NORTHWESTERN PUBLIC SERVICE CO, 10-K, 1995-03-27

NORTHWESTERN PUBLIC SERVICE CO
10-K, 1995-03-27
ELECTRIC & OTHER SERVICES COMBINED

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee required)
For the fiscal year ended December 31, 1994
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No fee required)
For the transition period from _______________ to _______________

Commission File No. 0-692

NORTHWESTERN PUBLIC SERVICE COMPANY
(Exact name of registrant as specified in its charter)

Delaware 46-0172280
(State of Incorporation) (IRS Employer Identification No.)

33 Third Street SE
Huron, South Dakota 57350-1318
(Address of principal office) (Zip Code)

605-352-8411
(Registrant's telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $3.50 par value New York Stock Exchange
(Title of each class) (Name of each exchange
on which registered)

Securities registered pursuant to Section 12(g) of the Act:

Preferred Stock, Par Value $100
(Title of Class)

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. ( X ) Yes ( ) No

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )

State the aggregate market value of the voting stock held by
nonaffiliated of the registrant:

$198,336,788 as of February 22, 1995

Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:

Common Stock, Par Value $3.50
7,677,232 shares outstanding at February 22, 1995

DOCUMENTS INCORPORATED BY REFERENCE:
1994 Annual Report to Stockholders . . . . . . . . Parts I and II
Proxy Statement for 1995 Annual Meeting . . . . . . . . Parts I and III

<PAGE>
PART I

ITEM 1. BUSINESS

GENERAL DEVELOPMENT OF BUSINESS

Northwestern Public Service Company (Company) is an electric and gas
utility engaged in generating, transmitting, distributing, and selling
electric energy in eastern South Dakota, where it furnishes electric
service to 54,863 customers in more than 100 communities and adjacent rural
areas. The Company also purchases, distributes, sells, and transports
natural gas to 74,982 customers in four communities in Nebraska and 56
communities in eastern South Dakota. The Company, through its
subsidiaries, is also engaged in certain nonutility operations as more
fully discussed in the section entitled "Nonutility Operations". The
Company was incorporated under the laws of the State of Delaware in 1923
and is qualified to do business in the states of South Dakota, Nebraska,
Iowa, and North Dakota. The Company does not serve customers in North
Dakota or Iowa. The Company has its principal office at 33 Third Street
SE, Huron, South Dakota 57350-1318. Its telephone number is 605-352-8411.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

The information required by this item 1(b) is incorporated by
reference to Note 10 of the "Notes to Consolidated Financial Statements" on
page 24 of the Company's 1994 Annual Report to Stockholders, filed as an
Exhibit hereto.

NARRATIVE DESCRIPTION OF BUSINESS

Pursuant to the South Dakota Public Utilities Act, the South Dakota
Public Utilities Commission (PUC) assigned as the Company's electric
service territory the communities and adjacent rural areas in which the
Company provides electric service in South Dakota. The Company has the
right to provide electric service to present and future electric customers
in its assigned service territory for so long as the service provided is
deemed adequate. Under the South Dakota Public Utilities Act, effective
July 1, 1976, the Company is not required to obtain or renew municipal
franchises to provide electric service within its assigned service
territory.

The Company has nonexclusive municipal franchises to provide gas
service in the Nebraska and South Dakota communities in which it provides
such service. The maximum term permitted under Nebraska law for such
franchises is 25 years while the maximum term permitted under South Dakota
law is 20 years. The Company's policy is to seek renewal of a franchise in
the last year of its term. The Company has never been denied the renewal
of any of these franchises and does not anticipate that any future renewals
would be withheld.

ELECTRIC BUSINESS

ELECTRIC SALES. On a fully consolidated basis, 46% of the Company's
1994 operating revenues were from the sale of electric energy. All of the
Company's electric revenues are derived from customers in South Dakota.

The Company has relatively few large customers in its service
territory. By customer category, 33% of 1994 total electric sales was from
residential sales, 50% was from commercial and industrial sales, 2% was
from street lighting and sales to public authorities, and 15% was from
sales for resale.

Sales for resale primarily include power pool sales to other
utilities. Power pool sales fluctuate from year to year depending on a
number of factors including the Company's availability of excess short-term
generation and the ability to sell the excess power to other utilities in
the power pool. The Company also sells power and energy at wholesale to
certain municipalities for resale and to various governmental agencies. In
1994, these sales accounted for less than 1% of total electric sales.

CAPABILITY AND DEMAND. The Company shares in the ownership of the Big
Stone Generating Plant (Big Stone), located near Big Stone City in
northeastern South Dakota. In North Dakota, the Company maintains
transmission facilities to interconnect with electric transmission lines of
other utilities and shares in the ownership of the Coyote I Electric
Generating Plant (Coyote), located near Beulah, North Dakota. In Iowa, the
Company shares in the ownership of Neal Electric Generating Unit #4 (Neal),
located near Sioux City.

At December 31, 1994, the aggregate net summer peaking capacity of all
Company-owned electric generating units was 309,480 mw, consisting of
105,711 kw from Big Stone (the Company's 23.4% share), 42,600 kw from
Coyote (the Company's 10.0% share), 54,169 kw from Neal (the Company's 8.7%
share), and 107,000 kw from internal combustion turbine units and small
diesel units, used primarily for peaking purposes.

The Company is a summer peaking utility. The 1994 peak demand of
229,922 occurred on July 18, 1994. Total system capability at the time of
peak was 309,480 kw. The reserve margin for 1994 was 35%. The minimum
reserve margin requirement as determined by the members of the Mid-
Continent Area Power Pool (MAPP), of which the Company is a member, is 15%.

MAPP is an area power pool arrangement consisting of utilities and
power suppliers having transmission interconnections located in a 9-state
area in the North Central region of the United States and in two Canadian
provinces. The objective of MAPP is to accomplish coordination of planning
and operation of generation and interconnecting transmission facilities to
provide reliable and economical electric service to members' customers,
consistent with reasonable utilization of natural resources and protection
of the environment. While benefiting from the advantages of the planning,
coordination, and operations of MAPP, each member has the right and
obligation to own or otherwise provide the facilities to meet its own
requirements. The terms and conditions of the MAPP agreement and
transactions between MAPP members are subject to the jurisdiction of the
FERC. The MAPP agreement was accepted for filing by the FERC effective
1972. The Company also has interconnections with the transmission
facilities of Otter Tail Power Company, Montana-Dakota Utilities Co.,
Northern States Power Company, and WAPA; and has emergency interconnections
with transmission facilities of East River Electric Cooperative, Inc. and
West Central Electric Cooperative. These interconnections and pooling
arrangements enable the Company to arrange purchases or sales of
substantial quantities of electric power and energy with other pool members
and to participate in the benefits of pool arrangements.

The Company is finalizing an integrated resource plan to identify how
it will meet the energy needs of its customers. The plan includes
estimates of customer usage and programs to provide for economic, reliable,
and timely supplies of energy. The plan does not anticipate the need for
additional baseload generating capacity for at least the next ten years.

FUEL SUPPLY. Lignite and sub-bituminous coal were utilized by the
Company as fuel for virtually all of the electric energy generated during
1994. North Dakota lignite is the primary fuel at Big Stone and Coyote I.
During 1994, the average heating value of lignite burned was 6,049 BTU per
pound at Big Stone and 6,922 BTU per pound at Coyote I. The sulfur content
of this lignite is typically between 0.80% and 1.2%. Neal #4 burns Wyoming
sub-bituminous coal which had an average heating value of 8,450 BTU per
pound during 1994. Typically, the sulphur content of this coal is between
0.30% and 0.40%.

The Company's fuel costs have remained relatively stable. The average
costs of fuels burned are shown below for the periods indicated:

Cost Per Million BTU % of 1994
Year Ended December 31 Megawatt Hours
Fuel Type 1992 1993 1994 Generated
--------- ---- ---- ---- --------------

Lignite - Big Stone $1.16 $1.12 $1.10 47%
Lignite - Coyote I** .81 .84 .86 21%
Sub-bituminous - Neal #4 .77 .76 .74 32%
Natural Gas 2.62 2.37 2.21 *
Oil 4.29 3.90 3.90 *

*Less than one-half of one percent.
**Includes pollution control reagent.

During 1994, the average delivered cost per ton of lignite was $13.13
to Big Stone and $10.99 to Coyote I. The average cost for coal delivered
to Neal #4 was $11.95 per ton for 1994. Such amounts include severance
taxes imposed by the state of North Dakota on lignite and a production tax
imposed by the state of Wyoming on other coal. While the effect on the
Company's fuel costs of future changes in severance or production taxes
cannot be predicted, any unforeseen changes in the Company's fuel costs may
be passed on to its customers through the operation of the fuel adjustment
clause. This feature of the Company's electric rates is more fully
discussed in the section entitled "Regulation".

The continued delivery of lignite and sub-bituminous coal to the three
large steam generating units in which the Company is part owner is
reasonably assured by contracts covering various periods of the operating
lives of these units. The Big Stone contract provides for adequate
supplies of lignite through purchases under the primary contract, which
expires in mid-1995. Following bid evaluations of coal supplies for the
Big Stone Plant, a contract for Montana sub-bituminous coal was secured
during 1994 for the period of mid-1995 through 1999. Further evaluations
will be conducted during the contract term to select a coal supply for
periods beyond 1999. The contract for delivery of lignite to the Coyote I
plant, which expires in 2016, provides for an adequate fuel supply for the
estimated economic life of that plant. Neal #4 receives Wyoming sub-
bituminous coal under a long-term contract which expires in 1998. In the
near future, the Company, along with the other owners of Neal #4, will
begin to study options for the supply of coal for periods beyond the
expiration date.

Following test burns in 1990 and 1991, the owners of the Big Stone
plant received approval from the South Dakota Department of Environment and
Natural Resources to burn tire derived fuel (TDF) and refuse derived fuel
(RDF). The quantity of TDF and RDF that was burned in 1994 and that is
expected to be burned in 1995 is insignificant when compared to total coal
consumption at the plant.

The fossil fuel supplies for the Big Stone and Neal #4 plants are
delivered via unit trains belonging to the respective plants' owners and
locomotives of the Burlington Northern Railroad and the Chicago and
Northwestern Railroad, respectively. The lignite supply for Coyote I is
delivered via conveyor at this "mine-mouth" plant.

While the Company has no firm contract for diesel fuel for its other
electric generating plants, it has been able to purchase its diesel fuel
requirements in recent years from local suppliers and currently has in
storage an amount adequate to satisfy its normal requirements for such
fuel.

Additional information relating to jointly owned plants is
incorporated by reference to Note 6 of the "Notes to Consolidated
Statements" on page 22 of the Company's 1994 Annual Report to Stockholders
filed as an Exhibit hereto.

GAS BUSINESS

GAS SALES AND DEMAND. On a fully consolidated basis, 40% of the
Company's 1994 operating revenues were from the sale of gas energy. During
1994, the Company derived 56% of its gas revenues from South Dakota and 44%
from Nebraska. The Company's peak daily sendout was 128,700 MMBTU.

CAPABILITY AND SUPPLY. The Company owns and operates natural gas
distribution systems serving 36,259 customers in eastern South Dakota, for
which it purchases gas from various gas marketing firms under gas
transportation service agreements with various gas marketing firms. These
agreements provide for firm deliverable pipeline capacity of approximately
49,300 MMBTU per day in South Dakota. The Company has service agreements
with Northern Natural Gas Company (NNG) providing for firm transportation
of natural gas. While NNG has eliminated nearly all of its gas supply
activities, the Company has supply contracts in place and peak shaving
capacity to meet its peak day system needs.

In Nebraska, the Company owns and operates natural gas distribution
systems serving 38,723 retail customers in the village of Alda and the
cities of Grand Island, Kearney, and North Platte, Nebraska. The Company
purchases much of its natural gas for these systems from KN Gas Supply Co.
under a seven-year service agreement entered in 1993. The Company also
purchases certain quantities of gas for its Nebraska customers from various
gas marketing firms. These agreements provide for firm deliverable
pipeline capacity of approximately 49,600 MMBTU per day in Nebraska.

In 1992, the Federal Energy Regulatory Commission (FERC) issued Order
636. Order 636 requires, among other provisions, that all companies with
natural gas pipelines separate natural gas supply or production services
from transportation service and storage businesses. This allows gas
distribution companies, such as the Company, and individual customers to
purchase gas directly from producers, third parties, and various gas
marketing entities and transport it through the suppliers' pipelines. Both
NNG and KN Interstate Gas Transmission Co. (KN) have completed
restructuring proceedings with the FERC under Order 636 in which their
transportation, sales, and storage services were changed. The Company has
operated under the restructured environment during the past two years.

To supplement firm gas supplies, the Company also has contracts for
underground natural gas storage services to meet the heating season and
peak day requirements of its gas customers. In addition, the Company also
owns and operates six propane-air plants with a total rated capacity of
18,000 MMBTU per day, or approximately 14% of peak day requirements. The
propane-air plants provide an economic alternative to pipeline
transportation charges to meet the extreme peaks caused by customer demand
on extremely cold days.

A few of the Company's industrial customers purchase their natural gas
requirements directly from gas marketing firms for transportation and
delivery through the Company's distribution system. The transportation
rates have been designed to make the Company economically indifferent as to
whether the Company sells and transports gas or only transports gas.

COMPETITION

Although the Company's electric service territory is assigned
according to the South Dakota Public Utilities Act, and the Company has the
right to provide electric service to present and future electric customers
in its assigned service area for so long as the service provided is deemed
adequate, the energy industry in general has become increasingly
competitive. Electric service also competes with other forms of energy and
the degree of competition may vary from time to time depending on relative
costs and supplies of other forms of energy.

The National Energy Policy Act of 1992 was designed to promote energy
efficiency and increased competition in the electric wholesale markets.
The Energy Act also allows the FERC to order wholesale wheeling by public
utilities to provide utility and nonutility generators access to public
utility transmission facilitates. The provision allows the FERC to set
prices for wheeling, which will allow utilities to recover certain costs
from the companies receiving the services, rather than the utilities'
retail customers. Many states are currently considering retail wheeling,
which aims to provide all customers with the right to choose their
electricity supplier. No regulatory proposals have yet been formally
introduced in South Dakota.

Federal Energy Regulatory Commission Order 636 requires, among other
provisions, that all companies with natural gas pipelines separate natural
gas supply or production services from transportation service and storage
businesses. This allows gas distribution companies, such as the Company,
and individual customers to purchase gas directly from producers, third
parties, and various gas marketing entities and transport it through the
suppliers' pipelines. While Order 636 had positive aspects by providing
for more diversified supply and storage options, it also required the
Company to assume responsibility for the procurement, transportation, and
storage of natural gas. The alternatives now available under Order 636
create additional pressure on all distribution companies to keep gas supply
and transportation pricing competitive, particularly for large customers.

REGULATION

The Company is a "public utility" within the meaning of the Federal
Power Act and the South Dakota Public Utilities Act and, as such, is
subject to the jurisdiction of, and regulation by, FERC with respect to
issuance of securities, the PUC with respect to electric service
territories, and both FERC and the PUC with respect to rates, service,
accounting records, and in other respects. The State of Nebraska has no
centralized regulatory agency which has jurisdiction over the Company's
operations in that state; however, the Company's natural gas rates are
subject to regulation by the municipalities in which it operates.

Under the South Dakota Public Utilities Act, enacted in 1975, a
requested rate increase may be implemented by the Company 30 days after the
date of its filing unless its effectiveness is suspended by the PUC and, in
such event, can be implemented subject to refund with interest six months
after the date of filing, unless sooner authorized by the PUC. The
Company's electric rate schedules provide that it may pass along to all
classes of customers qualified increases or decreases in the cost of fuel
used in its generating stations and in the cost of fuel included in
purchased power. A purchased gas adjustment provision in its gas rate
schedules permits the company to pass along to gas customers increases or
decreases in the cost of purchased gas.

The Company filed no electric rate cases in South Dakota during the
three years ended December 31, 1994. On May 26, 1994, the Company filed
for a $2.4 million increase in South Dakota natural gas revenues. As a
result of a negotiated settlement with the South Dakota Public Utilities
Commission, on November 15, 1994, the Company implemented rates which will
produce additional annual natural gas revenues of $2.1 million, assuming
normal weather, representing an overall increase of 6.2%. On December 30,
1994, the Company filed for increased rates applicable to the Nebraska
natural gas service area. The proposal, which would increase overall
revenues for a year with normal weather by $2.7 million or 9.6%, cannot
become effective before April 1, 1995 based upon provisions of the
Municipal Natural Gas Regulation Act passed in 1986.

ENVIRONMENTAL MATTERS

The Company is subject to regulation with regard to air and water
quality, solid waste disposal, and other environmental considerations by
Federal, state, and local governmental authorities. The application of
governmental requirements to protect the environment involves or may
involve review, certification, issuance of permits, or similar action by
government agencies or authorities, including the United States
Environmental Protection Agency (EPA), the South Dakota Department of
Environment and Natural Resources (DENR), the North Dakota State Department
of Health, and the Iowa Department of Environmental Quality, as well as
compliance with decisions of the courts. Such requirements, particularly
with regard to emissions into the air and water, may substantially increase
the cost to the Company of construction and operation of electric
generating facilities. Such requirements may also necessitate additional
investments in new equipment at existing installations.

CLEAN AIR ACT. The Clean Air Act Amendments of 1990 (the Clean Air
Act) which stipulate limitations on sulfur dioxide and nitrogen oxide
emissions from certain coal-fired power plants will require the purchase of
additional emission allowances or a reduction in sulfur dioxide emissions
beginning in the year 2000 from Big Stone. The Company believes Big Stone
can most economically meet the sulfur dioxide emission requirements of the
Clean Air Act by switching its fuel source from North Dakota lignite to low-
sulfur western sub-bituminous coal available in the region. The Company's
other baseload plants, Coyote I and Neal #4, are expected to comply with
the sulfur dioxide emission limitations through the use of existing flue
gas scrubbing and low sulfur coal without the need for additional emission
allowances.

With regard to the Clean Air Act's nitrogen oxide emission
requirements, the Neal #4 wall-fired boiler is expected to meet the
emission limitations for such boilers. The Clean Air Act does not yet
specify nitrogen oxide limitations for boilers with cyclone burners such as
those used at Big Stone and Coyote I because practical low-nitrogen oxide
cyclone burner technology does not exist. It requires the EPA to establish
nitrogen oxide emission limitations before 1997 for cyclone boilers
including consideration that the cost to accomplish such limits be
comparable to retrofitting low-nitrogen oxide burner technology to other
types of boilers. In addition, it also requires future studies to
determine what controls, if any, should be imposed on coal-fired boilers to
control emissions of certain air toxics other than sulfur and nitrogen
oxides. Because of the uncertain nature of cyclone boiler nitrogen oxide
and air toxic emission limits, the Company cannot now determine the
additional costs, if any, it may incur due to these provisions of the Clean
Air Act.

PCBs. The Company has met or exceeded the removal and disposal
requirements of equipment containing polychlorinated biphenyls (PCBs) as
required by state and federal regulations. The Company will use some PCB-
contaminated equipment for its remaining useful life, and dispose of the
equipment according to pertinent regulations that govern that use and
disposal of this equipment. PCB-contaminated oil is burned for energy
recovery at a permitted facility.

STORAGE TANKS. The South Dakota DENR and the EPA adopted regulations
imposing requirements upon the owners and operators of aboveground and
underground storage tanks. The Company's fuel oil storage facilities at
its generating plants in South Dakota are affected by the aboveground tank
regulations, and the Company has instituted procedures for compliance.

SITE REMEDIATION. The Company conducted an investigation of a
manufactured gas plant (MGP) site and is taking remedial action to dispose
of waste material found at such site. Recovery of remediation costs for
such sites will be sought from insurance carriers and through the
regulatory process although there is no assurance that such costs will be
recovered.

COMPLIANCE. In addition to the Clean Air Act, the Company is also
subject to other environmental regulations. The Company believes that it
is in compliance with all presently applicable environmental protection
requirements and regulations. However, the Company is unable to forecast
the effect which future environmental regulations may ultimately have upon
the cost of its facilities and operations. No administrative or judicial
proceedings involving the company are now pending or known by the Company
to be contemplated under presently effective environmental protection
requirements.

SITING. The states of South Dakota, North Dakota, and Iowa have
enacted laws with respect to the siting of large electric generating plants
and transmission lines. The South Dakota PUC, the North Dakota Public
Service Commission, and the Iowa Utilities Board have been granted
authority in their respective states to issue site permits for nonexempt
facilities.

CAPITAL SPENDING AND FINANCING

The Company's primary capital requirements include the funding of its
utility construction and expansion programs, the funding of debt and
preferred stock retirements and sinking fund requirements, and the funding
of its corporate development and investment activities.

The emphasis of the Company's construction activities is to undertake
those projects that most efficiently serve the expanding needs of its
customer base, enhance energy delivery capabilities, expand its current
customer base, and provide for the reliability of energy supply. Capital
expenditure plans are subject to continual review and may be revised as a
result of changing economic conditions, variations in sales, environmental
requirements, investment opportunities, and other ongoing considerations.

Expenditures for construction activities for 1994, 1993, and 1992 were
$22.7 million, $20.0 million, and $18.5 million. Construction expenditures
during the last three years included expenditures related to the
installation of an additional 43 mw of internal peaking capacity, the
expansion of the Company's natural gas system into 29 additional
communities in eastern South Dakota, and to an operations center which will
provide future cost savings and operating efficiencies through
consolidation of activities. Construction expenditures for 1995 are
estimated to be $19.3 million. The majority of the projected expenditures
will be spent on enhancements of the electric and gas distribution systems
and completion of the operations center. Estimated construction
expenditures for the years 1995 through 1999 are expected to be $69
million.

Capital requirements for the mandatory retirement of long-term debt
and the mandatory preferred stock sinking fund redemption totaled $600,000,
$180,000, and $513,000, for the years ended 1994, 1993, and 1992. It is
expected that such mandatory retirements will be $600,000 in 1995,
$1,080,000 in 1996, $570,000 in 1997, $20.6 million in 1998, and $13.5
million in 1999.

The Company anticipates that future capital requirements will be met
by both internally generated cash flows and available external financing.

The Company will continue to evaluate and pursue opportunities to
enhance shareholder return through nonregulated business investments.
Nonregulated projects are expected to be financed from the existing
investment portfolio and from other available financing options.

Information relating to capital resources and liquidity is
incorporated by reference to "Management's Discussion and Analysis" on
pages 12-14 of the Company's 1994 Annual Report to Stockholders, filed as
an Exhibit hereto.

NONUTILITY OPERATIONS

GRANT, INC. Grant, Inc., which holds title to property not used in
the Company's utility business, was incorporated in South Dakota in 1972.

NORTHWESTERN GROWTH CORPORATION (NGC). NGC was incorporated under the
laws of South Dakota in 1994 to pursue and manage nonutility investments
and development activities. Although the primary focus of NGC's investment
program will be to seek growth opportunities in the energy, energy
equipment, and energy services industries, NGC will also continue to pursue
opportunities in existing and emerging growth entities in nonenergy
industries that meet return and capital gain requirements. Along with a
portfolio of marketable securities, NGC's assets include the investments of
two subsidiaries: Northwestern Networks, Inc. and Northwestern Systems,
Inc.

NORTHWESTERN NETWORKS, INC. (NNI). NNI was incorporated in South
Dakota in 1986. NNI holds a common stock investment in LodgeNet
Entertainment Corporation, a provider of television entertainment and
information systems to hotels and motels.

NORTHWESTERN SYSTEMS, INC. (NSI). NSI was incorporated in South
Dakota in 1986. In December 1992, NSI acquired a 60% common stock
ownership in Lucht, Inc., a firm that develops, manufactures, and markets
multi-image photographic printers and other related equipment. On October
1, 1993, NSI acquired the remaining 40% common stock interest in that
company.

Additional information relating to nonutility business is incorporated
by reference to "Management's Discussion and Analysis" on pages 12-14 of
the Company's 1994 Annual Report to Stockholders filed as an Exhibit
hereto.

EMPLOYEES

At December 31, 1994, the Company had 452 employees. A three-year
collective bargaining agreement which expires June 30, 1995, covers 252
operating and clerical employees. The Company has never experienced a work
stoppage or strike and considers its relationship with its employees to be
very good.

ITEM 2. PROPERTIES

ELECTRIC PROPERTY

The Company's electric properties consist of an interconnected and
integrated system. The Company, Otter Tail, and MDU jointly own Big Stone,
a 455,783 kilowatt (kw) nameplate capacity lignite-fueled electric
generating plant and related transmission facilities. Big Stone is
operated by Otter Tail for the benefit of the owners. The Company owns
23.4% of the Big Stone Plant.

The Company is one of four power suppliers which jointly own Coyote I,
a 455,783 kw nameplate capacity lignite-fueled electric generating plant
and related transmission facilities located near Beulah, North Dakota. The
Company has a 10% interest in Coyote I, which is operated by MDU for the
benefit of the owners.

The Company is one of 14 power suppliers which jointly own Neal #4, a
639,999 kw nameplate capacity coal-fueled electric generating plant and
related transmission facilities located near Sioux City, Iowa. Midwest
Power Systems, Inc. is principal owner of Neal #4 and is the operator of
the unit. The Company has an 8.7% interest in Neal #4.

The Company has an undivided interest in these jointly owned
facilities and is responsible for its proportionate share of the capital
and operating costs while being entitled to its proportionate share of the
power generated. Each participant finances its own investment. The
Company's interest in each plant is reflected in the Consolidated Balance
Sheet on a pro rata basis, and its share of operating expenses is reflected
in the Consolidated Statement of Income and Retained Earnings.

In addition to its interest in Big Stone, Coyote I, and Neal #4, the
Company owns and operates 19 oil and gas-fired units for peaking and
reserve capacity.

As of December 31, 1994, the aggregate nameplate capacity of all
Company-owned electric generating units is 327,419 kw, with an aggregate
net summer peaking capacity of 309,480 kw and a net winter peaking capacity
of 327,542 kw. The Company's maximum peak hourly demand of 251,493 kw
occurred on July 17, 1991. In 1994, the Company's peak hourly demand was
229,922 kw and occurred on July 18, 1994.

The Company's interconnected transmission system consists of 318.5
miles operating at 115 kilovolts (kv) and 896.7 miles operating at 69 kv
and 34.5 kv. The Company also owns three segments of transmission line,
which are not tied to its internal system, in connection with its joint
ownership in the three large steam generating plants. These lines consist
of 18.2 miles of 230 kv line from Big Stone, 25.4 miles of 345 kv line from
Neal #4, and 23.1 miles of 345 kv line from Coyote I. In addition to these
lines, the Company owns 1,717.2 miles of distribution lines serving
customers in more than 100 communities and adjacent rural areas. The
company owns 38 transmission substations with a total rated capacity of
1,111,417 kilovolt amperes (kva), two mobile substations with a total rated
capacity of 5,500 kva and 78 distribution substations with a total rated
capacity of 358,449 kva.

GAS PROPERTY

On December 31, 1994, the Company owned 999 miles of distribution
mains and appurtenant facilities in South Dakota. The Company also owns
propane-air facilities in Aberdeen, Brookings, Huron, and Mitchell, South
Dakota, having a total rated capacity of 15,280 MMBTU per day, which are
operated for standby and peak shaving purposes only.

On December 31, 1994, the Company owned 649 miles of distribution
mains and appurtenant facilities in Nebraska. The Company also owns
propane-air facilities at Kearney and North Platte, Nebraska, having a
total rated capacity of 9,380 MMBTU per day, which are operated for standby
and peak shaving purposes only.

ITEM 3. LEGAL PROCEEDINGS

The Company is not currently involved in any pending major litigation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No issues were submitted to a vote of security holders during the last
quarter of the period covered by this report.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS

The Company's common stock is listed on the New York Stock Exchange
(NYSE) under the ticker symbol NPS. Common stock was registered in the
names of 8,132 stockholders at December 31, 1994. The payment of dividends
is subject to the restrictions described in Note 2 of the "Notes to
Consolidated Financial Statements" on page 21 of the Company's 1994 Annual
Report to Stockholders, filed as an Exhibit hereto.

QUARTERLY COMMON STOCK INFORMATION

1994 High Low Dividends
---- ---- --- ---------
First $29 $26 $.415
Second 29 5/8 26 .415
Third 29 3/8 27 1/2 .415
Fourth 28 7/8 24 1/2 .425

1993 High Low Dividends
---- ---- --- ---------
First $29 1/2 $26 1/4 $.405
Second 31 1/2 28 3/4 .405
Third 33 1/2 29 1/4 .405
Fourth 32 1/2 28 1/2 .415

ITEM 6. SELECTED FINANCIAL DATA

1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(in thousands, except per share amounts)

Operating Revenues $157,266 $153,257 $119,197 $122,900 $115,980
Net Income 15,440 15,191 13,721 14,815 17,506
Earnings Per Common Share 2.00 1.96 1.77 1.88 2.23
Dividends Per Common Share 1.670 1.630 1.590 1.535 1.475
Total Assets 359,066 343,574 308,194 297,761 283,073
Long-Term Debt 127,623 127,200 106,572 93,236 79,469
Redeemable Preferred Stock 40 70 100 2,990 3,185

Selected financial data includes the operating results and balance
sheet amounts for Lucht, Inc. effective December 1, 1992, the date of
acquisition. Additional information relating to Lucht, Inc. is
incorporated by reference to "Management's Discussion and Analysis" on
pages 12-14 of the Company's 1994 Annual Report to Stockholders, filed as
an Exhibit hereto.

ITEM 7. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATION

The information required by this Item 7 is incorporated by reference
to "Management's Discussion and Analysis" on pages 12-14 of the Company's
1994 Annual Report to Stockholders, filed as an Exhibit hereto.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this Item 8 is incorporated by reference
to the Company's financial statements and related footnotes on pages 16-24
of the Company's 1994 Annual Report to Stockholders, filed as an Exhibit
hereto.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE

There have been no changes in accountants or disagreements on
accounting principles or practices or financial statement disclosures.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a) IDENTIFICATION OF DIRECTORS

The information regarding directors required by this Item 10 and
paragraphs (a) and (e) of Item 401 of Regulation S-K is incorporated by
reference to the information under "Election of Directors" in the Company's
definitive Proxy Statement dated March 24, 1995, and filed with the
Commission pursuant to Regulation 14A under the Securities Exchange Act of
1934 within 120 days after the close of the Company's fiscal year ended
December 31, 1994.

(b) & (e) IDENTIFICATION AND BUSINESS EXPERIENCE OF EXECUTIVE OFFICERS

R. A. Wilkens, Chairman of the Board, age 66

Chairman of the Board of Directors since February 1994. Formerly Chief
Executive Officer from 1990-1994; formerly President from 1980-1994.

M. D. Lewis, President and Chief Executive, age 47

President and Chief Executive Officer since February 1994; formerly
Executive Vice President-Corporate Services 1992-1994; formerly Vice
President-Corporate Services 1987-1992; Assistant Vice President-Corporate
Services 1985-1987.

W. D. Craig, Vice President, age 58

Vice President since November 1994; formerly Vice President-Gas Operations
September 1988-November 1994; Assistant Vice President-Gas Operations June,
1988-September 1988; Manager-Gas Operations March 1988-June 1988. Joined
the Company in 1988. Formerly President & COO of Hoosier Gas Corporation
1987-1988. Formerly Director-Gas Operations of SIGECO 1985-1987.

A. D. Dietrich, Vice President-Corporate Services, age 44

Vice President-Corporate Services since November 1994; Corporate Secretary
since October 1989; formerly Vice President-Legal May 1990-November 1994;
Assistant Corporate Secretary September 1989-October 1989; Corporate
Attorney 1978-1989.

A. R. Donnell, Vice President-Energy Operations, age 51

Vice President-Energy Operations since November 1994; formerly Vice
President-Electric Operations July 1987-November 1994; Assistant Vice
President-Electric Operations June 1987-July 1987; Manager-Electric
Distribution 1985-June 1987; Manager-Special Projects 1977-1985.

T. A. Gulbranson, Vice President, age 47

Vice President since November 1994; formerly Vice President-Corporate
Services May 1993-November 1994; Vice President-Community Development 1988-
1993; formerly Division Manager-Webster 1983-1988.

R. R. Hylland, Vice President-Finance and Corporate Development, age 34

Vice President-Finance and Corporate Development since November 1994;
formerly Vice President-Finance and Corporate Development and Treasurer May
1993-November 1994; Vice President-Finance and Treasurer 1991-1994;
Treasurer and Controller December 1990-April 1991; Controller and Assistant
Treasurer November 1989-December 1990; Controller July 1989-November 1989.
Joined the Company in July 1989. Formerly Senior Audit and Financial
Consulting Manager with Arthur Andersen & Co. Mr. Hylland also serves as
President and Chief Operating Officer of Northwestern Growth Corporation
since November 1994.

R. F. Leyendecker, Vice President-Energy Services, age 49

Vice President-Energy Services since November 1994; formerly Vice President-
Rates & Regulation 1987-November 1994; Assistant Vice President-Rates &
Regulation 1985-1987.

W. K. Lotsberg, Vice President-Public Affairs, age 52

Vice President-Public Affairs since May 1994; formerly Vice President-
Consumer Affairs March 1989-May 1994; Manager-Public Affairs from 1980 to
1989.

D. C. Oberlander, Assistant Vice President, age 49

Assistant Vice President since May 1994; formerly Controller April 1991-May
1994; Assistant Controller December 1990-April 1991; Manager-Information
Systems 1979-1990.

R. A. Thaden, Treasurer, age 43

Treasurer since November 1994; formerly Manager-Corporate Accounting 1987-
November 1994.

All of the executive officers of the registrant serve at the
discretion of the Board and are elected annually by the Board of Directors
following the Annual Meeting of Stockholders except for the positions of
Controller, Assistant Treasurer and Assistant Corporate Secretary, which
are appointed by the Board of Directors. No family relationships exist
between any officers of the Company.

None

(d) FAMILY RELATIONSHIPS

None

(f) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

None

(g) PROMOTERS AND CONTROL PERSONS

None

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item 11 is incorporated by reference
to the information under "Compensation of Directors and Executive Officers"
in the Company's definitive Proxy Statement dated March 24, 1995, and filed
with the Commission pursuant to Regulation 14A under the Securities
Exchange Act of 1934 within 120 days after the close of the Company's
fiscal year ended December 31, 1994.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item 12 is incorporated by reference
to the information under "Securities Ownership by Directors and Officers"
in the Company's definitive Proxy Statement dated March 24, 1995, and filed
with the Commission pursuant to Regulation 14A under the Securities
Exchange Act of 1934 within 120 days after the close of the Company's
fiscal year ended December 31, 1994.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company has no relationships or transactions covered by this item.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) DOCUMENTS FILED AS PART OF THIS REPORT

1. Financial Statements

The following items are included in this annual report by reference
to the registrant's Annual Report to Stockholders for the year ended
December 31, 1994:
Page in
Annual Report
to Stockholders
---------------
Financial Statements:

Consolidated Statement of Operations and Retained
Earnings for the Three Years Ended December 31, 1994 16

Consolidated Statement of Cash Flows
for the Three Years Ended December 31, 1994 17

Consolidated Balance Sheet, December 31, 1994 and 1993 18

Consolidated Statement of Capitalization,
December 31, 1994 and 1993 19

Notes to Consolidated Financial Statements 20-24

Quarterly Unaudited Financial Data
for the Two Years Ended December 31, 1994 24

Report of Independent Public Accountants 15

2. Financial Statement Schedules

The following supplemental financial data included herein should be
read in conjunction with the financial statements referenced above:

Page in
Form 10-K
---------

Report of Independent Public Accountants Following
Signatures

Schedule VIII - Valuation and Qualifying Accounts Following
Report of
Independent
Public
Accountants

Schedules other than those listed above are omitted because of the
absence of the conditions under which they are required or because the
information required is included in the financial statements or the notes
thereto.

(b) REPORTS ON FORM 8-K

No reports on Form 8-K have been filed during the quarter ended
December 31, 1994.

See Exhibit Index.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

NORTHWESTERN PUBLIC SERVICE COMPANY

/s/ M. D. Lewis
---------------------------------------
M. D. Lewis, Director and President and Chief Executive Officer
March 15, 1995

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

/s/ R. A. Wilkens
---------------------------------------
R. A. Wilkens, Chairman of the Board of Directors

/s/ M. D. Lewis
---------------------------------------
M. D. Lewis, Director and President and Chief Executive Officer

/s/ R. R. Hylland
---------------------------------------
R. R. Hylland, Vice President-Finance & Corporate Development
(Principal Financial Officer)

/s/ Rogene A. Thaden
---------------------------------------
Rogene A. Thaden, Treasurer (Principal Accounting Officer)

/s/ Jerry W. Johnson
---------------------------------------
Jerry W. Johnson, Director

/s/ Aelred J. Kurtenbach
---------------------------------------
Aelred J. Kurtenbach, Director

/s/ Herman Lerdal
---------------------------------------
Herman Lerdal, Director

/s/ Larry F. Ness
---------------------------------------
Larry F. Ness, Director

/s/ Raymond M. Schutz
---------------------------------------
Raymond M. Schutz, Director

/s/ Bruce I. Smith
---------------------------------------
Bruce I. Smith, Director

/s/ W. W. Wood
---------------------------------------
W. W. Wood, Director

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Northwestern Public Service Company:

We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in Northwestern Public
Service Company's annual report to shareholders incorporated by reference
in this Form 10-K, and have issued our report thereon dated January 27,
1995. Our audit was made for the purpose of forming an opinion on those
statements taken as a whole. The supplemental financial information and
schedule listed in the table of contents of financial statements are the
responsibility of the Company's management and are presented for purposes
of complying with the Securities and Exchange Commission's rules and are
not part of the basic financial statements. This information has been
subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Minneapolis, Minnesota,
January 27, 1995

<PAGE>

<TABLE>

NORTHWESTERN PUBLIC SERVICE COMPANY AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS

Column A Column B Column C Column D Column E
---------------------------- ----------- --------------------- --------- -----------
Additions
---------------------
Balance Charged to Charged Balance
Beginning Costs and to Other Deductions End
Description of Period Expenses Expenses <F1> of Period
---------------------------- --------- ---------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1994
------------------------------------
RESERVES DEDUCTED
FROM APPLICABLE ASSETS:
Uncollectible accounts $ 400,000 $ 129,039 $ - $ (129,039) $ 400,000
=========== ========= ======== ========= ===========

OTHER DEFERRED CREDITS:
Reserve for decommissioning $ 6,769,631 $ 508,542 $ - $ - $ 7,278,173
=========== ========= ======== ========= ===========

FOR THE YEAR ENDED DECEMBER 31, 1993
------------------------------------
RESERVES DEDUCTED
FROM APPLICABLE ASSETS:
Uncollectible accounts $ 300,000 $ 249,455 $ - $ (149,455) $ 400,000
=========== ========= ======== ========= ===========

OTHER DEFERRED CREDITS:
Reserve for decommissioning $ 6,264,998 $ 504,633 $ - $ - $ 6,769,631
=========== ========= ======== ========= ===========

FOR THE YEAR ENDED DECEMBER 31, 1992
------------------------------------
RESERVES DEDUCTED
FROM APPLICABLE ASSETS:
Uncollectible accounts $ 300,000 $ 93,033 $ - $ (93,033) $ 300,000
=========== ========= ======== ========= ===========

OTHER DEFERRED CREDITS:
Reserve for decommissioning $ 5,760,197 $ 504,801 $ - $ - $ 6,264,998
=========== ========= ======== ========= ===========

<FN>

<F1> All deductions from reserves were for purposes for which such reserves were created.

</TABLE>

<PAGE>

EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 1994

(3) ARTICLES OF INCORPORATION AND BY-LAWS

3(a)(1)

Registrant's Restated Certificate of Incorporation, dated February 7, 1990,
is incorporated by reference to Exhibit 3(a)(1) to Form 10-K for the year
ended December 31, 1989, Commission File No. 0-692.

3(a)(2)

Certificate of Retirement of Preferred Stocks, dated January 13, 1992, is
incorporated by reference to Exhibit 3(a)(2) to Form 10-K for the year
ended December 31, 1991, Commission File No. 0-692.

3(b)

Registrant's By-Laws, as amended, dated December 1, 1990, are incorporated
by reference to Exhibit 3(b) to Form 10-K for the year ended December 31,
1990, Commission File No. 0-692.

(4) INDENTURES AND POLLUTION CONTROL FACILITY OBLIGATIONS

4(a)(1)

Indenture, dated August 1, 1940, executed by the Company to The Chase
Manhattan Bank (N.A.) and J. J. O'Connell, as Trustees, and supplemental
and amendatory indentures thereto are incorporated by reference to
Exhibit 2 to Form 12-K for the year ended December 31, 1970, Commission
File No. 2-4472.

4(a)(2)

Supplemental Indenture, dated August 1, 1972, executed by the Company to
The Chase Manhattan Bank (N.A.) and J. J. O'Connell, as Trustees, is
incorporated by reference to Exhibit 2 to Form 8-K for the month of August,
1972, Commission File No. 2-4472.

4(a)(3)

Supplemental Indenture, dated July 1, 1973, executed by the Company to The
Chase Manhattan Bank (N.A.) and J. J. O'Connell, as Trustees, is
incorporated by reference to Exhibit 1 to Form 8-K for the month of July,
1973, Commission File No. 2-4472.

4(a)(4)

Supplemental Indenture, dated November 14, 1974, executed by the Company to
The Chase Manhattan Bank (N.A.) and J. J. O'Connell, as Trustees, is
incorporated by reference to Exhibit 1 to Form 8-K for the month of
November, 1974, Commission File No. 2-4472.

4(a)(5)

Supplemental Indenture, dated May 1, 1975, executed by the Company to The
Chase Manhattan Bank (N.A.) and J. J. O'Connell, as Trustees, is
incorporated by reference to Exhibit 2 to Form 8-K for the month of May,
1975, Commission File No. 2-4472.

4(a)(6)

Supplemental Indenture, dated June 1, 1977, executed by the Company to The
Chase Manhattan Bank (N.A.) and J. J. O'Connell, as Trustees, is
incorporated by reference to Exhibit 2(a)(34) to Registration Statement on
Form S-7 (Reg. No. 2-58825).

4(a)(7)

Supplemental Indenture, dated July 1, 1978, executed by the Company to The
Chase Manhattan Bank (N.A.) and J. J. O'Connell, as Trustees, is
incorporated by reference to Exhibit 2(a)(43) to Registration Statement on
Form S-7 (Reg. No. 2-63083).

4(a)(8)

Supplemental Indenture, dated December 1, 1978, executed by the Company to
The Chase Manhattan Bank (N.A.) and J. J. O'Connell, as Trustees, is
incorporated by reference to Exhibit 11 to Form 10-K for the year ended
December 31, 1978, Commission File No. 0-692.

4(a)(9)

Registrant's Supplemental Indenture, dated May 6, 1987, is incorporated by
reference to Exhibit 3(a) to Form 10-Q for the quarter ended September 30,
1987, Commission File No. 0-692.

4(a)(10)

Supplemental Indenture, dated November 1, 1989, executed by the Company to
the Chase Manhattan Bank (N.A.) and Vincent J. Marino, as Trustees, is
incorporated by reference to Exhibit 4(a)(10) to Form 10-K for the year
ended December 31, 1989, Commission File No. 0-692.

4(a)(11)(i)

Supplemental Indenture, dated July 15, 1991, executed by the Company to the
Chase Manhattan Bank (N.A.) and C. J. Heinzelmann, as Trustees, is
incorporated by reference to Exhibit 4(a)(11)(i) to Form 8-K, dated
August 1, 1991, Commission File No. 0-692.

4(a)(12)

Supplemental Indenture, dated November 15, 1991, is incorporated by
reference to Exhibit 4(a)(12) to Form 10-K for the year ended December 31,
1991, Commission File No. 0-692.

4(a)(13)

Supplemental Indenture, dated September 1, 1992, executed by the Company to
the Chase Manhattan Bank (N.A.) and C. J. Heinzelmann, as Trustees, is
incorporated by reference to Exhibit 4(a)(11)(i) to Form 8-K, dated
September 18, 1992, Commission File No. 0-692.

4(a)(14)

Underwriting Agreement dated August 16, 1993 among the Company, Morgan
Stanley & Co. Incorporated, Lehman Brothers Inc. and NatWest Capital
Markets Limited, is incorporated by reference to Exhibit 1 of Registrant's
Report on Form 8-K, dated August 16, 1993, Commission File No. 0-692.

4(a)(15)

General Mortgage Indenture and Deed of Trust dated as of August 1, 1993
from the Company to The Chase Manhattan Bank (National Association), as
Trustee, is incorporated by reference to Exhibit 4(a) of Form 8-K, dated
August 16, 1993, Commission File No. 0-692.

4(a)(16)

Supplemental Indenture dated as of August 15, 1993 to the General Mortgage
Indenture and Deed of Trust dated as of August 1, 1993 executed by the
Company to The Chase Manhattan Bank (National Association), as Trustee, is
incorporated by reference to Exhibit 4(b) of Form 8-K, dated August 16,
1993, Commission File No. 0-692.

4(a)(17)

Supplemental Indenture dated August 15, 1993 to the Indenture dated
August 1, 1940 from the Company to The Chase Manhattan Bank (National
Association) and C. J. Heinzelmann, as successor Trustees, is incorporated
by reference to Exhibit 4(c) of Form 8-K, dated August 16, 1993, Commission
File No. 0-692.

4(b)(1)

Copy of Sale Agreement between Company and Mercer County, North Dakota,
dated June 1, 1993, related to issuance of Pollution Control Refunding
Revenue Bonds (Northwestern Public Service Company Project) Series 1993, is
incorporated by reference to Exhibit 4(b)(1) of Registrant's report on Form
10-Q for the quarter ending June 30, 1993, Commission File No. 0-692.

4(b)(2)

Copy of Loan Agreement between Company and Grant County, South Dakota,
dated June 1, 1993, related to issuance of Pollution Control Refunding
Revenue Bonds (Northwestern Public Service Company Project) Series 1993A,
is incorporated by reference to Exhibit 4(b)(2) of Registrant's report on
Form 10-Q for the quarter ending June 30, 1993, Commission File No. 0-692.

4(b)(3)

Copy of Loan Agreement between Company and Grant County, South Dakota,
dated June 1, 1993, related to issuance of Pollution Control Refunding
Revenue Bonds (Northwestern Public Service Company Project) Series 1993B,
is incorporated by reference to Exhibit 4(b)(3) of Registrant's report on
Form 10-Q for the quarter ending June 30, 1993, Commission File No. 0-692.

4(b)(4)

Copy of Loan Agreement between Company and City of Salix, Iowa, dated June
1, 1993, related to issuance of Pollution Control Refunding Revenue Bonds
(Northwestern Public Service Company Project) Series 1993, is incorporated
by reference to Exhibit 4(b)(4) of Registrant's report on Form 10-Q for the
quarter ending June 30, 1993, Commission File No. 0-692.

(10) MATERIAL CONTRACTS

10(a)(1)(i)

Copy of Big Stone Plant Agreement, an agreement between Otter Tail Power
Company, Montana-Dakota Utilities Co. and Northwestern Public Service
Company for sharing ownership of generating plant, dated January 7, 1970,
is incorporated by reference to Exhibit 6 to Form 12-K for the year ended
December 31, 1971, Commission File No. 2-4472.

10(a)(1)(ii)

Copy of Supplemental Agreement No. 1 to Big Stone Plant Agreement, dated
July 1, 1983, is incorporated by reference to Exhibit 10(a)(1)(ii) to
Form 10-K for the year ended December 31, 1988, Commission File No. 0-692.

10(a)(1)(iii)

Copy of Supplemental Agreement No. 2 to Big Stone Plant Agreement, dated
March 1, 1985, is incorporated by reference to Exhibit 10(a)(1)(iii) to
Form 10-K for the year ended December 31, 1988, Commission File No. 0-692.

10(a)(1)(iv)

Copy of Supplemental Agreement No. 3 to Big Stone Plant Agreement, dated
March 31, 1986, is incorporated by reference to Exhibit 10(a)(1)(iv) to
Form 10-K for the year ended December 31, 1988, Commission File No. 0-692.

10(a)(2)(i)

Copy of Big Stone Plant Coal Agreement between Otter Tail Power Company,
Montana-Dakota Utilities Co., and Northwestern Public Service Company and
Knife River Coal Mining Company, dated January 1, 1972, is incorporated by
reference to Exhibit 5 to Form 10-K for the year ended December 31, 1980.

10(a)(2)(ii)

Copy of Amendment to Big Stone Plant Coal Agreement, dated June 25, 1992,
is incorporated by reference to Exhibit 10(a)(2)(ii) to Form 10-K for the
year ended December 31, 1992, commission File No. 0-692.

10(a)(3)(i)

Copy of Big Stone Plant Transmission Facilities Agreement between Otter
Tail Power Company, Montana-Dakota Utilities Co., and Northwestern Public
Service Company, dated April 3, 1972, is incorporated by reference to
Exhibit 10(a)(3)(i) to Form 10-K for the year ended December 31, 1988,
Commission File No. 0-692.

10(a)(3)(ii)

Copy of Supplement No. 1 to Big Stone Plant Transmission Facilities
Agreement, dated October 1, 1974, is incorporated by reference to
Exhibit 10(a)(3)(ii) to Form 10-K for the year ended December 31, 1988,
Commission File No. 0-692.

10(a)(3)(iii)

Copy of Supplement No. 2 to Big Stone Plant Transmission Facilities
Agreement, dated June 10, 1976, is incorporated by reference to
Exhibit 10(a)(3)(iii) to Form 10-K for the year ended December 31, 1988,
Commission File No. 0-692.

10(a)(3)(iv)

Copy of Supplement No. 3 to Big Stone Plant Transmission Facilities
Agreement, dated October 1, 1982, is incorporated by reference to
Exhibit 10(a)(3)(iv) to Form 10-K for the year ended December 31, 1988,
Commission File No. 0-692.

10(a)(3)(v)

Copy of Supplement No. 4 to Big Stone Plant Transmission Facilities
Agreement, dated October 1, 1982, is incorporated by reference to
Exhibit 10(a)(3)(v) to Form 10-K for the year ended December 31, 1988,
Commission File No. 0-692.

10(a)(3)(vi)

Copy of Supplement No. 5 to Big Stone Plant Transmission Facilities
Agreement, dated March 1, 1985, is incorporated by reference to
Exhibit 10(a)(3)(vi) to Form 10-K for the year ended December 31, 1988,
Commission File No. 0-692.

10(a)(3)(vii)

Copy of Supplement No. 6 to Big Stone Plant Transmission Facilities
Agreement, dated March 31, 1986, is incorporated by reference to
Exhibit 10(a)(3)(vii) to Form 10-K for the year ended December 31, 1988,
Commission File No. 0-692.

10(b)(1)(i)

Copy of Amendment to Ownership Agreement for George Neal Generating Station
Unit 4, dated October 30, 1975, to reflect Registrant's ownership interest
of 50,000 KW (8.681%), is incorporated by reference to Exhibit 10 to
Form 12-K for the year ended December 31, 1975, Commission File No. 2-4472.

10(b)(1)(ii)

Copy of Second Amendment to Ownership Agreement for George Neal Generating
Station Unit 4, dated October 30, 1975, is incorporated by reference to
Exhibit 10(b)(1)(ii) to Form 10-K for the year ended December 31, 1988,
Commission File No. 0-692.

10(b)(1)(iii)

Copy of Third Amendment to Ownership Agreement for George Neal Generating
Station Unit 4, dated December 31, 1984, is incorporated by reference to
Exhibit 10(b)(1)(iii) to Form 10-K for the year ended December 31, 1988,
Commission File No. 0-692.

10(b)(2)(i)

Copy of Coal Sales and Purchase Agreement, between Iowa Public Service
Company (as agent for the owners of the George Neal Generating Station
Unit 4) and Carter Oil Company, dated September 29, 1977, is incorporated
by reference to Exhibit 13 to Form 10-K for the year ended December 31,
1977, Commission File No. 0-692.

10(b)(2)(ii)

Copy of Notice of Election to Extend Coal Contract with Carter Oil
Company, dated November 2, 1978, is incorporated by reference to
Exhibit 10(b)(2)(ii) to Form 10-K for the year ended December 31, 1988,
Commission File No. 0-692.

10(b)(2)(iii)

Copy of revised Exhibit "A", dated May 1, 1986 to Coal Sales and Purchase
Agreement, dated September 29, 1977, is incorporated by reference to
Exhibit 10(b)(2)(iii) to Form 10-K for the year ended December 31, 1990,
Commission File No. 0-692.

10(b)(3)(i)

Copy of Transmission Facilities and Operating Agreement for George Neal
Generating Station Unit 4, entered by and between Iowa Public Service
Company, Northwestern Public Service Company, & other plant owners, dated
October 24, 1984, is incorporated by reference to Exhibit 10(b)(3)(i) to
Form 10-K for the year ended December 31, 1988, Commission File No. 0-692.

10(b)(3)(ii)

Copy of First Amendment to Transmission Facilities and Operating Agreement
for George Neal Generating Station Unit 4, dated December 31, 1984, is
incorporated by reference to Exhibit 10(b)(3)(ii) to Form 10-K for the year
ended December 31, 1988, Commission File No. 0-692.

10(c)(1)(i)

Copy of Agreement for Sharing Ownership of Generating Unit No. 1, Coyote
Station, by and between Otter Tail Power Company, Minnkota Power
Cooperative, Inc., Montana-Dakota Utilities Co., Minnesota Power & Light
Company, & Northwestern Public Service Company, dated December 31, 1977, is
incorporated by reference to Exhibit 15 to Form 10-K for the year ended
December 31, 1978, Commission File No. 0-692.

10(c)(1)(ii)

Copy of Supplemental Agreement No. 1 to Agreement for Sharing Ownership of
Generating Unit No. 1, Coyote Station, dated December 31, 1977, is
incorporated by reference to Exhibit 16 to Form 10-K for the year ended
December 31, 1978, Commission File No. 0-692.

10(c)(1)(iii)

Copy of Amendment No. 2 to Agreement for Sharing Ownership of Generating
Unit No. 1, Coyote Station, Amendment No. 1 to Coyote 1 Station
Transmission Facilities Agreement, and Amendment No. 2 to Coyote Plant Coal
Agreement, dated March 1, 1981, is incorporated by reference to
Exhibit 10(c)(1)(iii) to Form 10-K for the year ended December 31, 1988,
Commission File No. 0-692.

10(c)(1)(iv)

Copy of Amendment No. 3 to Agreement for Sharing Ownership of Generating
Unit No. 1, Coyote Station, Amendment No. 2 to Coyote 1 Station
Transmission Facilities Agreement, and Amendment No. 5 to Coyote Plant Coal
Agreement, dated September 5, 1985, is incorporated by reference to
Exhibit 10(c)(1)(iv) to Form 10-K for the year ended December 31, 1988,
Commission File No. 0-692.

10(c)(2)(i)

Copy of Coyote Plant Coal Agreement, by and between Otter Tail Power
Company, Minnkota Power Cooperative, Inc., Montana-Dakota Utilities Co.,
Minnesota Power & Light Company, & Northwestern Public Service Company and
Knife River Coal Mining Company, and Addendum to Coyote Plant Coal
Agreement, both dated January 1, 1978, are incorporated by reference to
Exhibit 17 to Form 10-K for the year ended December 31, 1979, Commission
File No. 0-692.

10(c)(2)(ii)

Copy of Addendum to Coyote Plant Coal Agreement, dated March 10, 1980, is
incorporated by reference to Exhibit 10(c)(2)(ii) to Form 10-K for the year
ended December 31, 1988, Commission File No. 0-692.

10(c)(2)(iii)

Copy of Amendment to Coyote Plant Coal Agreement, dated May 28, 1981, is
incorporated by reference to Exhibit 10(c)(2)(iii) to Form 10-K for the
year ended December 31, 1988, Commission File No. 0-692.

10(c)(2)(iv)

Copy of Fourth Amendment to Coyote Plant Coal Agreement, dated August 19,
1985, is incorporated by reference to Exhibit 10(c)(2)(iv) to Form 10-K for
the year ended December 31, 1988, Commission File No. 0-692.

10(c)(3)(i)

Copy of Coyote 1 Station Transmission Facilities Agreement, by and between
Otter Tail Power Company, Minnkota Power Cooperative, Inc., Montana-Dakota
Utilities Co., Minnesota Power Company, & Northwestern Public Service
Company, dated November 30, 1978, is incorporated by reference to
Exhibit 10(c)(3)(i) to Form 10-K for the year ended December 31, 1988,
Commission File No. 0-692.

10(c)(3)(ii)

Copy of Amendment No. 2 to Coyote Station Transmission Facilities
Agreement, dated January 1, 1983, is incorporated by reference to
Exhibit 10(c)(3)(ii) to Form 10-K for the year ended December 31, 1988,
Commission File No. 0-692.

10(c)(3)(iii)

Copy of System Interconnection Agreement, by and between Otter Tail Power
Company, Montana-Dakota Utilities Co., & Northwestern Public Service
Company, dated September 26, 1988, is incorporated by reference to
Exhibit 10(c)(3)(iii) to Form 10-K for the year ended December 31, 1988,
Commission File No. 0-692.

10(d)

Mid-Continent Area Power Pool Agreement, dated March 31, 1972, as amended
through January 1, 1991, is incorporated by reference to Exhibit 10(d) to
Form 10-K for the year ended December 31, 1991, Commission File No. 0-692.

10(e)(1)

Interconnection Contract between Registrant and Western Area Power
Administration, dated April 1, 1984, is incorporated by reference to
Exhibit 4 to Form 10-K for the year ended December 31, 1984, Commission
File No. 0-692.

10(e)(2)

Supplement No. 6 to Interconnection Contract between Registrant and Western
Area Power Administration, dated February 5, 1987, is incorporated by
reference to Exhibit 10(e)(2) to Form 10-K for the year ended December 31,
1988, Commission File No. 0-692.

10(e)(3)

Supplement No. 5 to Interconnection Contract between Registrant and Western
Area Power Administration, dated June 1, 1987, is incorporated by reference
to Exhibit 10(e)(3) to Form 10-K for the year ended December 31, 1988,
Commission File No. 0-692.

10(g)(1)

Supplemental Income Security (Retirement) Plan for Directors, Officers and
Managers, as amended July 1, 1986, is incorporated by reference to
Exhibit 10(g)(1) to Form 10-K for the year ended December 31, 1988,
Commission File No. 0-692.

10(g)(2)

Deferred Compensation Plan for Non-employee Directors adopted November 6,
1985, is incorporated by reference to Exhibit 10(g)(2) to Form 10-K for the
year ended December 31, 1988, Commission File No. 0-692.

10(g)(3)

Form of Severance Agreement for Officers is incorporated by reference to
Exhibit 5 to Form 10-Q for the quarter ended March 31, 1986, Commission
File 0-692.

10(g)(4)

Pension Equalization Plan, dated August 5, 1987, is incorporated by
reference to Exhibit 10(g)(4) to Form 10-K for the year ended December 31,
1988, Commission File No. 0-692.

10(g)(5)

Director Retirement Plan dated November 4, 1987, as amended February 2,
1994, is incorporated by reference to Exhibit 10(g)(5) to Form 10-K for the
year ended December 31, 1993, Commission File No. 0-692.

10(g)(6)

Annual Performance Incentive Plan for Officers, dated February 1, 1989, as
amended February 2, 1994, is incorporated by reference to Exhibit 10(g)(6)
to Form 10-K for the year ended December 31, 1993, Commission File No. 0-
692.

10(g)(7)

Long-term Incentive Compensation Plan (Phantom Stock Unit Plan) for
Directors and Officers, dated February 1, 1989, as amended February 2,
1994, is incorporated by reference to Exhibit 10(g)(7) to Form 10-K for the
year ended December 31, 1993, Commission File No. 0-692.

10(g)(8)

Supplemental Pension Agreement for W. D. Craig, dated May 3, 1989, is
incorporated by reference to Exhibit 10(g)(9) to Form 10-K for the year
ended December 31, 1989, Commission File No. 0-692.

(13) REPORT FURNISHED TO SECURITY HOLDERS

13(a)

Annual Report for fiscal year ended December 31, 1994, furnished to
stockholders of record on March 1, 1995 (exhibit filed herewith).

(21) SUBSIDIARIES OF REGISTRANT

21(a)

Grant, Inc., a South Dakota corporation, is a wholly owned subsidiary of
Registrant which does business under the name of Grant, Inc.

21(b)

Northwestern Growth, Inc., a South Dakota corporation, is a wholly owned
subsidiary of Registrant which does business under the name of Northwestern
Growth, Inc.

21(c)

Northwestern Systems, Inc., a South Dakota corporation, is a wholly owned
subsidiary of Registrant which does business under the name of Northwestern
Systems, Inc.

21(d)

Northwestern Networks, Inc., a South Dakota corporation, is a wholly owned
subsidiary of Registrant which does business under the name of Northwestern
Networks, Inc.

(22) OTHER DOCUMENTS OR STATEMENTS TO SECURITY HOLDERS

22(a)

Proxy materials dated March 24, 1995, furnished to common stockholders of
record on March 6, 1995 (exhibit filed with SEC on March 27, 1995).

Financial Data Schedule

EXHIBIT 13.A

ANNUAL REPORT TO STOCKHOLDERS

MANAGEMENT'S DISCUSSION AND ANALYSIS
Pages 12-14

(graph of information in following table)

ELECTRIC CAPABILITY AND PEAK DEMAND
MW

Forecast
--------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Capability at Peak* 290 307 309 309 309
Peak Demand 192 237 230 257 260

*Includes Net Capacity Purchased.

(end of graph)

LIQUIDITY AND CAPITAL RESOURCES

The Company has a high degree of long-term liquidity through the generation
of operating cash flows, the availability of substantial cash reserves, and
a sound capital structure. The Company has adequate capacity for
additional financing and has maintained its liquidity position through
favorable bond and commercial paper ratings.

During the three years ended 1994, the Company has generated operating cash
flows while continuing to maintain substantial cash reserves in the form of
marketable securities. In 1994, 1993, and 1992, cash flows from operating
activities were $26.3 million, $24.3 million, and $23.1 million. Cash
equivalents and marketable securities totaled $39.2 million, $39.1 million,
and $25.6 million at December 31, 1994, 1993, and 1992.

Working capital and other financial resources are also provided by lines of
credit, which are generally used to support commercial paper borrowings, a
primary source of short-term financing. At December 31, 1994, unused short-
term lines of credit totaled $12 million.

The Company currently has outstanding bonds issued under two indentures;
the 1940 Mortgage Indenture and the 1993 General Mortgage Indenture. The
1940 indenture provides a first lien on substantially all electric and gas
property as security for outstanding bonds. The 1993 indenture provides a
junior lien on all of the Company's electric and gas properties that are
covered under the previously existing indenture as security for outstanding
bonds. The 1993 indenture junior lien will become a first lien when all
bonds issued under the 1940 indenture are retired. The provisions of the
1993 indenture provide increased financial flexibility and an increase in
the amount of bonds that can be issued on the basis of bonded property.

The Company will continue to review the economics of retiring or refunding
long-term debt and preferred stock to minimize long-term financing costs.
The Company's financial coverages are at levels in excess of those required
for the issuance of debt and preferred stock.

CAPITAL REQUIREMENTS

The emphasis of the Company's construction activities is to undertake those
projects that most efficiently serve the expanding needs of its customer
base, enhance energy delivery capabilities, expand its current customer
base, and provide for the reliability of energy supply. Capital expenditure
plans are subject to continual review and may be revised as a result of
changing economic conditions, variations in sales, environmental
requirements, investment opportunities, and other ongoing considerations.

Capital requirements for the mandatory retirement of long-term debt and the
mandatory preferred stock sinking fund redemption totaled $600,000,
$180,000, and $513,000 for the years ended 1994, 1993, and 1992. It is
expected that such mandatory retirements will be $600,000 in 1995,
$1,080,000 in 1996, $570,000 in 1997, $20.6 million in 1998, and $13.5
million in 1999.

The Company anticipates that future capital requirements will be met by
both internally generated cash flows and available external financing.

The Company will continue to evaluate and pursue opportunities to enhance
shareholder return through nonregulated business investments. Nonregulated
projects are expected to be financed from the existing investment portfolio
and from other available financing options.

RESULTS OF OPERATIONS

Earnings Comparisons

Earnings per share of common stock were $2.00 in 1994 compared to $1.96 in
1993 and $1.77 in 1992. The increase in 1994 was primarily due to a 5.6%
increase in retail electric sales and improved profitability from
nonregulated operations. Also favorably impacting 1994 earnings was a
decrease in other operating expenses. Offsetting earnings in 1994 was a
4.9% decrease in gas sales largely due to warmer than normal weather in the
last quarter of 1994 and increased interest expense related to the issuance
of general mortgage bonds in August 1993. The Company also recorded less
investment income in 1994 due to payments received in 1993 for accumulated
dividends and interest after LodgeNet Entertainment Corporation, an
investment held by one of the Company's subsidiaries, sold shares of common
stock through an initial public offering. The increase in earnings per
share in 1993 from 1992 was primarily due to more normal weather patterns
and to interest and dividends received after the initial public offering of
LodgeNet Entertainment Corporation.

Operating Revenues

Weather fluctuations in the Company's service area have the greatest
influence on the comparison of revenues from year to year. In 1994, more
favorable weather contributed to increased electric use per customer.
Residential customers averaged an increase of 2.5%, while commercial and
industrial customers' use increased 5.6%. Retail electric kwh sales
increased 5.6% in 1994, while sales to wholesale customers, representing
primarily kwh sales to other utilities in the power pool, decreased 4.8%.
In 1993, retail kwh sales increased 7.9%, while sales to wholesale
customers increased 19.6%. In 1994, warmer weather was largely responsible
for the 4.9% decrease in sales of gas, while in 1993, colder weather
patterns during the heating season resulted in a 20% increase in sales of
gas. The 6.2% overall rate increase implemented in South Dakota on
November 15, 1994 had a modest upward impact on gas revenues for the year.

The following tables summarize the factors affecting the variations in
electric and gas revenues between years (in thousands):

Variation from
Prior Year
---------------------
1994 1993
------- -------
ELECTRIC REVENUE:
Variation in kwh sales $ 3,571 $ 4,987
Changes in rates, fuel
cost recovery, and other (553) (876)
Sales for resale (45) 366
------- -------
$ 2,973 $ 4,477
======= =======

GAS REVENUE:
Variation in mmbtu sales $(3,129) $10,349
Changes in rates, gas cost
recovery, and other 252 2,453
------- -------
$(2,877) $12,802
======= =======

Operating Expenses

Fuel for electric generation and purchased power increased comparably in
1994 with the increase in electric revenue. Purchased gas sold decreased in
1994 as weather-related sales of gas declined. Other operating expenses,
excluding 1993 nonrecurring items, increased slightly over 1993 primarily
due to higher gas production and distribution expenses, partially offset by
lower employee benefit expense and lower administrative salaries related to
fewer employees during 1994. Maintenance decreased due primarily to lower
electric transmission and distribution expenditures. Depreciation
increases can be attributed to an increase in construction activity, and
income taxes increased as a result of higher taxable income. The increase
in interest charges is due to the increase in long-term debt issued through
refinancing activities in August 1993.

In 1993, the weather-related increases in electric and gas revenues
resulted in comparable increases in electric fuel-related costs and
purchased gas sold. Other operating expenses increased over 1992 due to
higher gas distribution and customer accounts expenses. Maintenance
increased due primarily to expenditures at the Company's baseload plants.
Property and other taxes increased primarily because South Dakota property
taxes were unusually low in 1992 related to reduced property tax
assessments. The increase in interest charges is due to the issuance of
long-term debt in August 1993.

FUTURE EARNINGS AND CASH FLOW VARIABLES

The Company's future earnings and cash flow performance are dependent on
numerous factors including, among others, the unpredictable midwestern
weather patterns, the effects of regulation on the Company's utility
operations, the Company's ability to maintain and expand its electric and
gas revenue base, the prudent containment of operating expenses, and the
performance of its corporate development and investment programs.

Although the Company will continue to pursue opportunities to expand its
gas and electric revenue base, it is not expected that high levels of
growth in electric and gas customer demand will occur in the Company's
service territory during the next several years. The anticipation
that growth in customer demand will not be at high levels in 1995, or the
near future, increases the importance of the Company's expansion programs,
customer retention, and cost containment activities to maintain and enhance
operating income from utility operations. Future utility operating income
will also be impacted by regulatory decisions affecting the Company's
electric and gas operations.

The energy industry in general has become increasingly competitive. The
National Energy Policy Act of 1992 was designed to promote energy
efficiency and increased competition in the electric wholesale markets. In
1992, the Federal Energy Regulatory Commission (FERC) also issued Order
636. Order 636 requires, among other provisions, that all companies with
natural gas pipelines separate natural gas supply or production services
from transportation service and storage businesses. This allows gas
distribution companies, such as the Company, and individual customers to
purchase gas directly from producers, third parties, and various gas
marketing entities and transport it through the suppliers' pipelines.
While Order 636 had positive aspects by providing for more diversified
supply and storage options, it also required the Company to assume
responsibility for the procurement, transportation, and storage of natural
gas. The alternatives now available under Order 636 create additional
pressure on all distribution companies to keep gas supply and
transportation pricing competitive, particularly for large customers.

The Company is subject to environmental regulations from numerous entities.
The Clean Air Act Amendments of 1990 (the Act) stipulate limitations on
sulfur dioxide and nitrogen oxide emissions from coal-fired power plants.
The Company believes it can economically meet such sulfur dioxide emission
requirements at its generating plants by the required compliance dates and
that it is in compliance with all presently applicable environmental
protection requirements and regulations. In addition to the Act, the
Company is also subject to other environmental regulations including
matters related to utility processing sites. The Company conducted an
investigation of a former gas manufacturing site in 1994 and is taking
remedial action to dispose of waste material found at such site. Recovery
of remediation costs for such sites will be sought from insurance carriers
and through the regulatory process although there is no assurance that such
costs will be recovered. No administrative or judicial proceedings
involving the Company are now pending or known by the Company to be
contemplated under present environmental protection requirements.

In addition to factors affecting electric and gas energy operations, the
Company's future earnings are also dependent on income generated from
corporate development and investment activities. A substantial portion of
such investment activities in 1994 included participation in preferred
stock investment programs that provide a flow of current income, much of
which is tax advantaged. During the next several years, the Company will
seek energy or energy-related investment opportunities that meet the goal
of expanding the Company's current energy operations. Additionally, the
Company may also pursue nonenergy investments in privately held entities
and ventures that provide the potential of increased long-term investment
returns. Such privately held investments can involve increased principal
and liquidity risk when compared to the Company's preferred stock
investments or its energy operations.

(graph of information in following table)

INVESTMENTS
Recorded Basis
Millions of Dollars

1990 1991 1992 1993 1994*
---- ---- ---- ---- ----
Other Investments 19.1 18.3 16.5 10.4 6.0
Marketable Equity
Securities 2.3 1.4 1.4 1.4 8.5
Preferred Stock 19.8 22.1 20.0 33.1 31.7
---- ---- ---- ---- ----
41.2 41.8 37.9 44.9 46.2
==== ==== ==== ==== ====

*Includes adoption of SFAS 115.

In addition to the investments reflected above, one of the Company's
subsidiaries, Northwestern Systems, Inc., owns Lucht, Inc. The Company's
Consolidated Statement of Income includes the results of Lucht, Inc.

(end of graph)

(graph of information in following table)

CASH FLOWS FROM OPERATIONS
Millions of Dollars

1990 1991 1992 1993 1994
---- ---- ---- ---- ----
Cash Flows from
Ongoing Activities 25.1 24.9 23.1 24.3 26.3
Cash Flows from
Capital Gains 3.6 - - - -
---- ---- ---- ---- ----
28.7 24.9 23.1 24.3 26.3
==== ==== ==== ==== ====

As the utility industry becomes more competitive, the amount of cash flow
generated from operations becomes an important benchmark. The Company has
a high degree of long-term liquidity through the generation of operating
cash flows while continuing to maintain a substantial investment portfolio.

(end of graph information)

NONENERGY OPERATIONS

In addition to the Company's investment portfolio of preferred stock
investments, the Company holds interests in two nonenergy businesses. At
December 31, 1994, Northwestern Networks, Inc. (NNI), one of the Company's
wholly owned subsidiaries, held investments in LodgeNet Entertainment
Corporation (LEC), consisting of 1,121,000 shares of LEC common stock.
During 1994, subordinated debt of $6 million which had been invested in LEC
by NNI was redeemed.

Another of the Company's subsidiaries, Northwestern Systems, Inc., owns
Lucht, Inc., a firm that develops, manufactures, and markets multi-image
photographic printers and other related equipment. This investment
contributed revenues of $22.0 million and operating income of $2.2 million
in 1994 compared to revenues of $18.1 million and operating income of $1.6
million in 1993.

REPORT OF MANAGEMENT
Page 15

The management of Northwestern Public Service Company is responsible for
the integrity and objectivity of the financial information contained in
this annual report. The consolidated financial statements, which
necessarily include some amounts which are based on informed judgments and
estimates of management, have been prepared in conformity with generally
accepted accounting principles.

In meeting this responsibility, management maintains a system of internal
accounting controls which is designed to provide reasonable assurance that
the assets of the Company are safeguarded and that transactions are
executed in accordance with management's authorization and are recorded
properly for the preparation of financial statements. This system is
supported by written policies, selection and training of qualified
personnel, an appropriate segregation of responsibilities within the
organization, and a program of internal auditing.

The Board of Directors, through its Audit Committee which is comprised
entirely of outside directors, oversees management's responsibilities for
financial reporting. The Audit Committee meets regularly with management,
the internal auditors, and the independent public accountants to make
inquiries as to the manner in which each is performing its
responsibilities. The independent public accountants and the internal
audit staff have unrestricted access to the Audit Committee, without
management's presence, to discuss auditing, internal accounting control,
and financial reporting matters.

Arthur Andersen LLP, an independent public accounting firm, has been
engaged annually to perform an audit of the Company's financial statements.
Their audit is conducted in accordance with generally accepted auditing
standards and includes examining, on a test basis, supporting evidence,
assessing the Company's accounting principles and significant estimates
made by management, and evaluating the overall financial statement
presentation to the extent necessary to allow them to report on the
fairness, in all material respects, of the operating results and financial
condition of the Company.

Merle Lewis
President and Chief Executive Officer

Richard Hylland
Vice President-Finance and Corporate Development

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Page 15

To the Stockholders and Board of Directors of
Northwestern Public Service Company:

We have audited the accompanying consolidated balance sheet and statement
of capitalization of NORTHWESTERN PUBLIC SERVICE COMPANY (a Delaware
corporation) AND SUBSIDIARIES as of December 31, 1994 and 1993, and the
related consolidated statements of operations and retained earnings and
cash flows for each of the three years in the period ended December 31,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Northwestern Public
Service Company and Subsidiaries as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.

As discussed in Note 1, effective January 1, 1994, the Company changed its
method of accounting for certain investments in debt and equity securities.

Arthur Andersen LLP

Minneapolis, Minnesota,
January 27, 1995.

<PAGE>

CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
Page 16

Years ended December 31

1994 1993 1992
------------ ------------ ------------
Operating Revenues:
Electric $ 73,077,431 $ 70,104,822 $ 65,627,621
Gas 62,141,382 65,017,964 52,216,333
Manufacturing 22,047,241 18,134,456 1,352,600
------------ ------------ ------------
157,266,054 153,257,242 119,196,554
------------ ------------ ------------
Operating Expenses:
Fuel for electric generation 13,399,170 12,731,558 12,072,833
Purchased power 1,153,467 1,229,748 841,356
Purchased gas sold 46,351,422 48,153,861 38,186,237
Other operating expenses 21,728,387 23,285,277 19,871,923
Manufacturing costs 19,552,720 16,296,738 1,345,966
Maintenance 6,169,895 6,368,346 5,889,310
Depreciation 12,438,501 11,805,763 11,061,520
Property and other taxes 6,103,903 6,139,613 5,118,469
------------ ------------ ------------
126,897,465 126,010,904 94,387,614
------------ ------------ ------------
Operating Income:
Electric 25,661,632 21,752,231 21,909,402
Gas 2,540,091 3,903,313 2,892,904
Manufacturing 2,166,866 1,590,794 6,634
------------ ------------ ------------
30,368,589 27,246,338 24,808,940

Investment Income and Other 2,610,791 4,457,438 2,690,294

Interest Expense, net (9,669,829) (8,944,584) (8,105,109)
------------ ------------ ------------
Income Before Income Taxes 23,309,551 22,759,192 19,394,125

Income Taxes (7,869,343) (7,568,119) (5,672,719)
------------ ------------ ------------
Net Income 15,440,208 15,191,073 13,721,406

Dividends on Cumulative
Preferred Stock (119,888) (121,463) (143,267)
------------ ------------ ------------
Earnings on Common Stock 15,320,320 15,069,610 13,578,139

Retained Earnings,
beginning of year 52,873,772 50,318,050 48,986,426
Dividends on Common Stock (12,820,980) (12,513,888) (12,206,799)
Premium on Preferred
Stock Retirement 0 0 (39,716)
------------ ------------ ------------
Retained Earnings, end of year $ 55,373,112 $ 52,873,772 $ 50,318,050
============ ============ ============
Earnings Per Average Common Share
based on 7,677,232 shares $ 2.00 $ 1.96 $ 1.77
============ ============ ============
Dividends Declared Per Common Share $ 1.67 $ 1.63 $ 1.59
============ ============ ============

See Notes to Consolidated Financial Statements

<PAGE>

CONSOLIDATED STATEMENT OF CASH FLOWS
Page 17

Years ended December 31

1994 1993 1992
------------ ------------ ------------
Operating Activities:
Net income $ 15,440,208 $ 15,191,073 $ 13,721,406
Items not requiring cash:
Depreciation 12,438,501 11,805,763 11,061,520
Deferred income taxes 1,509,619 (1,398,578) (47,328)
Investment tax credit (564,801) (566,498) (568,655)
Changes in current assets
and liabilities:
Accounts receivable (1,057,563) (2,145,693) (1,049,603)
Inventories (1,447,191) (111,703) 352,866
Other current assets (259,826) (1,056,726) (1,246,370)
Accounts payable 2,699,294 (1,565,245) 2,499,414
Accrued taxes (1,487,575) 2,393,850 (579,660)
Accrued interest (30,991) 193,772 143,992
Other current liabilities 421,690 898,638 424,523
Other, net (1,392,444) 624,146 (1,655,673)
Cash flows from ------------ ------------ ------------
operating activities 26,268,921 24,262,799 23,056,432
------------ ------------ ------------
Investment Activities:
Property additions (22,680,856) (19,974,072) (18,510,018)
Sale (purchase) of noncurrent
investments, net (1,386,178) (9,773,488) 3,872,766
Acquisition of net assets 0 0 (4,122,180)
------------ ------------ ------------
Cash flows for
investment activities (24,067,034) (29,747,560) (18,759,432)
------------ ------------ ------------
Financing Activities:
Common and preferred stock
dividends paid (12,940,868) (12,635,351) (12,350,066)
Issuance of long-term debt 1,100,000 76,453,842 26,072,200
Repayment of long-term debt (677,500) (58,900,200) (12,736,000)
Retirement of preferred stock (30,000) (30,000) (3,085,000)
Commercial paper borrowings
(repayments) 9,800,000 0 (2,000,000)
------------ ------------ ------------
Cash flows from (for)
financing activities (2,748,368) 4,888,291 (4,098,866)
------------ ------------ ------------
Increase (Decrease) in Cash and
Cash Equivalents (546,481) (596,470) 198,134
Cash and Cash Equivalents,
beginning of year 3,099,093 3,695,563 3,497,429
------------ ------------ ------------
Cash and Cash equivalents,
end of year $ 2,552,612 $ 3,099,093 $ 3,695,563
============ ============ ============
Supplemental Cash Flow Information:
Cash paid during the year for:
Income taxes $ 7,382,119 $ 6,338,293 $ 6,129,541
Interest 8,887,901 8,771,595 7,442,176

See Notes to Consolidated Financial Statements

<PAGE>

CONSOLIDATED BALANCE SHEET
Page 18

December 31
1994 1993
------------- -------------
ASSETS
Property:
Electric $ 321,153,724 $ 308,225,360
Gas 67,213,487 60,880,235
Manufacturing 1,558,484 1,864,751
------------- -------------
389,925,695 370,970,346
Less-Accumulated depreciation (139,381,075) (131,287,329)
------------- -------------
250,544,620 239,683,017
------------- -------------
Current Assets:
Cash and cash equivalents 2,552,612 3,099,093
Accounts receivable, net 12,255,483 11,197,920
Fuel, at average cost 4,886,572 4,040,170
Inventories, materials and supplies 4,686,771 5,109,966
Manufacturing inventories 5,064,859 4,040,875
Deferred gas costs 3,029,688 4,121,591
Other 3,694,912 2,343,183
------------- -------------
36,170,897 33,952,798
------------- -------------
Other Assets:
Investments 46,237,912 44,851,734
Deferred charges and other 26,112,211 25,086,544
------------- -------------
72,350,123 69,938,278
------------- -------------
$ 359,065,640 $ 343,574,093
============= =============
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity $ 114,704,940 $ 109,666,931
Nonredeemable cumulative preferred stock 2,600,000 2,600,000
Redeemable cumulative preferred stock 40,000 70,000
Long-term debt 127,052,500 126,600,000
------------- -------------
244,397,440 238,936,931
------------- -------------

Commitments and Contingencies (Notes 1,6,7,8)

Current Liabilities:
Commercial Paper 9,800,000 0
Long-term debt due within one year 570,000 600,000
Accounts payable 13,139,557 10,440,263
Accrued taxes 6,740,035 8,227,610
Accrued interest 2,915,084 2,946,075
Other 6,039,430 5,617,740
------------- -------------
39,204,106 27,831,688
------------- -------------
Deferred Credits:
Accumulated deferred income taxes 37,328,539 35,683,509
Unamortized investment tax credits 10,584,830 11,149,631
Other 27,550,725 29,972,334
------------- -------------
75,464,094 76,805,474
------------- -------------
$ 359,065,640 $ 343,574,093
============= =============
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF CAPITALIZATION
Page 19

December 31
1994 1993
------------------- -------------------
Common Stock Equity:
Common stock, $3.50 par value,
20,000,000 shares authorized;
7,677,232 shares outstanding $ 26,870,312 $ 26,870,312
Additional paid-in capital 29,922,847 29,922,847
Retained earnings 55,373,112 52,873,772
Unrealized gain on investments, net 2,538,669 0
------------------- -------------------
114,704,940 47% 109,666,931 46%
------------------- -------------------
Cumulative Preferred Stock:
$100 par value, 300,000 shares
authorized; outstanding:

Nonredeemable, 4 1/2% Series 2,600,000 2,600,000
Redeemable, 5 1/4% Series 40,000 70,000
------------------- -------------------
2,640,000 1% 2,670,000 1%
------------------- -------------------
Long-Term Debt:

Series Due
------------------------------- -----
First mortgage bonds-
8.824% 1998 15,000,000 15,000,000
8.9% 1999 7,500,000 7,500,000
6.99% 2002 25,000,000 25,000,000
General mortgage bonds-
7% 2023 55,000,000 55,000,000
Pollution control obligations-
5.85%, Mercer Co., ND 2023 7,550,000 7,550,000
5.90%, Salix, IA 2023 4,000,000 4,000,000
5.90%, Grant Co., SD 2023 9,800,000 9,800,000
------------------- -------------------
123,850,000 123,850,000

Other long-term debt 3,772,500 3,350,000
Less-Due within one year (570,000) (600,000)
------------------- -------------------
127,052,500 52% 126,600,000 53%
------------------- -------------------
Total Capitalization $244,397,440 100% $238,936,931 100%
================== ==================

See Notes to Consolidated Financial Statements

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pages 20-24

(1) SIGNIFICANT ACCOUNTING POLICIES -

Basis of Consolidation:

The accompanying consolidated financial statements include the accounts of
Northwestern Public Service Company and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated
from the consolidated financial statements. The Company's regulated
businesses are subject to various state and federal agency regulation. The
accounting policies followed by these businesses are generally subject to
the Uniform System of Accounts of the Federal Energy Regulatory Commission
(FERC) which differ in some respects from those used by nonregulated
businesses. Manufacturing revenues and costs reflect the operations of
Lucht, Inc. which was acquired effective December 1, 1992.

Revenue Recognition and Gas Costs:

Electric and gas revenue is based on billings rendered to customers rather
than on meters read or energy delivered. Customers are billed monthly on a
cycle basis.

The commodity cost portion of gas purchased from wholesale suppliers but
not yet billed to customers is charged to deferred gas costs. This account
is subsequently credited in future periods as customers are billed for gas
used in prior periods. This method has the approximate effect of matching
gas costs with gas revenues in any financial reporting period. The demand
cost portion of gas costs, which is comprised of numerous components, is
expensed as incurred.

The Company has various long-term gas supply agreements with its pipeline
suppliers for the purchase of natural gas in the normal course of its gas
operations. Service agreements with Northern Natural Gas Company provide
for firm transportation of natural gas in South Dakota, while a service
agreement with KN Gas Supply Co. provides much of the Company's natural gas
supply in Nebraska.

Allowance for Funds Used During Construction:

The allowance for funds used during construction includes the costs of
equity and borrowed funds used to finance construction which are
capitalized in accordance with rules prescribed by the FERC. In 1994,
1993, and 1992, allowance for equity funds was $17,000, $32,000, and
$105,000. Allowance for borrowed funds for 1994, 1993, and 1992 was
$39,000, $50,000, and $158,000.

Cash Equivalents:

The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.

Depreciation and Maintenance:

Depreciation is computed using the straight-line method based on the
estimated useful lives of the various classes of property. Depreciation
provisions, as a percentage of the average balance of depreciable property,
were 3.39% in 1994, 3.37% in 1993, and 3.32% in 1992.

Depreciation rates include a provision for the Company's share of the
estimated costs to decommission three coal-fired generating plants at the
end of the useful life of each plant. The annual provision for such costs
is included in depreciation expense, while the accumulated provisions are
included in other deferred credits.

The costs of maintenance, repairs, and replacements of minor property items
are charged to maintenance expense accounts. Costs of renewals and
betterments of electric and gas property units are charged to property
accounts. The costs of units of electric and gas property removed from
service, net of removal costs and salvage, are charged to accumulated
depreciation. No profit or loss is recognized in connection with ordinary
retirements of depreciable electric and gas property.

Investments and Fair Value of Financial Instruments:

The Company's investments consist primarily of corporate preferred and
common stocks. In addition, the Company has investments in privately held
entities and ventures, safe harbor leases, and various money market and tax
exempt investment programs. Effective January 1, 1994, the Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115). SFAS 115
requires that certain investments in debt and equity securities be reported
at fair value. The cumulative effect of adopting SFAS 115 was a $9,302,000
gain, net of tax, and the net unrealized gain was $2,539,000 at December
31, 1994.

The Company's securities are classified under the provisions of SFAS 115.
As of December 31, 1994, the fair value, cost, and the gross unrealized
holding loss of the Company's preferred stock, classified as available for
sale, were $31,742,000, $34,948,000, and $3,206,000, respectively. The
fair value, cost, and the gross unrealized gains on the Company's
marketable equity securities, classified as available for sale, were
$8,480,000, $1,368,000, and $7,112,000, respectively. Other held to
maturity securities are reported on the cost basis of $6,016,000.

The Company uses the specific identification method for determining the
cost basis of its investments in available for sale securities. Gross
proceeds and realized gains and losses on sales of its available for sale
securities were not material in 1994.

Based on current market rates for debt of similar credit quality and
remaining maturities or quoted market prices for certain issues, the face
value of the Company's long-term debt approximates its market value.

Income Taxes:

Deferred income taxes relate primarily to the difference between book and
tax methods of depreciating property, taxable income derived from safe
harbor leases, the difference in the recognition of revenues for book and
tax purposes, and gas costs which are deferred for book purposes but
expensed currently for tax purposes.

For book purposes, investment tax credits were deferred and are being
amortized as a reduction of income tax expense over the useful lives of the
property which generated the credits.

Reclassifications:

Certain 1993 and 1992 amounts have been reclassified to conform to the 1994
presentation. Such reclassifications had no impact on net income and
common stock equity as previously reported.

(2) CAPITAL STOCK TRANSACTIONS AND
RETAINED EARNINGS AVAILABILITY -

There were no common stock transactions during the three years ended
December 31, 1994. Preferred stock transactions for the three years ended
December 31, 1994, have been limited to redemptions to satisfy mandatory
sinking fund requirements.

At December 31, 1994, $42,461,000 of retained earnings was available for
payment of dividends on common stock under the most restrictive of various
provisions which limit the payment of dividends on common stock.

(3) INCOME TAXES -

Income tax expense is comprised of the following (in thousands):

1994 1993 1992
------ ------ ------
Federal income -
Current tax expense $6,522 $9,038 $6,002
Deferred tax (benefit)
expense 1,509 (1,399) (47)
Investment tax credit (565) (566) (568)
State income 403 495 286
------ ------ ------
$7,869 $7,568 $5,673
====== ====== ======

The following table reconciles the Company's effective income tax rate to
the federal statutory rate:

1994 1993 1992
---- ---- ----
Federal statutory rate 35% 35% 34%
Amortization of investment
tax credit (2) (2) (3)
Dividends received deduction (3) (2) (2)
Other, net 4 2 -
---- ---- ----
34% 33% 29%
==== ==== ====

The components of the net deferred federal income tax liability recognized
in the Company's Consolidated Balance Sheet is related to the following
temporary differences at December 31 (in thousands):

1994 1993
-------- --------
Excess tax depreciation $(24,592) $(22,671)
Safe harbor leases (8,233) (9,171)
Property basis and life differences (7,526) (8,312)
Asset sales (4,766) (5,171)
Regulatory asset (4,052) (4,477)
Regulatory liability 4,189 4,189
Unbilled revenue 3,882 3,901
Unamortized investment tax credit 3,491 3,491
Other, net 278 2,537
-------- --------
$(37,329) $(35,684)
======== ========

(4) SHORT-TERM BORROWINGS -

The Company may issue short-term debt in the form of bank loans and
commercial paper as interim financing for general corporate purposes. The
bank loans may be obtained under short-term lines of credit which totaled
$12 million at December 31, 1994. The Company pays an annual fee
equivalent to 1/4% of the unused lines. There were no line of credit
borrowings outstanding at December 31, 1994 and 1993. At December 31,
1994, the Company had outstanding $9.8 million of commercial paper.

(5) LONG-TERM DEBT -

Substantially all of the Company's utility plant is subject to the lien of
the indentures securing its first mortgage bonds, general mortgage bonds
and pollution control obligations. General mortgage bonds of the Company
may be issued in amounts limited by property, earnings, and other
provisions of the mortgage indenture.

Lucht has a credit agreement with a bank whereby it may borrow up to $7
million in revolving and term loans. A balance of $3,772,500 was
outstanding under the revolving and term loan as of December 31, 1994 at a
weighted average interest rate of 8.90%. Borrowings under the agreement
are collateralized by all receivables, inventories, property, and other
assets of Lucht.

Annual scheduled retirements of the Company's long-term bond debt during
the next five years are $20,000,000 in 1998 and $12,500,000 in 1999.
Scheduled retirements of the Lucht long-term debt are $570,000 in 1995,
$1,070,000 in 1996, $570,000 in 1997, $570,000 in 1998, and $992,500 in
1999.

(6) JOINTLY OWNED PLANTS -

The Company has an ownership interest in three major electric generating
plants, all of which are operated by other utility companies. The Company
has an undivided interest in these facilities and is responsible for its
proportionate share of the capital and operating costs while being entitled
to its proportionate share of the power generated. The Company's interest
in each plant is reflected in the Consolidated Balance Sheet on a pro rata
basis, and its share of operating expenses is reflected in the Consolidated
Statement of Income and Retained Earnings. The participants finance their
own investment.

The Company has long-term coal contracts for delivery of lignite coal to
Coyote I and sub-bituminous coal to Neal #4. The lignite coal contract for
Big Stone expires in mid-1995, and the plant owners have negotiated and
secured a contract for Montana sub-bituminous coal for the period of mid-
1995 through 1999. The new sub-bituminous coal contract for Big Stone
requires minimum annual purchases of 1.2 million tons. The lignite contract
for Coyote I is a total requirements contract with a minimum obligation of
30,000 tons per week except during scheduled or forced outages. Neal #4
has a contract for delivery of sub-bituminous coal with an annual minimum
purchase requirement of 1.8 million tons. Information relating to the
Company's ownership interest in these facilities at December 31, 1994, is
as follows (dollars in thousands):

Big Stone Neal #4 Coyote I
--------- ------- --------
Utility plant in service $46,982 $35,002 $45,477
Accumulated depreciation $24,688 $15,097 $16,735
Construction work
in progress $788 $269 $270
Total plant capacity - mw 449 624 427
Company's share 23.4% 8.7% 10.0%
In-service date 1975 1979 1981
Coal contract
expiration date 1999 1998 2016

(7) EMPLOYEE RETIREMENT BENEFITS -

The Company maintains a noncontributory defined benefit pension plan
covering substantially all employees. The benefits to which an employee is
entitled under the plan are derived using a formula based on the number of
years of service and compensation levels as defined. The Company
determines the annual funding for its plan using the frozen initial
liability cost method. The Company's annual contribution is funded in
accordance with the requirements of ERISA. Assets of the plan consist
primarily of debt and equity securities.

The components of net periodic pension cost for the years ended December
31, 1994, 1993, and 1992 were as follows (in thousands):

1994 1993 1992
------ ------ ------
Service cost $ 948 $ 985 $ 966
Interest cost on projected
benefit obligation 3,176 3,048 2,951
Actual return on assets 586 (2,970) (5,779)
Net amortization and deferral (4,391) (886) 2,283
------ ------ ------
Net periodic pension cost $ 319 $ 177 $ 421
====== ====== ======

The following table reflects the funded status of the Company's pension
plan as of December 31, 1994, 1993, and 1992 (in thousands):

1994 1993 1992
------- ------- -------
Actuarial present value of:
Accumulated benefit obligation-
Vested $34,436 $34,052 $33,058
Nonvested 1,197 1,528 1,131
------- ------- -------
35,633 35,580 34,189
Provision for future pay
increases 3,993 5,515 5,234
------- ------- -------
Projected benefit obligation 39,626 41,095 39,423
Plan assets at fair value 44,501 46,912 45,366
------- ------- -------
Projected benefit obligation
less than plan assets (4,875) (5,817) (5,943)
Unrecognized transition
obligation (1,702) (1,856) (2,011)
Unrecognized net gain 5,365 6,941 7,910
------- ------- -------
Prepaid pension cost $(1,212) $ (732) $ (44)
======= ======= =======

The assumptions used in calculating the projected benefit obligation for
1994, 1993, and 1992 were as follows:

1994 1993 1992
------ ------ ------
Discount rate 8 1/2% 8% 8%
Expected rate of return on assets 8 1/2% 8 1/2% 8 1/2%
Long-term rate of increase
in compensation levels 4% 5% 5%

On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 112 (SFAS 112), "Employers' Accounting for Postemployment
Benefits." As the Company provides only certain limited disability-related
postemployment benefits to its employees, adoption of SFAS 112 had no
material impact on operating results.

The Company provides an employee savings plan which permits all employees
to defer receipt of compensation as provided in Section 401(k) of the
Internal Revenue Code. Under the plan, any employee may elect to direct up
to twelve percent of their gross compensation be contributed to the plan.
The Company contributes 50 cents for each one dollar contributed by the
employee, up to a maximum Company contribution of three percent of the
employee's gross compensation. Costs incurred under the plan were
$468,000, $442,000, and $411,000 in 1994, 1993, and 1992.

The Company also provides an Employee Stock Ownership Plan (ESOP) for most
full-time employees. The ESOP is funded primarily with federal income tax
savings which arise from tax laws applicable to such employee benefit
plans. Certain Company contributions and shares of stock acquired by the
ESOP are allocated to participants' accounts in proportion to the
compensation of employees during the particular year for which allocation
is made. Costs incurred under the plan were $705,000, $757,000, and
$794,000 in 1994, 1993, and 1992.

The Company also has various supplemental retirement plans for outside
directors and selected management employees. The plans are nonqualified
defined benefit plans that provide for certain amounts of salary
continuation in the event of death before or after retirement, or certain
supplemental retirement benefits in lieu of any death benefits. In
addition, the Company provides life insurance benefits to beneficiaries of
all eligible employees who represent a reasonable insurable risk. To
minimize the overall cost of plans providing life insurance benefits, the
Company has obtained life insurance coverage that is sufficient to fund
benefit obligations. Costs incurred under the plans were $552,000,
$544,000, and $508,000 in 1994, 1993, and 1992.

(8) ENVIRONMENTAL MATTERS -

(9) CUMULATIVE PREFERRED STOCK AND PREFERENCE STOCK -

The Company's cumulative preferred stock, 5 1/4% Series, is subject to
mandatory redemption at par through an annual sinking fund requirement, as
defined.

All cumulative preferred stock may be redeemed in whole or in part at the
option of the Board of Directors at any time upon at least 30 days notice
at the per share prices noted below, plus accrued dividends:

Redemption Prices
----------------------------------------------
Series Present Through Subsequent
------ ------- ------------ ---------------
4 1/2% $110.00 - -
5 1/4% 100.35 May 31, 1995 $100.18-$100.00

In the event of involuntary dissolution, all preferred stock outstanding
would have a preferential interest of $100 per share, plus accumulated
dividends, before any distribution to common stockholders.

The Company is also authorized to issue a maximum of 200,000 shares of
preference stock at a par value of $50 per share. No preference shares
have ever been issued.

(10) SEGMENTS OF BUSINESS -

The three primary segments of the Company's business are its electric,
natural gas distribution, and manufacturing operations. The following table
summarizes certain information specifically identifiable with each segment
as of or for the years ended December 31 (in thousands):

1994 1993 1992
-------- -------- --------
Depreciation Expense:
Electric $ 10,115 $ 9,841 $ 9,504
Gas 1,996 1,718 1,558
Manufacturing 328 247 -
------- -------- --------
12,439 $ 11,806 $ 11,062
------- -------- --------
Capital Expenditures:
Electric $ 16,023 $ 11,225 $ 12,605
Gas 6,425 8,483 5,905
Manufacturing 233 266 -
------- -------- --------
22,681 $ 19,974 $ 18,510
------- -------- --------
Assets:
Identifiable -
Electric $210,872 $206,962 $204,206
Gas 52,008 45,296 37,814
Manufacturing 13,843 11,352 9,161
Corporate assets 82,343 79,964 57,013
-------- -------- --------
$359,066 $343,574 $308,194
-------- -------- --------

Identifiable assets include all assets that are used directly in each
business segment. Corporate assets consist of assets not directly
assignable to a business segment, i.e., cash, investments, certain accounts
receivable, prepayments, and other miscellaneous current and deferred
assets.

(11) QUARTERLY FINANCIAL DATA (UNAUDITED) -

First Second Third Fourth
------- ------- ------- -------
(thousands except per share amounts)
1994:

Operating revenues $55,464 $33,757 $30,195 $37,850
Operating income 14,104 4,784 3,752 7,729
Net income 8,017 2,244 1,330 3,849
Earnings per
average common
share $ 1.04 $ .29 $ .17 $ .50
======= ======= ======= =======

1993:

Operating revenues $51,137 $33,783 $29,775 $38,562
Operating income 11,495 5,416 5,727 4,608
Net income 6,574 2,344 2,468 3,805
Earnings per
average common
share $ .85 $ .30 $ .32 $ .49
======= ======= ======= =======

<ARTICLE> UT

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 250,544,620
<OTHER-PROPERTY-AND-INVEST> 46,237,912
<TOTAL-CURRENT-ASSETS> 36,170,897
<TOTAL-DEFERRED-CHARGES> 26,112,211
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 359,065,640
<COMMON> 26,870,312
<CAPITAL-SURPLUS-PAID-IN> 29,922,847
<RETAINED-EARNINGS> 57,911,781
<TOTAL-COMMON-STOCKHOLDERS-EQ> 114,704,940
0
2,640,000
<LONG-TERM-DEBT-NET> 127,052,500
<SHORT-TERM-NOTES> 0
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<COMMERCIAL-PAPER-OBLIGATIONS> 9,800,000
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0
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<TOTAL-OPERATING-EXPENSES> 134,766,808
<OPERATING-INCOME-LOSS> 22,499,246
<OTHER-INCOME-NET> 2,610,791
<INCOME-BEFORE-INTEREST-EXPEN> 25,110,037
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119,888
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<COMMON-STOCK-DIVIDENDS> 12,820,980
<TOTAL-INTEREST-ON-BONDS> 8,823,085
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