based real estate company.

Forerunners: 1880s-1910s

Minnesota Power's roots go back to the late 1880s when small electric utilities were sprouting up across the nation. These early entrepreneurial ventures competed with each other to provide service to growing urban industrial and commercial areas. Duluth, Minnesota, at the southwestern tip of Lake Superior, was a port town receiving timber from the white pine forests of northeastern Minnesota and grain from the Red River Valley to the west. The electric utilities were eager to serve the lumber and shipping businesses on the shore of the big lake and the city itself. To do so, they needed to create an infrastructure to carry the electricity to their customers--a difficult task in a city built on rock.

Alexander W. Hartman was one of the people who was instrumental in electrifying Duluth. As was typical with early utilities ventures, Hartman's efforts materialized in many mergers and acquisitions, ending with the formation of Duluth Edison Electric Company in 1906. The electric power retailer would be one of the principal companies that merged with other regional electric utilities to form Minnesota Power & Light Company (MP & L).

While Hartman and other electric retailers were creating the systems of power lines to deliver the electric power, other visionaries were developing hydroelectric power from the area's abundant water resources. Investment banker Jay Cooke helped lay the groundwork for the construction of a dam on the lower St. Louis River which ran into Lake Superior. The Thomson Hydroelectric Station was constructed in 1907 by Great Northern Power Company, the second of the regional utilities which would form MP & L.

General Light and Power Co. in Cloquet, about 20 miles from Duluth, and the smallest of the four utilities to later form MP & L, had a history that is representative of the physical difficulties of electrifying the region. In Duluth, the utilities had trouble installing electric poles because of the rock bed on which the city was built. The Cloquet utility's problem with nature was the abundance of pine and aspen forests and the occurrence of devastating forest fires. Two such fires, one in the late 19th century and another in the early 20th century, destroyed entire systems of lines and caused more than a thousand deaths. Nature, in northeastern Minnesota, brought disaster on the one hand and on the other provided plentiful resources that served the growing utility industry.

The last decade of the 19th century was marked by the discovery of rich iron ore deposits in northeastern Minnesota. The Minnesota Utilities Company was created in 1917 from smaller utilities vying to serve the booming mining industry; it ranked as the state's third largest supplier of electricity. Usage of electric power by iron mines quadrupled from 1918 to 1924 and quadrupled again by 1929. In 1922, the year before its consolidation with MP & L, the Minnesota Utilities Company was earning a profit on revenues of $544,000.

Political and Economic Climates Shape Utilities: 1920s-40s

On October 23, 1923, Minnesota Power & Light was consolidated by Electric Bond and Share, a subsidiary of the Eastern electrical equipment manufacturer General Electric. The manufacturer, through its subsidiary, had been financially tied to small electric utilities in the area since the 1890s. By 1922, Electric Bond and Share Co., which provided capital for the small utilities, owned most of Duluth Edison Electric Co. and had a controlling interest in the Great Northern Power Company. Minnesota Utilities and General Light and Power entered into agreements with Electric Bond and Share that year. The consolidation of the four utilities was financed with 125,000 shares of preferred stock of American Power and Light Co., a holding company subsidiary, at a par value of $12.5 million. The sale was a complex one which would later be brought under federal scrutiny.

The federal government had encouraged the consolidation of utilities such as MP & L due to the massive needs of World War I, which helped foster the concept of the holding company, as well as the need to link up utility systems in order to provide an adequate supply of power. Herbert Hoover, as secretary of commerce in the early 1920s, promoted this 'super power' idea, the networking of electric utilities. In addition, the 1920 Federal Power Act had given electric utilities the right of eminent domain in building and operating hydroelectric dams on rivers.

Not surprisingly then, the 1920s were years of expansion for the newly created Minnesota Power & Light Co. Construction of three dams and the linkage of the four existing utility systems by transmission lines highlighted the decade. Total capitalization rose from about $41 million at the time of consolidation to $70 million at the end of the decade. In those early years, MP & L sold the bulk of its electricity to northeastern Minnesota industries--mines, paper mills, and coal shipping docks. In 1927, 66 percent of its kilowatt hours (kwh) went to industrial customers, and over 50 percent of revenues were derived from fewer than 200 customers. The company ended the decade with $6 million in annual sales.

The Great Depression of the 1930s brought with it social and economic change, and, with the election of Franklin Delano Roosevelt in 1932, the climate for the electric utility holding companies was drastically altered. Legislation created the Tennessee Valley Authority and the Rural Electrification Administration, which were intended to bring power to distressed areas and farmers. In effect, the federally financed projects directly competed with the utilities. The Public Utilities Holding Company Act was also passed, calling for the breakup of the holding companies. In Minnesota, in the region served by MP & L, a movement of local governments emerged to create publicly owned utilities in order to curb costs of electrifying their cities.

In spite of political and economic stresses brought on by the Depression and the accompanying recession in the iron and steel industries, MP & L survived the decade. Electric utilities were a growing industry at the time, and both commercial and residential use increased throughout the 1930s. Stock dividends were down and operations and wages cut back during the worst times, but by the end of the decade MP & L was back up to its 1929 revenue level.

The Roosevelt-era movement to change the face of electric utilities was put on hold in December 1941 when the United States entered World War II. As Bill Beck noted in Northern Lights: An Illustrated History of Minnesota Power & Light, 'The Sherman tanks rolling off assembly lines in Detroit, the airplanes being assembled in the California plants, the aircraft carriers sliding down the ways in East Coast shipyards--all were dependent upon the soft, red iron ore of the Mesabi Range.'

When the war ended, MP & L focused on recapitalization of its stock and reclassification of its accounts. The recapitalization was due to the 1935 Public Holding Company Act, which required subsidiaries to be separated from their holding companies. The reclassification was the result of other federal action in the 1930s. During an investigation of electric holding companies, MP & L was found to have overvalued stock at the time of consolidation. The decade was also marked by MP & L's decision to move from hydroelectric generation of power to coal-fired steam generation. Coincidentally, the region was facing the worst drought in decades. Nevertheless, MP & L weathered the turmoil and finished the 1940s financially strong while setting new records for power usage.

Independent Yet Interconnected: 1950s-70s

MP & L entered the 1950s by terminating its affiliation with American Power and Light as its holding company. Thus Minnesota Power began the new decade as a small utility serving the seasonal needs of the iron ore industry, with 58 percent of its power coming from hydroelectric sources and 42 percent through steam generation. It was a decade of increased defense needs due to the Korean War and a rapid increase of residential use due to widespread home modernization. MP & L's speedy construction of steam generating stations resulted in the first rate increase in its history. Economic diversification of the region helped MP & L grow. The St. Lawrence Seaway connected Duluth with the Atlantic Ocean, paper production in the city was expanded, and commercial ventures were on the rise. The 1950s also saw the advent of atomic power in utilities.

The 1960s marked the end of MP & L's relative isolation from other utilities when the company linked with the two other large utilities in the state, Northern States Power and Otter Tail Power. MP & L expanded its power pooling and transfer of bulk power through a regional grid when the Minnesota utilities joined those in Iowa and Wisconsin to form the Upper Mississippi Valley Power Pool in 1961. In 1963, the Midcontinental Area Power Planners linked 22 power suppliers in ten states and Canada.

The decade also proved a politically charged one for the utility, as it fought the expansion of federally funded electric cooperatives and pressure from Minnesota Senator Hubert H. Humphrey regarding MP & L's own rates. However, the company benefited from the passage of Minnesota's taconite amendment, which would revitalize the fading iron ore industry in the Arrowhead region. In 1968, the company decided to shift from high-sulfur Eastern coal to low-sulfur Western coal and began initiating extensive plant construction and adaptation of existing plants.

The 1970s was a growth decade for MP & L and the taconite industry, which unlike the iron ore industry demanded electric power 24 hours a day throughout the year. Revenues went from $50 million to $281 million in the ten-year period. As the taconite plants grew MP & L kept pace by adding additional coal-fired generating stations. According to Beck, 'During the latter half of the decade, MP & L was perhaps the fastest growing electric utility in the United States.' During the decade, the company also increased its power supply through a cooperative project with a utility in North Dakota. The Square Butte Electric Cooperative offered access to the area's vast lignite coal reserves through a 400,000 kilowatt mine-mouth generating plant and sent power to Minnesota via a state-of-the-art AC/DC transmission line. On the political front MP & L was entering the era of federal and state environmental regulation. The 1970s also marked the end of a 40-year trend toward lower rates. The low point of 2.26 cents per kwh in 1967 doubled to 4.51 cents in 1979.

In 1980, the company changed its name to Minnesota Power and began the decade with legal proceedings, fighting a 30 percent severance tax on Montana coal and a 62 percent rate increase by Burlington Northern Railroad, its sole rail shipper. More foreboding for the utility, however, was the national economic recession. The recession hit the taconite industry hard and production of the low-grade ore fell 40 percent from 1979 to 1982. In an effort to cut costs the utility trimmed 15 percent of its workforce between 1980 and 1985. Anthony Carideo, in an article for a November 1984 edition of the Minneapolis Star Tribune, observed that 'Five years ago, Minnesota Power looked like a candidate for the poor house. Strapped with an $850 million construction program, the Duluth-based utility was at the door of the Minnesota Public Utilities Commission (PUC) for rate increases every year except one between 1976 and 1981. Faced with a nearly insolvent utility, state regulators allowed the company to bill consumers for millions of dollars in construction costs before the work was finished, a concession it had never made before to any utility and has allowed only once since.' The company comeback was also served by the take-or-pay contracts it had entered into with the taconite companies when the industry was booming and they were building plants to keep up with the demand for power. Under such contracts, the companies had agreed to pay for a certain level of use each month whether they used it or not. However, by the mid-1980s, the taconite producers wanted out of the contracts.

Drive Toward Diversification: 1980s-Early 1990s

Fortunately, Minnesota Power had by then built a profitable investment portfolio (stocks and bonds of other utilities) and had formed a subsidiary, Topeka Group, Inc., which owned a five-state telephone firm and a water and wastewater treatment company in Florida. The utility was also embarking on a joint venture with St. Paul-based Pentair, Inc. to build a high-tech supercalender paper plant in Duluth. The plan was to keep investments in regulated and core support industries. Minnesota Power had used the post-construction cash buildup it had beginning in 1981 for its investments rather than give large stockholder dividends. By 1985, the company was looking at a 44 percent market return (stock movement plus dividends) according to Standard and Poor's, while the industry average was 25 percent. The company also exceeded the industry's five-year compound earnings growth and dividend growth with increases of 13 and eight percent, respectively. A December 1989 Forbes article reported that Minnesota Power had the second lowest electric utility rates in the country at 4.2 cents per kwh yet was among the most profitable with a five-year average return on equity of 15.8 percent. Forbes also reported that by the end of 1989 the utility had sold its telephone investment for three times the purchase price, expanded its water and wastewater ventures, and purchased a coal mining venture to serve its North Dakota power generation interests. Minnesota Power also sold about 100 megawatts of surplus capacity--a problem since the taconite industry downturn&mdashø a group of Wisconsin municipal utilities. The company still gained 57 percent of its $460 million in operating revenue from electric sales to industrial customers, compared with a 30 percent utility industry average.

The 1990s marked a change in the company's approach to its largest customer, the taconite industry. Jack Rowe, who led the company during the taconite hey days, had stood firm on the take-or-pay contracts. With Arend 'Sandy' Sandbulte at the helm, the company began to renegotiate rates to the remaining taconite plants, giving a 20 to 30 percent decrease in rates and shortening the length of contracts. The company continued to look toward a future that was less dependent on the taconite industry with a goal of accelerating the contributions of non-electric businesses to over 60 percent of total revenue by the year 2000.

The 1990s also saw increased involvement by Minnesota Power in the economic development of the Arrowhead region. Minnesota Power not only provided funding for start-up businesses but offered financial support as part of a state package to attract a Northwest Airlines' maintenance base and reservations center to Duluth and the Iron Range. In another move to create usage for its core business of electric power, Minnesota Power created Synertec, a waste paper reclamation subsidiary. In partnership with four competing paper mills, Synertec opened a $76 million paper recycling plant in Duluth, named Superior Recycled Fiber Industries.

In spite of Minnesota Power's move toward decreased dependency on the taconite industry, the company's financial strength was still clearly tied to it. When National Steel Co., one of its largest customers, shut down its Keewatin plant indefinitely in the fall of 1993, Minnesota Power experienced a more than $2 a share fall on the stock market. The utility responded by actively working with other stakeholders in the taconite industry to facilitate the restarting of the Japanese-owned plant. By mid-1994, new corporate management at National's subsidiary had recommitted to fully integrated steel operations and was prepared to end the deadlock and resume operations, following various concessions and the approval of union steelworkers. National Steel Pellet and Minnesota Power arrived at a new electric rate deal in July 1994.

In January 1994, Minnesota filed for a rate increase of up to 25 percent for residential and commercial customers. The last rate increase Minnesota Power had filed for was in 1987, one which was successfully fought by the Minnesota Senior Federation's Northeastern Coalition. Subsequently, rates for homes and businesses had not risen in 12 years. The utility asserted in the filing that industrial users had been carrying an unfair share of the company's costs; the Minnesota Public Utilities Commission granted the company a residential retail rate increase.

Also during this time, the company faced more changes on the regulatory front. The state of Minnesota began to require that utilities include environmental costs--such as air emissions of coal-burning plants--in the estimate of the costs of future plants.

In terms of the bottom line, a downturn in its usually strong investment portfolio, losses by the company's hydraulic lifting equipment company, Reach All, Inc., and heavy rainfall in Florida which depressed water utility revenue, all conspired to drop Minnesota Power's earnings to its lowest point in a decade.

Risky Route for Utility: Mid- to Late 1990s

In early 1995, Minnesota Power earned the scorn of some market analysts when the utility announced its intention to purchase North America's third largest auto auction company. Indianapolis-based ADESA Corporation sold 400,000 vehicles in 1994, up from 112,000 two years earlier, and netted $7.7 million.

'I think this is a negative for shareholders,' Eric Elverkrog, an analyst with Chicago-based Duff & Phelps, said in a January 1995 Duluth News-Tribune article. 'Buying an auto auction business is not a good strategic fit for Minnesota Power.' Elverkrog questioned the utility's ability to successfully negotiate the twists and turns of a rapid-growth industry.

About mid-year 1995, Minnesota Power pulled out of Lake Superior Paper, the joint venture with Pentair, and sold Reach All, freeing up resources for its other pursuits. Following the acquisition of an 80 percent share in ADESA in July, the company moved to bolster its real estate holdings. Minnesota Power had entered the Florida market in 1991 with the purchase of Lehigh Acres, a home site development near Fort Myers. In September 1995, Minnesota Power bought into Sugarmill Woods Communities, a development north of Tampa and, in April 1996, closed a deal to purchase nearly one-third of Palm Coast, a planned community south of St. Augustine.

Meanwhile, skepticism regarding the auto auction investment led Standard and Poor's to lower Minnesota Power's bond rating early in 1996. ADESA's earnings performance proved to be weaker than expected during its first few quarters under Minnesota Power majority ownership. Responding to the situation, the utility sped up the time table for acquiring the last shares of the company from the founder and remaining executives and gained 100 percent ownership in August 1996.

Elsewhere, Minnesota Power was fine-tuning its core electric operations. The utility negotiated long-term contracts with some of its large industrial customers, including an 11-year agreement with USX Corporation's Minntac iron ore processing plant, one of the top electric users in the country. By and large, previous long-term contracts with large customers had been tied to lender stipulations on new plant construction, but the move toward deregulation of the electric industry prompted Minnesota Power to stabilize those important relationships. One scenario in the restructuring of electric utility markets foresaw a time when Minnesota Power would be required to give transmission line access to competitors and therefore vie for the business of long established customers.

In the same vein, Minnesota Power launched a new power marketing division, MPEX, in 1996. The utility had been involved in group buying and selling of energy for 25 years, but the move further positioned the company to take advantage of opportunities in the wholesale power market which had largely been deregulated by state and federal lawmakers. Bulk power sales were the main contributor to the 14 percent increase in electric sales during 1996.

Developments in the water services segment included a name change for the Florida water utility affiliate. Southern States Utilities was renamed Florida Water Services. Minnesota Power also purchased a Florida-based predictive, preventive, and corrective maintenance company, Instrumentation Services, Inc., (ISI), which served clients such as Coca-Cola, Amoco, and the city of Houston. The utility largely pulled out of South Carolina, blaming the difficult regulatory environment, but it continued to push for regulatory relief in Florida operations, seeking the right to charge higher rates.

As Minnesota Power's auto auction business began to significantly contribute to earnings, analysts changed their tune about the utility's endeavor. 'This was for years the stock that everyone loved to hate,' said David Thickens, a Dain Bosworth analyst, in a June 1997 Knight-Ridder/Tribune News article. The Minnesota-based investment firm rated Minnesota Power a good buy during a time when utility stocks in general were sagging due to deregulation uncertainties. Minnesota Power, in addition to making gains with ADESA, was a solidly positioned, low-rate utility without the burdens related to nuclear power plants.

In 1997, Minnesota Power established a new telecommunications subsidiary, MP Telecom. Through MP Telecom, the utility sold bandwidth off its fiber optic network, a system established in the early 1970s to link far-flung substations and power plants. Minnesota Power's was the first utility-owned network in the nation. The company planned to offer system access to high volume users such as long distance phone companies, large businesses, and internet providers--the Telecommunications Act of 1996 had opened the door to this market.

Also in 1997, the utility added two new subsidiaries to the water services division: U.S. Maintenance and Management and America's Water Services, providing, respectively, predictive maintenance services and water and wastewater services. Elsewhere, ADESA's Automotive Finance Corp. (AFC) began providing dealer financing at independent auto auctions in the United States and Canada, expanding for the first time outside the ADESA. AFC wrote short-term inventory loans for wholesale and retail car dealers buying vehicles at those various auction sites.

The 1998 annual report touted ADESA as the fastest-growing automotive remarketing company in North America, and reported AFC had doubled in size every year since the 1995 purchase. In spite of the impressive gains, electric operations continued to produce the lion's share of Minnesota Power's operating revenues. On the year, profitability continued upward, and operating revenue topped $1 billion for the first time in company history.

1999/2000: Charging Up for an Electric Future?

Early in 1999, Minnesota Power moved to gain a toehold in the Chicago market as it signed an agreement to purchase electricity from a power plant to be constructed 30 miles southwest of the city. While electric consumption was stagnant in the company's retail service area, Chicago utilities needed to purchase excess power through the wholesale market, especially during the hot summer months. Down in Florida, Minnesota Power expanded its real estate holdings, buying about 2,500 acres of Cape Coral residential, commercial, and recreational properties for $45 million. North Carolina-based Heater Utilities acquired Mid-South Water Systems, Inc. in 1999 and was ranked as that state's largest investor-owned water business.

Faring less well in another area of its investments, Minnesota Power took a non-cash charge of $36.2 million against 1999 net operating income due to events related to the sale of Capital Re Corporation to ACE Ltd. The 21 percent interest Minnesota Power held in the reinsurance company represented a key component of its investment portfolio. Capital Re's value begun to plummet in the second half of 1998 due in part to extraordinary claims generated by a bankrupt client.

As automotive services continued to grow, so did the expectation that the segment would overtake Minnesota Power's electric business as the largest producer of net income early into the 21st century. ADESA operated 29 vehicle auction sites and was poised to enter the hot Los Angeles market. Other Minnesota Power automotive businesses offered customers such options as transport and information services. On the whole, automotive net income jumped 57 percent in 1999; electric operations net income declined.

Minnesota Power entered 2000 exclaiming, 'Now, more than ever, Minnesota Power is more than Minnesota ... and more than power.' While seemingly well positioned to negotiate the changing electric utility landscape, future growth was clearly tied to relatively new endeavors, particularly the automobile auction business. Stockholders and analysts alike would be sure to keep a watchful eye on Minnesota Power's progress on both fronts.

Principal Subsidiaries:ADESA Corporation; Lehigh Acquisition Corp.; Automotive Finance Corporation; Minnesota Power Telecom, Inc.; BNI Coal, Ltd.; Florida Water Services Corporation.

Principal Operating Units: Automotive; Water; Investments; Electric.

Principal Competitors: Alliant Energy Corporation; Copart, Inc.; Northern States Power Company; Otter Tail Power Company.

Minnesota Power, Inc. History

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