Minnesota Power & Light Company

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Minnesota Power & Light Company

30 West Superior Street
Duluth, Minnesota 55802
U.S.A.
(218) 722-2641
Fax: (218) 723-3960

Public Company
Incorporated: 1906 as Duluth Edison Electric Company
Employees: 2,587
Sales: $505.52 million
Stock Exchanges: American New York
SICs: 1221 Bituminous Coal and Lignite Surface Mining; 2621 Paper Mills; 4911 Electric Services; 4924 Natural Gas Distribution; 4931 Electric & Other Services Combined; 4941 Water Supply

Minnesota Power & Light Company (MP&L), the second largest electric utility in Minnesota, provides power to the northern third of the state as well as electricity, water, and natural gas to neighboring northwestern Wisconsin. The company, throughout its long history, has been and remains closely linked to the development of the considerable natural resources in the Arrowhead region of Minnesota. Between 1991 and 1993, some 56 percent of the company’s total electric revenue came from large taconite and wood products plants in the area. To offset this historically beneficial yet potentially limiting dependency, the utility has evolved into a successfully diversified company since the early 1980s, gaining national attention in the process. Through October of 1994 electric revenue accounted for 80 percent of the company’s operating revenues in 1994. Water utility operations in Florida and the Carolinas; utility-related ventures such as coal mining, paper production, and pulp production; and investments in insurance, real estate, and securities comprised the remainder.

MP&L’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.

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 nineteenth century and another in the early twentieth 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 nineteenth 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 due to the electrification of the growing mines and the electrification of heavy mining-related equipment, such as locomotives and steam shovels. In 1922, the year before its consolidation with MP&L, the Minnesota Utilities Company was earning a profit on revenues of $544,000.

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. And 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 America 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.

MP&L entered the 1950s by terminating its affiliation with American Power and Light as its holding company. Thus the company 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 rapid 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 building and adapting 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 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 kw 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 work force 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.

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 waste water 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 waste water 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—to 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 nonelectric 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.

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. Moreover, Minnesota Power experienced a downturn in its strong investment portfolio. First quarter earnings fell 53 percent due mainly to poor performance of the company’s securities investments. Nonetheless, Minnesota Power itself remained a proven performer, dedicated to its core business of providing electricity and other utility services to its more than 300,000 customers. The company was also uniquely situated to continue a program of diversification with benefits both to itself and the economies of the regions it served.

Principal Subsidiaries

BNI Coal, Ltd.; Heater Utilities, Inc.; Lake Superior Paper Industries (50%); Southern States Utilities, Inc.; Superior Water, Light & Power Company; Synertec, Inc.