An analysis of Minnesota Power & Light Company and its subsidiaries.
Minnesota Power and Light Company (MP) is a diversified utility company with headquarters in Duluth, MN and business operations in 28 states and three Canadian provinces. Once exclusively an electric utility, MP has diversified over the past 12 years into water utilities and several nonregulated businesses including auto auctions and real estate. Its common stock is traded on the New York Stock Exchange under the symbol MPL.
Board Chairman, President and Chief Executive Officer:
Edwin L. Russell
PROFILE: 51 years old; joined MP in May of 1995; 25-year record of experience in non-regulated businesses. Previously was a group vice-president at J.M. Huber Corp., a broadly diversified manufacturing and natural resources company headquartered in Edison, N.J. Holds a BA degree in International Government from Bowdoin College and an MBA from the Harvard Graduate School of Business Administration. Russell succeeded Arend J. Sandbulte who remains a member of the company's 14-member corporate board of directors.
When he took the helm, one of Russell's goals was to have total shareholder return ranking in the upper quartile of MP's peer group of 17 diversified utility companies by the year 2000. So far, MP remains in fifth place among those peers.
Board of Directors:
Edwin L. Russell, Merrill K. Cragun, Dennis E. Evans, Peter J. Johnson, George L. Mayer, Paul F. McQueen, Robert S. Nickoloff, Jack I. Rajala, Arend J. Sandbulte, Nick Smith, Bruce W. Stender, Donald C. Wegmiller; all re-elected to the board in 1997, and Kathleen A. Brekken, elected this year.
President MP Electric-Robert D. Edwards; President Southern States Utilities-John A. Cirello; President MP Real Estate Holdings-Donnie R. Crandell; Chief Financial Officer-David G. Gartzke; General Counsel & Secretary-Philip R. Halverson; Vice President-Corporate Relations-James A. Roberts; Vice President-Corporate Information Services-Geraldine R. VanTassel; Corporate Controller-Mark A. Schober; Corporate Treasurer-James K. Vizanko; Assistant Vice President-Corporate Development-Dennis L. Hollingsworth; Assistant General Counsel-Steve W. Tyacke
MWh Sales Breakdown
79% Industrial 10% Commercial 10% Residential 1% Other
Residential - 6.32 cents/kWh Commercial - 5.72 cents/kWh Industrial - 3.39 cents/kWh Other - 6.55 cents/kWh
MP's residential rates increased by 13.5% in 1995. With additional increases of 3.3% for each of the years 1996 and 1997.
1,252 after reducing their utility workforce by 180 through offering of an early retirement package in 1995 and cutting of another 50 employees in December 1996. (A total workforce reduction of 16%). Russell noted at MP's annual meeting that the total workforce has actually swelled to over 6,500 employees if you consider those employed by all business operations.
Other offices - Eveleth, International Falls, Cloquet, Little Falls, Long Prairie, Crosby, Park Rapids, Pine River, and Sandstone. (Aurora, Chisholm and Coleraine offices were closed November 4, 1996 as a cost savings measure.)
Dividend on Company Common Stock:
MP indicated total earnings per share of $2.28 according to a report issued January 27, 1997. This compares to $2.16 per share in 1995. The company's stock has remained stable and is currently trading at over $29 per share. The 52-week high was $29 5/8 and the low was $26. Dain Bosworth gave the company's stock a "buy" rating in an evaluation report mailed to its customers this spring. MP has paid cash dividends since 1948 and has approximately 27,000 registered shareholders owning 32 million shares of stock.
To contain costs, get maximum production from existing facilities, and take advantage of new revenue opportunities.
Stand on Deregulation:
MP indicated in its annual report that it remains opposed to retail wheeling as it would benefit only a few large customers while potentially adversely impacting smaller customers' rates and shareholder returns. In spite of this stand, the last year has seen the MP electric division sign long-term contracts with two of its biggest Iron Range customers; continue to trim its workforce; and hire marketing visionaries to help focus the company on changing consumer needs. Along the way, it has also reinvented its retail outlet at the Miller Hill Mall to offer new electric gee-whiz gadgets. The overall message is that the utility is not standing still as lawmakers come ever closer to giving customers a choice in who provides their power.
Anticipating a less-regulated electric industry, MP functionally separated into four business units.
The Generation Group-Comprises nearly half of MP's utility assets. Positioned to compete aggressively with all power producers.
The Transmission Group-Expected to remain federally regulated - is responsible for moving electricity from the generating stations to the distribution systems.
The Distribution Group - Delivers power to retail customers. Will focus on innovation in customer service, efficiency, adding load, and finding new uses for existing infrastructure.
The Power Marketing Group - Uses skills and experience to work with industrial and commercial customers to expand the services and assistance provided to them and to increase sales beyond traditional service territory.
ELECTRIC - 74% OF REVENUES/50% OF ASSETS
With headquarters in Duluth, Minnesota, MP Electric supplies electric service to 122,000 customers in northern Minnesota, and its wholly owned subsidiary, Superior Water, Light and Power Company, sells electricity to 14,000 customers and natural gas to 11,000 customers, and provides water to 10,000 customers in northern Wisconsin. About half of MP's electric revenue comes from its large industrial customers, including forestry, product mills and the taconite mining industry, the domestic steel industry's main supplier of pelletized iron ore.
Taconite mining customers account for approximately 35% of MP's electric operating revenue. While taconite production is expected to be at record levels for several years, production will decline gradually some time after the year 2005. The paper and wood products industries account for approximately 13% of MP's electric sales.
MP's BNI coal subsidiary mines lignite coal for two North Dakota mine-mouth generating plants. Under the terms of a 30-year contract with Square Butte that extends through 2007, MP is purchasing 71% of its output from a 470 MW generating unit located near Center, N.D. MP owns 80% of Boswell Unit 4. Wisconsin Public Power owns the other 20%. Each have equal representation and voting rights. Coal fuels 89% of MP's generating capacity, the remaining is hydro. They have no nuclear plants.
Though legally defined as a regulated utility, MP is broadly diversified and operates four businesses; electric energy, water resources, automobile auctions, and investments. Each business has its own strategy and receives capital support commensurate with its contribution to total shareholder return. Each is evaluated on a combination of free cash flow, return growth investment, and growth where appropriate. President and Chief Executive Officer Edwin L. Russell indicated MP does not anticipate further diversification, rather, will concentrate on achieving enhanced performance from the businesses they have.
20 Largest Electric Customers:
Blandin Paper Company, Grand Rapids, MN
Boise Cascade Corporation, International Falls, MN
Eveleth Mines, Eveleth, MN
Georgia Pacific Corporation, Duluth, MN
Hibbing Taconite Co. Hibbing, MN
Inland Steele Co., Virginia, MN (at risk load)
International Bildrite, Inc., International Falls, MN
Lake Superior Paper Industries, Duluth, MN (MP used to own 50% of this business but sold it to another paper company in Wisconsin.)
Lakehead Pipeline Co., Bemidji, MN
LTV Steel Mining Co., Hoyt Lakes, MN
ME International, Duluth, MN
Minnesota Pipeline Co., based in Wichita, KS
National Steel Pellet Co., Silver Bay
Potlatch Corp., Grand Rapids, MN
Superior Recycled Fiver Industrires, Duluth, MN
Trust Joist Macmillan, Deerwood, MN
USG Interiors, Inc., Cloquet, MN
USX Corp. (Minnesota Ore Operations), Mr. Iron (In September 1996, MP signed an 11-year contract with USX to remain the sole electric supplier for USX's Minntac taconite iron mine.)
WLSSD, Duluth, MN
WATER-10% OF REVENUES/18% OF ASSETS
Minnesota Power affiliates provide water and wastewater utility service to 199,000 customers in Florida and the Carolinas, MP's Southern States Utilities (SSU) is Florida's largest privately-held water utility, ranking 12th in the nation among private service. In the Carolinas, MP's Heater Utilities affiliate serves some of the nation's fastest growing areas including services for Buena Ventura Lakes, a 2,800 acre planned residential development.
SSU filed for a 38.9% average rate increase in June 1995.
AUTOMOBILE AUCTIONS - 9% OF REVENUES/18% OF ASSETS
On July 1, 1995 MP acquired 80% of ADESA Corporation, the nation's third-largest auto auction chain, for $167 million in cash. In January 1996 MP provided an additional $15 million of capital in exchange for original issue common stock share which increased the company's ownership interest in ADESA to 83%. MP has the right to purchase the remaining 17% retained ownership interest in increments during the years 1997, 1998 and 1999 at a price based on ADESA's financial performance.
ADESA has 19 auctions located in the U.S. and Canada. Besides receiving auction fees from sellers and buyers, ADESA provides related services such as reconditioning, body and paint work, remarketing, dealer financing, and transportation.
After contributing nothing to shareholder's dividends in 1995, the division added 13 cents a share in 1996 and the automotive services division posted a 50% increase in revenues for the first quarter of 1997. Officials say the division is on track to contribute earnings of 30-35 cents per share in 1997.
Nationally, auto auction sales have been increasing about 6% to 8% a year for the past decade. Considering the high volume of cars coming off lease, the growth trend is expected to continue.
INVESTMENTS - 7% OF REVENUES/14% OF ASSETS
Minnesota Power invests funds to supplement earnings and provide liquidity and capital for growth. Besides their $106 million security portfolio, MP holds approximately 22% of Capital Re Corporation, a financial guarantee reinsurance company valued at nearly $100 million, and 80% of Lehigh Acquisition Corporation. Lehigh, with its subsidiary Sugarmill Woods Communities, owns approximately 9,000 homesites and 4,000 acres of commercial, residential, and undeveloped property near Fort Myers, Florida. From investments of $10.7 million in Lehigh since 1991, MP has received a total of $18 million in cash dividends and $43 million in contributions to net income.
In 1995, the real estate operations closed a $4 million purchase in Sugarmill Woods Communities, a development project about 60 miles north of Tampa including 1,250 completed homesites and 40 acres of undeveloped land adjacent to a golf course.
The special strength of MP's real estate investments has been their ability to solve problems and discourage competitive bidders - whether zoning and drainage issues, or parcels too large for competitors to finance. Their strategy is to acquire large residential community properties at a low cost, add value, and sell them at a gain for shareholders. The long-term goal is to achieve and sustain a liquidity level of from 5% to 10% of total corporate assets.
Minnesota Power and Light has consistently received high marks in annual customer satisfaction surveys conducted by an independent researcher. Although MP still ranks higher than most co-ops in the same survey, overall satisfaction among MP customer deteriorated between the fall of 1995 and fall of 1996. They experienced an 8% reduction in the top box "very satisfied" rating while the average co-op showed a 4% gain.
MP's closing of three offices and reduction in employees likely contributed to this decline. MP said reductions were necessary to improve competitiveness but customers and employees seemed to view these actions as evidence of poor management. In November 1996 an MP employee was quoted as saying "Morale is just fantastic around here. I have not heard this kind of sniping and backstabbing since I left my last job. All goodwill seems to be out the window."
Although MP has been diversifying beyond electricity for over 12 years, none of their ventures seemed to get as much attention as when they moved into the auto auction business. This received a good deal of press and not all customers or shareholders were pleased with the venture.
Minnesota Power officially re-opened their Electric Outlet store in the Miller Hill Mall in Duluth in November 1996. The store is now promoting special interest electric products such as portable saunas, mitten and boot dryers, outdoor stereo speakers and self-propelled golf carts and bicycles. MP is considering expanding this same concept into a national network and adding a direct mail catalog business.
A recent article in The Duluth News-Tribune talks about how MP has been undergoing strategic hiring in their marketing department. According to the article, "Minnesota Power has recruited a handful of marketing visionaries to study local preferences and figure out what customers want and at what price."
MP may start to regain competitive edge as they increase marketing efforts and heighten their corporate positioning. Image marketing has long been a strength of MP's and they have never been afraid to put substantial dollars toward getting their message out to the public. They have targeted environmental issues and community involvement on television in the Duluth, MN market.
In spite of their diversification, MP plans to gain most of their revenue from electric sales. In light of their previous failed effort to buy out Northern Electric Cooperative (Virginia, MN), it is likely they will aggressively pursue larger co-op loads should they have the opportunity to do so. However, they may be receptive to negotiating trades for their more rural lines/customers.
1) MP management has proven they have vision and the ability to adapt. Their recent diversification efforts are evidence of this. (Many co-ops are lacking in this area. We are often slow at making decisions which involve major change, investment or risk.)
2) MP has been consistently aggressive and successful in marketing their image. (Even though co-ops may not be able to match IOUs like MP dollar for dollar, I believe we could be more effective with the dollars spent. Unified branding efforts on statewide, regional and national levels will help leverage our dollars for greater impact.)
3) MP has whittled down to bare bones with employee cuts and office closings. This makes them less appealing to takeover efforts. (Although I don't agree with all methods used by MP for cost savings, I do believe co-ops with high equity could be vulnerable and should consider reducing equity through investments in value-added products/services to grow their business.)
4) MP is technologically advanced. An example is a new process whereby MP customers can read their own meters, call a toll-free number, punch in their meter reading, and if they choose, elect an option to find out the amount of their next bill based on the new reading. (Co-ops are not generally seen as being on the cutting edge of technology. Options available with current computer and telephone sets often limit our service capabilities. Out' ability to quickly access customer data and respond will be key to our success in a competitive environment.)
5) MP's customer base is heavily weighted toward the industrial/commercials. (Although this may have been a substantial advantage in the past, it may be a vulnerability under deregulation.)
6) MP changed their bylaws a year ago to reduce buyout potential. (Constant review of our bylaws is critical. Our goal is to establish bylaws which protect our business as much as possible without limiting our own opportunities and flexibility.)
7) MP customer loyalty levels were higher than all cooperatives surveyed at the same time in 1996.
1) MP customer satisfaction levels dropped substantially for two years in a row. (Similar surveys indicate co-op customer satisfaction levels have either increased or remained stable during this same time period.)
2) MP's service reality does not match the image they market. (Co-ops tend to under-market themselves. Most of us haven't done a very good job telling the public all the great things we're doing in our communities. It's time to stop being modest about the positive involvements.)
3) MP has reduced their community involvements and have started to charge for many of the services they once provided gratis. (I believe this also contributed to MP's reduced satisfaction levels. Part of the co-op's local "edge" is the result of involvement in the communities we serve and our financial and human resource contributions to various community projects.)
4) MP has increased residential rates and other fees including an up front recovery of 100% of the cost of providing a new service. A May 8, 1997 letter to the editor in the Pine River Journal regarding MP'S service charges carried the heading "Electric service a bureaucratic nightmare." The writer indicated he was given an $11,000 field estimate from MP for a service the local cooperative would have provide for $2,200. (Most cooperatives in our region have had very stable rates and many have even had recent rate reductions.)
5) MP considers themselves too small to be a world-class utility or a serious competitor against many of the large contenders. (The same is true of individual cooperatives but the picture changes drastically when we consider the possibility of efforts combined on a national level.)
When I first began this analysis, I saw MP as a primary competitor. Now, I see more potential for business opportunity relative to rural residential customers bordering coop territory. It's important for us to look even in the most unlikely places for business partners and/or deals which could strengthen our competitive position.
A potential threat is presented as some of MP's largest loads also have facilities served by area cooperatives. Should MP be successful in aggregating these loads, the cooperative would be heavily impacted. Keep in mind we have this same opportunity available to us. Our challenge will be to put together an attractive offer which can be backed by our solid, long-standing, relationship with these customers.
Gwen Thomas is manager of customer service at East Central Electric Association, a member of United Power Association. ECE serves nearly 40,000 customers in parts of nine counties and has its headquarters in Braham, Minnesota. Thomas manages 30 employees in six service centers. Her responsibilities includes managing front-line customer service, credit and collections, meter reading, communications, public relations and market research. She assumed her current responsibilities following the merger of ECE and North Pine Electric Cooperative (Finlayson, MN) in July of 1995 and has been employed by ECE since 1981 in the capacities of member services representative and communications coordinator. Thomas' career also included work with a local newspaper and photo studio and eight years of service as a peace officer. She was recognized as an NREAD Certified Rural Electric Communicator in 1989 and Minnesota Rural Electric Association (*MREA) Cooperator of the Year in 1994. Thomas was also recognized by MREA for her efforts to help prevent the sale of Northern Electric Cooperative Association to Minnesota Power. She is a 1997 graduate of NRECA's Management Internship Program.