UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
________________________________________
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
-- OR --
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
________________________________________
Commission file number 1-4566
THE MONTANA POWER COMPANY
(Exact name of registrant as specified in its charter)
Montana 81-0170530
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
40 East Broadway, Butte, Montana 59701-9394
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (406) 723-5421
________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
On August 4, 1998, the Company had 55,000,649 shares of common stock
outstanding.
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PART I
FINANCIAL STATEMENTS
THE MONTANA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Six Months Ended
June 30, June 30,
1998 1997
Thousands of Dollars
<S> <C> <C>
REVENUES $ 544,870 $ 497,421
EXPENSES:
Operations 222,990 192,058
Maintenance 39,986 41,417
Selling, general and
administrative 62,937 56,227
Taxes other than income taxes 50,326 48,824
Depreciation, depletion and
amortization 54,787 44,421
431,026 382,947
INCOME FROM OPERATIONS 113,844 114,474
INTEREST EXPENSE AND OTHER:
Interest 28,901 25,436
Distributions on mandatorily redeemable preferred
securities of subsidiary trust 2,746 2,746
Other (income) deductions - net (1,847) (12,504)
29,800 15,678
INCOME TAXES 25,625 37,840
NET INCOME 58,419 60,956
DIVIDENDS ON PREFERRED STOCK 1,845 1,845
NET INCOME AVAILABLE FOR
COMMON STOCK $ 56,574 $ 59,111
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (000) 54,929 54,632
BASIC EARNINGS PER SHARE OF COMMON STOCK $ 1.03 $ 1.08
FULLY DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 1.03 $ 1.08
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THE MONTANA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Quarter Ended
June 30, June 30,
1998 1997
Thousands of Dollars
<S> <C> <C>
REVENUES $260,566 $216,051
EXPENSES:
Operations 104,309 88,283
Maintenance 20,204 22,142
Selling, general and
administrative 33,571 28,395
Taxes other than income taxes 24,802 23,746
Depreciation, depletion and
amortization 27,701 22,378
210,587 184,944
INCOME FROM OPERATIONS 49,979 31,107
INTEREST EXPENSE AND OTHER:
Interest 14,397 12,873
Distributions on company obligated
mandatorily redeemable preferred
securities of subsidiary trust 1,373 1,373
Other (income) deductions - net (119) (7,687)
15,651 6,559
INCOME TAXES 11,777 9,795
NET INCOME 22,551 14,753
DIVIDENDS ON PREFERRED STOCK 923 923
NET INCOME AVAILABLE FOR
COMMON STOCK $ 21,628 $ 13,830
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (000) 54,983 54,630
BASIC EARNINGS PER SHARE OF COMMON STOCK $ 0.39 $ 0.25
FULLY DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 0.39 $ 0.25
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THE MONTANA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
A S S E T S
June 30, December 31,
1998 1997
Thousands of Dollars
<S> <C> <C>
PLANT AND PROPERTY IN SERVICE:
UTILITY PLANT (includes $39,820 and $39,425
plant under construction)
Electric $ 1,818,552 $ 1,820,280
Natural gas 392,924 395,918
2,211,476 2,216,198
Less - accumulated depreciation and depletion 701,578 684,960
1,509,898 1,531,238
NONUTILITY PROPERTY (includes $32,712 and $17,259
property under construction) 840,142 781,406
Less - accumulated depreciation and depletion 292,601 260,567
547,541 520,839
2,057,439 2,052,077
MISCELLANEOUS INVESTMENTS (at cost):
Independent power investments 41,164 51,534
Reclamation fund 48,509 47,312
Other 42,142 35,619
131,815 134,465
CURRENT ASSETS:
Cash and temporary cash investments 15,504 16,706
Accounts and notes receivable 147,573 126,787
Materials and supplies (principally at average cost) 40,110 39,471
Prepayments and other assets 60,205 49,673
Deferred income taxes 6,137 10,539
269,529 243,176
DEFERRED CHARGES:
Advanced coal royalties 17,577 16,698
Regulatory assets related to income taxes 125,516 122,903
Regulatory assets - other 148,617 158,573
Other deferred charges 76,540 73,804
368,250 371,978
$ 2,827,033 $ 2,801,696
The accompanying notes are an integral part of these statements.
THE MONTANA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
L I A B I L I T I E S
June 30, December 31,
1998 1997
Thousands of Dollars
CAPITALIZATION:
Common shareholders' equity:
Common stock (120,000,000 shares
authorized; 54,999,879 and
54,728,709 shares issued) $ 700,603 $ 694,561
Retained earnings and other shareholders' equity 349,955 342,973
Unallocated stock held by trustee for retirement
savings plan (24,651) (25,945)
1,025,907 1,011,589
Preferred stock 57,654 57,654
Company obligated mandatorily redeemable preferred
securities of subsidiary trust, which holds solely,
company junior subordinated debentures 65,000 65,000
Long-term debt 725,754 653,168
1,874,315 1,787,411
CURRENT LIABILITIES:
Short-term borrowing 84,939 133,958
Long-term debt - portion due within one year 63,544 81,659
Dividends payable 22,757 22,684
Income taxes 4,603 3,803
Other taxes 49,476 47,818
Accounts payable 52,801 77,821
Interest accrued 16,280 13,836
Other current liabilities 54,214 35,158
348,614 416,737
DEFERRED CREDITS:
Deferred income taxes 344,154 340,251
Investment tax credit 34,390 35,182
Accrued mining reclamation costs 134,922 131,108
Other deferred credits 90,638 91,007
604,104 597,548
CONTINGENCIES AND COMMITMENTS (Notes 2 and 5)
$ 2,827,033 $ 2,801,696
The accompanying notes are an integral part of these statements.
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THE MONTANA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For Six Months Ended
June 30, June 30,
1998 1997
Thousands of Dollars
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 58,419 $ 60,956
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 54,784 44,421
Deferred income taxes 464 6,044
Noncash earnings from unconsolidated
independent power investments. (5,264) (4,415)
Reclamation expensed and paid - net 3,815 (2,502)
Deferred stripping expenses and payments - net (397) (941)
Losses (gains) on sales of property and investments (83) (12,674)
Other noncash charges to net income - net 10,450 13,590
Changes in other assets and liabilities:
Accounts and notes receivable (20,785) 5,230
Materials and supplies (639) 665
Accounts payable (25,021) (16,881)
Other - net 20,375 (5,013)
Net cash provided by operating activities 96,118 88,480
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (57,960) (144,884)
Reclamation funding (1,198) (2,744)
Sales of property 2,636 29,870
Additional investments (6,522) (1,211)
Net cash used by investing activities (63,044) (118,969)
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (45,739) (45,547)
Sales of common stock 6,141 340
Issuance of long-term debt 73,616 96,452
Retirement of long-term debt (19,275) (8,340)
Issuance of mandatorily redeemable preferred
securities of subsidiary trust (65)
Net change in short-term borrowing (49,019) (37,208)
Net cash used by financing activities (34,276) 5,632
CHANGE IN CASH FLOWS (1,202) (24,857)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 16,706 32,404
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 15,504 $ 7,547
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During Six Months For:
Income taxes $ 23,419 $ 26,481
Interest 29,477 25,720
The accompanying notes are an integral part of these statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying financial statements of the Company for the interim
periods ended June 30, 1998 and 1997 are unaudited but, in the opinion of
management, reflect all adjustments, consisting only of normal recurring
accruals, necessary for a fair statement of the results of operations for those
interim periods. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year. These
financial statements do not contain the detail or footnote disclosure
concerning accounting policies and other matters which would be included in
full fiscal year financial statements; therefore, they should be read in
conjunction with the Company's audited financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
Certain reclassifications have been made to the prior year amounts to
make them comparable to the 1998 presentation. These changes had no impact on
previously reported results of operations or shareholders' equity.
NOTE 1 -- DEREGULATION AND ASSET DIVESTITURE, AND OTHER REGULATORY MATTERS:
The electric and natural gas utility businesses are in transition to
competition to provide energy commodity and related services to wholesale and
retail customers. In Montana, electric and natural gas restructuring and
customer choice legislation was passed by the Montana Legislature and signed
into law in 1997.
The legislation provides for choice of electricity supplier for the
Company's large customers by July 1, 1998, for pilot programs for residential
and small commercial customers by July 1, 1998 and for all customers no later
than July 1, 2002.
As required by the electric legislation, the Company filed a
comprehensive transition plan with the Montana Public Service Commission (PSC)
on July 1, 1997. The filing contains the Company's transition plan, including
the proposed handling and resolution of transition costs, and addresses other
issues required by the legislation. Initial hearings on the filing began April
26, 1998 and the issues involved in the restructuring filing have been
separated into three groups. The PSC rendered a decision on June 24, 1998 on
the issues relating to the implementation of customer choice for the large
industrial group and the pilot programs. The Company expects a decision on
the remaining issues, including the amount of transition costs, the effect of
the sale of the generation assets and the Uniform Systems Benefits Charge,
after the sale details are final. The PSC will consider the Company's efforts
to mitigate transition costs in making its determination.
On February 20, 1998, the Company submitted a filing with the PSC
related to pilot programs for natural gas customers. The Company has reached
a settlement with many of the intervening parties in the PSC natural gas pilot
programs case. A PSC hearing was held August 5, 1998 to discuss the
settlement provisions. Pilot programs are expected to begin with the 1998
heating season which begins this Fall. A decision is expected in the third
quarter of 1998.
On March 30, 1998, the Company submitted a filing with the Federal
Energy Regulatory Commission (FERC) requesting increased rates for bundled
wholesale electric service to two rural electric cooperatives. The filing
also included a request for increased transmission rates based upon updated
cost of service reflecting current operating costs for wholesale transmission
service and for FERC regulated transmission service for retail customers that
transition to customer choice. Resolution of this filing is expected before
the end of the first quarter of 1999.
In December 1997, the Company announced that it would offer for sale all
of its electric generating facilities in Montana, consisting of 1,157.4
megawatts of capacity from 13 hydroelectric projects and its interests in four
coal-fired thermal generating units. In addition, the Company offered for sale
its 222 megawatt leasehold interest in Colstrip Unit 4, its power purchase
contracts with qualifying facilities and Basin Electric Power Cooperative
(Basin), and two power exchange agreements.
The sale process began in 1998 with offering memoranda being sent to 30
to 50 potential buyers. In June, the Company received non-binding preliminary
bids from potential buyers. The top bidders, numbering less than ten, have
been short-listed for further negotiations and binding bids. The winning
bidder is expected to be selected in early Fall and financial closing will
occur as soon as all required legal and regulatory approvals are complete,
possibly three months to two years after selection of the winning bidder. The
Company intends to proceed with the sale process as tentatively scheduled.
However, divestiture is not a requirement of the restructuring bill and the
Company may at any time cease to continue this option.
Responses to the restructuring legislation and the Company's decision to
offer for sale its generations assets included two calls for special
legislative sessions to amend or repeal the electric restructuring legislation
and three petitions for initiatives for the November general election ballot.
One of the proposed initiatives was seeking repeal of the electric
restructuring legislation. The other two called for the State of Montana to
acquire the Company's water rights associated with its hydroelectric plants.
Both calls for a special legislative session were unsuccessful as was the
petition drive for the initiatives.
Both the electric and natural gas legislation authorized the issuance of
transition bonds, often referred to as securitization. The issuance of
transition bonds involves the issuance of a debt instrument which is repaid
through, and secured by, a specified component of future revenues, thereby
reducing the credit risk of the securities. Although the bonds are expected to
be shown as debt on the Consolidated Balance Sheet of the Company, the bonds
will be issued by a special purpose entity and will be without recourse to the
general credit of the Company. Similarly, the right to receive the revenues
pledged to secure the bonds is a specific right of the special purpose entity
and not the Company. However, as a wholly owned subsidiary of the Company,
revenues of the special purpose entity are expected to be shown as revenues on
the Consolidated Statement of Income of the Company. This right to receive
revenues will have been transferred to the special purpose entity issuing the
bonds and will not be the property of the Company. As a result of such
features, the bonds should carry a relatively low interest rate and allow the
Company, on a consolidated basis, to carry higher debt levels in relation to
equity than would otherwise be desirable.
A filing requesting authorization to issue up to $65,000,000 in
transition bonds related to the natural gas transition costs and bond issuance
costs was made to the PSC in November 1997. In April 1998, the PSC approved
the issuance of up to $65,000,000 of transition bonds and the Company expects
the issuance of approximately $60,000,000 of bonds to occur in the third
quarter of this year.
On January 5, 1998, Enron Capital & Trade Resources Corp. (Enron)
requested court review of the PSC's decision regarding the measure of natural
gas transition costs as well as the level of functional separation of the
various segments of the Company's natural gas business. This appeal was
resolved by settlement in April 1998.
As a result of a three-year rate plan approved by the PSC in 1996,
electric rates increased 2.4%, or approximately $9,000,000, effective
January 1, 1998.
NOTE 2 - CONTINGENCIES:
In July 1985, the Federal Energy Regulatory Commission (FERC) issued to
the Company a new license for the 180 megawatt Kerr Project (Project) and
required the subsequent adoption of conditions to mitigate the impact of
Project operations on fish, wildlife and habitat. The Company proposed a
consensus plan in June 1990 that was agreed to by the Confederated Salish and
Kootenai Tribes (Tribes) and other state and federal resource agencies. In
November 1995, the United States Department of Interior (Department) submitted
alternative conditions to those stated in the Company's plan.
On June 25, 1997, FERC approved a mitigation plan, substantially adopting
the Department's conditions. The mitigation plan calls for payments totaling
approximately $135,000,000 over the 35-year term of the license. The net
present value of the total amount, using an assumed discount rate of 9.5%, is
approximately $57,000,000, which the Company recognized as license costs in
plant and long-term debt in the Consolidated Balance Sheet during the second
quarter of 1997.
The Company, the Tribes and the Department requested rehearing of FERC's
June 25, 1997 order. The Company asserted that the Department's conditions are
unreasonable and that FERC should modify them. In the event FERC does not
modify the mitigation plan it ordered, the Company expects to seek judicial
review.
In November 1992, the Company applied to FERC to relicense nine Madison
and Missouri River hydroelectric projects, with generating capacity of 292
megawatts. On September 26, 1997, FERC Staff issued its draft environmental
impact statement, recommending acceptance of most of the measures proposed by
the Company in its application. FERC Staff recommended adoption of limited
additional measures. The Company has analyzed the recommendations and
submitted comments. The analysis indicates that the FERC Staff's
recommendations do not materially change the cost of relicensing and proposed
environmental mitigation, previously estimated to be approximately
$162,000,000 on a net present value basis. The Company expects to receive a
license order in late 1999 or early 2000.
Western Energy Company (Western), a subsidiary of the Company, was a
party in a dispute concerning the Coal Supply Agreement (CSA) for Colstrip
Units 3 and 4 with the non-operating owners (NOOs), other than Puget Sound
Energy (Puget). Puget withdrew from this dispute as part of a settlement
concerning a power sales agreement between Puget and the Company. During the
spring of 1996, the Consumer Price Index (CPI) doubled when compared to the
CPI level at the time that the CSA was executed. Under the terms of the CSA,
this change in the CPI allows any party to seek a modification of the coal
price if that party can demonstrate an "unusual condition" causing a "gross
inequity." These NOOs asserted that a number of "unusual conditions" had
occurred, including (i) the deregulation of various aspects of the electric
utility industry, (ii) increased scrutiny of electric utilities by their
public utility commissions, and (iii) changes in economic conditions not
anticipated at the time of execution of the CSA. These NOOs claimed these
"unusual conditions" had created a "gross inequity" that had to be remedied by
a reduction in the coal price. Western did not believe that under the terms
of the contract any "unusual condition" or "gross inequity" had occurred.
Western, the Company and these NOOs have resolved this dispute as part
of an ongoing mediation to restructure the relationship of the NOOs, including
Puget, the Company and Western at the Colstrip Project.
The gross inequity settlement provides for two options which the each
NOO can elect independently. The first option provides a reduction in base
price of $0.50 per ton on tons sold from April 1996 through June 2000. The
election of this option by all of the NOOs would result in an adjustment to
Western's pre-tax earnings of approximately $1,700,000 for the tons delivered
prior to June 30, 1998. The second option offers the same "incentive pricing"
under the CSA that Western offered during 1997 and the first quarter of 1998
to stimulate sales to the Buyers. The election of this option by all of the
NOO's would result in an immaterial adjustment to Western's pre-tax earnings
for the tons delivered prior to June 30, 1998. Under the settlement, each NOO
must elect an option on or before August 31, 1998.
Western, the Company and these NOOs are continuing the mediation to
restructure the relationship of the NOOs, including Puget, the Company and
Western at the Colstrip Project. The outcome of the restructuring mediation is
uncertain.
Houston Lighting & Power (HL&P), the purchaser of lignite produced by
Northwestern Resources Co. (Northwestern), a Company subsidiary, filed
litigation on October 5, 1995 in the District Court of the 157th Judicial
District, Harris County, Texas, seeking, among other remedies, a declaratory
judgment that changed conditions required a renegotiation of management and
dedication fees paid to Northwestern under the terms of the Lignite Supply
Agreement (LSA) between it and Northwestern. The LSA governs the delivery of
approximately 9,000,000 tons of lignite per year and is effective until
July 29, 2015. Under the terms of the LSA, Northwestern realizes approximately
$25,000,000 per year from these fees. HL&P alleged Northwestern failed to
renegotiate these fees in good faith. HL&P sought a reduction exceeding 60% in
the LSA fees. It alleged that the reduction should be retroactive to
September 1, 1995. Additionally, HL&P sought a declaration that it may
substitute other fuels for lignite without violating the LSA.
Trial concluded in December 1997 with the jury denying all of HL&P's
claims regarding changed circumstances and Northwestern's alleged obligations
to negotiate reduced fees. Thus, current pricing under the terms of the LSA is
unchanged. HL&P has appealed the jury's determination that the fees are
appropriate and do not require renegotiation. In a pretrial summary judgment,
the trial court concluded other fuel may be substituted for lignite at the
Limestone Plant. Northwestern has appealed this summary judgment.
Northwestern believes it will maintain a price for lignite that is competitive
with alternate fuels.
The Company and its subsidiaries are party to various other legal
claims, actions and complaints arising in the ordinary course of business.
Management does not expect disposition of these matters to have a material
adverse effect on the Company's consolidated financial position or its
consolidated results of operations.
NOTE 3 - DERIVATIVE FINANCIAL INSTRUMENTS:
The Company has a formal policy regarding the execution, recording and
reporting of derivative instruments. The purpose of the policy is to manage a
portion of the price risk associated with its Nonutility producing assets,
firm-supply commitments and natural gas transportation agreements. The
Company uses derivatives as hedging instruments to achieve earnings targets,
reduce earnings volatility and provide more stabilized cash flows. When
fluctuations in natural gas and crude oil market prices result in the Company
realizing gains on the derivative instruments into which it has entered, the
Company is exposed to credit risk relating to the nonperformance by
counterparties of their obligation to make payments under the agreements. Such
risk to the Company is mitigated by the fact that the counterparties, or the
parent companies of such counterparties, are investment grade financial
institutions. The Company does not anticipate any material impact to its
financial position, results of operations or cash flow as a result of
nonperformance by counterparties.
To manage a portion of Nonutility price risk, the Company uses a variety
of derivative instruments including crude oil and natural gas swap and option
agreements to hedge revenue from anticipated production of crude oil and
natural gas reserves, supply costs and transportation commitments to its firm
markets. Under swap agreements, the Company receives or makes payments based
on the differential between a specified price and a variable price of oil or
natural gas when the hedged transaction is settled. The variable price is
either a crude oil or natural gas price quoted on the New York Mercantile
Exchange or a quoted natural gas price in Inside FERC's Gas Market Report or
other recognized industry index. These variable prices are highly correlated
with the market prices received by the Company for its natural gas and crude
oil production or paid by the Company for commodity purchases. Under option
agreements, the Company makes or receives monthly payments at the settlement
date based on the differential between the actual price of oil or natural gas
and the price established in the agreement depending on whether the Company
sells or buys the option. At June 30, 1998, the Company had no hedge
agreements on crude oil. The Company had swap and option agreements on
approximately 3.1 Bcf of Nonutility natural gas, or 10% of its expected
production from proved, developed and producing Nonutility natural gas
reserves through October 1999. The Company had swap and option agreements to
hedge approximately 1.4 Bcf of Nonutility natural gas, or 8% of its expected
delivery obligations under long-term natural gas sales contracts through
October 1999. In addition, the Company had swap and option agreements to
hedge approximately 7.0 Bcf, or 17%, of its Nonutility natural gas pipeline
transportation obligations under contracts through October 1999.
The Company accounts for derivative transactions through hedge
accounting. The Company designates all its derivatives as fair value hedges.
A fair value hedge is based on the following criteria:
? The hedged item is specifically identified as a recognized asset or a firm
commitment.
? The hedged item is a single asset or a portfolio of similar assets.
? The hedged item presents an exposure to changes in fair value for the
hedged risk that could affect earnings.
? The hedged item is not an asset or liability that is measured at fair value
with changes in fair value attributable to the hedged risk reported
currently in earnings.
Gains or losses from these derivative instruments are reflected in
operating revenues on the Consolidated Statement of Income at the same time as
the recognition of the revenue or expense associated with the underlying
hedged item. If the Company determines that any portion of the underlying
hedged item will not be produced or purchased, the unmatched portion of the
instrument is marked-to-market and any gain or loss is recognized in the
Consolidated Statement of Income. If the Company terminates a hedging
instrument prior to the date of the anticipated natural gas or crude oil
production, commodity purchase or transportation commitment, the gain or loss
from the agreement is deferred in the Consolidated Balance Sheet at the
termination date. At June 30, 1998, the Company had no material deferred
gains or losses related to these transactions.
The Company also has investments in independent power partnerships, some
of which have entered into derivative financial instruments to hedge against
interest rate exposure on floating rate debt and foreign currency and natural
gas price fluctuations. At June 30, 1998, the Company believes it would not
experience any materially adverse impacts from the risks inherent in these
instruments.
NOTE 4 - COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST:
Montana Power Capital I (Trust) was established as a wholly owned
business trust of the Company for the purpose of issuing common and preferred
securities (Trust Securities) and holding Junior Subordinated Deferrable
Interest Debentures (Subordinated Debentures) issued by the Company. The Trust
has issued 2,600,000 units of 8.45% Cumulative Quarterly Income Preferred
Securities, Series A (QUIPS). Holders of the QUIPS are entitled to receive
quarterly distributions at an annual rate of 8.45% of the liquidation
preference value of $25 per security. The sole asset of the Trust is
$67,000,000 of Subordinated Debentures, 8.45% Series due 2036, issued by the
Company. The Trust will use interest payments received on the Subordinated
Debentures it holds to make the quarterly cash distributions on the QUIPS.
NOTE 5 - COMMITMENTS:
The Montana Power Group (MPG), an energy supply and management alliance,
was exclusively endorsed by the California Manufacturers Association (CMA) to
assist its members with their energy decisions. As a participant in the MPG,
Montana Power Trading and Marketing Company (MPT&M), a Nonutility subsidiary
of the Company has agreed to offer energy supply, discounted from current
utility tariff rates, and energy management products and services to members
of the CMA. The supply program is offered on a limited basis and is capped at
predetermined volumes. Once the caps are fully subscribed, the Company will
have, at its sole discretion, the option to extend the offered supply and
services to other CMA members. At this time, the Company cannot predict the
impact of the CMA agreement on future earnings, however, due to the limits
provided in the agreement, any potential negative impacts are not expected to
have a material impact on the Company's financial position or results of
operations.
NOTE 6 - LONG-TERM DEBT:
On January 2, 1998, the Company used short-term borrowings to retire
$16,000,000 in sinking fund debentures.
On April 6, 1998, the Company issued $60,000,000 of floating rate Medium
Term Notes, Series B, due April 6 2001, the proceeds of which were used to
reduce outstanding debt.
NOTE 7 - COMPREHENSIVE INCOME:
During June 1997, the Financial Accounting Standards Board (FASB)
released SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130
requires reporting in financial statements all items recognized as
"components of comprehensive income", which is defined as changes in equity
during the period from transactions, events or circumstances from non-owner
sources. The statement is effective for fiscal years beginning after
December 15, 1997.
During the six-month periods ended June 30, 1998 and 1997, the Company's
components included adjustments of $5,644,000 and $755,000, respectively, to
retained earnings for the foreign currency translation adjustments. The 1998
adjustment results not only from the change in the valuation of the assets of
the Company's Canadian operations, but also a change in the rate used to adjust
certain Canadian assets. Until November 1, 1997, the plant of the Company's
natural gas utility operations, owned by a wholly owned subsidiary, was
included in natural gas utility rate base. As such, the Company earned a rate
of return on these assets stated at their historical costs, converted to U.S.
dollars using historical foreign currency exchange rates. When the assets were
transferred from the Company's regulated operations to the unregulated
operations, and removed from utility rate base, they were converted to U.S.
dollars using current foreign currency exchange rates which resulted in a
decrease of approximately $5,100,000 in retained earnings in 1998.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the management's
discussion included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
Safe Harbor for Forward-Looking Statements:
The Company is including the following cautionary statements to make
applicable and take advantage of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 for any forward-looking statements
made by, or on behalf of, the Company in this Quarterly Report on Form 10-Q.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions and
other statements which are other than statements of historical facts. Such
forward-looking statements may be identified, without limitation, by the use
of the words "anticipates", "estimates", "expects", "intends", "believes" and
similar expressions. From time to time, the Company or one of its subsidiaries
individually may publish or otherwise make available forward-looking
statements of this nature. All such forward-looking statements, whether
written or oral, and whether made by, or on behalf of, the Company or its
subsidiaries, are expressly qualified by these cautionary statements and any
other cautionary statements which may accompany the forward-looking
statements. In addition, the Company disclaims any obligation to update any
forward-looking statements to reflect events or circumstances after the date
hereof.
Forward-looking statements made by the Company are subject to risks and
uncertainties that could cause actual results or events to differ materially
from those expressed in, or implied by, the forward-looking statements. These
forward-looking statements include, among others, statements concerning the
Company's revenue and cost trends, cost recovery, cost-reduction strategies
and anticipated outcomes, pricing strategies, planned capital expenditures,
financing needs, and availability and changes in the utility industry.
Investors or other users of the forward-looking statements are cautioned that
such statements are not a guarantee of future performance by the Company and
that such forward-looking statements are subject to risks and uncertainties
that could cause actual results to differ materially from those expressed in,
or implied by, such statements. Some, but not all, of the risks and
uncertainties include general economic and weather conditions in the areas in
which the Company has operations, competitive factors and the impact of
restructuring initiatives in the electric and natural gas industry, market
prices, environmental laws and policies, federal and state regulatory and
legislative actions, drilling successes in oil and natural gas operations,
changes in foreign trade and monetary policies, laws and regulations related
to foreign operations, tax rates and policies, rates of interest and changes
in accounting principles or the application of such principles to the Company.
Results of Operations:
The following discussion presents significant events or trends that have
had an effect on the operations of the Company or which are expected to have an
impact on operating results in the future.
For the Six Months Ended June 30, 1998 and 1997:
Net Income Per Share of Common Stock:
The Company had consolidated net income of $1.03 per share in the six
months ended June 30, 1998, a decrease of 5 cents from six months ended June
30, 1997 earnings of $1.08 per share.
Nonutility earnings increased to 59 cents per share, compared to
52 cents in the second quarter of 1997. Utility earnings decreased to 44
cents per share from 56 cents per share in the same period of 1997.
Nonutility earnings benefited from telecommunications operations which
had an earnings improvement of 26 cents a share compared to the same period in
1997 and improvements in coal and independent power operations.
Telecommunication increases were driven by capacity sales of lit fiber and
dark fiber sales on the fiber-optic network in service and under construction.
Coal operations benefited from an increase in sales volumes to the Colstrip
units, and the independent power operation's investments produced higher
earnings.
Oil and natural gas earnings were below year-earlier figures primarily
because of one-time gains in 1997 from the sales of non-strategic properties
and lower oil and natural gas market prices.
Decreased Utility earnings primarily reflected the adverse affects of
warm weather during prime winter-heating months and the impact of a seasonal
power-purchase contract. Higher rates, customer growth and increased
industrial sales partially offset the decreases.
Six Months Ended
June 30, June 30,
1998 1997
Utility Operations $ 0.44 $ 0.56
Nonutility Operations 0.59 0.52
Consolidated $ 1.03 $ 1.08
<TABLE>
<CAPTION>
UTILITY OPERATIONS
Six Months Ended
June 30, June 30,
1998 1997
Thousands of Dollars
<S> <C> <C>
ELECTRIC UTILITY:
REVENUES:
Revenues $219,235 $ 217,517
Intersegment revenues 2,454 2,263
221,689 219,780
EXPENSES:
Power supply 69,163 66,483
Transmission and distribution 17,123 18,802
Selling, general and
administrative 27,440 25,825
Taxes other than income taxes 24,172 25,828
Depreciation and amortization 26,369 25,547
164,267 162,485
INCOME FROM ELECTRIC OPERATIONS 57,422 57,295
NATURAL GAS UTILITY:
REVENUES:
Revenues (other than gas supply cost revenues) 40,034 60,162
Gas supply cost revenues 20,316 9,934
Intersegment revenues 352 326
60,702 70,422
EXPENSES:
Gas supply costs 20,316 9,934
Other production, gathering and
exploration 1,159 4,513
Transmission and distribution 7,440 7,215
Selling, general and
administrative 10,091 8,469
Taxes other than income taxes 6,702 8,529
Depreciation, depletion and
amortization 4,407 6,248
50,115 44,908
INCOME FROM GAS OPERATIONS 10,587 25,514
INTEREST EXPENSE AND OTHER:
Interest 27,125 24,566
Distributions on company obligated
mandatorily redeemable preferred
securities of subsidiary trust 2,746 2,746
Other (income) deductions - net (795) (354)
29,076 26,958
INCOME BEFORE INCOME TAXES AND DIVIDENDS 38,933 55,851
INCOME TAXES 13,119 23,468
DIVIDENDS ON PREFERRED STOCK 1,845 1,845
UTILITY NET INCOME AVAILABLE FOR COMMON STOCK $ 23,969 $ 30,538
</TABLE>
UTILITY OPERATIONS:
Weather affects the demand for electricity and natural gas, especially
among residential and commercial customers. Very cold winters increase
demand, while mild weather reduces demand. The weather's effect is measured
using degree-days. A degree-day is the difference between the average daily
actual temperature and a baseline temperature of 65 degrees. Heating degree-
days result when the average daily actual temperature is less than the
baseline. As measured by heating degree days, the temperatures for the first
six months of 1998 in the Company's service territory were 6% warmer than 1997
and 4% warmer than the historic average. In addition, winter weather for the
primary heating months of January and February was 9% warmer than normal.
See Note 1 - Deregulation and Asset Divestiture, and Other Regulatory
Matters in the Notes to the Consolidated Financial Statements for a
description of the transition to competition in the electric and natural gas
utility business.
For its regulated operations, the Company follows SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation." Pursuant to this
pronouncement, certain expenses and credits, normally reflected in income as
incurred, are recognized when included in rates and recovered from or refunded
to the customers. Changes in regulation or changes in the competitive
environment could result in the Company not meeting the criteria of SFAS
No. 71. If the Company were to discontinue application of SFAS No. 71 for some
or all of its operations, the regulatory assets and liabilities related to
those portions would have to be eliminated from the balance sheet and included
in income in the period when the discontinuation occurred unless recovery of
those costs was provided through rates charged to those customers in a portion
of the business that remains regulated. In conjunction with the ongoing
changes in the electric industry, the Company will continue to evaluate the
applicability of this accounting principle to that business. Based upon the
Company's anticipated recovery of its regulatory assets in accordance with the
electric restructuring legislation, the Company believes that the
discontinuation of regulatory accounting for these generation assets will not
have a material impact on the Company's financial position or results of
operations.
The Company has existing long-term contracts for the purchase and sale
of electricity that have fixed price components. To the extent that these
contracts are not addressed in the restructuring docket, the Company would
become subject to the commodity price risks associated with meeting these
obligations.
<TABLE>
<CAPTION>
Electric Utility:
Revenues and
Power Supply Expenses Volumes Customers
(Thousands of Dollars) (Thousands of MWh) (Year to Date Average)
6/30/98 6/30/97 6/30/98 6/30/97 6/30/98 6/30/97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Residential,
Commercial &
Government $136,405 $135,772 0% 2,139 2,165 (1)% 279,145 275,098 1%
Industrial 55,430 50,893 9% 1,355 1,210 12% 3,134 2,897 8%
General Business 191,835 186,665 3% 3,494 3,375 4% 282,279 277,995 2%
Sales to Other
Utilities 20,961 22,212 (6)% 976 1,392 (30)% 85 84 1%
Other 6,439 8,640 (25)%
Intersegment 2,454 2,263 8% 58 78 (26)% 230 228 1%
Total $221,689 $219,780 1% 4,528 4,845 (7)% 282,594 278,307 2%
Power Supply
Expenses:
Hydroelectric $ 11,273 $ 10,825 4% 1,859 2,116 (12)%
Steam 24,147 27,220 (11)% 2,005 1,870 7%
Purchases
and Other 33,743 28,438 19% 1,256 1,365 (8)%
Total Power Supply $ 69,163 $ 66,483 4% 5,120 5,351 (4)%
Cents Per kWh $1.351 $1.242
</TABLE>
Revenues from general business customers increased year to date primarily
due to higher rates and customer growth. In addition, increased volumes sold
resulting from a new industrial customer and increased sales to current
customers also added to the higher revenues. Warmer weather partially offset
these increases. Despite a second quarter increase in sales for resale due to
higher prices, decreased hydroelectric generation, as well as maintenance and
other generator repairs at the Corette thermal plant, in the first quarter of
1998 resulted in decreased sales to other utilities year to date.
Power supply expenses increased largely due to the commencement of a
long-term seasonal power purchase agreement in January 1998. Lower steam
maintenance expense partially offset the increase. During the first six
months of 1998, there was a decrease in scheduled maintenance, but an increase
in unscheduled replacement of equipment at the Corette thermal plant, which
was capitalized. Selling, general and administrative expenses increased year
to date mainly from higher consulting and outsourcing charges combined with
increased amortization of regulatory assets. Taxes other than income taxes
decreased primarily as a result of decreased payroll taxes relating to
employees moving from Utility operations to Nonutility operations.
<TABLE>
<CAPTION>
Natural Gas Utility:
Revenues Volumes Customers
(Thousands of Dollars) (Thousands of Mmcf) (Year to Date Average)
6/30/98 6/30/97 6/30/98 6/30/97 6/30/98 6/30/97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Residential
and Commercial $ 50,750 $ 60,547 (16)% 11,145 13,403 (17)% 144,879 140,945 3%
Industrial 832 1,538 (46)% 192 359 (47)% 395 415 (5)%
Subtotal 51,582 62,085 (17)% 11,337 13,762 (18)% 145,274 141,360 3%
Gas Supply Cost
Revenues (GSC) (20,316) (9,934) (19)%
General Business
without GSC 31,266 52,151 (30)% 11,337 13,762 (18)% 145,274 141,360 3%
Sales to Other
Utilities 392 487 (20)% 114 147 (22)% 3 4 (25)%
Transportation 6,269 4,818 30% 13,056 13,341 (2)% 23 38 (39)%
Other 2,107 2,706 (22)%
Total $ 40,034 $ 60,162 (24)% 24,507 27,250 (10)% 145,300 141,402 3%
</TABLE>
Year to date revenues from general business customers decreased largely as
the result of lower volumes sold due to warmer weather. Customer growth
slightly offset the decrease. The increase in transportation revenue is the
result of a PSC order allowing natural gas customers with annual loads greater
than 5,000 dekatherms (Dkt) the right to choose their own supplier effective
November 1, 1997. The number of customers decreased due to aggregators
carrying the transportation contracts.
The restructuring of the natural gas utility also affected its operating
results for the period. In November 1997, almost all of the Company's regulated
natural gas production assets were transferred to its Nonutility affiliate, MP
Gas. Since that time, operating expenses related to the transferred assets
have been included in the Company's nonutility oil and natural gas operations.
The absence of these expenses in the utility's natural gas operations resulted
in reduced non-gas supply cost revenues and expenses in the second quarter of
1998. Timing differences between reductions in non-gas supply cost accruals
and corresponding reductions in consumption-based revenues caused a decrease in
operating income.
As a result of the restructuring mentioned above, the Utility is no longer
producing most of its gas, but has contracted to purchase gas from its
Nonutility affiliate. The contract price includes costs associated with the
transferred assets and returns on those assets. Gas cost revenues and
expenses, which are always equal due to regulated rate and accounting
procedures, increased in the second quarter of 1998 due to the new purchase
contract. Amortizations of prior period under-collections also contributed to
the increase.
Higher selling, general and administrative expense for the period resulted
mainly from increased amortization of regulatory assets, which are currently
being collected in rates.
Taxes other than income taxes and depreciation, depletion and amortization
decreased due to the transfer of the natural gas production properties as
discussed above.
Interest Expense and Other:
Increases in interest expense in the first six months of 1998 due to
increased short-term borrowing, the mid-1997 recognition of the Kerr Project
mitigation liability, and the issuance of additional medium-term notes in
April 1998 were partially offset by decreases related to retirements of long-
term debt in the first and fourth quarters of 1998 and 1997, respectively.
Other income increased due to costs associated with the property
transfer of Flint Creek Dam to Granite County, Montana during 1997, which was
partially offset by the change in interest capitalized on Utility
construction.
Income Taxes:
Income taxes decreased in the first six months of 1998 due to lower
before-tax net income and a reduced effective tax rate.
<TABLE>
<CAPTION>
NONUTILTY OPERATIONS
Six Months Ended
June 30, June 30,
1998 1997
Thousands of Dollars
<S> <C> <C>
COAL:
REVENUES:
Revenues $ 88,478 $ 78,121
Intersegment revenues 19,856 14,649
108,334 92,770
EXPENSES:
Operations and maintenance 64,191 54,936
Selling, general and
administrative 9,421 10,426
Taxes other than income taxes 13,112 10,238
Depreciation, depletion and
amortization 5,267 2,419
91,991 78,019
INCOME FROM COAL OPERATIONS 16,343 14,751
OIL AND NATURAL GAS:
REVENUES:
Revenues 87,513 76,808
Intersegment revenues 9,633 195
97,146 77,003
EXPENSES:
Operations and maintenance 69,120 47,938
Selling, general and
administrative 10,005 5,006
Taxes other than income taxes 2,312 2,653
Depreciation, depletion and
amortization 10,848 8,435
92,285 64,032
INCOME FROM OIL AND NATURAL GAS OPERATIONS 4,861 12,971
INDEPENDENT POWER:
REVENUES:
Revenues 36,379 34,218
Earnings from unconsolidated
investments 8,351 4,672
Intersegment revenues 1,181 1,214
45,911 40,104
EXPENSES:
Operations and maintenance 35,841 30,660
Selling, general and
administrative 2,155 2,196
Taxes other than income taxes 899 1,246
Depreciation, depletion and amortization 2,372 966
41,267 35,068
INCOME FROM INDEPENDENT POWER OPERATIONS $ 4,644 $ 5,036
NONUTILITY OPERATIONS (continued)
Six Months Ended
June 30, June 30,
1998 1997
Thousands of Dollars
TELECOMMUNICATIONS:
REVENUES:
Revenues $41,655 $15,036
Earnings from unconsolidated
investments 5,644 38
Intersegment revenues 503 386
47,802 15,460
EXPENSES:
Operations and maintenance 12,466 10,364
Selling, general and
administrative 5,084 3,526
Taxes other than income taxes 2,559 329
Depreciation, depletion and
amortization 3,230 541
23,339 14,760
INCOME FROM TELECOMMUNICATIONS
OPERATIONS 24,463 700
OTHER OPERATIONS:
REVENUES:
Revenues 4,669 705
Intersegment revenues 760 1,114
5,429 1,819
EXPENSES:
Operations and maintenance 5,704 695
Selling, general and
administrative 1,337 2,649
Taxes other than income taxes 570
Depreciation, depletion and
amortization 2,294 266
9,905 3,610
LOSS FROM OTHER OPERATIONS (4,476) (1,791)
INTEREST EXPENSE AND OTHER:
Interest 4,589 2,899
Other (income) deductions - net (3,865) (14,177)
724 (11,278)
INCOME BEFORE INCOME TAXES 45,111 42,945
INCOME TAXES 12,506 14,372
NONUTILITY NET INCOME AVAILABLE FOR COMMON STOCK $ 32,605 $28,573
</TABLE>
NONUTILITY OPERATIONS:
Coal Operations:
Income from coal operations increased $1,600,000 compared to the same
period last year. Revenues from the Rosebud Mine increased $12,800,000. Volume
of coal sold to the Colstrip Units in 1998 was 36% higher due to less down
time for repairs and scheduled maintenance. Despite a 14% decrease in tons of
coal sold, revenues from the Jewett mine rose $1,700,000 as a result of an
increase in reimbursable mining expenses.
Operation and maintenance expense, taxes other than income taxes and
depreciation, depletion and amortization were up primarily due to increased
volumes at the Rosebud mine and increased reclamation and stripping costs at
the Jewett mine.
Oil and Natural Gas Operations:
The following table shows changes from the previous year, in millions of
dollars, in the various classifications of revenue (excluding intersegment
revenues) and the related percentage changes in volumes sold and prices
received:
Oil -revenue $(8)
-volume (42)%
-price/bbl (38)%
Natural gas -revenue $27
-volume 69 %
-price/Mcf (14)%
Miscellaneous $ 1
Income from oil and natural gas operations decreased due to lower market
prices in the first half of 1998. In addition to lower prices, revenues from
oil operations decreased due to the sale of production properties in
conjunction with the Company's increased emphasis on its natural gas
operations. Natural gas revenues increased due to the sale of production from
the Vessels properties acquired in the second quarter of 1997 and from
formerly regulated assets transferred to oil and natural gas operations in the
fourth quarter of 1997. These increases were partially offset by decreased
prices in 1998. Miscellaneous revenues rose primarily as a result of increased
processing and gathering revenues.
Operation and maintenance expense increased due to the costs of
operating the Vessels properties and transferred regulated assets. This
increase was partially offset by lower costs for purchased gas. These new
operations also accounted for the increases in selling, general and
administrative and depreciation, depletion and amortization expenses.
Independent Power Operations:
Income from independent power operations for 1998 decreased primarily as
a result of an increase in operations and maintenance expense. Increased
project development costs of $2,900,000, due to a new domestic investment
opportunity, combined with higher amortization of independent power
investments of $1,400,000 and higher power supply expense of $2,300,000
contributed to the increase. During 1998, the Colstrip plant generated more
energy than in 1997 due to increased long-term power sales volumes.
Earnings from unconsolidated investments increased $3,700,000 as a
result of improved operations. In addition, revenues from power sales
increased $2,500,000 due to increased long-term sales volumes.
The Company, through its wholly owned subsidiary, Continental Energy
Services, Inc. (Continental), owns a 49.5% interest in Encogen Four Partners,
Ltd. (the Partnership). The Partnership owns and operates a 62 MW electric
generating facility near Buffalo, New York. As a partner, Continental is a
party to the Master Restructuring Agreement (MRA), completed June 30, 1998,
with Niagara Mohawk Power Corporation (Niagara), the purchaser of the
electricity from the facility. Under the terms of the MRA, Niagara paid the
Partnership to terminate the power purchase agreement that was in place
between the two entities. Continental expects the remaining details relating
to this buyout to be finalized in the third quarter of 1998. At this time,
however, the Company cannot, with a degree of certainty, determine the
positive impact of this buyout on the Company's results of operations or the
amount of the partnership cash distribution resulting from the buyout.
Telecommunications Operations:
Revenues from telecommunications operations increased primarily due to
sales on its Washington to Minnesota, Colorado to Canada fiber optic network
and a higher volume of long-distance minutes sold. Revenues from the fiber
optic network did not begin until the third quarter of 1997.
Telecommunications operations has a one-third interest in a limited liability
company which made sales in the first half of 1998 on a Portland to Los
Angeles fiber optic network currently under construction. These sales account
for the $5,600,000 increase in earnings from unconsolidated investment.
Expenses for the first six months are higher due to the operation of the
Washington to Minnesota, Colorado to Canada fiber optic network mentioned
above.
Other Operations:
Changes to revenues and expenses in other operations are primarily the
result of including the activities of MPT&M in this section for 1998. MPT&M
results reflect the purchase and resale of electricity that does not utilize
the Utility's electric system.
Interest Expense and Other:
Interest expense increased primarily due to increases in the amount of
outstanding borrowings to provide short-term financing for the Company's
expansion of telecommunications and oil and natural gas operations.
Other (income) and deductions - net decreased due to a $12,800,000 gain
realized on dispositions of oil and natural gas properties in the first half
of 1997. This gain was partially offset by increased costs associated with a
discontinued coal project in the first quarter of 1997.
Quarter Ended June 30, 1998 and 1997
Net Income Per Share of Common Stock:
The Company had consolidated net income of $0.39 per share in the second
quarter ended June 30, 1998, an increase of 14 cents or 56 percent over
second-quarter 1997 earnings of $0.25 per share.
Nonutility earnings increased to 30 cents per share, compared to
20 cents in the second quarter of 1997. Utility earnings increased to 9 cents
per share from 5 cents per share in the same quarter of 1997.
The telecommunications operations had an earnings improvement of
14 cents a share compared to the same quarter in 1997 along with improvements
in coal and independent power operations. As mentioned in the six month ended
discussion, telecommunication increases were driven by network capacity sales.
Coal operations benefited from an increase in sales volumes to the Colstrip
units, and the independent power operation's investments produced higher
earnings.
Oil and natural gas earnings were below year-earlier figures primarily
because of a one-time gain in 1997 from the sale of non-strategic properties.
Higher Utility earnings reflected increased sales volumes of
electricity, higher rates, reduced maintenance expenses compared to 1997, and
a 19 percent increase in steam-generated electricity. Weather was 7 percent
warmer than normal, based on degree days, and as a result, natural gas volumes
decreased by 26 percent.
Quarter Ended
June 30, June 30,
1998 1997
Utility Operations $ 0.09 $ 0.05
Nonutility Operations 0.30 0.20
Consolidated $ 0.39 $ 0.25
<TABLE>
<CAPTION>
UTILITY OPERATIONS
Quarter Ended
June 30, June 30,
1998 1997
Thousands of Dollars
<S> <C> <C>
ELECTRIC UTILITY:
REVENUES:
Revenues $102,716 $ 95,509
Intersegment revenues 1,178 926
103,894 96,435
EXPENSES:
Power supply 29,198 30,639
Transmission and distribution 8,539 9,486
Selling, general and
administrative 14,124 12,303
Taxes other than income taxes 12,075 13,010
Depreciation and amortization 13,185 12,790
77,121 78,228
INCOME FROM ELECTRIC OPERATIONS 26,773 18,207
NATURAL GAS UTILITY:
REVENUES:
Revenues (other than gas supply cost revenues) 13,407 19,934
Gas supply cost revenues 5,937 3,082
Intersegment revenues 155 93
19,499 23,109
EXPENSES:
Gas supply costs 5,937 3,082
Other production, gathering and
exploration 485 2,153
Transmission and distribution 3,805 3,565
Selling, general and
administrative 5,533 4,194
Taxes other than income taxes 3,330 4,278
Depreciation, depletion and
amortization 2,203 3,119
21,293 20,391
INCOME FROM GAS OPERATIONS (1,794) 2,718
INTEREST EXPENSE AND OTHER:
Interest 13,680 12,428
Distributions on QUIPS 1,373 1,373
Other (income) deductions - net (680) 400
14,373 14,201
INCOME BEFORE INCOME TAXES AND DIVIDENDS 10,606 6,724
INCOME TAXES 4,661 3,258
DIVIDENDS ON PREFERRED STOCK 923 923
UTILITY NET INCOME AVAILABLE FOR COMMON STOCK $ 5,022 $ 2,543
</TABLE>
<TABLE>
<CAPTION>
UTILITY OPERATIONS:
Electric Utility:
Revenues and
Power Supply Expenses Volumes Customers
(Thousands of Dollars) (Thousands of MWh) (Quarterly Average)
6/30/98 6/30/97 6/30/98 6/30/97 6/30/98 6/31/97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Residential
and Commercial $ 61,916 $ 59,764 4% 1,008 997 1% 278,817 274,853 1%
Industrial 27,143 24,573 10% 699 606 15% 3,929 3,461 14%
General Business 89,059 84,337 6% 1,707 1,603 6% 282,746 278,314 2%
Sales to Other
Utilities 11,626 7,794 49% 528 494 7% 85 82 4%
Other 2,031 3,378 (40)%
Intersegment 1,178 926 27% 37 32 16% 230 230 0%
Total $ 103,894 $ 96,435 8% 2,272 2,129 7% 283,061 278,626 2%
Power Supply
Expenses:
Hydroelectric $ 5,609 $ 5,440 3% 1,041 1,033 1%
Steam 12,440 14,942 (17)% 984 830 19%
Purchases
and Other 11,149 10,257 9% 460 518 (11)%
Total Power Supply $ 29,198 $ 30,639 (5)% 2,485 2,381 4%
Cents Per kWh $1.175 $1.287
</TABLE>
Second quarter revenues from general business customers increased due to
the items mentioned in the six months ended discussion. Sales to other
utilities increased as a result of higher prices.
Power supply expense decreased largely due to lower steam maintenance
expense. During second quarter 1997, both the Corette thermal plant and one of
the Colstrip thermal plants were down for scheduled maintenance. Selling,
general and administrative expense increased due to the items mentioned in the
six months ended discussion.
<TABLE>
<CAPTION>
Natural Gas Utility:
Revenues Volumes Customers
(Thousands of Dollars) (Thousands of Mmcf) (Quarterly Average)
6/30/97 6/30/96 6/30/97 6/30/96 6/30/97 6/30/96
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Residential
and Commercial $14,870 $18,866 (21)% 3,030 4,023 (25)% 144,515 140,690 3%
Industrial 190 518 (63)% 41 121 (66)% 390 404 (3)%
Subtotal 15,060 19,384 (22)% 3,071 4,144 (26)% 144,905 141,094 3%
Gas Supply Cost
Revenues (GSC) (5,937) (3,082) (93)%
General Business
without GSC 9,123 16,302 (44)% 3,071 4,144 (26)% 144,905 141,094 3%
Sales to Other
Utilities 142 134 6% 20 33 (39)% 3 4 (25)%
Transportation 3,205 2,273 41% 6,178 5,733 8% 23 34 (32)%
Other 937 1,225 (24)%
Total $13,407 $19,934 (33)% 9,269 9,910 (6)% 144,931 141,132 3%
</TABLE>
Revenues from general business customers decreased largely as the result of
lower volumes sold due to warmer weather.
Gas supply costs and selling, general and administrative expense increased
due to the items mentioned in the six months ended discussion.
Also, as mentioned in the six months ended discussion, taxes other than
income taxes and depreciation, depletion and amortization decreased due to the
transfer of the natural gas production properties.
Interest Expense and Other:
The change in interest expense is due to the reasons discussed in the
six months ended section with the exception that short term borrowing was not
higher than in the same period last year.
Other income increased as a result of costs associated with the Flint
Creek Dam property transfer mentioned in the six month discussion. This was
partially offset by the change in other investment income.
<TABLE>
<CAPTION>
NONUTILITY OPERATIONS
Quarter Ended
June 30, June 30,
1998 1997
Thousands of Dollars
<S> <C> <C>
COAL:
REVENUES:
Revenues $ 45,053 $ 35,750
Intersegment revenues 9,657 6,570
54,710 42,320
EXPENSES:
Operations and maintenance 32,427 25,228
Selling, general and
administrative 4,369 5,487
Taxes other than income taxes 6,424 4,419
Depreciation, depletion and
amortization 2,531 1,253
45,751 36,387
INCOME FROM COAL OPERATIONS 8,959 5,933
OIL AND NATURAL GAS:
REVENUES:
Revenues 44,278 34,452
Intersegment revenues 4,887 89
49,165 34,541
EXPENSES:
Operations and maintenance 35,705 23,469
Selling, general and
administrative 5,643 2,756
Taxes other than income taxes 961 1,093
Depreciation, depletion and
amortization 5,471 4,135
47,780 31,453
INCOME FROM OIL AND NATURAL GAS OPERATIONS 1,385 3,088
INDEPENDENT POWER:
REVENUES:
Revenues 17,803 17,020
Earnings from unconsolidated
investments 6,798 1,647
Intersegment revenues 612 397
25,213 19,064
EXPENSES:
Operations and maintenance 17,167 14,756
Selling, general and
administrative 1,181 1,107
Taxes other than income taxes 434 751
Depreciation, depletion and
amortization 1,453 661
20,235 17,275
INCOME FROM INDEPENDENT POWER OPERATIONS $ 4,978 $ 1,789
NONUTILITY OPERATIONS (continued)
Quarter Ended
June 30, June 30,
1998 1997
Thousands of Dollars
TELECOMMUNICATIONS:
REVENUES:
Revenues $21,273 $ 8,056
Earnings from unconsolidated
Investments 3,564 15
Intersegment revenues 252 204
25,089 8,275
EXPENSES:
Operations and maintenance 6,519 5,529
Selling, general and
administrative 2,876 1,891
Taxes other than income taxes 1,313 193
Depreciation, depletion and
amortization 1,698 287
12,406 7,900
INCOME FROM TELECOMMUNICATIONS
OPERATIONS 12,683 375
OTHER OPERATIONS:
REVENUES:
Revenues 3,186 453
Intersegment revenues 416 825
3,602 1,278
EXPENSES:
Operations and maintenance 3,949 477
Selling, general and
administrative 1,234 1,669
Taxes other than income taxes 265
Depreciation, depletion and amortization 1,163 133
6,611 2,279
LOSS FROM OTHER OPERATIONS (3,009) (1,001)
INTEREST EXPENSE AND OTHER:
Interest 2,360 1,787
Other (income) deductions - net (1,085) (9,426)
1,275 (7,639)
INCOME BEFORE INCOME TAXES 23,721 17,823
INCOME TAXES 7,115 6,536
NONUTILITY NET INCOME AVAILABLE FOR COMMON STOCK $16,606 $ 11,287
</TABLE>
NONUTILITY OPERATIONS:
Coal Operations:
Income from coal operations increased $3,000,000 compared to the same
period last year. Revenues from the Rosebud Mine increased $9,000,000. Volume
of coal sold to the Colstrip Units in 1998 was 44% higher due to less down
time for repairs and scheduled maintenance. Despite a 4% decrease in tons of
coal sold, revenues from the Jewett mine rose $2,700,000 as a result of an
increase in reimbursable mining expenses.
Operation and maintenance expense, taxes other than income taxes and
depreciation, depletion and amortization were up primarily due to increased
volumes at the Rosebud mine and increased reclamation and stripping costs at
the Jewett mine.
Oil and Natural Gas Operations:
The following table shows changes from the previous year, in millions of
dollars, in the various classifications of revenue (excluding intersegment
revenues) and the related percentage changes in volumes sold and prices
received:
Oil -revenue $ (3)
-volume (38)%
-price/bbl (38)%
Natural gas -revenue $ 18
-volume 75%
-price/Mcf (3)%
Income decreased and revenues and expenses for oil and natural gas
operations differed from the second quarter of 1997 for the same reasons
discussed in the six months ended section above.
Independent Power Operations:
Income from independent power operations for the second quarter 1998
increased primarily as a result of a $5,200,000 increase in earnings from
unconsolidated investments. Slightly offsetting the increase was an increase
in project development costs of $700,000 due to new domestic project
development activities and a $800,000 increase in amortization of independent
power investments.
An increase in volumes increased revenues from power sales by
$1,600,000, which was partially offset by a 1997 adjustment of $600,000 to
revenues relating to a long-term contract. The increase in revenues was also
offset by a $1,750,000 increase in operations and maintenance expense as a
result of the Colstrip plant generating more energy than in 1997.
Telecommunications Operations:
For the quarter, revenues and expenses from telecommunications
operations increased for the same reasons presented in the six months ended
discussion.
Other Operations:
As presented in the six months ended discussion, changes to revenues and
expenses in other operations are primarily the result of including the
activities of MPT&M.
Interest Expense and Other:
Interest expense increased for the same reasons noted in the six months
ended discussion.
Other (income) and deductions - net decreased due to a $7,800,000 gain
realized on dispositions of oil and natural gas properties in the second
quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES:
Operating Activities --
Net cash provided by operating activities was $96,118,000 during the
period compared to $88,480,000 in the first six months of 1997. The current
year increase of $7,638,000 was due primarily to higher 1998 Nonutility
revenues and a $30,000,000 loan to a third party made in 1997 which were
partially offset by 1998 construction costs which will be reimbursed in future
periods.
Investing Activities --
Net cash used for investing activities was $63,044,000 during the period
compared to $118,969,000 in the first six months of 1997. The current year
decrease of $55,925,000 was due primarily to the decrease in capital
expenditures resulting from a 1997 oil and gas plant acquisition and
hydroelectric license costs capitalized in 1997. The current year decrease was
partially offset by the lack of property sales which occurred in 1997.
Forecasted capital expenditures for 1998 are as follows:
Forecasted
1998
Thousands of Dollars
Utility $ 77,000
Nonutility 174,000
Total $ 251,000
Financing Activities --
On January 2, 1998, the Company used short-term borrowings to retire
$16,000,000 in sinking fund debentures.
On April 6, 1998, the Company issued $60,000,000 of floating rate Medium
Term Notes, Series B, due April 6 2001, the proceeds of which were used to
reduce outstanding debt.
The Company's consolidated borrowing ability under its Revolving Credit
and Term Loan Agreements was $160,000,000, of which $70,000,000 was unused at
June 30, 1998. The unused amount excludes $50,000,000 under the Agreements
which is currently being used to back a like amount of commercial paper.
SEC RATIO OF EARNINGS TO FIXED CHARGES:
For the twelve months ended June 30, 1998, the Company's ratio of
earnings to fixed charges was 2.79 times. Fixed charges include interest,
distributions on preferred securities of a subsidiary trust, the implicit
interest of the Colstrip Unit 4 rentals and one-third of all other rental
payments.
NEW ACCOUNTING PRONOUNCEMENTS:
During February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". SFAS No. 132
revises employers' disclosures about pension and other postretirement plans
currently provided under the provisions of SFAS Nos. 87, 88 and 106. Although
the statement will affect the presentation of the information, it does not
change the measurement or recognition of those plans, and therefore it will not
affect the Company's financial position or results of operations. The statement
is effective for fiscal years beginning after December 15, 1997.
In June 1998, the FASB also issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 requires that
all derivative instruments be recorded on an entity's balance sheet at fair
value. Changes in the fair value of the derivatives are recognized each
period either in current earnings or as a component of comprehensive income,
depending on whether the derivative is designated as part of a hedge
transaction, and if so, what type of hedge transaction. The statement
distinguishes between fair-value hedges, defined as hedges of the Company's
assets, liabilities or firm commitments, and cash-flow hedges, defined as
hedges of future cash flows related to a variable rate asset or liability or a
forecasted transaction. Recognition of changes in the fair value of a hedge,
determined to be a fair-value hedge, will generally be offset in the income
statement by the recognition of the change in the fair value of the hedged
item. Recognition of changes in the fair value of a cash-flow hedge will be
reported as a component of comprehensive income. The gains or losses on the
derivative instruments that are reported in comprehensive income will be
reclassified into current earnings in the periods in which the earnings are
impacted by the variability of the cash flows of the hedged item. The
ineffective portion of all hedges will be recognized in current earnings.
The new statement is effective for all fiscal quarters of all fiscal
years beginning after June 15, 1999. The Company has not yet determined the
impact that the adoption of the new standard will have on its earnings or
financial position.
YEAR 2000 COMPLIANCE:
As the year 2000 approaches, most companies face a potentially serious
problem resulting from the possible failure of computer software programs and
other operational electronic systems to recognize calendar dates beyond the
year 1999. This failure could force computers and other electronic equipment
to shut down or create erroneous results.
The Company is currently addressing this "Year 2000" issue to ensure the
availability and integrity of its financial systems as well as the operational
systems which may be affected by the issue. The Company has developed a
corporate-wide strategy and has established an executive Year 2000 Steering
Committee to oversee the project. The Company's assessment of the Year 2000
issue has focused on prioritizing each system into critical or non-critical
categories. Detailed plans are being developed as the inventories and
assessments of all of the systems are being completed. Top executives,
business unit leaders, and the Company's Legal, Audit and Insurance/Risk
Management Departments have been involved in determination of readiness in the
Year 2000 effort. Corporate officers and the Board of Directors are kept
informed of the status of the Year 2000 compliance progress. Included in this
evaluation, is the development of contingency plans in the event of a failure
of any of the Company's critical information systems, critical operational
systems or systems of third parties with which the Company does business.
The Company has established a project team within its central
Information Services (IS) Department to ensure that all of its information
services software and hardware will be year 2000 compliant before 2000. The
IS Department began addressing the issue in 1993. The project team reports on
a regular basis to the Company's Board of Directors. Focusing on the critical
systems, the IS Department's process of inventorying, assessing impacts and
implementation is expected to be approximately 70% to 80% complete by the end
of 1998. Contingency plans for information systems failure have been
developed and a portion of the plans have been tested. At this time, the
Company does not expect the costs of year 2000 compliance for its information
services function to have a material impact on its future results of
operations.
In January 1998, the Company formally began the process of identifying
the other operational systems which have embedded electronic microprocessors
that could be affected by this issue. The senior vice presidents of the
Company's two divisions and the officers of the various business units have
been given the responsibility for addressing these operational/process control
issues as they relate to the year 2000. With respect to the operational
systems, the Company is also focusing its efforts on the critical systems in
inventorying, assessing impacts and implementation of remediation efforts.
Although the operational systems project began later than the IS Department
project, all critical systems are expected to be ready before January 2000.
Contingency plans for operation systems failure are being developed. Although
it is not currently possible to accurately estimate the overall cost of the
required modifications, the Company believes that the ultimate cost of this
work, including amounts spent to date, will not have a material effect on the
Company's financial position, liquidity or results of operations.
The year 2000 issue may also impact other entities with which the
Company transacts business or with which the Company's electric and natural
gas systems are interconnected. Currently, the Company is approximately 25%
complete in contacting suppliers, vendors and key customers to assess their
year 2000 readiness. The Company and other electric and natural gas service
providers are evaluating potential Year 2000 risks resulting from
interconnected electric, natural gas and informational systems. Such
interconnected systems are critical to the reliability and integrity of each
interconnected service provider. It is possible that the failure of one such
interconnected provider to achieve Year 2000 compliance could disrupt the
provision of service by others. The Company and other providers are working
together in an effort to avoid such disruptions.
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
Houston Lighting and Power Lignite Sales Agreement Dispute
Refer to Part 1, "Notes to the Consolidated Financial Statements -
Note 2" for additional information pertaining to legal proceedings.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Shareholders was held on May 12,
1998.
(b) Security holders elected five persons to the Board of Directors at
the Company's Annual Meeting of Shareholders. The results of the
election were as follows:
Director For Against Abstentions
R. D. Corette 48,087,264 -- 1,307,181
Beverly D. Harris 48,092,107 -- 1,302,338
John R. Jester 48,058,289 -- 1,336,156
Arthur K. Neill 47,999,199 -- 1,395,246
N. E. Vosburg 48,124,678 -- 1,269,767
Arthur K. Neill retired from the Board of Directors June 30, 1998.
Directors whose term of office as a director continued after the
meeting are as follows:
Tucker Hart Adams Robert P. Gannon
Alan F. Cain Chase T. Hibbard
John G. Connors Carl Lehrkind, III
Kay Foster Jerrold P. Pederson
(c) Security holders approved the Montana Power Company Long-Term
Incentive Plan (the Plan) at the Company's Annual Meeting of
Shareholders. The purpose of the Plan is to reward employees who
make important contributions to the continued growth, development
and financial success of the Company or its subsidiaries and to
attract and retain such employees. The results of the election were
as follows:
For Against Abstentions
36,485,975 11,110,175 1,798,295
ITEM 5. Other Information
(a) Arbitration Panel Rules Against Bonneville Power Administration
An arbitration panel ruled July 28 that the Bonneville Power
Administration (BPA) breached its purchase power contract with
Tenaska Washington Partners II, L.P. (Tenaska). The panel ruled
that Tenaska is entitled to lost profit damages and awarded
monetary damages, including interest to date, of approximately
$160,000,000. BPA must also pay all arbitration costs associated
with the three-judge panel who heard the matter. The Montana Power
Company's wholly owned subsidiary, Continental Energy Services
(Continental), owns a 25 percent interest in the Tenaska
partnership. Including recovery of its investment, the Company's
share of the award, as currently constituted, would contribute
after-tax net income of more than $20,000,000.
The dispute arose in 1995 when BPA informed Tenaska that it would
not honor its obligation under the contract. At the time of the
breach, approximately 70% of the project costs had been committed
by Tenaska to build the 248 megawatt natural gas-fired electric
generating plant at Frederickson, Washington. During the past
three years, all of the third party damage issues that were part
of Tenaska's original claim were resolved or settled by a payment
from BPA. Earlier this year, BPA accepted assignment of the
partially completed plant and physical assets on the site, which
helped resolve another significant issue in dispute.
Tenaska, in consultation with its partners, including Continental,
is reviewing options with respect to an appeal of the arbitration
panel's decision; the appeal would be an effort to increase the
awarded damages. In the event that Tenaska appeals the panel's
decision, income would not be recognized by the Company until the
outcome of the appeal is known. The outcome of any potential
appeal is uncertain.
(b) Shareholder Proposal Deadline for the 1999 Annual Meeting of
Shareholders
Rule 14a-4 of the Securities and Exchange Commission's proxy rules
allows the Company to use discretionary voting authority to vote on
a matter coming before an annual meeting of shareholders which is
not included in the Company's proxy statement, if the Company does
not have notice of the matter at least 45 days before the date on
which the Company first mailed its proxy materials for the prior
year's annual meeting of the shareholders. In addition,
discretionary voting authority may generally also be used if the
Company receives timely notice of such matter (as described in the
preceding sentence) and if, in the proxy statement, the Company
describes the nature of such matter and how the Company intends to
exercise its discretion to vote on such matter. Accordingly, for
the 1999 Annual Meeting of Shareholders of the Company, any such
notice must be submitted to the Secretary of the Company on or
before February 9, 1999.
This requirement is separate and apart from the Securities and
Exchange Commission's requirements that a shareholder must meet in
order to have a shareholder proposal included in the Company's
proxy statement. Shareholder proposals intended to be presented at
the 1999 Annual Meeting of Shareholders of the Company must be
received by the Company no later than November 26, 1998 in order to
be eligible for inclusion in the Company's proxy statement and the
form of proxy relating to that meeting
ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Exhibit 10(a)(vi)* The Montana Power Company Long-Term
Incentive Plan
Exhibit 12 Computation of ratio of earnings to fixed
charges for the twelve months ended
June 30, 1998.
Exhibit 27 Financial data schedule
* Management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Form 10-Q by Item
601(b)(10)(iii) of Regulation S-K.
(b) Reports on Form 8-K
DATE SUBJECT
April 23, 1998 Item 5. Other Events. Discussion of First
Quarter Net Income.
Item 7. Exhibits. Consolidated Statements
of Income for the Quarters Ended March 31,
1998 and 1997 and for the Twelve Months
Ended March 31, 1998 and 1997. Utility
Operations Schedule of Revenues and
Expenses for the Quarters Ended March 31,
1998 and 1997 and the Twelve Months Ended
March 31, 1998 and 1997. Nonutility
Operations Schedule of Revenues and
Expenses for the Quarters Ended March 31,
1998 and 1997 and the Years Twelve Months
Ended March 31, 1998 and 1997.
SIGNATURES
Pursuant to the requirements 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.
THE MONTANA POWER COMPANY
(Registrant)
By /s/ J. P. Pederson
J. P. Pederson
Vice President and Chief
Financial and Information
Officer
Dated: August 14, 1998
EXHIBIT INDEX
Exhibit 10(a)(vi)
The Montana Power Company Long-Term
Incentive Plan
Exhibit 12
Computation of ratio of earnings
to fixed charges for
the twelve months ended June 30, 1998
Exhibit 27
Financial data schedule
Exhibit 10(a)(vi)
THE MONTANA POWER COMPANY
1998 LONG-TERM INCENTIVE PLAN
SECTION ONE.
PURPOSE OF PLAN
The purpose of The Montana Power Company Long-Term Incentive Plan is to
reward employees who make important contributions to the continued growth,
development and financial success of The Montana Power Company or one or
more of its subsidiaries, and to attract and retain such employees. The
Plan is intended to stimulate individual performance by eligible employees
so that specific long-term goals increasing the profitability of the Company
and its subsidiaries may be achieved for the benefit of customers and
shareholders.
SECTION TWO.
DEFINITIONS
The following definitions are applicable herein:
"Award" means the award to a Participant of Restricted Stock, an Option,
a Stock Appreciation Right, a Performance Share or a Dividend Equivalent
Share.
"Award Period" means the period of time specified by the Committee with
respect to an Award during which (i) Restricted Shares will remain
restricted, or (ii) the conditions precedent to the right to receive payment
with respect to Performance Shares must be met.
"Board" means the Board of Directors of the Company.
"Book Value" means the book value of a share of Common Stock determined
in accordance with the Company's regular accounting practices. Any such
determination, in the absence of manifest error, shall be conclusive.
"Code" means the Internal Revenue Code of 1986, as amended. Reference
in the Plan to any section of the Code shall be deemed to include any
amendments or successor provisions to such section and any regulations
promulgated thereunder.
"Committee" means the committee, consisting of two or more members of
the Board who are not Eligible Employees and who are otherwise qualified, to
the extent required, to administer the Plan for purposes of Section 16 of
the Exchange Act and the rules thereunder.
"Common Stock" means the common stock, without par value, of the
Company.
"Company" means The Montana Power Company and its successors, including
any company specified in Section Sixteen I.
"Covered Participant" means a Participant who is a "covered employee" as
defined in Section 162(m)(3) of the Code.
"Date of Disability" means the date on which a Participant is classified
as under a Disability.
"Date of Grant" means the date on which an Award is granted by the
Committee or such later date as may be specified by the Committee in making
such grant.
"Date of Retirement" means the date of Retirement or Earlier Than Normal
Retirement.
"Disability" means a physical or mental impairment that prevents a
Participant from performing the essential functions of the Participant's
regular occupation and which can be expected to result in death or which has
lasted or can be expected to last for a continuous period of not less than
twelve months.
"Dividend Equivalent Shares" has the meaning assigned in Section Eleven
A.
"Earlier than Normal Retirement" means the retirement, with the consent
of the Company, of an employee prior to that employee's Normal Retirement
Date.
"Eligible Employee" means any person employed by the Company or a
Subsidiary on a regularly scheduled basis during any portion of a period for
which an Award is made (including employees who are members of the Board or
of the Board of Directors of any Subsidiary, but excluding any such director
who is not otherwise so regularly employed) and who satisfies the
requirements of Section Six.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means as follows: (i) for Options, and Stock
Appreciation Rights, the average of the high and low prices for the Common
Stock as reported on the New York Stock Exchange Composite Tape on a
specified date, or, if the Common Stock shall not have traded on any
specified date, the next preceding date on which it shall have traded; and
(ii) for Performance Shares, the average of the reported closing prices of
the Common Stock on the New York Stock Exchange for 30 consecutive trading
days prior to a specified date.
"Incentive Stock Option" means an incentive stock option within the
meaning of Section 422 of the Code.
"Normal Retirement Date" is the retirement date as described in the
Company's or a Subsidiary's retirement or pension plan.
"Option" has the meaning assigned in Section Eight A.
"Option Holder" means a Participant who has received an Award of an
Option.
"Participant" means an Eligible Employee who has been granted an Award
under this Plan.
"Performance Criteria" means the objectives established by the Committee
for a Performance Period, for the purpose of determining when an Award
subject to such objectives has been earned.
"Performance Period" means the time period designated by the Committee
during which performance goals must be met in order for a Participant to
obtain a performance-based Award.
"Plan" means The Montana Power Company 1998 Long-Term Incentive Plan, as
it may be amended from time-to-time.
"Performance Share" has the meaning assigned in Section Ten A.
"Restricted Stock" has the meaning assigned in Section Seven A.
"Retirement" means retirement on or after the Normal Retirement Date.
"Stock Appreciation Right" has the meaning assigned in Section Nine A.
"Subsidiary" means any corporation of which 50% or more of its
outstanding voting stock or voting power is beneficially owned, directly or
indirectly, by the Company.
"Termination" means resignation or discharge from employment with the
Company or any of its Subsidiaries, except in the event of death,
disability, retirement or earlier than normal retirement.
SECTION THREE.
EFFECTIVE DATE AND DURATION
A. Effective Date.
The Plan shall be effective as of May 12, 1998, subject to shareholder
approval.
B. Period for Grants of Awards.
Awards may be granted on and after the effective date through the period
ending May 12, 2008.
C. Termination
The Plan shall continue in effect until all matters relating to the
payment of Awards and administration of the Plan have been settled.
SECTION FOUR.
ADMINISTRATION
The Plan shall be administered by the Committee which still have all of
the powers respecting the Plan (other than amending the Plan as provided in
Section Fifteen); provided, however, that the Committee, in its discretion,
may delegate to one or more of its members or to one or more agents such
administrative duties as it may deem advisable. The Committee or any person
to whom it has delegated duties may employ attorneys, consultants,
accountants or other persons and the Committee shall be entitled to rely
upon the advice, opinions or evaluations of any such persons.
Notwithstanding the foregoing, the Committee may not delegate its authority
if such delegation would cause a violation of the requirements of Section 16
of the Exchange Act and the rules thereunder. All questions of
interpretation and application of the Plan, or of the terms and conditions
pursuant to which Awards are granted, exercised or forfeited under the
provisions hereof, shall be subject to the determination of the Committee.
Any such determination shall be final and binding upon all parties affected
thereby.
SECTION FIVE.
GRANT OF AWARDS AND LIMITATION OF NUMBER OF SHARES AWARDED
The Committee may, from time-to-time, grant Awards to one or more
Eligible Employees, provided that (i) subject to any adjustment pursuant to
Section Sixteen H, the aggregate number of shares of Common Stock subject to
Award under the Plan (including those constituting the basis for Awards) may
not exceed 2,000,000 shares; and (ii) to the extent that an Award shall
expire without either being exercised or the benefits thereof paid, the
shares of Common Stock pertaining to such Award shall again be available for
the grant of an Award to the maximum extent permissible under Section 16 of
the Exchange Act. Shares delivered by the Company under the Plan may be
authorized but unissued Common Stock, Common Stock held in the treasury of
the Company or Common Stock purchased on the open market (including private
purchases). In granting Awards, the Committee shall establish criteria,
such as the growth, financial and other performance and achievement of
specified goals of the Company and/or one or more of its Subsidiaries,
against which the performance of the Participant shall be measured, and
shall take into account such matters as each Participant's position and
compensation, the Fair Market Value of the Common Stock at the Date of
Grant, economic conditions and such other matters as it shall deem to be
appropriate. Participants subject to Section 16 of the Exchange Act shall
sell stock acquired pursuant to the Plan in accordance with the rules
promulgated under Section 16 of the Exchange Act.
SECTION SIX.
ELIGIBILITY
Eligible Employees are full-time employees who, in the opinion of the
Committee, contribute to the continued growth, development and financial and
other successes of the Company or one or more of its Subsidiaries. The
Committee, from time-to-time, shall select from the Eligible Employees those
to whom Awards shall be granted and determine the size of such Awards. No
Eligible Employee of the Company or any of its Subsidiaries shall have any
right to an Award.
SECTION SEVEN.
RESTRICTED STOCK
A. Grants of Restricted Stock.
Restricted Stock shall mean shares of Common Stock awarded pursuant to
this Section Seven. Shares of Restricted Stock shall be issued to
Participants without payment of cash consideration. A Certificate for
Restricted Stock shall be issued in the name of each Participant receiving
such an Award and shall bear a restrictive legend prohibiting the sale,
transfer, pledge or hypothecation of the Restricted Stock evidenced thereby
until the expiration of the restricted period.
Holders of Restricted Stock shall have the right to vote such Stock. In
granting a Restricted Stock Award, the Committee may authorize the
Participant to receive the cash dividends payable with respect to such Stock
or may direct that they be retained by the Company.
B. Restriction Period.
At the time of each grant of a Restricted Stock Award, the Committee
shall establish the restriction period applicable to such Award. Each
restriction period shall be a period within which must be accomplished the
achievement of such Company or Subsidiary performance standards or the
fulfillment of such other terms and conditions as may be determined, in its
sole discretion, by the Committee. Notwithstanding the other provisions of
this Section Seven B: (i) in the event of a public tender for all or any
portion of the Common Stock or in the event that any proposal to merge or
consolidate the Company with another company is submitted to the
stockholders of the Company for a vote, the Committee, in its sole
discretion, may change or eliminate the restriction period with respect to
any and all Restricted Stock Awards; and (ii) the Committee, in its sole
discretion, may change or eliminate the Award Period with respect to any
Restricted Stock Award whenever it shall determine that changes in tax or
other laws, or in rules or regulations promulgated thereunder, or material
and unforeseen events or circumstances arising after the Date of Grant of
such Restricted Stock Award make such action appropriate.
C. Removal of Restrictions; Forfeiture of Shares.
Upon completion of the restriction period pertaining to an Award of
Restricted Stock and the fulfillment of the terms and conditions with
respect thereto, all restrictions upon such Restricted Stock will expire and
a new certificate representing such Stock will be issued without the
restrictive legend described in Section Seven A. In the event of the
disability or death of a Participant prior to the issuance of such new
certificate, such certificate will be issued to such Participant's guardian,
executor, administrator or heir.
Should the terms and conditions with respect to an Award of Restricted
Stock not be satisfied, the Participant shall have no further right, title
or interest in or to such Restricted Stock and shall surrender the
certificate representing shares of such Stock to the Committee.
SECTION EIGHT.
STOCK OPTIONS
A. Grants of Options.
An Option shall mean the Award of the right to purchase shares of Common
Stock pursuant to this Section Eight, and may be either an Incentive Stock
Option or a non-statutory stock option.
B. Stock Option Agreement.
Each Award of an Option shall be evidenced by a written option agreement
containing the terms and conditions set forth in this Section Eight and such
other terms and conditions as may be determined, in its sole discretion, by
the Committee, including, without limitation, provisions to qualify such
Option as an Incentive Stock Option. Each such option agreement shall be
subject to the provisions applicable to Options set forth in the Plan,
whether or not such provisions shall be set forth in such agreement.
C. Option Price.
The Option Price per share of Common Stock shall be set in the Award by
the Committee, and in the case of non-statutory stock option the price may
not be less than 85% of the Fair Market Value at the Date of Grant, but, in
the case of an Incentive Stock Option, shall be not less than 100% of the
Fair Market Value at the Date of Grant.
D. Form of Payment.
At the time of the exercise of an Option, the Option price shall be
payable in full in cash or in other shares of Common Stock (whether already
owned or pursuant to a cashless exercise) or in a combination of both. If
Common Stock shall constitute payment of all or a portion of the Option
Price, it shall be valued at the Fair Market Value on the date the Option is
exercised. To the extent required, such exercise and payment shall be
effected in accordance with Section 16 of the Exchange Act and the rules
thereunder.
E. Right to Exercise.
Each Option shall become exercisable within such period as the
Committee, in its sole discretion, shall determine. Unless the Committee
shall determine that an Option may only be exercised in whole, it may be
exercised in whole at any time or in part from time-to-time.
In the event of a public tender for all or any portion of the Common
Stock or in the event that any proposal to merge or consolidate the Company
with another company is submitted to the stockholders of the Company for a
vote, the Committee, in it sole discretion, may declare any Option to be
immediately exercisable.
The Committee, in its sole discretion, may declare any Option to be
immediately exercisable whenever it shall determine that changes in tax or
other laws, or in rules or regulations promulgated thereunder, or material
and unforeseen events or circumstances arising after the Date of Grant of
such Option make such action appropriate.
An Option may be exercised only by the Option Holder or, in the event of
the legal disability or death of such Option Holder, by such Option Holder's
legal guardian, executor, administrator or heir.
F. Expiration of Options.
An Option will expire upon the first to occur of the following: (i) the
expiration of the period within which it may be exercised as determined by
the Committee; (ii) the tenth anniversary of its Date of Grant; (iii) the
lapse of three months following the Option Holder's Date of Retirement; (iv)
the Option Holder's Termination; (v) the lapse of a period of one year
following the date of the Option Holder's disability or death; or (vi) to
the extent of the exercise of related Stock Appreciation Rights, upon the
exercise of such Rights.
G. Rights as a Stockholder.
An Option Holder shall have no rights as a stockholder with respect to
any shares of Common Stock covered by an Option until the date, following
the exercise of the Option, of the issuance of either a certificate for the
Common Stock or a book entry of the Common Stock with respect to which the
Option has been exercised. No adjustment shall be made for dividends,
distributions or other rights for which the record date occurs prior to the
date such certificate shall be issued, except as provided in Section Sixteen
H.
H. Modification, Extension and Renewal of Options.
The Committee, in its sole discretion, may modify, extend or renew
outstanding Options, or exchange outstanding Options for new Options;
provided, however, that no modification of an outstanding Option, without
the consent of the Option Holder, shall adversely effect the rights of such
Option Holders under such Option.
I. Early Disposition of Common Stock.
If a Participant shall dispose of any Common Stock purchased pursuant to
an Incentive Stock Option within one year from the date on which such Stock
was acquired or within two years from the Date of Grant of such Option,
then, to provide the Company with the opportunity to claim the benefit of
any income tax deduction which may be available to it under the
circumstances, such Participant, within ten days of such disposition, shall
notify the Company of the dates of acquisition and disposition of such
Stock, the number of shares so disposed of and the consideration, if any,
received therefore.
J. Individual Dollar Limitations.
The aggregate Fair Market Value (determined at the time of Award) of the
Common Stock with respect to which an Incentive Stock Option shall be
exercisable for the first time during any calendar year (whether under this
Plan or another plan or arrangement of the Company or any of its
Subsidiaries) shall not exceed $100,000 (or such other limit as may be in
effect under the Code on the date of Award).
SECTION NINE.
STOCK APPRECIATION RIGHTS
A. Grants of Stock Appreciation Rights.
A Stock Appreciation Right is the right to receive payment of an amount
equal to the greater of the increase, if any, in the Fair Market Value or
the Book Value of a share of Common Stock over the period of time between
the Date of Grant of such Right and its exercise.
Stock Appreciation Rights may be granted in conjunction with an Option,
either at the time of Award or thereafter. Stock Appreciation Rights shall
be subject to such terms and conditions as the Committee, in its sole
discretion, shall determine. Stock Appreciation Rights may be granted only
in conjunction with an Option, and may not be granted separately from the
grant of an Option. Stock Appreciation Rights shall be credited to a Stock
Appreciation Rights account to be maintained for each Participant. Stock
Appreciation Rights shall be granted without the payment of consideration by
Participants. The Award of Stock Appreciation Rights shall not entitle the
Participant to any dividend, voting or other rights of a stockholder of the
Company.
B. Right to Exercise
Stock Appreciation Rights issued in conjunction with an Option shall be
exercisable to the extent that such Option shall be exercisable and in lieu
of the exercise of such Option which, to the extent of the exercise of such
Stock Appreciation Rights, shall lapse.
In the event of a public tender for all or any portion of the Common
Stock or in the event that any proposal to merge or consolidate the Company
with another company is submitted to the stockholders of the Company for a
vote, the Committee, in its sole discretion, may declare any Stock
Appreciation Rights to be immediately exercisable. The Committee, in its
sole discretion, may change or eliminate the Award Period with respect to
any Stock Appreciation Rights Award whenever it shall determine that changes
in tax or other laws, or in rules or regulations promulgated thereunder, or
material or unforeseen events or circumstances arising after the Date of
Grant of such Stock Appreciation Right Award make such action appropriate.
A Stock Appreciation Right may be exercised only by the Participant or,
in the event of the legal disability or death of such Participant, by such
Participant's legal guardian, executor, administrator or heir.
C. Expiration of Stock Appreciation Rights.
A Stock Appreciation Right granted in conjunction with an Option will
expire upon the exercise or expiration of the related Option.
D. Deemed Exercise.
If on the date of expiration of any Stock Appreciation Right (other than
an expiration by virtue of the exercise of the related Option) such Stock
Appreciation Right shall not have been exercised, such Stock Appreciation
Right shall be deemed to have been exercised on such date.
E. Payment.
Upon the exercise of Stock Appreciation Rights, the Participant shall
receive, in respect of each such Right, payment, in cash or Common Stock or
a combination of both as the Committee, in its sole discretion, shall
determine, an amount equal to the greater of: (i) the excess of the Fair
Market Value of one share of Common Stock at the date of exercise over the
Fair Market Value of one share of Common Stock at the Date of Grant, or (ii)
the excess of the Book Value of one share of Common Stock determined as of
the end of the calendar month preceding the date of exercise over the Book
Value of one share of Common Stock determined as of the end of the calendar
month preceding the Date of Grant. The number of shares of Common Stock to
be received upon the exercise of Stock Appreciation Rights shall be
determined on the basis of the Fair Market Value of the Common Stock on the
day next preceding the date on which such Stock Appreciation Rights shall
have been exercised.
SECTION TEN.
PERFORMANCE SHARE AWARDS
A. Grants of Performance Shares.
A Performance Share is the right to receive payment of an amount equal
to the Fair Market Value of a share of Common Stock at the end of the Award
Period with respect to such Performance Share.
The right to receive payment for Performance Shares shall be subject to
satisfaction of such terms and conditions as the Committee, in its sole
discretion, may determine. Performance Shares shall be credited to a
Performance Share account to be maintained for each Participant.
Performance Shares shall be issued without the payment of consideration by
Participants. The Award of Performance Shares shall not entitle the
Participant to any dividend, voting or other rights of a stockholder of the
Company.
B. Right to Payment.
Following the end of the award Period, payment for Performance Shares
shall be made only if the Committee, in its sole discretion, shall have
determined that the terms and conditions of such payment shall have been
fulfilled. The Committee, in its sole discretion, may change or eliminate
the Award Period or modify such terms and conditions with respect to any
Performance Shares whenever it shall determine that changes in tax or other
laws, or in rules or regulations promulgated thereunder, or material and
unforeseen events or circumstances arising after the Date of Grant of such
Performance Share Award make such action appropriate. In the event of a
public tender for all or any portion of the Common Stock or in the event
that any proposal to merge or consolidate the Company with another company
is submitted to the stockholders of the Company for a vote, the Committee,
in its sole discretion, may change or eliminate the terms and conditions
with respect to any and all Performance Share Awards.
C. Payment.
Payment in respect of Performance Shares shall be made as soon as
practicable after the receipt by the Committee of all information, including
financial statements, necessary to determine whether the terms and
conditions applicable to such Performance Shares shall have been fulfilled.
Payment in respect of each Performance Share shall be made in cash or
Common Stock, or a combination of both, as the Committee, in its sole
discretion, shall determine in an amount equal to the Fair Market Value, as
of the day following the end of the Award Period, of one share of Common
Stock. The number of shares of Common Stock to be received as payment with
respect to Performance shares shall be determined on the basis of the Fair
Market Value of the Common Stock on the day next preceding the day on which
such shares of Common Stock shall be issued.
SECTION ELEVEN.
DIVIDEND EQUIVALENT SHARES
A. Grants of Dividend Equivalent Shares.
A Dividend Equivalent Share is the right to receive payment of an amount
calculated as provided below.
A Participant in conjunction with an Award of Stock Appreciation Rights
or Performance Shares may be granted, at no cost, the right to accumulated
Dividend Equivalent Shares based on the dividends declared on the Common
Stock for record dates occurring during the Award Period for the related
Stock Appreciation Rights or Performance Shares. Dividend Equivalent Shares
shall be credited to a Dividend Equivalent Share Account maintained for each
recipient.
Dividend Equivalent Shares shall be calculated in terms of shares of
Common Stock as of each dividend record date as follows:
Number of Dividend Number of related Performance Per Share
Equivalent Shares Shares or Stock Appreciation x Dividend on
earned Rights awarded plus previously Common Stock
earned Dividend Equivalent Shares
Book Value of Common Stock
Dividend Equivalent Shares shall be computed, as of each dividend record
date, both with respect to the number of related Performance Shares or Stock
Appreciation Rights awarded and with respect to the number of Dividend
Equivalent Shares previously earned and not paid during the period prior to
the dividend record date.
Book Value shall be determined as of the end of the month preceding any
dividend record date, unless any record date shall be the last day of the
month, in which case Book Value shall be determined as of such record date.
B. Right to Payment.
Payment with respect to Dividend Equivalent Shares granted in
conjunction with an Award of Stock Appreciation Rights shall be made at the
same time that payment shall be made upon the exercise of such Stock
Appreciation Rights. Payment with respect to Dividend Equivalent Shares
granted in conjunction with Performance Shares shall be made at the same
time that payment shall be made with respect to such Performance Shares.
C. Payment.
Payment in respect of Dividend Equivalent Shares shall be made in cash
or Common Stock, or a combination of both, as the Committee, in its sole
discretion, shall determine. The number of shares of Common Stock to be
received as payment with respect to Dividend Equivalent Shares shall be
determined on the same basis as the number of shares of Common Stock to be
received as payment with respect to the related Stock Appreciation Rights or
Performance Shares shall be determined.
SECTION TWELVE.
SPECIAL PROVISIONS APPLICABLE TO COVERED PARTICIPANTS
Awards to Covered Participants shall be governed by the conditions of
this Section Twelve in addition to the requirements of Sections Seven
through Eleven above. Should conditions set forth under this Section Twelve
conflict with the requirements of Sections Seven through Eleven, the
conditions of this Section Twelve shall prevail.
A. Performance Criteria.
All Performance Criteria relating to Covered Participants for a relevant
Performance Period shall be established by the Committee in writing prior to
the beginning of the Performance Period, or by such other later date for the
Performance Period as may be permitted under Section 162(m) of the Code.
Performance Criteria may include alternative and multiple Performance
Criteria and will be based on one or more of the following business
criteria: business or financial goals of the Company, including economic
value added, absolute or relative levels of total shareholder return,
revenues, sales, net income, or net worth of the Company, any of its
Subsidiaries, divisions, business units, or other areas of the Company.
The Performance Criteria must be objective and must satisfy third party
"objectivity" standards under Section 162(m) of the Code, and the
regulations promulgated thereunder.
The Performance Criteria shall not allow for any discretion by the
Committee as to an increase in any Award, but discretion to lower an Award
is permissible.
The Award and payment of any Award under this Plan to a Covered
Participant with respect to a relevant Performance Period shall be
contingent upon the attainment of the Performance Criteria that are
applicable to such Award. The Committee shall certify in writing prior to
payment of any such Award that such applicable Performance Criteria have
been satisfied. Resolutions adopted by the Committee may be used for this
purpose.
B. Grants of Options.
The Option Price per share of Common Stock shall be set in the Award by
the Committee, and in the case of a non-statutory stock option or Incentive
Stock Option granted to a Covered Participant the price may not be less than
the Fair Market Value at the Date of Grant.
C. Grants of Stock Appreciation Rights.
A Stock Appreciation Right granted to a Covered Participant shall be the
right to receive payment of an amount equal to the increase, if any, in the
Fair Market Value of a share of Common Stock over the period of time between
the Date of Grant of such Right and its exercise. Upon the exercise of a
Stock Appreciation Right, a Covered Participant shall receive payment in
cash or Common Stock or a combination of both as the Committee, in its sole
discretion, shall determine, in an amount equal to the excess of the Fair
Market Value of one share of Common Stock at the date of exercise over the
Fair Market Value of one share of Common Stock at the Date of Grant.
D. Maximum Awards.
The aggregate maximum Awards that may be paid (in cash or in shares of
Common Stock or a combination thereof) to any Covered Participant under the
Plan during any calendar year shall be an amount equivalent to the Fair
Market Value of 100,000 shares of Common Stock, such Fair Market Value to be
determined as of the first day of such calendar year.
The aggregate maximum number of shares of Common Stock subject to
Options and Stock Appreciation Rights made to any Covered Participant during
any calendar year shall be 150,000.
All Awards to Covered Participants under this Plan shall be further
subject to such other conditions, restrictions, and requirements as the
Committee may determine to be necessary to carry out the purposes of this
Section Twelve.
SECTION THIRTEEN.
FORFEITURE
In the event a Participant ceases employment during an Award Period,
Restricted Stock, Stock Appreciation Rights, Performance Shares and Dividend
Equivalent Shares are subject to forfeiture as follows:
(i) Termination - the Award will be completely forfeited as of the
date of Termination.
(ii) Retirement - payout of the Award will be prorated for service
during the Award period.
(iii) Earlier Than Normal Retirement - payout of the Award will be
prorated for service during the Award period.
(iv) Disability - payout of the Award will be prorated for service
during the Award Period as if the Participant had maintained active
employment until the Normal Retirement Date.
(v) Death - payout of the Award will be prorated for service during
the Award Period.
In any instance where payout of an Award is to be prorated, the
Committee, in its sole discretion, may choose to provide the Participant (or
the Participant's estate) with the entire payout rather than the prorated
portion thereof.
Any Award which is forfeited, in whole or in part, will revert to the
Plan.
SECTION FOURTEEN.
DEFERRAL ELECTION
Upon the request of a Participant, the Committee may, in its sole
discretion, permit a Participant to elect to defer the payout of all or any
part of any Award which he or she is not entitled to receive during the
calendar year in which such deferral election is made under such conditions
as the Committee may establish, including the crediting of reasonable
interest on deferred amounts denominated in cash and Dividend Equivalent
Shares on amounts denominated in Common Stock.
SECTION FIFTEEN.
AMENDMENT OF PLAN
At any time and from time-to-time, the Board may alter, amend, suspend
or terminate the Plan, in whole or in part, except that: (i) no such action
may be taken, without stockholder approval, which increases the benefits
accruing to Participants pursuant to the Plan, increases the number of
shares of Common Stock which may be issued pursuant to the Plan (except as
provided in Section Sixteen H), extends the period for granting Awards under
the Plan or modifies the requirements as to eligibility for participation in
the Plan; and (ii) no such action may be taken without the consent of each
Participant to whom any Award shall theretofore have been granted, which
adversely affects the rights of such Participant concerning such Award,
except, in each case, as such alteration, amendment, suspension or
termination is required by changes in tax or other laws, or by rules or
regulations promulgated thereunder.
SECTION SIXTEEN.
MISCELLANEOUS PROVISIONS
A. Nontransferability.
No Award under this Plan shall be subject to alienation or assignment by
a Participant (or by any person entitled to such benefit pursuant to the
terms of this Plan), nor, to the fullest extent provided by law, shall it be
subject to attachment or other legal process of whatever nature. Any
attempted alienation, assignment or attachment, to the fullest extent
provided by law, shall be void and of no effect whatsoever. Payments,
whether in cash or in shares of Common Stock, shall be made only into the
hands of the Participant entitled to receive the same or into the hands of
the Participant's authorized legal representative. Deposit of any sum in any
financial institution to the credit of any Participant (or of any other
person entitled to such sum pursuant to the terms of this Plan) shall
constitute payment into the hands of that Participant (or such person).
B. No Employment Right.
Neither this Plan nor any action taken hereunder shall be construed as
giving any right to be retained as an officer or other employee of the
Company or any of its subsidiaries.
C. Tax Withholding.
Either the Company or a Subsidiary, as appropriate, shall have the right
to deduct from all Awards paid in cash any federal, state or local taxes as
it shall deem to be required by law to be withheld with respect to such
payments. In the case of Awards paid in Common Stock, the employee or other
person receiving such Common Stock may be required to pay to the Company or
a Subsidiary, as appropriate, the amount of any such taxes which the Company
or a Subsidiary is required to withhold with respect to such Stock. The
Company shall have the right to withhold any amounts required to be withheld
on account of any Award from such Participant's compensation from the
Company or any of its Subsidiaries. At the request of a Participant, or as
required by law, such sums as may be required for the payment of any
estimated or accrued income tax liability may be withheld and paid over to
the governmental entity entitled to receive the same. Subject to approval
by the Committee, a Participant may also make payment by tendering shares of
Common Stock already owned, by having such amounts withheld from shares of
Common Stock otherwise distributable to him or her upon the exercise or
vesting of any Award or pursuant to a cashless exercise. Such payments
shall, to the extent required, be effected in accordance with Section 16 of
the Exchange Act and the rules thereunder.
D. Fractional Shares.
Any fractional shares shall be eliminated at the time of payment or
payout by payment of cash.
E. Government and Other Regulations.
The obligation of the Company to make payment of Awards in Common Stock
or otherwise shall be subject to all applicable laws, rules and regulations,
and to such approvals by any government agencies as may be required. Except
as required by law, the Company shall be under no obligation to register
under the Securities Act of 1933, as amended ("Act"), any of the shares of
Common Stock issued, delivered or paid in settlement under the Plan. If
Common Stock awarded under the Plan may in certain circumstances be exempt
from registration under the Act, the Company may restrict its transfer in
such manner as it deems advisable to ensure such exempt status.
F. Indemnification.
Each person who is or at any time serves as a member of the Committee
(and each person to whom the Committee has delegated any of its authority or
power under this Plan pursuant to Section Four) shall be indemnified and
held harmless by the Company against and from (i) any loss, cost, liability,
or expenses that may be imposed upon or reasonably incurred by such person
in connection with or resulting from any claim, action, suit, or proceeding
to which such person may be a party or in which such person may be involved
by reason of any action or failure to act under the Plan; and (ii) any and
all amounts paid by such person in satisfaction of judgment in any such
action, suit or proceeding relating to the Plan. Each person covered by
this indemnification shall give the Company an opportunity, at its own
expense, to handle and defend the same before such person undertakes to
handle and defend it on such persons own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the restated
Articles or By-laws of the Company or any of its subsidiaries, as a matter
of law, or otherwise, or any power that the Company may have to indemnify
such person or hold such person harmless.
G. Reliance on Reports.
Each member of the Committee (and each person to whom the Committee has
delegated any of its authority or power under this Plan pursuant to Section
Four) shall be fully justified in relying or acting in good faith upon any
report made by the independent public accountants of the Company and its
Subsidiaries and upon any other information furnished in connection with the
Plan. In no event shall any person who is or shall have been a member of
the Committee be liable for any determination made or other action taken or
any omission to act in reliance upon any such report or information or for
any action taken, including the furnishing of information, or failure to
act, if in good faith.
H. Changes in Capital Structure.
In the event of any change in the outstanding shares of Common Stock by
reason of any stock dividend or split, recapitalization, combination or
exchange of shares or other similar changes in the Common Stock, then
appropriate adjustments shall be made in Awards theretofore granted to the
Participants and in the aggregate number of shares of Common Stock (or cash
payment in lieu thereof) which may be granted pursuant to the Plan. Such
adjustments shall be conclusive and binding for all purposes. Additional
shares of Common Stock issued to a Participant as the result of any such
change shall bear the same restrictions as the shares of Common Stock to
which they relate.
I. Company Successors.
In the event the Company becomes a party to a merger, consolidation,
sale of substantially all of its assets or any other corporate
reorganization in which the Company will not be the surviving corporation or
in which the holders of the Common Stock will receive securities of another
corporation, then such company shall assume the rights and obligations of
the Company under this Plan.
J. Governing Law.
All matters relating to the Plan or to Awards granted hereunder shall be
governed by the laws of the State of Montana, without regard to the
principles of conflict of laws.
K. Relationship to Other Benefits.
No payment under the Plan shall be taken into account in determining any
benefits under any pension, retirement, profit sharing or group insurance
plan of the Company or any Subsidiary, except as may be required by tax or
other law or by rules or regulations promulgated thereunder.
L. Expenses.
The expenses of administering the Plan shall be borne by the Company and
its Subsidiaries.
M. Titles and Headings.
The titles and headings of the sections in the Plan are for convenience
of reference only, and in the event of any conflict, the text of the Plan,
rather than such titles or headings, shall control.
N. Certain Participants.
All Award agreements for Participants subject to Section 16(b) of the
Exchange Act shall be deemed to include any such additional terms,
conditions, limitations and provisions as Rule 16b-3 requires, unless the
Committee, in its sole discretion, determines that any such Award should not
be governed by Rule 16b-3. All performance-based Awards to Covered
Participants shall be deemed to include any such additional terms,
conditions, limitations and provisions as are necessary to comply with the
performance-based compensation exemption of Section 162(m) of the Code,
unless the Committee, in its sole discretion, determines that any such Award
is not intended to qualify for the exemption for performance-based
compensation under Section 162(m) of the Code.
Exhibit 12
THE MONTANA POWER COMPANY
Computation of Ratio Earnings to Fixed Charges
(Dollars in Thousands)
Twelve Months
Ended
June 30,1998
Net Income $ 132,792
Income Taxes 49,655
$ 182,447
Fixed Charges:
Interest $ 64,730
Amortization of Debt Discount,
Expense and Premium 1,532
Rentals 35,542
$ 101,804
Earnings Before Income Taxes
and Fixed Charges $ 284,251
Ratio of Earning to Fixed Charges 2.79 x
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at 6/30/98, the Consolidated Income Statement and the
Consolidated Statement of Cash Flows for the six months ended 6/30/98 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,509,898
<OTHER-PROPERTY-AND-INVEST> 679,356
<TOTAL-CURRENT-ASSETS> 269,529
<TOTAL-DEFERRED-CHARGES> 368,250
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,827,033
<COMMON> 700,603
<CAPITAL-SURPLUS-PAID-IN> 2,232
<RETAINED-EARNINGS> 323,072
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,025,907
65,000
57,654
<LONG-TERM-DEBT-NET> 725,032
<SHORT-TERM-NOTES> 84,939
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<LONG-TERM-DEBT-CURRENT-PORT> 63,544
0
<CAPITAL-LEASE-OBLIGATIONS> 722
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<OTHER-ITEMS-CAPITAL-AND-LIAB> 804,235
<TOT-CAPITALIZATION-AND-LIAB> 2,827,033
<GROSS-OPERATING-REVENUE> 544,870
<INCOME-TAX-EXPENSE> 25,625
<OTHER-OPERATING-EXPENSES> 431,026
<TOTAL-OPERATING-EXPENSES> 456,651
<OPERATING-INCOME-LOSS> 88,219
<OTHER-INCOME-NET> 1,847
<INCOME-BEFORE-INTEREST-EXPEN> 90,066
<TOTAL-INTEREST-EXPENSE> 31,647
<NET-INCOME> 58,419
1,845
<EARNINGS-AVAILABLE-FOR-COMM> 56,574
<COMMON-STOCK-DIVIDENDS> 43,970
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