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
For the fiscal year ended December 31, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File 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
Company Obligated Mandatorily Redeemable New York Stock Exchange
Security of Trust Holding Solely Parent
Debentures, $25.00 liquidation amount
(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. ( )
State the aggregate market value of the voting stock held by
nonaffiliated of the registrant:
$334,023,000 as of February 18, 1997
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
8,922,632 shares outstanding at February 18, 1997
DOCUMENTS INCORPORATED BY REFERENCE:
1996 Annual Report to Stockholders . . . . . . . . Parts I and II
Proxy Statement for 1997 Annual Meeting . . . . . . . . Parts I and III
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Northwestern Public Service Company (Company) is a diversified energy
distribution company with core operations engaged in the electric, natural
gas, and propane businesses. The Company generates and distributes
electric energy to 56,000 customers in eastern South Dakota. The Company
also purchases, distributes, sells, and transports natural gas to 77,000
customers in Central Nebraska and eastern South Dakota.
The Company acquired Synergy Group Incorporated, a major retail
propane distributor in August 1995. In 1996, Northwestern acquired eight
additional propane companies, including Empire Energy Corporation in
October, then the eighth largest retail marketer of propane in the U.S.,
and CGI Holdings, Inc., then the eighteenth largest retail marketer of
propane in the U.S. in December. Also, in December 1996, Northwestern
combined all of its propane businesses into Cornerstone Propane Partners,
L.P. (Cornerstone), a publicly traded master limited partnership which sold
9.8 million common units to the public on December 17, 1996, at a price of
$21 per unit. Net proceeds from the offering of common units, together
with the concurrent sale of $220 million of senior secured notes by a
subsidiary partnership, were used to redeem preferred stock of the combined
propane entities and repay acquisition loans and existing debt.
Northwestern's majority-owned subsidiaries hold 6.9 million subordinated
units or 41.4% of Cornerstone, while public unitholders, own 58.6% of the
Partnership. Cornerstone is the fifth largest retail propane marketer in
the U.S., serving approximately 360,000 customers from 312 service centers
in 26 states.
Through its other subsidiaries, the Company is engaged in additional
nonregulated operations as more fully discussed in the section entitled
"Nonregulated Operations". The Company was incorporated under the laws of
the State of Delaware in 1923 and is qualified to conduct its utility
business in the states of South Dakota, Nebraska, Iowa, and North Dakota.
The Company does not serve any utility 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
Financial information about industry segments is incorporated by
reference to Note 12 of the "Notes to Consolidated Financial Statements" on
page 19 of the financial section of the Company's 1996 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.
Unlike the Company's electric and natural gas businesses, propane
distribution rates and service areas are unregulated. In an unregulated
business such as propane, the Company is competing against a number of
other distributors. There are, however, certain inherent barriers for
customers to overcome in switching from one propane delivery service
provider to another. The Company believes that its ownership of propane
storage tanks installed at customers' premises, together with safety
regulations which prohibit other propane distributors from filling the
propane tanks and cylinders at the customers' premises, promotes long-
standing relationships which are typical in the retail propane industry.
The cost and inconvenience of switching tanks tend to minimize the
switching by customers among suppliers on the basis of minimal price
variations. Conversely, it also makes it more difficult for the Company to
acquire new customers, other than through acquisitions, in areas where
there are existing relationships between potential customers and other
distributors.
Weather patterns have a material impact on the Company's operating
performance for all three segments of its energy business. This impact is
particularly relevant for natural gas and propane. Because natural gas and
propane are heavily used for residential and commercial heating, the demand
for these products depends upon weather patterns throughout the Company's
service area. With a larger proportion of its operations related to
seasonal natural gas and propane sales in the future, the distribution of
the Company's quarterly operating performance will be different than in
historical periods. A significantly greater portion of the Company's
future operating income is expected to be recognized in the first and
fourth quarters related to higher revenues from the heating season.
Operating income for the second and third quarters is expected to be
significantly less than historical periods.
ELECTRIC BUSINESS
ELECTRIC SALES. On a consolidated basis, 21% of the Company's 1996
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, 37% of 1996 total electric sales was from
residential sales, 55% was from commercial and industrial sales, 1% was
from street lighting and sales to public authorities, and 7% 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
1996, 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, Iowa.
At December 31, 1996, the aggregate net summer peaking capacity of all
Company-owned electric generating units was 306,572 kw, consisting of
102,703 kw from Big Stone (the Company's 23.4% share), 42,700 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. In addition to those
plant facilities, the Company entered into an agreement in 1995 to purchase
up to 14,950 kw of firm capacity from Basin Electric Cooperative to assist
in meeting peak capacity demands. The Company has also contracted with
Nebraska Public Power District to purchase various amounts of firm capacity
to further assist in supplying peak energy demands.
The Company is a summer peaking utility. The 1996 peak demand of
260,159 kw occurred on June 27, 1996. Total system capability at the time
of peak was 321,522 kw. The reserve margin for 1996 was 19%. 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
Federal Energy Regulatory Commission (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
Western Area Power Administration; 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 has finalized 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
1996. North Dakota lignite is the primary fuel at Coyote. The Company
burned Montana sub-bituminous coal at Big Stone during 1996. During 1996,
the average heating value of lignite burned was 6,974 BTU per pound at
Coyote. The sulfur content of this lignite is typically between 0.8% and
1.2%. The Montana sub-bituminous coal burned at Big Stone contained an
average heating value of 8,825 BTU per pound and a sulfur content between
0.55% and 0.75%. Neal burned Wyoming sub-bituminous coal which had an
average heating value of 8,491 BTU per pound during 1995. Typically, the
sulfur content of this coal is between 0.30% and 0.40%.
The Company's fuel costs have remained relatively stable. The average
cost by type of fuel burned is shown below for the periods indicated:
Cost Per Million BTU % of 1996
Year Ended December 31 Megawatt
---------------------- Hours
Fuel Type 1994 1995 1996 Generated
----- ----- ---- ---------
Lignite - Big Stone $1.10 $1.09 - 0%
Sub-bituminous-Big Stone - 1.00 $.95 46%
Lignite - Coyote** .86 .83 .86 26%
Sub-bituminous-Neal .74 .76 .75 28%
Natural Gas 2.21 1.80 2.24 *
Oil 3.90 3.96 4.65 *
*Combined for approximately one percent.
**Includes pollution control reagent.
During 1996, the average delivered cost per ton of lignite was $11.25
to Coyote. The average cost per ton of sub-bituminous coal received at Big
Stone for 1996 was $16.91. The average cost for coal delivered to Neal was
$12.08 per ton for 1996. Such amounts include severance taxes imposed by
the states of North Dakota and Montana and a production tax imposed by the
state of Wyoming. While the effect on the Company's fuel costs of future
changes in severance or production taxes cannot be predicted, any 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 contract for delivery of Montana sub-bituminous
coal to Big Stone expires in 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 Coyote, which expires in 2016,
provides for an adequate fuel supply for the estimated economic life of
that plant. Neal 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, 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 1996 is
insignificant when compared to total coal consumption at the plant.
The fossil fuel supplies for Big Stone and Neal are delivered via unit
trains belonging to the respective plants' owners and locomotives of the
Burlington Northern Railroad and the Union Pacific Railroad, respectively.
The lignite supply for Coyote is delivered via conveyor at this "mine-
mouth" plant. In early 1996, the Company and its partners at Big Stone
executed a fifteen year operating lease agreement for unit train cars.
This agreement was effective late in 1996. The prior unit train cars were
sold to another third party independent of the leasing transaction.
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 8 of the "Notes to Consolidated
Statements" on page 17 of the financial section of the Company's 1996
Annual Report to Stockholders filed as an Exhibit hereto.
NATURAL GAS BUSINESS
NATURAL GAS SALES AND DEMAND. On a consolidated basis, 21% of the
Company's 1996 operating revenues were from the sale of natural gas energy.
During 1996, the Company derived 55% of its natural gas revenues from South
Dakota and 45% from Nebraska. The Company's peak daily sendout was 134,072
MMBTU.
CAPABILITY AND SUPPLY. The Company owns and operates natural gas
distribution systems serving 38,023 customers in eastern South Dakota. In
1996 the Company completed construction of a new natural gas pipeline in
northern South Dakota which increased internal capacity by 15,000 MMBTU per
day. In 1995, the Company executed a service agreement with Cibola Energy
Services Corporation (Cibola) whereby Cibola coordinates supply and
transportation services. The agreement with Cibola and Northern Natural
Gas pipeline and storage capacity, supplemented with peak shaving capacity
allows the Company to meet its peak day system needs. This agreement
provides for firm deliverable pipeline capacity of approximately 49,300
MMBTU per day in South Dakota.
In Nebraska, the Company owns and operates natural gas distribution
systems serving 39,455 retail customers in the village of Alda and the
cities of Grand Island, Kearney, and North Platte, Nebraska. The Company
purchases all of its natural gas for these systems through KN Gas
Marketing, Inc. (KN) under a service agreement entered in 1995 whereby KN
coordinates supply and transportation services. This agreement provides
for firm deliverable pipeline capacity of approximately 58,000 MMBTU per
day in Nebraska.
In 1992, 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. The Company has operated under the restructured
environment during the past three years.
To supplement firm gas supplies, the Company's service agreements with
Cibola and KN also provide 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 17% of peak
day requirements. The propane-air plants provide an economic alternative
to pipeline transportation charges to meet the 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.
PROPANE BUSINESS
Effective August 15, 1995, the Company acquired Synergy Group, Inc.
(Synergy), a retail propane distributor with operations in the eastern and
south-central regions of the United States. Synergy was acquired through a
subsidiary (SYN Inc.) formed for this purpose. Late in 1995, two smaller
propane companies were acquired: Western Gas on November 20 and Myers
Propane Gas Company on December 7. Propane complements the Company's
electric and natural gas distribution businesses and adds geographical
diversity to its operations.
On October 7, 1996, the Company completed the acquisition of Empire
Energy Corporation (Energy), a retail distributor of propane. Energy
maintained 168 retail branches serving approximately 130,000 customers in
10 states, primarily in southeast and midwest regions of the United States.
On December 17, 1996, a wholly owned subsidiary of Northwestern Growth
Corporation acquired CGI Holdings, Inc. (Coast). Immediately after the
acquisition the Company combined the propane distribution businesses of
Coast, Energy, Myers and Synergy into Cornerstone. As part of an IPO on
the same date, Cornerstone sold a total of 9,821,000 Common Units at a
price to the public of $21 a unit. Cornerstone's capital consists of
9,821,000 Common Units, 6,597,619 subordinated units (Subordinated Units)
representing limited partner interests and a 1% general partner interest.
The Company's majority owned subsidiaries own all 6,597,619 Subordinated
Units and an aggregate 2% general partner interest in the Partnership, or a
combined 41.4% effective interest in the Partnership.
The net proceeds from the sale of 9,821,000 Common Units of
Cornerstone and the net proceeds from the issuance of Cornerstone Senior
Notes were used to repay term and revolving debt of Coast, Energy and
Synergy, including accrued interest and any prepayment premiums which were
assumed by the Partnership. In addition, the preferred stock of Synergy
was redeemed at a premium. As a result of these repayments, the Company
recorded a one-time after tax gain of $.19 per share from the prepayment of
the term debt and redemption of preferred stock investment in Synergy.
Additional information regarding the acquisitions is incorporated by
reference to Note 2 of the "Notes to Consolidated Statements" on page 13 of
the financial section of the Company's 1996 Annual Report to Stockholders,
filed as an Exhibit hereto.
SALES. On a consolidated basis, 51% of the Company's 1996 operating
revenues were from the sale of propane. Operating revenues recorded of
$175.1 million on sales of 160 million gallons do not reflect a full year
of operations due to various acquisitions.
Similar to its electric and natural gas businesses, no single customer
accounts for a significant portion of the Company's propane sales. By
customer category, propane sales were 50% residential, 21% commercial and
industrial, 13% agriculture related, 4% other, and 12% to wholesale
customers.
Agricultural uses of propane include tobacco curing, crop drying, and
poultry breeding. Other customers include industrial customers who use
propane to fire furnaces, as a cutting gas, and in other process
applications. Other industrial customers include large scale heating
accounts, local gas utility customers who maintain a standby propane
capability for use during peak demand periods, and customers who use
propane as a feedstock in manufacturing processes.
SUPPLY AND DISTRIBUTION. The Company purchased propane from various
suppliers, including major domestic oil companies and independent producers
of gas liquid and oil and made occasional spot market transactions. The
majority of the propane purchases were on a contractual basis under one-
year agreements subject to annual renewal. The largest supplier provided
approximately 13% of the total volumes purchased under contract. The
percentage of contract purchases may vary from year to year depending on a
number of factors. Supply contracts generally provide for pricing in
accordance with posted prices at the time of delivery or contract prices
established at major storage points, and some contracts include a pricing
formula that typically is based on such market prices. The Company has
established relationships with a number of suppliers and believes it will
have ample sources of supply under comparable terms to draw upon to meet
the necessary propane requirements if it were to discontinue purchasing
propane from its two largest suppliers. The Company has not experienced a
shortage that has prevented it from satisfying its own customers' needs and
does not foresee any significant shortage in the supply of propane that
would cause a disruption in meeting the needs of the Company's customers as
well.
The Company primarily uses common carriers and railroad tank cars to
transport propane from refineries, natural gas processing plants or
pipeline terminals to the Company's bulk storage plants. The
transportation of propane requires specialized equipment. The trucks and
railroad cars utilized for this purpose carry specialized steel tanks that
maintain the propane in a liquefied state.
Propane delivery to customers is made by means of 917 bulk delivery
tank trucks owned by the Company. Propane is stored by the customers on
their premises in stationary steel tanks generally ranging in capacity from
120 to 1,000 gallons, with large users having tanks with a capacity of
30,000 gallons. A majority of the propane storage tanks used by the
Company's residential and commercial customers are owned by the Company.
In addition, a certain number of Company owned tanks are provided to
customers under a leasing agreement.
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 (Energy Act) 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 facilities. 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 with respect to retail
wheeling 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.
Weather conditions have a significant impact on the demand for propane
for both heating and agricultural purposes. Many customers of Cornerstone
rely heavily on propane as a heating fuel. Actual weather conditions can
vary substantially from year to year, significantly affecting Cornerstone's
financial performance. Furthermore, variations in weather in one or more
regions in which Cornerstone operates can significantly affect the total
volumes sold by Cornerstone and the margins realized on such sales and,
consequently Cornerstone's results of operations.
The retail propane business is a margin-based business in which gross
profits depend on the excess of sales prices over propane supply costs.
Consequently, Cornerstone's profitability will be sensitive to changes in
wholesale propane prices. Propane is a commodity, the market price of
which can be subject to volatile changes in response to changes in supply
or other market conditions. As it may not be possible immediately to pass
on to customers rapid increases in the wholesale cost of propane, such
increases could reduce Cornerstone's gross profits.
Cornerstone's profitability is affected by the competition for
customers among all participants in the retail propane business. Some of
Cornerstone's competitors are larger or have greater financial resources
than Cornerstone. Should a competitor attempt to increase market share by
reducing prices, Cornerstone's financial condition and results of
operations could be materially adversely affected. In addition, propane
competes with other sources of energy, some of which are less costly for
equivalent energy value.
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, effective July 1, 1976, 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, 1996. A natural gas increase was
implemented in South Dakota on November 15, 1994. Effective April 1, 1995,
the Company implemented increased rates related to its Nebraska natural gas
service area as a result of a negotiated settlement with representatives of
the four communities in which the Company operates. These new rates will
generate additional annual revenues of $2.3 million, based on normal
weather, or an overall increase of 8.3%.
On April 24, 1996, FERC issued its final rule (Order No. 888) on
wholesale electric transmission open access and recovery of stranded costs.
On July 9, 1996, the Company filed proposed tariffs with FERC in compliance
with Order 888. Under the proposed tariffs, which became effective on July
10, 1996, eligible transmission service customers can choose to purchase
transmission services from a variety of options ranging from full use of
the transmission network on a firm long-term basis to a fully interruptible
service available on an hourly basis. The proposed tariffs also include a
full range of ancillary services necessary to support the transmission of
energy while maintaining reliable operations of the Company's transmission
system. The Company is awaiting final approval of the proposed tariffs by
FERC.
On August 27, 1996, the Company filed a Request for Waiver of the
requirements of FERC Order No. 889 as it relates to the Standards of
Conduct. The Standards of Conduct require companies to physically separate
their transmission operations/reliability functions from their
marketing/merchant functions. The Request for Waiver is based on criteria
established by FERC, exempting small public utilities as defined by the
United States Small Business Administration. The Request for Waiver was
approved by FERC on November 26, 1996.
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.
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 changing its fuel source from North Dakota lignite to low-
sulfur western sub-bituminous coal available in the region as evidenced by
the switch made to Montana sub-bituminous coal in August 1995. The
Company's other baseload plants, Coyote and Neal, 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 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 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 taking into account 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 above ground and
underground storage tanks. The Company's fuel oil storage facilities at
its generating plants in South Dakota are affected by the above ground 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 took remedial action during 1995 by
permanently removing the residues contained in the soil through a thermal
desorption process. In May 1996, EPA Region VIII (which includes South
Dakota, North Dakota, Colorado, Utah, Wyoming, and Montana) selected the
Company to receive an Outstanding Achievement Award for Leadership and
Innovation. EPA Region VIII chose recipients who had demonstrated
protection and enhancement of Region VIII's environment. Adjustments of
the Company's natural gas rates to reflect the costs associated with the
remediation were approved by the South Dakota Public Utilities Commission.
The Company is pursuing recovery from insurance carriers. Any recovery
from insurance regarding the MGP soil remediation costs, less costs of
insurance recovery, will be passed back to customers.
OTHER. 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 utility related 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.
PROPANE TRANSPORTATION AND SAFETY MATTERS. The Company's propane
operations are subject to various Federal, state, and local laws governing
the transportation, storage and distribution of propane, occupational
health and safety, and other matters. All states in which the Company
operates have adopted fire safety codes that regulate the storage and
distribution of propane. In some states, these laws are administered by
state agencies, and in others they are administered on a municipal level.
Certain municipalities prohibit the underground installation of propane
furnaces and appliances, and certain states are considering the adoption of
similar regulations.
The Company currently meets and exceeds Federal regulations requiring
that all persons employed in the handling of propane gas be trained in
proper handling and operating procedures. All employees have participated,
or will participate within 90 days of their employment date, in hazardous
materials training. The Company has established ongoing training programs
in all phases of product knowledge and safety including participation in
the National Propane Gas Association's (NPGA) Certified Employee Training
Program.
CAPITAL SPENDING AND FINANCING
The Company's primary ongoing capital requirements include the funding
of its energy business 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 1996, 1995, and 1994 were
$35.2 million, $29.6 million, and $22.7 million. Construction expenditures
during the last three years included expenditures related to an operations
center expected to provide cost savings and operating efficiencies through
consolidation of activities, the installation of an additional 43 mw of
internal peaking capacity, and the expansion of the Company's natural gas
system into additional communities in eastern South Dakota. In addition,
1996 and 1995 included $9.8 million and $4.7 million of capital
expenditures related to propane. Construction expenditures for 1997,
excluding propane, are estimated to be $14.5 million. The majority of the
projected expenditures will be spent on enhancements of the electric and
gas distribution systems. Estimated electric and natural gas related
construction expenditures for the years 1997 through 2001 are expected to
be $69.1 million. Nonregulated capital expenditures for 1997 are estimated
to be $4.8 million. Estimated nonregulated capital expenditures for the
years 1997 through 2001 are expected to be $18.8 million.
Capital requirements for the mandatory retirement of long-term debt
and mandatory preferred stock sinking fund redemption totaled $400,000,
$600,000 and $600,000 for the years ended 1996, 1995, and 1994,
respectively. It is expected that such mandatory retirements will be $1.2
million in 1997, $21.5 million in 1998, $14.0 million in 1999, $6.5 million
in 2000, and $6.5 million in 2001.
The Company anticipates that future capital requirements will be met
by both internally generated cash flows, available investments and
available external financing.
The Company plans to 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 1 - 6 of the financial section of the Company's 1996 Annual Report to
Stockholders, filed as an Exhibit hereto.
NONREGULATED 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 ENERGY CORPORATION. Northwestern Energy Corporation
markets natural gas and energy related services, and has interests in
nonregulated energy holdings.
NORTHWESTERN GROWTH CORPORATION (NGC). NGC was incorporated under the
laws of South Dakota in 1994 to pursue and manage nonutility investments
and development activities. NGC owns majority common stock control of SYN
Inc., the entity created to acquire Synergy and Western Gas. Other NGC
assets include a portfolio of marketable securities and the investments of
two subsidiaries: Northwestern Networks, Inc., which holds a common stock
investment in LodgeNet Entertainment Corporation, a provider of television
entertainment and information systems to hotels and motels, and
Northwestern Systems, Inc., which owns 100% of the common stock of Lucht
Inc., a firm that develops, manufactures, and markets multi-image
photographic printers and other related equipment. Although the primary
focus of NGC's investment program will be to continue 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 non-energy industries that meet return and
capital gain requirements.
Additional information relating to nonregulated business is
incorporated by reference to "Management's Discussion and Analysis" on
pages 1 - 6 of the financial section of the Company's 1996 Annual Report to
Stockholders, filed as an Exhibit hereto.
EMPLOYEES
At December 31, 1996, the Company had 436 utility employees. A three-
year collective bargaining agreement which expires June 30, 1998, covers
239 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.
At December 31, 1996, the Company had 1,995 employees involved in its
propane operations. None of these employees are represented by unions.
The Company has not experienced any work stoppage or other significant
labor problems and believes it has a good relationship with its employees.
At December 31, 1996, the Company had 150 employees involved in its
manufacturing operations. None of these employees are represented by
unions. The Company has not experienced any work stoppage or other
significant labor problems and believes it has a good relationship with its
employees.
EXECUTIVE OFFICERS OF THE REGISTRANT
R. A. Wilkens, Chairman of the Board, age 68
Chairman of the Board of Directors since February 1994. Formerly
Chief Executive Officer from 1990-1994; President from 1980-1994.
M. D. Lewis, President and Chief Executive Officer, age 49
President and Chief Executive Officer since February 1994; formerly
Executive Vice President from May 1993, to February 1994; Executive
Vice President-Corporate Services 1992-1993; Vice President-Corporate
Services 1987-1992; Assistant Corporate Secretary 1982-1993. Mr.
Lewis also serves as Chairman and Chief Executive Officer of
Northwestern Growth Corporation since September 1994. Mr. Lewis is
also a member of the board of directors of Cornerstone Propane
Partners, Lucht, Inc. and Northwestern Energy Corporation. Mr. Lewis
has been elected to serve as Chairman of the Board of Northwestern
Public Service effective May 1, 1997.
R. R. Hylland, Executive Vice President, age 36
Executive Vice President - Strategic Development since November 1995;
formerly Vice President-Strategic Development from August 1995 to
November 1995; Vice President Corporate Development from 1993-1995;
Vice President-Finance from 1991-1995; Treasurer from 1990-1994; Mr.
Hylland also serves as President and Chief Operating Officer of
Northwestern Growth Corporation since September 1994. Mr. Hylland is
also a member of the board of directors of Northwestern Public
Service, Northwestern Growth Corporation, LodgeNet Entertainment
Corporation, Lucht, Inc., Cornerstone Propane Partners and Franklin
Industries.
A. D. Dietrich, Vice President - Administration and Corporate Secretary,
age 46
Vice President-Administration since November 1994; Corporate Secretary
since October 1989; formerly Vice President-Legal May 1990-November
1994.
A. R. Donnell, Vice President - Energy Operations, age 53
Vice President-Energy Operations since November 1994; formerly Vice
President-Electric Operations July 1987-November 1994.
T. A. Gulbranson, Vice President - Energy Services, age 49
Vice President - Energy Services since January 1996; formerly Vice
President November 1994-January 1996; Vice President-Corporate
Services May 1993-November 1994; Vice President-Community Development
1988-1993.
R. F. Leyendecker, Vice President - Market Development, age 51
Vice President-Market Development since January 1996; formerly Vice
President-Energy Services November 1994-January 1996; Vice President-
Rates & Regulation 1987-November 1994.
W. K. Lotsberg, Vice President - Public Affairs, age 54
Vice President-Public Affairs since May 1994; formerly Vice President-
Consumer Affairs March 1989-May 1994.
D. K. Newell, Vice President - Finance, age 40
Vice President - Finance since July 1995. Joined the Company in July
1995. Formerly CFO, Vice President - Finance and Treasurer with Energy
Fuels Corporation. Mr. Newell also serves as Executive Vice President
of Northwestern Growth Corporation since July 1995. Mr. Newell also
is a member of the board of directors of Northwestern Growth
Corporation, Cornerstone Propane Partners, Lucht, Inc. and Franklin
Industries.
D. C. Oberlander, Assistant Vice President, age 51
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, Vice President - Communications and Treasurer, age 45
Vice President-Communications since February 1997; Treasurer since
November 1994; formerly Manager-Corporate Accounting 1987-November
1994. Ms. Thaden also serves as Vice President and Treasurer of
Northwestern Growth Corporation since September 1995.
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. No family relationships
exist between any officers of the Company.
ITEM 2. PROPERTIES
ELECTRIC PROPERTY
The Company's electric properties consist of an interconnected and
integrated system. The Company, Otter Tail Power Company (Otter Tail), and
Montana-Dakota Utilities Co. (MDU) jointly own Big Stone, a 455,783
kilowatt (kw) nameplate capacity coal-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, a
455,782 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, which is operated by MDU for the
benefit of the owners.
The Company is one of 14 power suppliers which jointly own Neal, a
639,999 kw nameplate capacity coal-fueled electric generating plant and
related transmission facilities located near Sioux City, Iowa. MidAmerican
Energy Company is principal owner of Neal and is the operator of the unit.
The Company has an 8.7% interest in Neal.
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 and Neal, the Company
owns and operates 19 fuel oil and gas-fired units for peaking and reserve
capacity.
As of December 31, 1996, the aggregate nameplate capacity of all
Company-owned electric generating units was 327,419 kw, with an aggregate
net summer peaking capacity of 306,572 kw and a net winter peaking capacity
of 327,449 kw. In addition to owned capacity, the Company entered into two
contractual agreements to purchase firm capacity to assist in meeting peak
energy needs.
The Company's interconnected transmission system consists of 321.8
miles operating at 115 kilovolts (kv) and 897.6 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, and 23.1 miles of 345 kv line from Coyote. In addition to these
lines, the Company owns 1,732.3 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 350,949 kva.
GAS PROPERTY
On December 31, 1996, the Company owned 1,017 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, 1996, the Company owned 659 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.
PROPANE PROPERTY
The Company operates 312 service centers consisting of appliance
showrooms, bulk storage plants, warehousing space, maintenance facilities,
garages, and storage depots of large propane tanks with associated
distribution equipment. These service center facilities are located in 26
states comprised of Texas, New Mexico, Oklahoma, Mississippi, Tennessee,
Arkansas, Missouri, Vermont, New Hampshire, New York, Maryland, New Jersey,
Virginia, North Carolina, South Carolina, Ohio, Florida, California,
Alaska, Nevada, Utah, Indiana, Illinois, Georgia, Alabama, and Kentucky.
CHARACTER OF OWNERSHIP
All mortgage bonds issued under the Company's General Mortgage
Indenture and Deed of Trust dated as of August 1, 1993 (the "Indenture")
are secured by a first mortgage lien on the Company's properties used in
the generation, production, transmission or distribution of electric energy
or the distribution of natural gas in any form and for any purpose, with
certain exceptions expressly provided in the Indenture. The principal
offices and properties of the Company are held in fee and are free from
other encumbrances, subject to minor exceptions, none of which is of such a
nature as substantially to impair the usefulness to the Company of such
properties. In general, the electric lines and natural gas lines and mains
are located on land not owned in fee, but are covered by necessary consents
of various governmental authorities or by appropriate rights obtained from
owners of private property. These consents and rights are deemed adequate
for the purposes for which they are being used.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various pending proceedings and suits, but
in the judgment of management after consultation with counsel for the
Company, the nature of such proceedings and suits, and the amounts involved
do not depart from the routine litigation and proceedings incident to the
kind of business conducted by the Company.
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 information required by this Item 5 is incorporated by reference
to page 21 of the Company's 1996 Annual Report to Stockholders, filed as an
Exhibit hereto.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item 6 is incorporated by reference
to "Financial Statistics" on page 21 of the financial section of the
Company's 1996 Annual Report to Stockholders, filed as an Exhibit hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS 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 1 - 6 of the financial
section of the Company's 1996 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 11 -
20, of the financial section of the Company's 1996 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 15, 1997, 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, 1996.
The information relating to the Company's executive officers is set
forth in Part I of this Annual Report on Form 10-K.
Reports to the Securities and Exchange Commission
The information required by Item 405 of Regulation S-K is incorporated
by reference to the information under "Reports to the Securities and
Exchange Commission" in the Company's definitive Proxy Statement dated
March 15, 1997 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, 1996.
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 15, 1997, 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, 1996.
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 15, 1997, 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, 1996.
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, 1996:
Page in financial
section of Annual
Report to Stockholders
FINANCIAL STATEMENTS:
Report of Independent Public Accountants 7
Consolidated Statements of Income and
Retained Earnings for the Three Years
Ended December 31, 1996 8
Consolidated Statement of Cash Flows for the
Three Years Ended December 31, 1996 9
Consolidated Balance Sheets,
December 31, 1996 and 1995 10
Notes to Consolidated Financial Statements 11-20
Quarterly Unaudited Financial Data for the
Two Years Ended December 31, 1996 20
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 26
Schedule II - Valuation and Qualifying Accounts 27
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.
3. Exhibits
The exhibits listed on the Exhibit Index beginning on page 28 of this
Annual Report on Form 10-K are filed herewith or are incorporated herein by
reference to other filings.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter ended
December 31, 1996.
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 (Registrant)
/s/ M. D. Lewis
M. D. Lewis, Director and President and Chief Executive Officer
March 15th, 1997
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, Director and Executive Vice President
/s/ D. K. Newell
- -------------------------------
D. K. Newell, Vice President-Finance (Principal Financial Officer)
/s/ Rogene A. Thaden
- -------------------------------
Rogene A. Thaden, Vice President-Communications and 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/ Gary Olson
- -------------------------------
Gary Olson, Director
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 31,
1997. Our audit was made for the purpose of forming an opinion on those
financial statements taken as a whole. The schedule listed in the table of
contents of financial statements is the responsibility of the Company's
management and is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule 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 31, 1997
<PAGE>
<TABLE>
NORTHWESTERN PUBLIC SERVICE COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
Column A Column B Column C Column D Column E
- ---------------------------- ----------- --------------------- --------- -----------
Additions
Balance ---------------------
Beginning Charged to Charged Balance
of Period Costs and to Other Deductions End
Description <F1> Expenses Expenses <F1> of Period
- ---------------------------- ------------ ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1996
- ------------------------------------
RESERVES DEDUCTED
FROM APPLICABLE ASSETS:
Uncollectible accounts $ 8,704,698 $3,109,374 $ $(6,445,418) $ 5,368,654
=========== =========== ======== ============ ===========
OTHER DEFERRED CREDITS:
Reserve for decommissioning costs $ 7,788,482 $ 511,341 $ $ $ 8,299,823
=========== =========== ======== ============ ===========
FOR THE YEAR ENDED DECEMBER 31, 1995
- ------------------------------------
RESERVES DEDUCTED
FROM APPLICABLE ASSETS:
Uncollectible accounts $ 5,907,675 $ 827,909 $ $ (310,681) $ 6,424,903
=========== =========== ======== ============ ===========
OTHER DEFERRED CREDITS:
Reserve for decommissioning costs $ 7,278,173 $ 510,309 $ $ $ 7,788,482
=========== =========== ======== ============ ===========
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 costs $ 6,769,631 $ 508,542 $ $ $ 7,278,173
=========== =========== ======== ============ ===========
<FN>
<F1> The beginning balance for 1996 and 1995 were restated to reflect propane acquisitions that
occurred during those periods.
<F2> 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, 1996
(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(a)(3)
Certificate of Amendment of Restated Certificate of Incorporation, dated
May 16, 1996.
3(a)(4)
Certificate of Retirement of Preferred Stocks, dated June 20, 1996.
3(b)
Registrant's By-Laws, as amended, dated August 7, 1996.
(4) INDENTURES AND POLLUTION CONTROL FACILITY OBLIGATIONS
4(a)(1)
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)(2)
Supplemental Indenture, dated August 15, 1993, from 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)(3)
Letter Agreement, dated July 28, 1995, from the Company to The Chase
Manhattan Bank (National Association), as Trustee, the Travelers Insurance
Company, and Metropolitan Life Insurance Company pursuant to which each
party agreed to amend the 1940 Mortgage Indenture and allow bonds issued
under the 1940 Indenture be exchanged for comparable bonds under the 1993
General Mortgage Indenture and Deed of Trust.
4(a)(4)
Supplemental Indenture, dated August 1, 1995, from 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 30, 1995, Commission
File No. 0-692.
4(a)(5)
Supplemental Indenture, dated September 1, 1995, from the Company to The
Chase Manhattan Bank (National Association), as Trustee, concerning the New
Mortgage Bonds, 6.99% Series due 2002.
4(a)(6)
Supplemental Indenture, dated September 1, 1995, from the Company to The
Chase Manhattan Bank (National Association), as Trustee, concerning the New
Mortgage Bonds, 8.824% Series due 1998.
4(a)(7)
Supplemental Indenture, dated September 1, 1995, from the Company to The
Chase Manhattan Bank (National Association), as Trustee, concerning the New
Mortgage Bonds, 8.90% Series due 1999.
4(b)(1)
Preferred Securities Guarantee Agreement, dated August 3, 1995, between the
Company and Wilmington Trust Company is incorporated by reference to
Exhibit 1(d) of Form 8-K, dated August 30, 1995, Commission File No. 0-692.
4(b)(2)
Declaration of Trust of NWPS Capital Financing I is incorporated by
reference to Exhibit 4(d) of Form 8-K, dated August 30, 1995, Commission
File No. 0-692.
4(b)(3)
Amended and Restated Declaration of Trust of NWPS Capital Financing I is
incorporated by reference to Exhibit 4(e) of Form 8-K, dated August 30,
1995, Commission File No. 0-692.
4(b)(4)
Subordinated Debt Securities Indenture, dated August 1, 1995, between the
Company and The Chase Manhattan Bank (National Association), as Trustee, is
incorporated by reference to Exhibit 4(f) of Form 8-K, dated August 30,
1995, Commission File No. 0-692.
4(b)(5)
First Supplemental Indenture, dated August 1, 1995, to the Subordinated
Debt Securities Indenture is incorporated by reference to Exhibit 4(g) of
Form 8-K, dated August 30, 1995, Commission File No. 0-692.
4(c)(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(c)(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(c)(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(c)(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)
Supplemental Income Security (Retirement) Plan for Directors, Officers and
Managers, as amended January 1, 1997.
10(a)(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(a)(3)
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(a)(4)
Director Retirement Plan, dated November 4, 1987, as amended May 3, 1995,
is incorporated by reference to Exhibit 10(a)(4) to Form 10-K for the year
ended December 31, 1995, Commission File No. 0-692.
10(a)(5)
Long-term Incentive Compensation Plan (Phantom Stock Unit Plan) for
Directors and Officers, dated February 1, 1989, as amended May 3, 1996.
10(a)(6)
Form of Severance Agreement for Officers, dated November 1, 1995, is
incorporated by reference to Exhibit 10(a)(6) to Form 10-K for the year
ended December 31, 1995, Commission File No. 0-692.
10(a)(7)
Annual Performance Incentive Plan (NorthSTAR Plan) for all eligible
employees, as amended May 1, 1996.
(13) REPORT FURNISHED TO SECURITY HOLDERS
13(a)
Annual Report for fiscal year ended December 31, 1996, furnished to
stockholders of record on March 11, 1997 (exhibit filed herewith).
(21) SUBSIDIARIES OF REGISTRANT
State of Jurisdiction
of Incorporation
Name or Limited Partnership
- ------------------------------------- ----------------------
Northwestern Public Service Company Delaware
Grant, Inc. South Dakota
Northwestern Growth Corporation South Dakota
Northwestern Networks, Inc. South Dakota
Northwestern Systems, Inc. South Dakota
Lucht Inc. Delaware
Cornerstone Propane GP, Inc. California
SYN Inc. (1) Delaware
Cornerstone Propane Delaware -
Partners, L.P.(2) Limited Partnership
Northwestern Energy Corporation South Dakota
Nekota Resources Inc. South Dakota
(1) Cornerstone Propane GP, Inc. owns 82.5% of the common stock of
SYN Inc.
(2) Cornerstone Propane GP, Inc. and SYN Inc. own a combined partnership
interest of 41.4% of Cornerstone Propane Partners, L.P.
Exhibit 3(a)(3)
CERTIFICATE OF AMENDMENT OF
RESTATED CERTIFICATE OF INCORPORATION OF
NORTHWESTERN PUBLIC SERVICE COMPANY
Northwestern Public Service Company, a corporation organized and
existing under the laws of the State of Delaware (hereinafter called the
"Company"), by its Chairman of the Board of Directors and its Corporate
Secretary, does hereby certify as follows:
1. That the Board of Directors of the Company at a meeting of said
Board duly called, convened and held on February 7, 1996, proposed six
amendments to the Restated Certificate of Incorporation of the Company, as
previously amended, which amendments affected Article Fourth of said
Restated Certificate of Incorporation, and at said meeting adopted a
resolution setting forth the amendments proposed, unanimously declaring
their advisability, and directing that, at the Annual Meeting of
Stockholders to be held on May 1, 1996, two amendments (the first of which
is the first amendment below) be submitted to the holders of Common Stock
of the Company, and four amendments (set forth as the second, third,
fourth, and fifth amendments below) be submitted to the holders of Common
Stock and the holders of Cumulative Preferred Stock of the Company, those
being the only classes of stock of the Company having voting rights in
respect of said proposed amendments and that the amendments so proposed and
declared advisable by the Board of Directors of the Company which were
approved (another proposed amendment presented to the holders of Common
Stock failed to receive a favorable vote from a majority of the shares
outstanding) are as follows:
AMENDMENT ONE
That the first paragraph of Article Fourth of the Restated Certificate
of Incorporation of Northwestern Public Service Company (the "Company"), as
heretofore amended, is hereby amended to increase the total authorized
capital stock of the Company by increasing to 1,000,000 the number of
authorized shares of Preference Stock, of the par value of $50 per share,
of the Company.
AMENDMENT TWO
That the first paragraph of Article Fourth of the Restated Certificate
of Incorporation of Northwestern Public Service Company (the "Company"), as
heretofore amended, is hereby amended to increase the total authorized
capital stock of the Company by increasing to 1,000,000 the number of
authorized shares of Cumulative Preferred Stock, of the par value of $100
per share, of the Company (such Cumulative Preferred Stock being also
called "New Preferred Stock" in said Restated Certificate of
Incorporation).
AMENDMENT THREE
That the Restated Certificate of Incorporation of Northwestern Public
Service Company, as heretofore amended, is hereby amended by deleting
therefrom in its entirety subparagraph (c)(i) in subdivision 6-I of
Division A of Article Fourth therein.
AMENDMENT FOUR
That the Restated Certificate of Incorporation of Northwestern Public
Service Company, as heretofore amended, is hereby amended by deleting
therefrom in its entirety subparagraph (a) in subdivision 6-II of Division
A of Article Fourth.
AMENDMENT FIVE
That the Restated Certificate of Incorporation of Northwestern Public
Service Company, as heretofore amended, is hereby amended by deleting
therefrom in its entirety Section 2 of Division B of Article Fourth.
2. That the first paragraph of Article Fourth of the Restated
Certificate of Incorporation of Northwestern Public Service Company, if
restated to reflect Amendment One and Amendment Two, as stated above, would
read as follows:
The total authorized capital stock of the Company is (i)
1,000,000 shares of Cumulative Preferred Stock, of the par value
of $100 per share (hereinafter called the "New Preferred Stock"),
(ii) 1,000,000 shares of Preference Stock, if the par value of
$50 per share, and (iii) 20,000,000 shares of Common Stock, of
the par value of $3.50 per share.
3. That subdivision 6-I of Division A of Article Fourth of the
Restated Certificate of Incorporation of Northwestern Public Service
Company, if restated to reflect Amendment Three, as stated above, would
read as follows:
I. So long as any shares of New Preferred Stock are
outstanding, the Company shall not, without the affirmative vote
given at a stockholders' meeting whereat the New Preferred Stock
shall vote separately as a class, or without the written consent,
of the record holders of two-thirds of the outstanding shares of
New Preferred Stock:
(a) Amend the provisions of the Certificate of
Incorporation of the Company, as then in effect, so as to
create or authorize any stock ranking prior in any respect
to the shares of the New Preferred Stock then outstanding,
or as to create or authorize any stock convertible into
stock ranking prior in any respect to the shares of New
Preferred Stock then outstanding, or issue any such prior-
ranking stock or stock convertible into such prior-ranking
stock; or
(b) Change, by amendment of the Certificate of
Incorporation of the Company, as then in effect, or
otherwise, the terms and provisions of the New Preferred
Stock so as to affect adversely the rights and preferences
of the holders thereof; provided, however, that if any such
amendment is adverse to the rights and preferences of the
holders of one or more, but less than all, of the series of
New Preferred Stock at the time outstanding, the vote or
consent only of the holders of at least two-thirds of the
total number of shares of each series so adversely affected
shall be required; or
(c) Issue any shares of New Preferred Stock or shares
of any stock ranking pari passu with the New Preferred Stock
as to dividends or liquidation rights, or any securities
convertible into shares of New Preferred Stock or stock
ranking pari passu with the New Preferred Stock as to
dividends or liquidation rights, otherwise than in exchange
for or for the purpose of effecting the redemption or other
retirement of, not less than an equal number of shares of
New Preferred Stock or shares of any stock ranking pari
passu with the New Preferred Stock as to dividends or
liquidation rights, at the time outstanding, unless the
Common Stock equity as defined in subdivision 2 of Division
B hereof shall be not less than the aggregate par value of
all shares of New Preferred Stock and the aggregate par
value or stated value of all other shares of stock, if any,
ranking prior to or pari passu with the New Preferred Stock
as to dividends or liquidation rights, which will be
outstanding after the issue of the shares or convertible
securities proposed to be issued.
4. That subdivision 6-II of Division A of Article Fourth of the
Restated Certificate of Incorporation of Northwestern Public Service
Company, if restated to reflect Amendment Four, as stated above, would read
as follows:
So long as any shares of New Preferred Stock are
outstanding, the Company shall not, without the affirmative vote
given at a stockholders' meeting whereat the New Preferred Stock
shall vote separately as a class, or without the written consent,
of the record holders of a majority of the outstanding shares of
New Preferred Stock:
(a) Merge or consolidate the Company with or into any
other corporation or corporations (provided that this
provision shall not apply to a purchase or other acquisition
by the Company of franchises or assets of another
corporation in any manner which does not involve a statutory
merger or consolidation); or
(b) Sell, lease or exchange all or substantially all
of the property and assets of the Company.
No vote or consent of the holders of the New Preferred Stock
shall be required under the provisions of this subdivision 6, if
at or prior to the taking of any action described in this
subdivision 6, provision is made for the retirement, by
redemption or otherwise, of all shares of New Preferred Stock
then outstanding.
5. That Division B of Article Fourth of the Restated Certificate of
Incorporation of Northwestern Public Service Company, if restated to
reflect Amendment Five, as stated above, would read as follows:
DIVISION B -- COMMON STOCK
1. Voting Rights
The holders of the Common Stock shall be entitled to one vote for
each share of such stock held by them at any meeting of stockholders
for any purpose or matter submitted to a vote at a meeting of the
stockholders. Any action required or permitted to be taken by the
holders of the Common Stock shall be taken only at an annual meeting
or special meeting of such holders and shall not be taken without a
meeting by a consent in writing. Special meetings of stockholders of
the corporation may be called at any time by the Chairman of the Board
of Directors, by the President, by any one of the Vice Presidents, by
the Secretary or upon the written request of the holders of a majority
of the capital stock of the corporation outstanding at the time and
entitled to vote on the matter or matters to be presented at the
meeting, on at least ten days' notice to each stockholder by mail at
such stockholder's last known post office address, specifying the
time, place and object of the special meeting.
2. Distribution of Assets
In the event of any liquidation, dissolution or winding up of the
Company or any reduction of its capital resulting in any distribution
of its assets to its stockholders, after there shall have been paid to
or set apart for the holders of the New Preferred Stock and the
Preference Stock the full preferential amounts to which they are
entitled, the holders of the Common Stock shall be entitled to receive
pro rata all of the remaining assets of the Company available for
distribution to its stockholders.
6. That thereafter pursuant to the aforesaid resolution of its Board
of Directors, at the Annual Meeting of Stockholders of the Company duly
held on May 1, 1996, and completed following an adjournment to May 8, 1996,
holders of the necessary number of shares of Common Stock, as required by
statute and the Restated Certificate of Incorporation of the Company, as
amended, voted in favor of the first amendment hereinbefore set forth; and
the holders of necessary of shares of Common Stock voting separately as a
class and holders of the necessary number of shares of Cumulative Preferred
Stock, all series thereof voting together as a single class, all as
required by statute and the Restated Certificate of Incorporation of the
Company, as amended, each voted in favor of the second, third, fourth, and
fifth of such amendments.
7. That accordingly, the amendments of the Restated Certificate of
Incorporation of the Company, as hereinbefore set out, have been duly
adopted in accordance with the provisions of Section 242 of Title 8 of the
Delaware Code.
8. The capital of the Company will not be reduced under or by reason
of the amendments.
IN WITNESS WHEREOF, said Northwestern Public Service Company has
caused its corporate seal to be hereunto affixed and this certificate to be
signed by R. A. Wilkens, its Chairman of the Board of Directors, and
attested by Alan D. Dietrich, its Corporate Secretary, this 16th day of
May, 1996.
NORTHWESTERN PUBLIC SERVICE COMPANY
By /s/ R. A. Wilkens
___________________________________
R. A. Wilkens
Chairman of the Board of Directors
Attest:
/s/ Alan D. Dietrich
______________________________
Alan D. Dietrich, Corporate Secretary
(Corporate Seal)
Northwestern Public Service Company
1923
Delaware
Exhibit 3(a)(4)
NORTHWESTERN PUBLIC SERVICE COMPANY
CERTIFICATE OF RETIREMENT OF PREFERRED STOCKS
Northwestern Public Service Company (the "Company"), a corporation
organized and existing under the General Corporation Law of the State of
Delaware (the "Law") hereby certifies as follows:
1. The Company, in compliance with the provisions of its Restated
Certificate of Incorporation and resolutions of its Board of Directors,
has, on the dates shown below redeemed 1300 shares of Company's issued and
outstanding 5 1/4% Cumulative Preferred Stock (1961 Series), par value $100
each, as follows:
300 shares redeemed on June 1, 1992
300 shares redeemed on June 1, 1993
300 shares redeemed on June 1, 1994
300 shares redeemed on June 1, 1995
100 shares redeemed on June 1, 1996
2. Pursuant to the provisions of Section 243 of the Law, said
redeemed shares have the status of retired shares, and the Restated
Certificate of Incorporation of the Company prohibits the reissue of said
shares as part of the same series when so redeemed so that such shares
resume the status of authorized and unissued shares of the class, but not
of the series, to which they belong. Upon this Certificate becoming
effective as provided by law, the Restated Certificate of Incorporation of
the Company shall hereby be further amended so as to reduce the number of
authorized shares of the series to which such redeemed and retired shares
belong, by the number of shares redeemed and retired as stated above.
3. The shares of the 5 1/4% Cumulative Preferred Stock (1961 Series)
of the Company redeemed and retired as stated above constitute all of the
outstanding shares of the series to which said shares belong.
IN WITNESS WHEREOF, the Company has caused this Certificate to be
signed by M. D. Lewis, its President and Chief Executive Officer, and
attested by Alan D. Dietrich, its Corporate Secretary, this 20th day of
June, 1996.
NORTHWESTERN PUBLIC SERVICE COMPANY
By /s/ M.D. Lewis
______________________________________
M. D. Lewis, President & CEO
Attest:
/s/ Alan D. Dietrich
______________________________
Alan D. Dietrich, Corporate Secretary
(Corporate Seal)
Exhibit 3(b)
NORTHWESTERN PUBLIC SERVICE COMPANY
BY-LAWS
(As Amended to and Including August 7, 1996)
ARTICLE I
Section 1. Principal Office. The principal office of the Company
shall be located in the City of Wilmington, County of New Castle, and State
of Delaware, and the name of the agent therein and in charge thereof, and
upon whom legal process against the corporation may be served (until
otherwise determined by the Board of Directors) is the CORPORATION TRUST
COMPANY OF AMERICA.
Section 2. Other Offices. Offices of the Company where meetings of
the stockholders and directors may be held, shall be and are hereby,
established in the City of Huron, Beadle County, South Dakota, or such
other places within or without the State of Delaware, as may from time to
time be established by the Board of Directors.
ARTICLE II
Section 1. Annual Meeting. The annual meeting of stockholders for
the election of directors and for such other business as may properly be
conducted at such meeting shall be held at such time and date as the Board
of Directors shall designate from time to time and set forth in the notice
of the meeting. Such meeting shall be held at the office of the
corporation in the City of Wilmington, Delaware, or at the office of the
corporation in the City of Huron, South Dakota, or at such other place
within or without the State of Delaware, as may be designated in the notice
of the meeting.
Section 2. Special Meetings. Special meetings of the stockholders
may be called by the Chairman of the Board, the President or any Vice
President, or by order of the Board of Directors whenever they deem it
necessary, and it shall be their duty to order and call such meetings
whenever persons holding a majority of the outstanding capital stock of the
corporation entitled to be voted at such meeting, shall in writing request
the same. Such special meetings shall be held at the office of the
corporation in the City of Wilmington, Delaware, or at the office of the
corporation in the City of Huron, South Dakota, or at such other place
within or without the State of Delaware, as may be designated in the notice
of the meeting, and the business of such special meeting shall be confined
to the objects stated in the notice thereof.
Section 3. Notice of Meetings. Notice of the time and place of the
annual, and of any special meeting of the stockholders, shall be given by
the Corporate Secretary to each of the stockholders entitled to vote at
such meetings by posting the same in postage prepaid letters, addressed to
each such stockholder at the address left with the Corporate Secretary of
the Corporation, or at his last known address, or by delivering same
personally, at least ten days prior to such meeting. The notice of a
special meeting shall also set forth the objects of the meeting. Any or
all of the stockholders may waive notice of the annual or any special
meeting, and the presence of a stockholder at any meeting, in person or by
proxy, shall be deemed a waiver of notice thereof by him. Meetings of the
stockholders may be held at any time and place and for any purpose without
notice, when all of the stockholders entitled to vote at such meetings are
present in person or by proxy, or when all of such stockholders waive
notice and consent to the holding of such meeting.
Section 4. Voting at Stockholders' Meetings. At all meetings of
stockholders each holder of stock having voting power or entitled to vote
at such meetings shall be entitled to one vote for each share of stock held
by him at the time of the closing of the transfer books for said meeting,
or on the record date fixed by the Board of Directors for that purpose as
provided in Section 2 of Article VI of these By-laws, and if such transfer
books shall not have been closed or any record date fixed, then for each
share of stock standing registered in his name at the time of the meeting;
provided, always, that except when the transfer books have been closed or a
record date fixed, as aforesaid, no share of stock shall be voted at any
election which has been transferred on the books of the corporation within
twenty days next preceding such election. Such vote may be given
personally or by proxy authorized in writing. Only the persons in whose
names shares of stock shall stand on the books of the corporation at the
time aforesaid shall be entitled to vote in person or by proxy upon the
shares of stock standing in their name. No proxy shall be voted on after
three years from its date.
Section 5. Quorum. The holders for the time being of a majority of
the total number of shares of stock issued and outstanding and entitled to
be voted at any meetings represented in person or by proxy, shall
constitute a quorum for the transaction of business at such meetings unless
the representation of a larger number shall be required by law. In the
absence of a quorum, the stockholders attending or represented at the time
and place at which a meeting shall have been called, may adjourn the
meeting from time to time until a quorum shall be present. At any such
adjourned meeting at which a quorum shall be present, any business may be
transacted which might have been transacted by a quorum of the stockholders
at the meeting as originally convened.
Section 6. Presiding Officer and Secretary. The Chairman of the
Board, or in the Chairman's absence the President, or in the President's
absence a Vice President, shall call meetings of the stockholders to order
and shall act as chairman of such meetings. The Board of Directors may
appoint any stockholder to act as chairman at any meeting in the absence of
the Chairman of the Board, the President and Vice Presidents, and, in
default of any appointment by the Board of Directors of a chairman, the
stockholders may elect a chairman to preside at the meeting. The Corporate
Secretary, or an Assistant Corporate Secretary, of the corporation shall
act as Secretary at all meetings of the stockholders, but in their absence
the stockholders or presiding officer may appoint any person to act as
Secretary of the meeting.
Section 7. Business at Annual Meeting. No business may be transacted
at an annual meeting of stockholders, other than business that is either
(a) specified in the notice of meeting (or any supplement thereto) given by
or at the direction of the Board of Directors (or any duly authorized
committee thereof), (b) otherwise properly brought before the annual
meeting by or at the direction of the Board of Directors (or any duly
authorized committee thereof) or (c) otherwise properly brought before the
annual meeting by any stockholder of the corporation (i) who is a
stockholder of record on the date of the giving of the notice provided for
in this Section 7 of this Article and on the record date for the
determination of stockholders entitled to vote at such annual meeting and
(ii) who complies with the notice procedure set forth in this Section 7.
In addition to any other applicable requirements, for business to be
properly brought before an annual meeting by a stockholder, such
stockholder must have given timely notice thereof in proper written form to
the Corporate Secretary.
To be timely, a stockholder's notice to the Corporate Secretary must
be delivered to or mailed and received at the principal office of the
Company not less than 90 days nor more than 120 days prior to the date of
the annual meeting of stockholders, provided, however, that in the event
that less than 100 days' notice or prior public disclosure of the date of
the meeting is given to stockholders, notice by the stockholder to be
timely must be so received not later than the close of business on the
tenth (10th) day following the day on which such notice of the date of the
annual meeting was mailed or such public disclosure of the date of the
annual meeting was made, whichever first occurs.
To be in proper written form, a stockholder's notice to the Corporate
Secretary must set forth as to each matter such stockholder proposes to
bring before the annual meeting (i) a brief description of the business
desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (ii) the name and record
address of such stockholder, (iii) the class or series and number of shares
of capital stock of the Company that are owned beneficially or of record by
such stockholder, (iv) a description of all arrangements or understandings
between such stockholder and any other person or persons (including their
names) in connection with the proposal of such business by such stockholder
and any material interest of such stockholder in such business and (v) a
representation that such stockholder intends to appear in person or by
proxy at the annual meeting to bring such business before the meeting.
No business shall be conducted at the annual meeting of stockholders
except business brought before the annual meeting in accordance with the
procedures set forth in this Section 7, provided, however, that, once
business has been properly brought before the annual meeting in accordance
with such procedures, nothing in this Section 7 shall be deemed to preclude
discussion by any stockholder of any such business. If the chairman of an
annual meeting determines that business was not properly brought before the
annual meeting in accordance with the foregoing procedures, the chairman of
the meeting shall declare to the meeting that the business was not properly
brought before the meeting and such business shall not be transacted.
ARTICLE III
BOARD OF DIRECTORS
Section 1. Election, Qualification and Filling of Vacancies. The
business and affairs of the Company shall be managed by or under the
direction of a Board of Directors. The number of Directors shall be no
less than nine (9) and no greater than twelve (12). Within the limits
specified above, the number of Directors constituting the Board of
Directors of the Company shall be fixed from time to time by or pursuant to
a resolution passed by the Board of Directors. However, no decrease in the
number of Directors shall have the effect of shortening the term of any
incumbent Director. The number of Directors of the Company may exceed
twelve (12) when and to the extent needed to permit the holders of shares
of the New Preferred Stock to elect a majority of Directors under
subdivision 5 of Division A of Article Fourth of the Company's Restated
Certificate of Incorporation.
The Board of Directors shall be and is divided into three classes,
Class I, Class II and Class III, which shall be as nearly equal in number
as possible. Each Director shall serve for a term ending on the date of
the third annual meeting of stockholders following the annual meeting of
stockholders at which such Director was elected; provided, however, that
each initial Director in Class I shall hold office until the annual meeting
of stockholders in 1986; each initial Director in Class II shall hold
office until the annual meeting of stockholders in 1987; and each initial
Director in Class III shall hold office until the annual meeting of
stockholders in 1988. Directors elected at the annual meeting of
stockholders shall be elected by a plurality of the votes cast for election
of Directors. In the event of any increase or decrease in the number of
Directors, (i) each Director then serving as such shall nevertheless
continue as a Director of the class of which he is a member until the
expiration of his current term, or his prior death, retirement,
resignation, or removal, and (ii) the newly created or eliminated
directorships resulting from such increase or decrease shall be apportioned
by the Board of Directors among the three classes of Directors so as to
maintain such classes as nearly equal in number as possible.
Notwithstanding any of the foregoing provisions of this Section, each
Director shall serve until his successor is elected and qualified or until
his death, resignation or removal. Should a vacancy occur or be created,
whether arising through death, resignation or removal of a Director or
through an increase in the number of Directors, such vacancy shall be
filled by a majority vote of the remaining Directors of all classes though
less than a quorum of the Board of Directors. A Director so elected to
fill a vacancy shall serve for the remainder of the then present term of
office of the class to which he was elected.
Any Director or the entire Board of Directors may be removed; however,
such removal must be for cause and must be approved as set forth in this
paragraph. Removal for cause must be approved by at least a majority of
the total number of Directors or by at least a majority vote of the shares
of the corporation then entitled to be voted at an election for that
Director. For purposes of this paragraph, the total number of Directors
will not include the Director who is the subject of the removal
determination, nor will such Director be entitled to vote thereon.
Section 2. Place of Meeting. Any meetings of the Board of Directors
may be held either within or without the State of Delaware.
Section 3. Annual, Regular and Special Meetings. The annual meeting
of the Board of Directors shall be held in each year immediately following
and at the same place as the annual meeting of stockholders, for the
election of officers and the transaction of such other business as may come
before the Board; and regular meetings of the Board shall be held on the
first Wednesday in the months of February, August and November in each year
at the hour of 10 o'clock a.m. at the office of the Company in the City of
Huron, South Dakota, or at such other time of day or such other place as
may from time to time be established by resolution of the Board or as may
be specified by the Chairman of the Board or the President with respect to
each such meeting. Special meetings of the Board may be called by the
Chairman of the Board, the President, or any two Directors, and shall be
held at such time and place as may be specified by the officer or Directors
calling the meeting, or in the absence of such specification as to place,
at the office of the Company in the City of Huron, South Dakota. Notice
stating the place, date, and hour of each meeting of the Board (other than
the annual meeting, as to which no notice need be given) shall be given to
each Director either by mail to his residence or place of business not less
than forty-eight (48) hours before the date of the meeting, or personally
by telephone, telegram, telecopy, electronic mail, or similar means of
communication on twenty-four (24) hours' notice. All or any of the
Directors may waive notice of any meeting, and the presence of a Director
at any meeting of the Board shall be deemed a waiver of notice thereof by
him.
Section 3A. Action on Written Consent Without Meetings. Unless
otherwise restricted by the Certificate of Incorporation or these By-laws,
any action required or permitted to be taken at any meeting of the Board of
Directors may be taken without a meeting, if prior to such action a written
consent thereto is signed by all members of the Board and such written
consent is filed with the minutes of proceedings of the Board.
Section 4. Quorum and Adjournment. A majority of the Directors in
office at a meeting regularly called, shall constitute a quorum. In the
absence of a quorum, the Directors present at the time and place at which a
meeting shall have been duly called, may adjourn the meeting from time to
time and place to place until a quorum shall be present.
Section 5. Submission of Acts to Approval of Stockholders. The Board
of Directors, in its discretion, may submit any contract or act for
approval or ratification at any annual meeting of the stockholders, or at
any special meeting of the stockholders called for that purpose, and any
contract or act that shall be approved or ratified by the vote of the
holders of a majority of the capital stock of the Company which is
represented in person or by proxy at such meeting, provided that a lawful
quorum of stockholders be there represented in person or by proxy, shall be
as valid and binding upon the corporation and upon all the stockholders as
if it had been approved or ratified by every stockholder of the Company.
Section 6. Compensation. Directors shall be entitled to receive such
fees and expenses, if any, for attendance at meetings of the Board of
Directors, and/or such fixed salaries for services as Directors, as may be
fixed from time to time by resolution of the Board. Nothing herein
contained shall be construed to preclude any Director from serving the
Company in any other capacity as an officer, committee member, agent or
otherwise, and receiving compensation therefor.
Section 7. Nomination of Directors. Only persons who are nominated
in accordance with the following procedures shall be eligible for election
as Directors of the Company except as may be otherwise expressly provided
in the Restated Certificate of Incorporation of the Company with respect to
the right of the holders of New Preferred Stock and Preference Stock to
nominate and elect a specified number of directors in certain
circumstances. Nominations of persons for election to the Board of
Directors may be made at any annual meeting of stockholders (a) by or at
the direction of the Board of Directors (or any duly authorized committee
thereof) or (b) by any stockholder of the Company (i) who is a stockholder
of record on the date of the giving of the notice provided for in this
Section 7 and on the record date for the determination of stockholders
entitled to vote at such annual meeting and (ii) who complies with the
notice procedures set forth in this Section 7.
In addition to any other applicable requirements, for a nomination to
be made by a stockholder, such stockholder must have given timely notice
thereof in proper written form to the Corporate Secretary.
To be timely, a stockholder's notice to the Corporate Secretary must
be delivered to or mailed and received at the principle office of the
Company not less than 90 days nor more than 120 days prior to the date of
the annual meeting of stockholders; provided, however, that in the event
that less than 100 days' notice or prior public disclosure of the date of
the meeting is given to stockholders, notice by the stockholder to be
timely must be so received not later than the close of business on the
tenth (10th) day following the day on which such notice of the date of the
annual meeting was mailed or such public disclosure of the date of the
annual meeting was made, whichever first occurs.
To be in proper written form, a stockholder's notice to the Corporate
Secretary must set forth (a) as to each person whom the stockholder
proposes to nominate for election as a Director (i) the name, age, business
address and residence address of the person, (ii) the principal occupation
or employment of the person, (iii) the class or series and number of shares
of capital stock of the Company that are owned beneficially or of record by
the person and (iv) any other information relating to the person that would
be required to be disclosed in a proxy statement or other filings required
to be made in connection with solicitations of proxies for election of
directors pursuant to Section 14 of the Securities and Exchange Act of
1934, as amended (the "Exchange Act"), and the rules and regulations
promulgated thereunder; and (b) as to the stockholder giving this notice
(i) the name and record address of such stockholder, (ii) the class or
series and number of shares of capital stock of the Company that are owned
beneficially or of record by such stockholder, (iii) a description of all
arrangements or understandings between such stockholder and each proposed
nominee and any other persons (including their names) pursuant to which the
nomination(s) are to be made by such stockholder, (iv) a representation
that such stockholder intends to appear in person or by proxy at the
meeting to nominate the persons named in its notice and (v) any other
information relating to such stockholder that would be required to be
disclosed in a proxy statement or other filings required to be made in
connection with the solicitations of proxies for election of Directors
pursuant to Section 14 of the Exchange Act and the rules and regulations
promulgated thereunder. Such notice must be accompanied by a written
consent of each proposed nominee to being named as a nominee and to serve
as a director if elected.
No person shall be eligible for election as a Director of the Company
unless nominated in accordance with the procedures set forth in this
Section 7. If the chairman of the meeting determines that a nomination was
not made in accordance with the foregoing procedures, the chairman shall
declare to the meeting that the nomination was defective and such defective
nomination shall be disregarded.
ARTICLE IV
OFFICERS
Section 1. Designation, Term and Vacancies. The officers of the
corporation shall be a Chairman of the Board, a President, one or more Vice
Presidents, a Corporate Secretary and a Treasurer, all of whom shall be
elected by the Board of Directors. The Board of Directors may elect one or
more Assistant Vice Presidents, who shall have such authority and shall
perform such duties as may from time to time be prescribed by the Board.
The Board of Directors may appoint one or more Assistant Corporate
Secretaries and one or more Assistant Treasurers, and such other officers
as may be deemed necessary, who shall have such authority and shall perform
such duties as may from time to time be prescribed by the Board. Vacancies
occurring among the officers of the corporation shall be filled by the
Board of Directors. Officers elected by the Board shall hold office until
the next annual meeting of the Directors and until their successors are
elected and qualified, provided that any officer may be removed at any time
by the affirmative vote of a majority of the whole Board. All other
officers, agents and employees shall hold office during the pleasure of the
Board or the officer appointing them. Any two or more offices may be held
by the same person, with the exception that the Chairman of the Board of
Directors and the President shall not also hold the office of Secretary or
Treasurer.
Section 1A. Chairman of the Board. The Chairman of the Board shall
preside at all meetings of stockholders and of the Board of Directors.
Except as otherwise provided in these By-laws or ordered by the Board of
Directors, he shall appoint all committees of the Board of Directors. He
shall inform himself on the general conduct of the Company's business and
shall act as consultant to the Board of Directors on the Company's affairs.
He shall advise and assist the other officers of the Company in the
evolvement of policies which may require ultimate consideration or action
by the Board of Directors and in dealing with problems on which his
experience may be helpful. He shall exercise such other powers and perform
such other duties as may from time to time be assigned to him by the Board
of Directors or be prescribed by these By-laws.
Section 2. President. The President shall be chosen from among the
Directors and shall be the chief executive officer of the Company. In the
absence of the Chairman of the Board he shall preside at all meetings of
stockholders and of the Board of Directors. Subject to the control and
direction of the Board, he shall have general charge of the affairs and
business of the Company and general charge and supervision of all the
officers, agents, and employees of the Company. He may sign, with the
Corporate Secretary or an Assistant Corporate Secretary, any or all
certificates for shares of stock of the Company. He may sign and execute
in the name of the Company all deeds, mortgages, bonds, contracts, or other
instruments authorized by the Board, except in cases where the signing and
execution thereof shall be expressly delegated by the Board or by these By-
laws to some other officer or agent of the Company, and he may, without
previous authority of the Board, make, in the name of the Company, such
contracts, leases, and other agreements as the ordinary conduct of the
Company's business requires; and may sign and endorse notes, drafts, and
checks. He shall have power to select and appoint all necessary officers
and servants, except those elected or appointed or required to be elected
or appointed by the Board, and shall also have power to remove all such
officers and servants and to make appointments to fill the vacancies. In
general, he shall exercise all powers and perform all duties incident to
the principal executive office of the Company and such other powers and
duties as may from time to time be assigned to him by the Board or be
prescribed by these By-laws. He may delegate any of his powers to any Vice
President of the Company.
Section 3. Vice Presidents. Each Vice President shall exercise such
powers and perform such duties as may from time to time be assigned to him
by the Board of Directors or the President. In the absence or disability
of the President a Vice President shall exercise the powers and perform the
duties of the President.
Section 4. Treasurer. The Treasurer shall have custody of such funds
and securities of the Company as may come to his hands or be committed to
his care by the Board of Directors. When necessary or proper, he shall
endorse on behalf of the Company, for collection, checks, notes, or other
obligations, and shall deposit the same to the credit of the Company, in
such bank or banks or depositories as the Board of Directors, or the
President, may designate. He may sign receipts or vouchers for payments
made to the Company, and the Board of Directors may require that such
receipts or vouchers shall also be signed by some other officer to be
designated by them. Whenever required by the Board of Directors, he shall
render a statement of his cash accounts and such other statements
respecting the affairs of the Company as may be requested. He shall keep
proper and accurate accounts of receipts and disbursements and other
matters pertaining to his office. He shall perform all acts incident to
the office of Treasurer, subject to the control of the Board. In the
discretion of the Board of Directors, he may be required to give a bond in
such amount and containing such conditions as the Board of Directors may
approve, and such bond may be the undertaking of a surety company, and the
premium therefor may be paid by the Company.
Section 5. Corporate Secretary. The Corporate Secretary shall be
sworn to the faithful discharge of his duties. He shall record the votes
and proceedings of the stockholders and of the Board of Directors in a book
or books kept for that purpose, and shall attend all meetings of the
Directors and stockholders. He shall keep in safe custody the seal of the
Company, and, when required by the Board of Directors, or when any
instrument shall have been signed by the President, or any other officer
duly authorized to sign the same, or when necessary to attest any
proceedings of the stockholders or Directors, shall affix it to any
instrument requiring the same, and shall attest the same with his
signature. He shall attend to the giving and serving of notices of
meetings. He shall have charge of such books and papers as properly belong
to his office or as may be committed to his care by the Board of Directors.
He shall perform such other duties as appertain to his office or as may be
required by the Board of Directors. In the absence of the Corporate
Secretary, or an Assistant Corporate Secretary, from any meeting of the
Board, the proceedings of such meeting shall be recorded by such other
person as may be appointed at the meeting for that purpose.
Section 5A. Assistant Vice President. Each Assistant Vice President
shall exercise such powers and perform such duties as may be assigned to
him by the Board of Directors.
Section 6. Assistant Corporate Secretary. Each Assistant Corporate
Secretary shall be vested with the same powers and duties as the Corporate
Secretary, and any act may be done or duty performed by an Assistant
Corporate Secretary with like effect as though done or performed by the
Corporate Secretary. He shall have such other powers and perform such
other duties as may be assigned to him by the Board of Directors.
Section 7. Assistant Treasurer. Each Assistant Treasurer shall be
vested with the same powers and duties as the Treasurer, and any act may be
done or duty performed by an Assistant Treasurer with like effect as though
done or performed by the Treasurer. He shall have such other powers and
perform such other duties as may be assigned to him by the Board of
Directors.
Section 8. Execution of Checks, etc. The funds of the Company shall
be deposited in such banks or trust companies as the Board of Directors
from time to time shall designate and shall be withdrawn only on checks or
drafts of the Company for the purposes of the Company. All checks, drafts,
notes, acceptances and endorsements of the Company shall be signed in such
manner and by such officer or officers or such individual or individuals as
the Board of Directors from time to time by resolution shall determine. If
and to the extent so authorized by the Board of Directors, such signature
or signatures may be facsimile. Only checks, drafts, notes, acceptances
and endorsements signed in accordance with such resolution or resolutions
shall be the valid checks, drafts, notes, acceptances or endorsements of
the Company.
ARTICLE V
INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
The corporation shall, to the fullest extent to which it is empowered
to do so by the General Corporation Law of Delaware, or any other
applicable laws, as from time to time in effect, and in the manner therein
provided, indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a director or officer of the
corporation, or is or was serving at the request of the corporation as a
director or officer of another corporation, partnership, joint venture,
trust or other enterprise, against all expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or
proceeding.
Expenses incurred by an officer or director of the corporation in
defending a civil or criminal action, suit or proceeding shall be paid by
the corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director
or officer to repay such amount of it shall ultimately be determined that
he or she is not entitled to be indemnified as authorized by the General
Corporation Law of the State of Delaware. Expenses incurred in defending a
civil or criminal action, suit or proceeding by any other person entitled
to claim indemnification under the preceding paragraph may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon such terms and conditions as the Board of Directors of the
corporation deems appropriate.
The provisions of this Article shall be deemed to be a contract
between the corporation and each director or officer who serves in any such
capacity at any time while this Article and the relevant provisions of the
General Corporation Law of Delaware, or other applicable law, if any, are
in effect, and any repeal or modification of any such law shall not affect
any rights or obligations then existing with respect to any state of facts
then or theretofore existing or any action, suit or proceeding theretofore
or thereafter brought or threatened based in whole or in part upon any such
state of facts.
Persons who are not covered by the foregoing provisions of this
Article and who are employees or agents of the corporation, or are serving
at the request of the corporation as employees or agents of another
corporation, partnership, joint venture, trust or other enterprise, may be
indemnified to the extent authorized at any time or from time to time by
the Board of Directors of the corporation.
The indemnification and advancement of expenses provided or permitted
by this Article shall not be deemed exclusive of any other rights to which
those indemnified or entitled to advancement of expenses may be entitled
under any other by-law or any agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office,
and shall continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors
and administrators of such a person.
The corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity or arising
out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability under the provisions of this
Article.
ARTICLE VI
SHARES OF STOCK
Section 1. Certificates of Stock. All certificates for shares of the
capital stock of the Company shall be in such form, not inconsistent with
the Certificate of Incorporation of the Company, as shall be approved by
the Board of Directors, and shall be signed by the Chairman of the Board of
Directors, the President, or a Vice President, and Treasurer or an
Assistant Treasurer, or the Corporate Secretary or an Assistant Corporate
Secretary of the Company, and shall not be valid unless so signed;
provided, however, that where such certificate is signed (1) by a transfer
agent or an assistant transfer agent or (2) by a transfer clerk acting on
behalf of the Company and a registrar, the signature of any such Chairman
of the Board of Directors, President, Vice President, Treasurer, Assistant
Treasurer, Corporate Secretary or Assistant Corporate Secretary, may be
facsimile. In case any officer or officers who shall have signed, or whose
facsimile signature or signatures shall have been used on, any such
certificate or certificates, shall cease to be such officer or officers of
the Company, whether because of death, resignation, or otherwise, before
such certificate or certificates shall have been delivered by the Company,
such certificate or certificates may nevertheless be adopted by the Company
and be issued and delivered as though the person or persons who signed such
certificate or certificates or whose facsimile signature or signatures
shall have been used thereon had not ceased to be such officer or officers
of the Company. All certificates shall be consecutively numbered and the
name of the person owning the shares represented thereby, with the number
of such shares, and the date of issue, shall be entered on the Company's
books. All certificates surrendered shall be cancelled, and no new
certificates issued until the former certificates for the same number of
shares shall have been surrendered and cancelled, except in cases provided
for in Section 4 of this Article.
Section 2. Transfer of Shares. (a) Transfers of stock shall be made
upon the books of the Company by the holder in person or by attorney, upon
the surrender and cancellation of the certificate or certificates for such
shares. But the Board of Directors may appoint one or more suitable banks
and/or trust companies as transfer agents and/or registrars of transfers,
for facilitating transfers of any class of stock of the Company by the
holders thereof under such regulations as the Board of Directors may from
time to time prescribe. Upon such appointment being made, all certificates
of stock of such class thereafter issued shall be countersigned by one of
such transfer agents and/or one of such registrars of transfer, and shall
not be valid unless so countersigned. (b) The stock transfer books may be
closed, by order of the Board of Directors, for a period not exceeding
fifty (50) days preceding the date of any meeting of stockholders or the
date for the payment of any dividend or the date for the allotment of
rights or the date when any change or conversion or exchange of capital
stock shall go into effect or for a period of not exceeding fifty (50) days
in connection with obtaining the consent of stockholders for any purpose;
provided, however, that, in lieu of closing the stock transfer books as
aforesaid, the Board of Directors, in its discretion, may fix and is hereby
authorized to fix in advance a date, not exceeding sixty (60) days
preceding the date of any meeting of stockholders or the date for the
payment of any dividend or the date for the allotment of rights or the date
when any change or conversion or exchange of capital stock shall go into
effect or a date in connection with obtaining such consent, as a record
date, for the determination of the stockholders entitled to notice of and
to vote at any such meeting and any adjournment thereof, or entitled to
receive payment of any such dividend, or to any such allotment of rights,
or to exercise the rights in respect of any such change, conversion or
exchange of capital stock, or to give such consent, and in such case such
stockholders and only such stockholders as shall be stockholders of record
on the date so fixed shall be entitled to such notice of and to vote at
such meeting and any adjournment thereof, or to receive payment of such
dividend, or to receive such allotment of rights, or to exercise such
rights, or to give such consent, as the case may be, notwithstanding any
transfer of any stock on the books of the corporation after any such record
date fixed as aforesaid.
Section 3. Addresses of Stockholders. Every stockholder shall
furnish the Corporate Secretary with an address to which notices of
meetings and all other notices may be served upon or mailed to him, and in
default thereof notices may be addressed to him at his last known address
or at the office of the Company in Huron, South Dakota.
Section 4. Lost and Destroyed Certificates. The Board of Directors
may direct that a new certificate or certificates may be issued in place of
any certificate or certificates theretofore issued by the Company, alleged
to have been lost or destroyed, and the Board of Directors, when
authorizing the issuance of such new certificate or certificates, may, in
their discretion, and as a condition precedent thereto, require the owner
of such lost or destroyed certificate or certificates or his legal
representatives to give to the Company a bond in such sum as they may
direct, as indemnity against any claim that may be made against the
Company.
Section 5. Regulations. The Board of Directors shall have power and
authority to make all such rules and regulations as they may deem expedient
concerning the issue, transfer and registration of certificates for shares
of the capital stock of the Company.
ARTICLE VII
DIVIDENDS AND WORKING CAPITAL
The Board of Directors may declare dividends from the surplus or net
profits of the corporation over and above the amount which from time to
time may be fixed by the Board of Directors as the amount to be reserved as
a working capital, as they may in their discretion, from time to time
determine. Such dividends may be declared by the Board at any meeting,
either regular or special, at which a quorum is present. The dividends
upon the preferred stock, if and when declared, shall be payable quarterly
on the first days of December, March, June and September in each year. Any
dividends so declared upon the common stock shall be payable upon such
dates as may from time to time be fixed by the Board. The power to fix the
working capital of the corporation shall be, and is hereby conferred upon
the Board of Directors, and the Board of Directors may from time to time
fix the sum which shall be set aside or reserved, over and above the
corporation's capital stock paid in, as a working capital for the
corporation, and from time to time may increase, diminish and vary the same
in their absolute discretion.
ARTICLE VIII
SEAL
The common corporate seal is, and until otherwise ordered, and
directed by the Board of Directors shall be, an impression upon paper or
wax, bearing the name of the corporation and the words "Corporate Seal -
Delaware." One or more duplicate dies for impressing such seal may be kept
and used.
ARTICLE IX
AMENDMENT TO BY-LAWS
These By-laws may be altered, amended or repealed by a vote of a
majority of all the Directors at any regular or special meeting of the
Board, provided notice of such proposed alteration, amendment or repeal
shall have been included in the notice of such meeting or shall have been
waived by all the Directors. These By-laws may also be altered, amended or
repealed at any annual meeting of the stockholders, or at any special
meeting of the stockholders, provided notice of the proposed alteration,
amendment or repeal shall have been included in the notice of such special
meeting or shall have been waived by all the stockholders.
Exhibit 10(a)(1)
NORTHWESTERN PUBLIC SERVICE COMPANY
SUPPLEMENTAL INCOME SECURITY PLAN
ARTICLE I
DEFINITIONS AND INTERPRETATIONS
1.1 Definitions. When the following terms are used herein with
initial capital letters, they shall mean:
(a) Administrator. The Company or such individual or
committee as the Company shall designate from time to time. The
Administrator shall have the authority to administer the Plan and
to construe its provisions, and the decisions of the
Administrator shall be final and binding on all parties. The
Administrator shall constitute the "administrator" and "named
fiduciary" of the Plan within the meaning of the Employee
Retirement Income Security Act of 1974 ("ERISA").
(b) Company. Northwestern Public Service Company.
(c) Disability. The total and permanent disability as
determined by a doctor of medicine approved by the Company, which
event will be deemed to have occurred on the date of delivery of
such doctor's certificate to such effect to the Company. In lieu
of such certification, the Company may accept, as proof of total
and permanent disability, proof of the Participant's eligibility
for disability benefits under the Federal Social Security Act, as
amended from time to time.
(d) Earnings. The amount of salary paid by the Company to
a Participant for services rendered, excluding any commissions
and bonuses.
(e) Earnings Level. Earnings within a prescribed range as
shown on the attached Schedule A.
(f) Employee. An individual who customarily works a
regularly scheduled work week with the Company of at least twenty
(20) hours per week.
(g) Participant. An Employee who has become eligible to
participate in the Plan in accordance with Article II.
(h) Plan Anniversary. The first day of a Plan Year which
is July 1 of each year.
(i) Plan Year. The twelve (12) month period beginning on
July 1 and ending on June 30.
(j) Retirement Date. The later of the Employee's or
Director's 65th birthday or retirement from the Company.
1.2 Gender and Number. The pronouns "he", "him" and "his", referring
to an Employee, Participant or Beneficiary, shall also refer to and include
females as well as males, and the singular shall include the plural, and
the plural the singular, except when the context or otherwise requires.
ARTICLE II
ELIGIBILITY
2.1 Eligibility. Senior management employees who are selected by the
Chief Executive Officer of the Company ("Eligible Employee") and all
outside members of the Board of Directors of the Company shall be eligible
to participate in this Plan as of the date he has satisfied such
requirement. To be an Eligible Employee, one must:
(a) Be under age 65;
(b) Be credited with six months or more of service in a
qualifying position; and
(c) Be actively at work on the Plan Anniversary Date.
(d) Be in a state of health that would meet customary
requirements at reasonable standard insurance rates.
2.2 Special State of Health Rule. Participation in the Plan shall be
limited to those Eligible Employees and Directors whose state of health and
safety at the time of their entry into the Plan is determined to the
satisfaction of the Administrator to be normal for their age group, on the
basis of standards comparable to those customarily employed in the
insurance industry for setting standard premium rates; provided, however,
that the Administrator in its sole discretion may permit participation by
an Eligible Employee or Director whose state of health or safety does not
meet this requirement, on the condition that the amount of benefits
provided to him or his Beneficiary may be reduced, at the Administrator's
discretion, from that which would otherwise apply to him under the terms of
this Plan. An Eligible Employee or Director who participates in the Plan
under this section shall be advised by the Administrator in a written
notice no later than sixty (60) days after the determination of his state
of health and safety as required herein, of the dollar amount of benefits
to be provided to him (or his Beneficiary) under the Plan.
2.3 Forfeiture of Eligibility. No benefits shall apply to a
terminated Participant who, prior to the occurrence of a Change in Control
or Major Transaction, is discharged from his employment with the Company on
account of dishonesty or misconduct.
ARTICLE III
BENEFITS
3.1 Death Benefits. Upon the death of a Participant, the
Participant's Beneficiary shall be entitled to receive Death Benefits in
the form of a monthly income in the amount applicable to the Participant's
executed certificate on file (Earnings Level for Eligible Employees) as
shown on the attached Schedule A.
3.2 Retirement Benefits. Subject to the provisions of Article II, an
Eligible Employee shall upon his retirement, be eligible to receive a
Retirement Benefit on his Retirement Date. The amount of benefit shall be
based on the Participant's executed certificate on file as shown on the
attached Schedule A. An election for Retirement Benefits by an Eligible
Employee must be made within thirty (30) days of Retirement. At the time
of the election, the Eligible Employee may elect to receive all or part of
the retirement benefit in 25% increments. Once this election is made, it
cannot be changed.
3.3 Increase in Benefits. Subject to the provisions of Article II, a
Participant whose Earnings increase to the extent that he enters a higher
Earnings Level shall become entitled to the amount of benefits of such
higher Earnings Level, as of the Plan Anniversary coincident with or next
following such increase in Earnings provided, that he is actively employed
by the Company on such Plan Anniversary, that he is credited with six
months or more of service in a qualifying position (under 2.1) and provided
further that if the state of health and safety of such a Participant is not
then determined to the satisfaction of the Administrator to be normal for
his age group, on the basis of standards comparable to those customarily
employed in the insurance industry in setting standard or reasonable
premium rates, such increase in benefits shall apply only to the extent
authorized by the Administrator. The Administrator shall advise any such
Participant, in a written notice no later than sixty (60) days after the
determination of his state of health and safety as required herein, of the
dollar amount of benefits to be provided to him (or his Beneficiary) under
the Plan, which dollar amount shall in no event be less than that to which
he was entitled prior to such notice.
3.4 Payment of Benefits. Retirement benefits will be eligible for
payment on the first of the month following the Participant's Retirement
Date. Death Benefits will be paid to the participant's named beneficiary
on the first of the month following the Participant's date of death. All
Retirement and Death benefit payments shall be made in monthly installments
and shall continue for fifteen (15) years from the date of the initial
monthly payment.
ARTICLE IV
PORTABILITY AND ELIGIBILITY FOR BENEFITS
IN THE EVENT OF TERMINATION
4.1 Subject to, in the cases of clauses (a), (b) and (c) only, the
provisions of Article II, an Eligible Employee whose employment has
terminated will be eligible for benefits if:
(a) The Eligible Employee retires under the Company's
Pension Plan;
(b) The termination is due to total disability;
(c) The Eligible Employee terminates for reasons other than
4.1(a), 4.1(b) or 4.1(d) and has beenemployed by the Company for
ten (10) or more consecutive years or has five (5) years of Plan
participation; or
(d) The Eligible Employee is terminated following a Change
in Control or Major Transaction (each as defined in Section 4.2
hereof) and such employee was employed by the Company prior to
such Change in Control or Major Transaction.
4.2 Definitions of Change in Control and Major Transaction
(a) Change in Control. For purposes of the Plan, a Change
in Control of the Company shall occur upon the happening of the
earliest to occur of the following:
1. any Person (as defined below) is or becomes the
Beneficial Owner (as defined below), directly or indirectly,
of securities of the Company (not including in the
securities beneficially owned by such Person any securities
acquired directly from the Company or its affiliates)
representing 20% or more of the combined voting power of the
Company's then outstanding securities; or
2. during any period of not more than two consecutive
years (not including any period prior to August __, 1995),
individuals who at the beginning of such period constitute
the Board and any new director (other than a director
designated by a Person who has entered into an agreement
with the Company to effect a transaction described in clause
(I) of this paragraph or clauses (I), (II) or (III) of
paragraph (b) below) whose election by the Board or
nomination for election by the Company's shareholders was
approved or recommended by a vote of at least two-thirds
(2/3) of the directors then still in office who either were
directors at the beginning of the period or whose election
or nomination for election was previously so approved or
recommended, cease for any reason to constitute a majority
thereof.
(b) Major Transaction. For purposes of the Plan, a Major
Transaction shall occur upon the happening of the earliest to
occur of the following:
1. the shareholders of the Company approve a merger
or consolidation of the Company with any corporation or
business trust, other than (i) a merger or consolidation
which would result in the individuals who prior to such
merger or consolidation constitute the Board constituting at
least two-thirds (2/3) of the board of directors of the
Company or the surviving or succeeding entity immediately
after such merger or consolidation, or (ii) a merger or
consolidation effected to implement a recapitalization of
the Company (or similar transaction) in which no Person
acquires more than 20% of the combined voting power of the
Company's then outstanding securities; or
2. the shareholders of the Company approve a plan of
complete liquidation of the Company; or
3. the shareholders of the Company approve an
agreement for the sale or disposition by the Company of all
or substantially all the Company's assets, other than a sale
or disposition which would result in the individuals who
prior to such sale or disposition constitute the Board
constituting at least two-thirds (2/3) of the board of
directors of the Person purchasing such assets immediately
after such sale or disposition.
For purposes of the Plan, "Beneficial Owner" shall have the
meaning defined in Rule 13d-3 under the Securities Exchange Act
of 1934, as amended (the "Exchange Act") and "Person" shall have
the meaning given in Section 3(a)(9) of the Exchange Act, as
modified and used in Sections 13(d) and 14(d) thereof; however, a
Person shall not include (i) the Company, (ii) a trustee or other
fiduciary holding securities under an employee benefit plan of
the Company, (iii) an underwriter temporarily holding securities
pursuant to an offering of such securities, or (iv) a corporation
owned, directly or indirectly, by the shareholders of the Company
in substantially the same proportions as their ownership of
shares of the Company.
ARTICLE V
DESIGNATION OF BENEFICIARY
5.1 General. Beneficiary shall mean the person or persons designated
by a Participant in writing, in a form acceptable to the Administrator, to
receive benefits in the event of the Participant's death. Such a
designation may be revoked in writing by the Participant at any time, and
the last such designation executed by the Participant and filed with the
Administrator shall control. A Participant may, by completing and filing
with the Administrator a form provided by the Administrator for the
purpose, waive entirely his right to designate a Beneficiary hereunder, or
irrevocably assign such right to either the Company or the Beneficiary.
5.2 Plan Designations. If there is no designated Beneficiary to
receive any amount that becomes payable to a Beneficiary, or in the event a
designated Beneficiary has predeceased the Participant, or if the
Participant designated distribution according to the Plan ("Per Plan"),
such balance shall be paid in equal shares to the person or persons in the
first surviving class of the following classes of preference Beneficiaries:
(a) Participant's surviving spouse, with a balance of
payments that may be payable in the event that the spouse dies
before the end of the fixed payment period, to be paid in order
of preference to those designated in classes (b), (c) or (d)
hereafter, or as my spouse may validly designate during his or
her lifetime,
(b) Participant's surviving issue, (including legally
adopted issue), per stirpes and not per capita,
(c) Participant's surviving parents,
(d) Participant's estate.
5.3 Interpretations. Any ambiguity in the interpretation of the
Beneficiary designation shall be determined by the Administrator.
ARTICLE VI
CLAIMS
A Participant or Beneficiary who has become entitled to Benefits and
who wishes payment to commence shall submit a claim to the Administrator in
writing, in such form and with such supporting documents and authorizations
as the Administrator may require. If a Participant's or a Beneficiary's
claim for benefits is denied in whole or in part, he shall be entitled to a
written explanation form the Administrator setting forth the specific
reasons for the denial, and to a full and fair review by the Administrator
of the decision denying the claim.
ARTICLE VII
EXCLUSIONS AND LIMITATIONS
7.1 General. No benefits shall be payable under the Plan:
(a) on account of a Participant's death by suicide within
two (2) years of his entry into the Plan, or
(b) to a Participant (or his Beneficiary) within two (2)
years after the Participant has materially misrepresented the
state of his health or safety to the Company, or to any party
designated by the Company, on the occasion of his entry into the
Plan.
In the case of a Participant who has become eligible for an increase
in benefits under Section 3.3, no such increase shall apply:
(a) in the event of the Participant's suicide within two
(2) years after such increase becomes effective, or
(b) within two (2) years following the Participant's
material misrepresentation of the state of his health or safety
to the Company, or to any party designated by the Company, on the
occasion of his becoming eligible for an increase in benefits.
No benefits shall be payable to a Participant (or his Beneficiary) who
has materially misrepresented his age to the Company, except as the
Administrator shall authorize in its sole discretion.
7.2 Benefits as stated in Executed Certificate. No benefits shall
apply to a terminated Participant except as shall be set forth in a valid
Executed Certificate of Eligibility issued to him by the Administrator,
according to such reasonable rules and procedures as the Administrator may
establish.
7.3 Employee Cooperation. The right of any Eligible Employee to
participate in the Plan is conditioned upon and subject to his cooperation
with the efforts of the Administrator to determine the state of his health
and safety.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Obligation of the Company. Benefits under the Plan will be paid
solely from the general assets of the Company. No funds or assets will be
segregated or set aside by the Company for the payment of benefits, and no
trust or escrow of any kind will be created with respect to the Plan by the
Company.
8.2 Amendments or Termination. This Plan may be amended or
terminated at any time by affirmative vote of the Board of Directors of the
Company; provided, however, that such amendment or termination shall not
effect any Participant's right to benefits which arises prior to such
amendment or termination.
This Plan, as revised, has been executed on the behalf of the Company
on the 2nd day of January, 1997.
NORTHWESTERN PUBLIC SERVICE COMPANY
By /s/ Merle D. Lewis
_____________________________________
Merle D. Lewis, President & CEO
Exhibit 10(a)(5)
NORTHWESTERN PUBLIC SERVICE COMPANY
PHANTOM STOCK UNIT PLAN
1. Objectives
The objective of the Northwestern Public Service Company Phantom Stock
Unit Plan (the "Plan") is to assist officers and directors ("Eligible
Individuals") in building financial security through capital accumulation
by providing them with deferred remuneration based upon the award of
Phantom Stock Units, the value of which is related to the value of the
common stock ("Common Stock") of Northwestern Public Service Company
("Company"). The Plan is also intended to: (1) create incentives to
participating Eligible Individuals related to the long-term performance of
the Common Stock, (2) encourage continued employment with, or service on
the Board of Directors ("Board") of, the Company, and (3) promote awareness
of the performance of the Common Stock.
2. Administration
The Plan shall be administered by the Company. Subject to the
provisions of the Plan, the Board shall have exclusive power to select the
Eligible Individuals to be granted Phantom Stock Units, to determine the
number of Phantom Stock Units to be granted as described in Section 3, to
determine the time or times when Phantom Stock Units will be granted and to
determine such terms and conditions, in addition to the terms and
conditions set forth in the Plan, that shall apply to the grant of Phantom
Stock Units. The authority granted to the Board by the preceding sentence
will be exercised based upon annual recommendations received from the
Nominating and Compensation Committee ("Committee") of the Board. In
determining the number of Phantom Stock Units to be granted to an Eligible
Individual, the Board shall consider an Eligible Individual's position and
responsibilities, the nature and value to the Company of an Eligible
Individual's services, an Eligible Individual's present and potential
contribution to the Company's success, and the Company's financial
performance. Determinations by the Board shall be made by majority vote
and shall be final and binding on all parties with respect to all matters
relating to the Plan.
The Committee shall have authority to interpret the Plan, to adopt and
revise rules and regulations relating to the Plan, and to make any other
determinations which it believes necessary or advisable for the
administration of the Plan.
3. Grants
Eligible Individuals to whom Phantom Stock Units are granted shall
hereafter be referred to as "Participants." Phantom Stock Units shall be
granted at the meeting of the Board in May, each year to Participants who
are Executive Officers of the Company in such amounts as the Board shall
determine based on the recommendations of the Committee. The Committee
shall recommend awards, in amounts based upon the criteria set forth in
paragraph 2 above, up to a maximum of 35% of base salary for the Chairman
of the Board, the President and Chief Executive Officer and the Executive
Vice President and up to a maximum of 15% of base salary for the other
Executive Officer Participants. The award shall be made in Phantom Stock
units at the closing price of the Company's Common Stock on the date of the
award. Annual awards of 200 units shall be made to each of the Director
Participants who are not Executive Officers of the Company.
4. Phantom Stock Units and Dividend Equivalents
(a) Phantom Stock Units granted to a Participant shall be credited to
a Phantom Stock Unit Account ("Account") established and maintained for
such Participant on the books of the Company. The Account of a
Participant, which shall be the record of Phantom Stock Units granted to
him under the Plan, and dividend equivalents related thereto, is solely for
accounting purposes and shall not require a segregation of any Company
assets. Each grant of Phantom Stock Units under the Plan to a Participant
shall be communicated by the Board in writing to the Participant within
thirty (30) days after the date of grant.
(b) Additional credits will be made to each Participant's Account in
amounts equal to the dividends the Participant would have received from
time to time had he been the owner on the record dates with respect thereto
of the number of shares of Common Stock equal to the number of Phantom
Stock Units in his Account on such dates. Such dividend credit amounts
shall be converted to Phantom Stock Units at the closing price of the
Common Stock on the New York Stock Exchange on the date that dividends are
paid.
5. Vesting
(a) A Participant shall have a nonforfeitable right to the Phantom
Stock Units granted in a given year and dividend equivalents thereon on May
1st of the year five years following the date that such Phantom Stock Units
were granted (the "Fifth Anniversary Date").
(b) A Participant shall have a nonforfeitable right to one hundred
percent (100%) of the Phantom Stock Units and other amounts credited to his
Account upon the Participant's termination of employment with the Company
due to death, permanent disability or retirement on or after the age of
sixty-five (65) years or such earlier date as the Board, in its discretion,
shall designate. The Participant or his Beneficiary may choose vesting
under paragraph 5(a) or the full vesting under the preceding sentence.
(c) For purposes of this Section 5 a Participant will be considered
to terminate employment by reason of "permanent disability" if, in the
determination of the Board, he is subject to a physical or mental condition
which is expected to render the Participant unable to perform his usual
duties or any comparable duties for the Company.
6. Payment for Phantom Stock Units
(a) Upon a Fifth Anniversary Date the Participant shall be entitled
to receive from the Company an amount equal to the sum of (1) the total
value (as determined by the Board pursuant to Section 7) of the Phantom
Stock Units credited to his Account that vest on such Date and (2) related
reinvested dividend equivalents credited to his Account pursuant to Section
4 as of such Date. Upon the date the Participant vests in 100% of the
Phantom Stock Units and related amounts credited to his Account pursuant to
paragraph 5(b) (the "Automatic Vesting Date"), the Participant shall be
entitled to receive from the Company an amount equal to the sum of (1) the
total value (as determined by the Board pursuant to Section 7) of the
Phantom Stock Units credited to the Participant's Account as of the
Automatic Vesting Date, and (2) the value of dividend equivalents thereon
credited to his Account pursuant to Section 4, as of the Automatic Vesting
Date.
(b) Payment to a Participant of any amount set forth in paragraph
6(a) shall be made in cash in a lump sum within thirty (30) days after the
applicable Fifth Anniversary Date and, unless otherwise elected by the
Participant or his Beneficiary, after the Automatic Vesting Date.
(c) Notwithstanding any other provision of the Plan, all Phantom
Stock Units and other amounts credited to the Account of a Participant, and
all right to any payment hereunder to the Participant, will be forfeited,
and the Company will have no further obligation hereunder to such
Participant, if any of the following circumstances occur:
(i) The Participant at any time is discharged from employment
with the Company for cause ("Cause"). "Cause" shall mean (A) a
Participant's conviction of any criminal violation involving dishonesty,
fraud, or breach of trust, or (B) a Participant's willful engagement in any
misconduct in the performance of his duty that materially injures the
Company, or (C) failure to adequately perform his duties; or
(ii) The Participant at any time prior to the Fifth Anniversary
Date or the Automatic Vesting Date voluntarily terminates employment with
the Company.
The Board shall have sole discretion with respect to the application
of the provisions of this paragraph (c) and such exercise of discretion
shall be conclusive and binding upon the Participant, and all other
persons.
(d) Notwithstanding any other provision of the Plan, one-half of the
payment under paragraph 6(a) for Participants who are active Executive
Officers of the Company will be used to purchase Common Stock of the
Company. Those Participants may elect to make such purchase in a lump sum
at the time of award payout each year, through payroll deduction during the
year, or a combination thereof.
7. Valuation of Phantom Stock Units
For all purposes of the Plan other than for the purposes of paragraph
4(b), the value of a Phantom Stock Unit upon a Fifth Anniversary Date or
the Automatic Vesting Date for purposes of Section 6 will be an amount
equal to the average of the closing prices of the Common Stock on the
Composite Tape of the New York Stock Exchange for the ten (10) consecutive
trading days immediately preceding such Date; or
8. Changes in Capital and Corporate Structure
In the event of any change in the outstanding shares of Common Stock
of the Company by reason of an issuance of additional shares,
recapitalization, reclassification, reorganization, stock split, reverse
stock split, combination of shares, stock dividend or similar transaction,
the Board shall proportionately adjust, in an equitable manner, the number
of Phantom Stock Units held by Participants under the Plan. The foregoing
adjustment shall be made in a manner that will cause the relationship
between the aggregate appreciation in outstanding Common Stock and earnings
per share of the Company and the increase in value of each Phantom Stock
Unit granted hereunder to remain unchanged as a result of the applicable
transaction.
9. Non-Transferability
Phantom Stock Units granted under the Plan, and other amounts credited
to a Participant's Account, and any rights and privileges pertaining
thereto, may not be transferred, assigned, pledged or hypothecated in any
manner, by operation of law or otherwise, other than by will or by the laws
of descent and distribution, and shall not be subject to execution,
attachment or similar process.
10. Death of a Participant
In the event of a Participant's death, payment of any amount due under
the Plan shall be made to the Participant's designated Beneficiary. In the
event the Participant has not designated a Beneficiary, or if no designated
Beneficiary is living at the date of death of the Participant, payment of
any amount due under the Plan shall be paid as promptly as practicable to
the duly appointed and qualified executor or administrator of the
Participant's estate. "Beneficiary" shall mean the individual,
corporation, partnership, association, trust or unincorporated organization
designated by a Participant in writing filed with the Company as the
recipient of any payment to be made to a Participant hereunder in the event
of the Participant's death prior to payment. Such designation may be
changed by a Participant at any time by writing filed with the Company
without the consent of or notice to any Beneficiary previously designated.
11. Withholding
The Company shall have the right to deduct from all amounts paid
pursuant to the Plan any taxes required by law to be withheld with respect
to such amounts.
12. Voting and Dividend Rights
Except as provided in Sections 4, 6, and 8, no Participant shall be
entitled to any voting rights or to receive any dividends or other
distributions with respect to the Common Stock of the Company as a result
of his participation in the Plan.
13. Miscellaneous Provisions
(a) No Participant or other person shall have any claim or right to
be granted an award under the Plan. Neither the Plan nor any action taken
hereunder shall be construed as giving any Participant any right to be
retained in the employ of the Company or to continue to serve as a member
of the Board.
(b) The Plan shall at all times be entirely unfunded and no
provisions shall at any time be made with respect to segregating assets of
the Company for payment of any benefits hereunder. No Participant or other
person shall have any interest in any particular assets of the Company by
reason of the right to receive a benefit under the Plan and any such
Participant or other person shall have only the rights of a general
unsecured creditor of the Company with respect to any rights under the
Plan.
(c) Except when otherwise required by the context, any masculine
terminology in this document shall include the feminine, and any singular
terminology shall include the plural.
(d) This Plan shall be governed by the laws of the State of South
Dakota.
14. Effectiveness and Term of Plan
The effective date of the Plan shall be May 3, 1989, and the Plan
shall terminate with awards made in May, 1999. No Phantom Stock Units
shall be granted pursuant to the Plan after the date of termination of the
Plan, although after such date payments shall be made with respect to
Phantom Stock Units granted prior to the date of termination.
IN WITNESS WHEREOF, the Company has executed this Plan as of the 1st
day of May, 1996.
NORTHWESTERN PUBLIC SERVICE COMPANY
By /s/ M. D. Lewis
______________________________________
M. D. Lewis
President & CEO
By /s/ Aelred J. Kurtenbach
______________________________________
Aelred J. Kurtenbach, Chairman
Nominating and Compensation Committee
Exhibit 10(a)(7)
NORTHWESTERN PUBLIC SERVICE COMPANY
NorthSTAR PLAN
I. Objective
The Northwestern Public Service Company NorthSTAR Plan ("Plan") is
established to accomplish the following objectives: (1) to motivate and
reward outstanding performance by Northwestern Public Service Company (the
"Company") and its employees by providing additional compensation to
eligible employees who influence the profitability of the Company; (2) to
compare the Company's performance with a group of regional utilities; (3)
to compare the Company's performance to established annual objectives; (4)
to compare individual performance to established annual objectives; (5) to
focus on stockholder and ratepayer interests and (6) to support long-term
objectives by achieving short-term goals.
II. Administration
The Plan shall be administered by the Company. The Compensation
Committee ("Committee") of the Company's Board of Directors ("Board"),
shall have responsibility and authority with respect to the Plan, including
the following: (1) approving performance measures, the measurement scale
used, and the comparison utilities selected; (2) reviewing eligibility for
Plan participation; (3) approving the size of the performance fund
("Performance Fund") and individual levels of award opportunities; and (4)
reviewing and approving awards for all Executive Officers.
III. Eligibility for Participation
Employees eligible to participate in the Plan are those full-time
employees who have completed one year of service with the Company. To be
eligible for an award, an employee must be employed with the Company on
December 31st of the year for which the award is based, except as hereafter
provided in Subsection (b).
All Participants will be eligible to participate in the Plan for that
calendar year unless any of the following circumstances occur:
(a) The Participant at any time is discharged from employment with
the Company for cause ("Cause"). "Cause" shall mean (i) a Participant's
conviction of any criminal violation involving dishonesty, fraud, or breach
of trust, or (ii) a Participant's willful engagement in any misconduct in
the performance of his duty that materially injures the Company, or (iii)
failure to adequately perform his duties; or
(b) The Participant's employment with the Company has terminated for
any reason other than death, permanent disability, or retirement on or
after the age of sixty-five (65) years or such earlier date as the Board,
in its discretion, shall designate. For the purposes of this Section, a
Participant will be considered to terminate employment by reason of
"permanent disability" if, in the determination of the Board, he is subject
to a physical or mental condition which is expected to render the
Participant unable to perform his usual duties or any comparable duties for
the Company.
In the event that an eligible Participant is not employed for an
entire plan year, or for the first year of eligibility, his award shall be
pro-rated to reflect the proportionate part of the plan year during which
he was actually employed or eligible.
IV. Determination of Performance Award Amounts
(a) A Performance Award ("Award") shall be awarded under the Plan to
each Participant, within the Range of Award Opportunities set forth on
Exhibit I attached hereto, based on performance for the applicable calendar
year which shall be determined by reference to the measures of performance
for that year and weighting as set forth on Exhibit II attached hereto and
detailed as follows:
(i) Company Performance vs. Peer Utilities (50% weight)
The Company will compare itself against peer utilities set
forth on Exhibit II for (1) Change in Average Rates, defined as
total retail revenues, divided by retail sales in kilowatt-hours,
for electric operations, and total revenue from ultimate
customers, divided by volume of gas sold to ultimate customers,
for gas operations, and for (2) Change in Operating Expenses,
defined as total operating expenses per unit of energy furnished
to customers. The results of both electric and gas computations,
in relation to a peer group, will be weighted in proportion to
the Company's operating income from each source.
The Company will rank itself percentile-wise against the
peer utilities in terms of each of the above two measures. The
average percentile ranking will determine the overall degree of
achievement of peer-based goals and the degree to which this
portion of the annual incentive is earned. If the average
percentile ranking is fifty percent (50%), the target award level
will be earned on the peer-based measures. If the Company ranks
first among peers in terms of both measures (100th percentile),
then the maximum award will be earned. If the average percentile
ranking is twenty-five percent (25%), then the threshold award
level will be earned with respect to the peer-based portion of
the annual incentive. A ranking below the twenty-fifth
percentile will eliminate this portion of the bonus.
(ii) Company Performance vs. Annual Objective (25% Weight)
Under this objective, Earnings Per Share, will be the
primary earnings per share of the Company as it appears in the
approved budget for the Company.
Company management will develop a schedule for translating
results of the objective into threshold, target and maximum
achievement levels. This schedule must be approved by the
Compensation Committee.
(iii) Performance vs. Individual Objectives (25% Weight)
Each year, Participants will establish three or four major
individual and department goals for review and approval by their
supervisor and by the Chief Executive Officer. At the end of
each year, Participants will provide to their supervisor and to
the Chief Executive Officer an explanation regarding the degree
to which each goal has been achieved. The supervisor and the
Chief Executive Officer will review the Participant's
explanations and will then determine the achievement level for
each Participant.
(b) At the end of each calendar year, percentages will be computed
and totaled for each Participant for each of the Measures of Performance in
Exhibit II. Each Participant will receive an Award for the applicable
calendar year equal to a percentage of his base salary as shown on Exhibit
I. Threshold is defined as a composite twenty-five percentage level,
Target as a composite fifty percentage level, and Maximum as a composite
one hundred percentage level.
The total amount of all awards made to Participants shall not exceed
seven percent (7%) of the Company's net after tax income for that year.
(c) All Executive Officer Awards shall be reviewed, and must be
approved, by the Compensation Committee. All Awards for other Company
employees shall be reviewed, and must be approved, by the Chief Executive
Officer of the Company.
(d) Annual base salary adjustments, as appropriate, will continue to
be made by the Company to individual employees predicated on merit,
performance, cost-of-living and such other factors as the Company normally
has considered without regard to Awards awarded under the Plan.
(e) Awards shall be paid to each Participant in a single sum as
promptly as practicable after approved.
V. Participant's Death
(a) In the event of the death of the Participant, any unpaid Award
held for the Participant shall be paid as promptly as practicable in a
single sum to the Participant's designated Beneficiary.
(b) In the event the Participant has not designated a Beneficiary, or
if no designated Beneficiary is living at the date of death of the
Participant, the unpaid Award shall be paid as promptly as practicable in a
single sum to the duly appointed executor or administrator of the
Participant's estate.
(c) For purposes of this Section, "Beneficiary" shall mean any
individual, corporation, partnership, association, trust or unincorporated
organization designated by a Participant in writing filed with the Company
as the recipient of the Participant's Award in the event of the
Participant's death prior to its payment. Such designation may be changed
by the Participant at any time in writing filed with the Company without
the consent of or notice to any Beneficiary previously designated.
VI. Continuity of the Plan
Although it is the present intention of the Company to continue the
Plan in effect for an indefinite period of time, the Board reserves the
right to terminate the Plan in its entirety as of the end of any calendar
year or other fiscal year of the Company or to modify the Plan as it exists
from time to time, provided that no such action shall adversely affect any
Awards previously awarded under the Plan.
VII. Miscellaneous Provisions
(a) No Award payable under the Plan shall be subject in any manner to
transfer, assignment, pledge, or hypothecation in any manner by operation
of law or otherwise, other than by will or by the laws of descent and
distribution nor be subject to execution, attachment or similar process.
(b) Neither the Plan nor any action taken hereunder shall be
construed as giving any Participant any right to be retained in the employ
of the Company.
(c) The Plan shall at all times be entirely unfunded and no provision
shall at any time be made with respect to segregating assets of the Company
for payment of any Awards hereunder. No Participant or any other person
shall have any interest in any particular assets of the Company by reason
of the right to receive an Award under the Plan and any such Participant or
any other person shall have only the rights of a general unsecured creditor
of the Company with respect to any rights under the Plan.
(d) Except when otherwise required by the context, any masculine
terminology in this document shall include the feminine, and any singular
terminology shall include the plural.
(e) This Plan shall be governed by the laws of the State of South
Dakota.
IN WITNESS WHEREOF, the Company has executed this revised Annual
Performance Incentive Plan as of the 1st day of May, 1996.
NORTHWESTERN PUBLIC SERVICE COMPANY
By /s/ M. D. Lewis
______________________________________
M. D. Lewis
President & CEO
By /s/ Raymond M. Schutz
______________________________________
Raymond M. Schutz, Chairman
Nominating and Compensation Committee
EXHIBIT I
May 1, 1996
Range of Award Opportunities
(% of Base Salary)
Position Threshold Target Maximum
Group I:
President & CEO 20% 25% 30%
Executive Vice President
Group II:
Senior Executive Officers* 15% 20% 25%
Group III:
Other Executive Officers 10% 15% 20%
Group IV:
Manager Level Employees 5% 10% 15%
Group V:
Salaried-Non Manager 2.5% 5% 7.5%
Group VI:
Hourly 2% 4% 6%
* Vice President - Energy Services, Vice President - Energy Operations,
Vice President - Administration, Vice President - Market Development and
Vice President - Finance
EXHIBIT II
May 3, 1995
MEASURES OF PERFORMANCE
Performance will be measured in the following three ways for purposes of
determining awards under the Plan, with weightings placed on each as
indicated.
1. Company performance vs. peer utilities* (50% weight)
2. Company performance vs. annual objectives (25% weight)
3. Individual performance vs. objectives (25% weight)
* Peer Utility Companies
Black Hills Corporation
IES Industries, Inc.
Interstate Power Company
Madison Gas & Electric Company
MDU Resources Group, Inc.
Midwest Resources
Minnesota Power
Otter Tail Power Company
St. Joseph Light & Power Company
Southern Indiana Gas & Electric Company
Management's Discussion and Analysis
Northwestern Public Service is a diversified energy distribution company
with core operations engaged in the propane, electric and natural gas
industries.
Northwestern generates and distributes electric energy to 56,000 customers
in eastern South Dakota and purchases and distributes natural gas to 77,000
customers in eastern South Dakota and four communities in Nebraska.
The Company acquired Synergy Group Incorporated, a major retail propane
distributor in August 1995. In 1996, Northwestern acquired eight
additional propane companies, including Empire Energy Corporation in
October, then the eighth largest retail marketer of propane in the U.S.,
and CGI Holdings, Inc., then the eighteenth largest retail marketer of
propane in the U.S. in December. Also in December 1996, Northwestern
combined all of its propane businesses into Cornerstone Propane Partners,
L.P., (Cornerstone) a publicly traded master limited partnership which sold
9.8 million common units to the public on December 17, 1996, at a price of
$21 per unit. Net proceeds from the offering of common units, together
with the concurrent sale of $220 million of senior secured notes by a
subsidiary partnership, were used to redeem preferred stock of the combined
propane entities and repay acquisition loans and existing debt.
Northwestern's majority-owned subsidiaries hold 6.9 million subordinated
units or 41.4% of Cornerstone, while public unitholders, own 58.6% of the
Partnership. Cornerstone is the fifth largest retail propane marketer in
the U.S., serving approximately 360,000 customers from 312 service centers
in 26 states.
Weather
- -------
Weather patterns have a significant impact on the Company's operating
performance. Because propane and natural gas are heavily used for
residential and commercial heating, the demand for these products depends
upon weather patterns throughout the Company's market areas. With a larger
proportion of its operations related to seasonal propane and natural gas
sales in 1997, the distribution of the Company's quarterly operating
performance will be different than in historical periods. A greater portion
of the Company's future operating income is expected to be recognized in
the first and fourth quarters related to higher revenues from the winter
heating season.
Earnings
- --------
Earnings for 1996 were $22.9 million or $2.56 per share, compared to $18.0
million or $2.21 per share for 1995. Earnings per share for 1996 included
$.19 related to a one-time gain from proceeds received related to the
Cornerstone refinancing transactions. Earnings from ongoing operations
were $2.37 per share, up 7.2% from $2.21 per share in 1995. The earnings
increase was primarily due to slightly colder weather, propane
acquisitions, improved natural gas returns and increased investment income.
Earnings per share in 1995 were $2.21 compared to $2.00 in 1994. The
increase was primarily due to greater electric retail sales, modest gas
rate relief, and increased contributions from nonregulated businesses,
principally propane. Earnings for 1995 included propane operations since
August 1995.
Dividends
- ---------
In November 1995, the Company's Board of Directors elected to increase
annual dividends per share from $1.70 to $1.76. Subsequently, in November
1996, the Board approved an eight cent per share increase in annual
dividends from $1.76 to $1.84. The Company's financial strength, operating
performance, the success of its growth strategies and competitive changes
in the industry will be factors considered by the Company's Board of
Directors when evaluating future dividend payments.
- -------------------------
Business Segment Summary
- -------------------------
Year Ended Increase Increase
December 31 1996 1995 (Decrease) 1994 (Decrease)
(thousands of dollars)
-------- ------- --------------- -------- ------------
REVENUES
Propane $175,102 $38,883 $136,219 350.3% - $38,883 -
Electric 73,417 74,857 (1,440) (1.9%) $73,077 1,780 2.4%
Natural Gas 72,269 64,483 7,786 12.1% 62,141 2,342 3.8%
Manufacturing 23,221 26,747 (3,526)(13.2%) 22,047 4,700 21.3%
OPERATING INCOME
Propane $ 18,947 $ 5,604 $ 13,343 238.1% - $ 5,604 -
Electric 24,475 26,003 (1,528) (5.9%) $25,662 341 1.3%
Natural Gas 5,684 3,862 1,822 47.2% 2,540 1,322 52.0%
Manufacturing 1,312 2,628 (1,316)(50.1%) 2,334 294 12.6%
OPERATING DATA
Propane sales-
(000 gallons) 160,005 37,805 122,200 323.2% - 37,805 -
Electric sales-retail
(000 mwh) 1,083 1,071 12 1.1% 1,019 52 5.1%
Natural Gas throughput
(000 mmbtu) 16,321 15,204 1,117 7.3% 14,750 454 3.1%
- ---------------------
Results of Operations
- ---------------------
PROPANE
(graph of information in following table)
Revenue Growth (000's)
Propane Electric Natural Gas Manufacturing
-------- --------- ----------- -------------
1994 - 73,077 62,141 22,047
1995 38,883 74,858 64,483 26,747
1996 175,102 73,417 72,269 23,221
(end of graph)
Propane operations include revenues from Cornerstone since December 18,
1996, Empire Energy Corporation since October 7, 1996, and Synergy Group
Incorporated for all of 1996. Weather throughout Synergy's propane service
area was about 5% colder than normal while weather throughout Empire
Energy's area was about 3% colder than normal since acquisition. Because
of the heavy use of propane for heating, propane sales are extremely
weather sensitive. The majority of propane revenues occur in the first and
fourth quarters when propane is heavily sold for residential and commercial
heating.
Operating revenue from propane sales increased in 1996 to $175.1 from $38.9
million in 1995. Operating income increased in 1996 to $18.9 million from
$5.6 million in 1995. The large increases in sales and operating income
are primarily due to a full year of operations for Synergy which was
acquired in August 1995, the acquisition of Empire Energy in October 1996
and the formation of Cornerstone in December 1996. The increases are also
partly due to slightly colder than normal weather in the Company's propane
market areas.
In accordance with the Company's plans, substantial changes are being made
in the management and operation of the acquired propane businesses in order
to achieve improvement in the results of operations. Among the cost
efficiency measures being put into place to reduce operating, selling and
administrative expenses is the consolidation of corporate functions of all
the acquired propane businesses.
ELECTRIC
(graph of information in following table)
Electric Retail Sales
(000 kwh)
-------------------------------
1994 1,018,509
1995 1,071,328
1996 1,082,704
(end of graph)
In 1996, retail electric mwh sales grew by 1% even though weather during
the summer was approximately 20% cooler than the previous year. Electric
revenues decreased slightly due to a decline in wholesale sales. Operating
income decreased due to the slight decrease in revenues combined with
increases in growth-related costs in expanded energy services, marketing
functions and property taxes. Property taxes increased significantly in
1996 due primarily to changes in South Dakota's tax regulations.
1995 vs. 1994. In 1995, revenue increases were related to a 5.1% increase
in retail kwh sales over 1994. In 1995, the Company set a new record for
peak electric demand during the summer exceeding the previous peak record
set in 1991 by 8%. The increase in electric operating income reflects the
higher retail sales, offset by slightly higher operating expenses.
Maintenance expense declined slightly while depreciation and property taxes
reflect the increase in depreciable plant.
NATURAL GAS
(graph of information in following table)
Gas Throughput
000 mmbtu
----------------------------
1994 14,750
1995 15,204
1996 16,321
(end of graph)
One of the predominant factors affecting the Company's natural gas
operations is weather patterns during the winter heating season. Because
natural gas is heavily used for residential and commercial heating, the
demand for this product depends upon weather conditions. In 1996, the
increase in natural gas revenues over 1995 reflects the effects of cooler
weather, higher market prices for natural gas supply which are passed on to
customers through the purchased gas adjustment mechanism and a slight
increase in customers.
The increase in gas operating income reflects a 7.3% increase in
throughput, offset by slightly higher operating expenses. The increase in
other operating expenses was primarily due to growth-related costs in the
expanded energy services and marketing functions. Maintenance expense
decreased slightly while property taxes increased due to changes in South
Dakota tax regulations.
1995 vs. 1994. Cooler weather patterns during the heating season resulted
in a 3.8% increase in gas revenues. Natural gas revenues include an
overall rate increase in South Dakota implemented on November 15, 1994, and
an overall increase in Nebraska effective April 1, 1995. The increase in
operating income was related to a 3.1% increase in throughput and effects
of rate increases, offset by slightly higher operating expenses.
Maintenance expense declined slightly while depreciation and property taxes
reflect the increase in depreciable plant.
MANUFACTURING
Manufacturing revenues and operating income are related to the Company's
ownership interest in Lucht Inc., a company that manufactures photographic
processing and imaging equipment used by high-volume photo processing
laboratories. Operating income in 1996 decreased when compared to 1995 due
to decreased sales resulting from manufacturing delays in product
development. Operating income in 1995 increased by 12.6% over 1994 due to
acquisitions and an increase in sales of existing product lines.
OTHER INCOME STATEMENT ITEMS
Other income increased in 1996 over 1995 primarily due to a one-time gain
realized by the Company related to the Cornerstone transaction. The gain
is attributed to various prepayment and redemption premiums realized when
propane assets and liabilities were contributed to Cornerstone. Other
income also includes the gain on the sale of a portion of a common stock
investment.
- -------------------------------
Liquidity and Capital Resources
- -------------------------------
During 1996, cash flow from operations, net of dividends paid, together
with proceeds from the Cornerstone equity and debt offerings and other
external financing activities, provided the funds for propane and other
acquisition activities, construction expenditures and other requirements.
Operating Activities
- --------------------
(graph of information in following table)
Cash Flows From
Operating Activities
-------------------------
1994 26,268,921
1995 35,366,960
1996 60,903,017
(end of graph)
Cash flow from operating activities in 1996 increased 66% from 1995
primarily due to propane acquisitions and growth in the Company's earnings.
Liquidity is also provided from the availability of substantial cash and
investment balances. Cash equivalents and marketable securities totaled
$179.9 million, $44.7 million and $39.2 million at December 31, 1996, 1995
and 1994.
Investment Activities - Financing Activities
- ---------------------------------------------
The Company's principal investments and capital requirements in 1996 were
related to the acquisition of retail propane distributors Empire Energy
Corporation and CGI Holdings, Inc. which were refinanced by the Cornerstone
equity and debt offerings. The Cornerstone partnership sold 9.8 million
common units to the public with net proceeds of approximately $192 million
and also issued, in conjunction with the partnership public offering, $220
million of nonrecourse 7.53% series senior mortgage notes maturing in 2010
with eight equal annual installments beginning in the year 2003.
Working capital and other financial resources are also provided by unused
lines of credit which are generally used to support commercial paper
borrowings, a primary source of short-term financing. At December 31,
1996, the Company had no outstanding borrowings under its lines of credit
or commercial paper borrowings. Unused short-term lines of credit totaled
$24 million at December 31, 1996. In addition, the Company's nonregulated
businesses maintain credit agreements with various banks for revolving and
term loans.
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 additional debt and preferred stock.
- --------------------
Capital Requirements
- --------------------
The Company's primary capital requirements include the funding of its
energy business construction and expansion programs, the funding of debt
and preferred stock retirements, 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 and reliability capabilities through system
replacement 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 1996, 1995 and 1994 were $35.2
million, $29.6 million and $22.7 million. Construction expenditures during
the last three years included expenditures related to an operations center
expected to provide enhanced customer service capability, cost savings and
operating efficiencies through consolidation of activities and the
expansion of the Company's natural gas system in eastern South Dakota. In
addition, 1996 and 1995 included $9.8 million and $4.7 million of capital
expenditures related to propane operations. Total expenditures for 1997,
excluding propane operations, are estimated to be $14.5 million. The
majority of the projected expenditures will be spent on enhancements of the
electric and gas distribution systems. Estimated electric and natural gas
related construction expenditures for the years 1997 through 2001 are
expected to be $69.1 million. Nonregulated maintenance capital
expenditures for 1997 are estimated to be $4.8 million. Estimated
nonregulated maintenance capital expenditures for the years 1997 through
2001 are expected to be $18.8 million. Capital requirements for the
mandatory retirement of long-term debt and mandatory preferred stock
sinking fund redemption totaled $400,000, $600,000, and $600,000 for the
years ended 1996, 1995 and 1994, respectively. It is expected that such
mandatory retirements will be $1.2 million in 1997, $21.5 million in 1998,
$14.0 million in 1999, $6.5 million in 2000 and $6.5 million in 2001. The
Company anticipates that future capital requirements will be met by
existing investments and marketable securities, internally generated cash
flows and available external financing.
- -----------------------------
Competition and Business Risk
- -----------------------------
The electric and natural gas industries continue to undergo numerous
transformations, and the Company is operating in an increasingly
competitive marketplace. The passage of the National Energy Policy Act of
1992 has accelerated competition in the electric business by promoting
competition in the industry at the wholesale level. Competition in the
Company's gas business was accelerated with the passage of the Federal
Energy Regulatory Commission's (FERC) Order 636 which resulted in an
unbundling of gas supply and services to customers, or separately-priced
sale and transportation services.
The changes in the electric business are expected to be similar to those
experienced in the natural gas business over the last few years. The FERC,
which regulates interstate and wholesale electric transactions, has opened
up transmission grids and mandated that utilities must allow others equal
access to utility transmission systems. Various state regulatory bodies
are also supporting initiatives to redefine the electric energy market and
are experimenting with retail wheeling which gives some retail customers
the ability to choose their supplier of electricity. Traditionally,
utilities have been vertically integrated, providing bundled energy
services to customers. The potential for continued unbundling of energy
services exists, allowing customers to buy their own electricity and
natural gas on the open market and having it delivered by the local
utility.
The growing pace of competition in the energy industry has been a primary
focus of management over the last few years. The Company's future financial
performance will be dependent on the effective execution of operating
strategies to address a more competitive and changing energy marketplace.
Business strategies focus on enhancing the Company's competitive position,
on expanding energy sales and markets with new products and services for
customers and increasing shareholder value. The Company has realigned all
areas of the business to support energy services and marketing functions.
A new marketing plan, an expanded line of energy products and services,
additional staff and new technologies are part of the Company's strategy
for providing responsive and superior customer service.
To strengthen the Company's competitive position, new technologies were
added that enable employees to better serve customers. The company is
centralizing activities to improve efficiency and customer responsiveness,
and business processes are being reengineered to apply best-practices
methodologies. Long-term supply contracts have been renegotiated to lower
customers' energy costs, and new alliances help reduce expenses and add
innovative work approaches.
As described in Note 1 to the consolidated financial statements, the
Company complies with the provisions of Statement of Financial Accounting
Standards No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of
Regulation". SFAS 71 provides for the financial reporting requirements of
the Company's regulated electric and natural gas operations which requires
specific accounting treatment of certain costs and expenses that are
related to the Company's regulated operations. Criteria that could give
rise to the discontinuance of SFAS 71 include (1) increasing competition
that restricts the Company's ability to establish prices to recover
specific costs and (2) a significant change in the manner in which rates
are set by regulators from cost-based regulation to another form of
regulation. The Company periodically reviews these criteria to ensure the
continuing application of SFAS 71 is appropriate. Based on a current
evaluation of the various factors and conditions that are expected to
impact future cost recovery, the Company believes that its regulatory
assets, including those related to generation, are probable of future
recovery.
Weather conditions have a significant impact on the demand for propane for
both heating and agricultural purposes. Many customers of Cornerstone rely
heavily on propane as a heating fuel. Actual weather conditions can vary
substantially from year to year, significantly affecting Cornerstone's
financial performance. Furthermore, variations in weather in one or more
regions in which Cornerstone operates can significantly affect the total
volumes sold by Cornerstone and the margins realized on such sales and,
consequently Cornerstone's results of operations.
The retail propane business is a margin-based business in which gross
profits depend on the excess of sales prices over propane supply costs.
Consequently, Cornerstone's profitability will be sensitive to changes in
wholesale propane prices. Propane is a commodity, the market price of
which can be subject to volatile changes in response to changes in supply
or other market conditions. As it may not be possible immediately to pass
on to customers rapid increases in the wholesale cost of propane, such
increases could reduce Cornerstone's gross profits.
Cornerstone's profitability is affected by the competition for customers
among all participants in the retail propane business. Some of
Cornerstone's competitors are larger or have greater financial resources
than Cornerstone. Should a competitor attempt to increase market share by
reducing prices, Cornerstone's financial condition and results of
operations could be materially adversely affected. In addition, propane
competes with other sources of energy, some of which are less costly for
equivalent energy value.
Energy distribution growth will be increasingly important to the Company in
the future. In addition to maintaining a strong competitive position in
electric, natural gas and propane distribution businesses, the Company
intends to seek new investments and acquisitions that have long-term growth
potential. While such investments and acquisitions can involve increased
risk in comparison to the Company's energy distribution businesses, they
offer the potential for enhanced investment returns.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: The statements included in this Annual Report to Shareholders which
are not historical facts and which are forward looking statements involve
risks and uncertainties detailed in the Company's Securities and Exchange
Commission filings.
Report of Management
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 D. Lewis
President and Chief Executive Officer
Richard R. Hylland
Executive Vice President
Report of Independent Public Accountants
To the Stockholders and Board of Directors of Northwestern Public Service
Company:
We have audited the accompanying consolidated balance sheets of
NORTHWESTERN PUBLIC SERVICE COMPANY (a Delaware corporation) AND
SUBSIDIARIES as of December 31, 1996 and 1995, and the related consolidated
statements of income and retained earnings and cash flows for each of the
three years in the period ended December 31, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Minneapolis, Minnesota
January 31, 1997
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31
1996 1995 1994
--------------- --------------- --------------
Operating Activities:
Net income $ 26,053,800 $ 19,305,569 $ 15,440,208
Items not affecting cash:
Depreciation and amortization 19,414,065 14,633,154 12,438,501
Deferred income taxes 5,830,313 2,540,385 1,509,619
Investment tax credits (561,278) (563,311) (564,801)
Changes in current assets and
liabilities, net of
effects from acquisitions:
Trade accounts receivable (332,902) (3,897,932) (1,057,563)
Inventories (4,374,494) (327,160) (1,447,191)
Other current assets (4,308,027) (2,641,018) (259,826)
Accounts payable 15,712,431 (1,718,666) 2,699,294
Accrued taxes 4,621,014 937,553 (1,487,575)
Accrued interest 23,477 1,741,160 (30,991)
Other current liabilities (143,168) 3,328,632 421,690
Other, net (1,032,214) 2,028,594 (1,392,444)
--------------- --------------- --------------
Cash flows from operating
activities 60,903,017 35,366,960 26,268,921
--------------- --------------- --------------
Investment Activities:
Property additions (35,170,026) (29,636,745) (22,680,856)
Purchase of noncurrent
investments, net (107,425,554) (5,669,229) (1,386,178)
Purchase of net assets, net
of cash acquired (24,481,000) (109,528,168) -
Purchase of working capital
adjustments, net - (10,607,114) -
Acquisition related costs (2,040,000) (5,405,328) -
--------------- --------------- --------------
Cash flows for investment
activities (169,116,580) (160,846,584) (24,067,034)
--------------- --------------- --------------
Financing Activities:
Dividends on common and
preferred stock (16,346,762) (14,463,389) (12,940,868)
Minority interest on preferred
securities of subsidiary trust (2,722,232) (1,056,250) -
Issuance of long-term debt 21,653,811 86,599,820 1,100,000
Repayment of long-term debt (339,958) (3,156,699) (677,500)
Issuance of preferred securities
of subsidiary trust - 31,213,261 -
Issuance of preferred stock - 3,650,000 -
Retirement of preferred stock (10,000) (30,000) (30,000)
Issuance of common stock - 31,022,182 -
Short term borrowings
(repayments) 35,500,000 (6,300,000) 9,800,000
--------------- --------------- --------------
Cash flows from (for)
financing activities 37,734,859 127,478,925 (2,748,368)
--------------- --------------- --------------
Cornerstone Propane Partners
Formation Transactions:
Acquisition of CGI Holdings,
net of $2,568,000 of cash
acquired (68,962,482) - -
Issuance of Cornerstone Propane
Partners common units 191,804,130 - -
Issuance of long-term debt 220,000,000 - -
Repayment of long-term debt
and short-term borrowings (229,570,969) - -
Other fees and expenses (10,553,650) - -
--------------- --------------- --------------
Cash flows from Cornerstone
Propane Partners formation
transactions 102,717,029 - -
--------------- --------------- --------------
Increase (Decrease) in Cash and
Cash Equivalents 32,238,325 1,999,301 (546,481)
Cash and Cash Equivalents,
beginning of year 4,551,913 2,552,612 3,099,093
--------------- --------------- --------------
Cash and Cash Equivalents,
end of year $ 36,790,238 $ 4,551,913 $ 2,552,612
=============== =============== ==============
Supplemental Cash Flow Information:
Cash paid during the year for:
Income taxes $ 6,271,000 $ 5,972,200 $ 7,382,119
Interest $ 18,644,802 $ 8,381,217 $ 8,887,901
Noncash transactions during the year for:
Assumption of debt as part of
acquisitions $ 149,516,144 $ 2,344,603 $ -
See Notes to Consolidated Financial Statements
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Years Ended December 31
1996 1995 1994
------------- ------------- -------------
Operating Revenues:
Propane $ 175,102,363 $ 38,883,031 $ -
Electric 73,416,994 74,857,501 73,077,431
Natural Gas 72,269,047 64,482,943 62,141,382
Manufacturing 23,220,737 26,746,847 22,047,241
------------- ------------- -------------
344,009,141 204,970,322 157,266,054
------------- ------------- -------------
Operating Expenses:
Propane gas sold 101,359,989 18,527,061 -
Fuel and purchased power 13,347,461 14,304,791 14,552,637
Purchased natural gas sold 51,170,517 46,430,023 46,351,422
Manufacturing cost of goods sold 14,547,866 17,162,626 13,996,217
Other operating expenses 80,555,962 43,190,237 27,117,519
Maintenance 5,919,354 6,019,601 6,169,895
Depreciation and amortization 19,414,065 14,633,154 12,438,501
Property and other taxes 7,275,925 6,605,660 6,103,903
------------- ------------- -------------
293,591,139 166,873,153 126,730,094
------------- ------------- -------------
Operating Income:
Propane 18,947,261 5,604,307 -
Electric 24,474,634 26,003,006 25,661,632
Natural Gas 5,683,585 3,861,608 2,540,091
Manufacturing 1,312,522 2,628,248 2,334,237
------------- ------------- -------------
50,418,002 38,097,169 30,535,960
Interest Expense, net (18,668,279) (11,694,483) (9,669,829)
Investment Income and Other 9,719,236 3,029,376 2,443,420
------------- ------------- -------------
Income Before Income Taxes 41,468,959 29,432,062 23,309,551
Income Taxes (15,415,159) (10,126,493) (7,869,343)
------------- ------------- -------------
Net Income 26,053,800 19,305,569 15,440,208
Minority Interest on Preferred
Securities of Subsidiary Trust (2,722,232) (1,056,250) -
Dividends on Cumulative Preferred
Stock (468,945) (258,939) (119,888)
------------- ------------- -------------
Earnings on Common Stock 22,862,623 17,990,380 15,320,320
Retained Earnings, beginning of year 59,159,042 55,373,112 52,873,772
Dividends on Common Stock (15,877,817) (14,204,450) (12,820,980)
------------- ------------- -------------
Retained Earnings, end of year $ 66,143,848 $ 59,159,042 $ 55,373,112
============= ============= =============
Average Shares Outstanding 8,920,122 8,130,581 7,677,232
Earnings Per Average Common Share $ 2.56 $ 2.21 $ 2.00
============= ============= =============
Dividends Declared Per Average
Common Share $ 1.780 $ 1.746 $ 1.670
============= ============= =============
See Notes to Consolidated Financial Statements
<PAGE>
CONSOLIDATED BALANCE SHEETS
December 31
1996 1995
---------------- ----------------
ASSETS
Property:
Electric $ 350,419,398 $ 336,961,117
Natural Gas 80,905,454 73,546,150
Propane 248,555,861 74,815,533
Manufacturing 2,141,553 2,048,725
---------------- ----------------
682,022,266 487,371,525
Less-Accumulated depreciation (162,908,836) (150,469,310)
---------------- ----------------
519,113,430 336,902,215
---------------- ----------------
Current Assets:
Cash and cash equivalents 36,790,238 4,551,913
Trade accounts receivable, net 89,258,503 28,190,389
Inventories 43,826,307 21,645,758
Deferred gas costs 7,006,445 2,925,865
Other 20,806,825 33,305,776
---------------- ----------------
197,688,318 90,619,701
---------------- ----------------
Other Assets:
Investments 159,332,695 51,907,141
Deferred charges and other 40,260,445 30,240,083
Goodwill and other intangibles, net 197,320,839 49,052,343
---------------- ----------------
396,913,979 131,199,567
---------------- ----------------
$ 1,113,715,727 $ 558,721,483
================ ================
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity $ 163,805,137 $ 152,678,191
Nonredeemable cumulative preferred stock 2,600,000 2,600,000
Redeemable cumulative preferred stock 1,150,000 1,160,000
Company obligated mandatorily redeemable
security of trust holding solely
parent debentures 32,500,000 32,500,000
Long-term debt 183,850,000 183,850,000
---------------- ----------------
383,905,137 372,788,191
Preferred stock of subsidiary 2,500,000 2,500,000
Minority interest in subsidiaries 186,713,663 -
Long-term debt of subsidiaries 240,562,549 28,990,224
---------------- ----------------
813,681,349 404,278,415
---------------- ----------------
Commitments and Contingencies (Notes 8, 9, 10)
Current Liabilities:
Commercial Paper - 3,500,000
Long-term debt due within one year 1,244,220 570,000
Accounts payable 99,393,912 15,564,985
Accrued taxes 11,834,153 7,689,592
Accrued interest 4,761,720 4,738,243
Other 35,532,721 26,698,414
---------------- ----------------
152,766,726 58,761,234
---------------- ----------------
Deferred Credits:
Accumulated deferred income taxes 70,893,910 43,666,229
Unamortized investment tax credits 9,460,241 10,021,519
Other 66,913,501 41,994,086
---------------- ----------------
147,267,652 95,681,834
---------------- ----------------
$ 1,113,715,727 $ 558,721,483
================ ================
See Notes to Consolidated Financial Statements
<PAGE>
Notes to Consolidated Financial Statements
(1) Significant Accounting Policies -
Nature of Operations:
- ---------------------
Northwestern Public Service Company is an investor-owned diversified
energy distribution company with core operations engaged in the propane,
electric and natural gas industries. The Company is engaged in the
regulated utility business of production, purchase, transmission,
distribution and sale of electricity and the delivery of natural gas. The
Company serves 55,600 electric customers in eastern South Dakota and 77,478
natural gas customers in eastern South Dakota and central Nebraska. To
provide baseload electric power, the Company jointly owns three coal-fired
generating plants with other utilities. Through the acquisitions of Synergy
Group Incorporated (Synergy) and Myers Propane Gas Company (Myers) in 1995
and Empire Energy Corporation (Energy) in 1996, the Company engaged in
retail propane distribution business located throughout the United States.
On December 17, 1996, a wholly owned subsidiary acquired CGI Holdings,
Inc., (Coast) and combined the propane distribution businesses of Coast,
Energy, Myers and Synergy (the Partnership Formation) into Cornerstone
Propane, L.P., (the Operating Partnership), a Delaware limited partnership
and a subsidiary of Cornerstone Propane Partners, L.P. (Cornerstone), a
Delaware limited partnership, formed to acquire and operate these propane
businesses and assets. Cornerstone and the Operating Partnership are
collectively referred to herein as the Partnership. On December 17, 1996,
as part of an initial public offering (IPO), Cornerstone sold a total of
9,821,000 common units (Common Units) representing limited partner
interests. The Company through its majority owned subsidiaries retained an
effective 2% general partner interest and a 39% limited partnership
interest in the Partnership. A wholly owned subsidiary of the Company
serves as the general partner (General Partner) of the Partnership and
manages and operates the Partnership's business. (For a detailed
description of the Partnership Formation and related transactions, see Note
2). The Company's manufacturing operations are comprised of Lucht Inc., a
wholly owned subsidiary that develops, manufactures and markets multi-image
photographic printers and other related equipment.
Basis of Consolidation:
- -----------------------
The accompanying consolidated financial statements include the
accounts of Northwestern Public Service Company and all wholly and majority
owned subsidiaries, including the Partnership. 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 public unitholders'
interest in Cornerstone's net assets subsequent to the Partnership
Formation is reflected as a minority interest in the consolidated balance
sheets. For purposes of determining the minority interest in Cornerstone,
all 9,821,000 Common Units held by the public are considered to be
outstanding as of December 31, 1996.
Use of Estimates:
- -----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition and Gas Costs:
- ----------------------------------
Electric and natural gas revenues are based on billings rendered to
customers rather than on meters read or energy delivered. Customers are
billed monthly on a cycle basis. Revenues from propane sales are
recognized principally when fuel products are shipped or delivered to
customers. Manufacturing revenue is recognized as equipment is shipped or
delivered to customers.
The commodity cost portion of natural 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 natural gas used in prior periods. This method has the
approximate effect of matching costs with revenues in any financial
reporting period. The demand cost portion of natural gas costs, which is
comprised of numerous components, is expensed as incurred. The Company and
its subsidiaries have propane and natural gas supply agreements with
various suppliers for the purchase of these products in the normal course
of their operations
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 Federal Energy
Regulatory Commission (FERC). In 1996, 1995 and 1994, allowance for equity
funds was $95,000, $134,000 and $17,000. Allowance for borrowed funds for
1996, 1995 and 1994 was $83,000, $362,000 and $39,000.
Cash Equivalents:
- -----------------
The Company generally 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 4.20% in 1996, 3.61% in 1995 and 3.39% in 1994. The percentages for
1996 and 1995 include propane related depreciation provision and
depreciable property whose estimated useful lives principally range from 5
to 40 years.
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 natural gas property units are charged to
property accounts. The costs of units of electric and natural 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 natural gas property.
Goodwill and Other Intangibles:
- -------------------------------
The excess of the cost of businesses acquired over the fair market
value of all tangible and intangible assets acquired, net of liabilities
assumed, has been recorded as goodwill which is being amortized on a
straight-line basis over 40 years. Other intangibles, consisting
principally of costs of covenants not to compete, are being amortized over
the estimated periods benefited which do not exceed 10 years. Goodwill and
other intangibles are reflected net of accumulated amortization at December
31, 1996 and 1995, of $1,199,000 and $1,188,000.
It is the Company's policy to review property, goodwill, and other
intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. If such review indicates that the carrying amount is not
recoverable, it is the Company's policy to reduce the carrying amount of
these assets to fair value.
Investments and Fair Value of Financial Instruments:
- ----------------------------------------------------
The Company's investments consist primarily of short maturity fixed
income securities and 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.
These investments are accounted for in accordance with Statement of
Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities". SFAS 115 requires that certain
investments in debt and equity securities be reported at fair value.
The Company's securities are classified under the provisions of SFAS
115. As of December 31, 1996, the fair value, cost and the gross
unrealized gain of the Company's available for sale investments were
$31,742,000, $31,740,000 and $2,000 for preferred stock investments and
$16,264,000, $1,118,000 and $15,146,000 for marketable securities. As of
December 31, 1995, the fair value, cost and the gross unrealized gain of
the Company's available for sale investments were $37,746,000, $37,592,000
and $154,000 for preferred stock investments and $9,892,000, $1,271,000 and
$8,621,000 for marketable equity securities. The unrealized gain, net of
tax, at December 31, 1996 and 1995, was $9,846,000 and $5,704,000,
respectively. Held to maturity securities are reported at cost, which
approximated fair value and at December 31, 1996 and 1995 was $111,327,000
and $4,269,000.
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 1996 and 1995.
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 natural 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.
Regulatory Assets and Liabilities
- ---------------------------------
The Company is subject to the provisions of Statement of Financial
Accounting Standards No. 71 (SFAS 71), "Accounting for the Effects of
Certain Types of Regulations". Regulatory assets represent probable future
revenue to the Company associated with certain costs which will be
recovered from customers through the ratemaking process. Regulatory
liabilities represent probable future reductions in revenues associated
with amounts that are to be credited to customers through the ratemaking
process.
If all or a separable portion of the Company's operations becomes no
longer subject to the provisions of SFAS 71, an evaluation of future
recovery from related regulatory assets and liabilities would be necessary.
In addition, the Company would determine any impairment to the carrying
costs of deregulated plant and inventory assets.
Reclassifications:
- ------------------
Certain 1995 and 1994 amounts have been reclassified to conform to the
1996 presentation. Such reclassifications had no impact on net income or
common stock equity as previously reported.
(2) Master Limited Partnership Offering and Business Acquisitions -
Master Limited Partnership Offering:
- ------------------------------------
On December 17, 1996, a wholly owned subsidiary of Northwestern Growth
Corporation acquired Coast. Immediately after the acquisition the Company
combined the propane distribution businesses of Coast, Energy, Myers and
Synergy into Cornerstone. As part of an IPO on the same date, Cornerstone
sold a total of 9,821,000 Common Units at a price to the public of $21 a
unit. Cornerstone's capital consists of 9,821,000 Common Units, 6,597,619
subordinated units (Subordinated Units) representing limited partner
interests and a 1% general partner interest. The Company's majority owned
subsidiaries own all 6,597,619 Subordinated Units and an aggregate 2%
general partner interest in the Partnership, or a combined 41.4% effective
interest in the Partnership.
The net proceeds of $191.8 million from the sale of 9,821,000 Common
Units of Cornerstone and the net proceeds from the issuance of $220 million
face value of Cornerstone Senior Notes were used to repay term and
revolving debt of Coast, Energy and Synergy, including accrued interest and
any prepayment premiums which were assumed by the Partnership. In
addition, the preferred stock of Synergy was redeemed at a premium. As a
result of these repayments, the Company recorded a one-time after tax gain
of $.19 per share from the prepayment of the term debt and redemption of
preferred stock investment in Synergy.
The Partnership makes distributions to its partners with respect to
each fiscal quarter of the Partnership in an aggregate amount equal to its
Available Cash for such quarter. Available Cash generally means, with
respect to any fiscal quarter of the Partnership, all cash on hand at the
end of such quarter plus all additional cash on hand as of the date of
determination resulting from borrowings subsequent to the end of such
quarter, less the amount of cash reserves established by the General
Partner in its reasonable discretion for future cash requirements. These
reserves are retained for the proper conduct of the Partnership's business,
for the payment of debt principal and interest and for distributions during
the next four quarters.
Distributions by the Partnership, in an amount equal to 100% of its
Available Cash, will generally be made 98% to the Common and Subordinated
unitholders and 2% to the General Partners. Distributions are subject to
the payment of incentive distributions in the event Available Cash exceeds
the Quarterly Distribution of $.594 on all units. To the extent there is
sufficient Available Cash, the holders of Common Units have the right to
receive the Minimum Quarterly Distribution, plus any arrearages, prior to
the distribution of Available Cash to holders of Subordinated Units.
Common Units will not accrue arrearages for any quarter after the
Subordination Period (as defined below), and Subordinated Units will not
accrue any arrearages with respect to distributions for any quarter.
The Subordination Period will generally extend until the first day of
any quarter beginning on or after December 31, 2001, in respect of which
(a) distributions of Available Cash from operating surplus equal or exceed
the Minimum Quarterly Distribution on each of the outstanding Common and
Subordinated units for each of the three consecutive four-quarter periods
immediately preceding such date, (b) the adjusted operating surplus
generated during each of the three consecutive four-quarter periods
immediately preceding such date equals or exceeds the Minimum Quarterly
Distribution on each of the Common and Subordinated units and the related
distribution on the general partner interests in the Partnership during
such periods and (c) there are no outstanding Common Unit arrearages.
In addition, 1,649,405 Subordinated Units will convert into Common
Units for any quarter ending on or after December 31, 1999, and an
additional 1,649,405 Subordinated Units will convert into Common Units for
any quarter ending on or after December 31, 2000, if (a) distributions of
Available Cash from operating surplus on each of the outstanding Common and
Subordinated units equal or exceed the Minimum Quarterly Distribution for
each of the three consecutive four-quarter periods immediately preceding
such date, (b) the adjusted operating surplus generated during the
immediately preceding two consecutive four-quarter periods equals or
exceeds the Minimum Quarterly Distribution on all of the Common and
Subordinated units outstanding during that period and (c) there are no
arrearages on the Common Units.
The Partnership will make distributions of its Available Cash
approximately 45 days after the end of each quarter ending March, June,
September and December to holders of record on the applicable record dates.
Business Acquisitions:
- ----------------------
On August 15, 1995, the Company completed the acquisition of Synergy,
a retail distributor of propane. Synergy maintained 152 retail branches
serving approximately 200,000 customers in 23 states, primarily in suburban
and rural areas of the eastern and south-central regions of the United
States. In conjunction with the acquisition, the Company sold certain
retail property outlets to Energy, which was later acquired in October
1996.
The Synergy transaction represented an initial cash investment by the
Company of approximately $137.5 million, but after the sale of certain
retail property outlets, the total net cash acquisition investment by the
Company was $105.6 million. The Company made debt and preferred stock
investments in SYN Inc., the entity created to acquire Synergy.
Northwestern Growth Corporation, one of the Company's wholly owned
subsidiaries, owned control of SYN Inc. common stock. The acquisition was
accounted for under the purchase method of accounting. The total net
purchase price was comprised of consideration paid of $105.6 million cash,
issuance of $1.25 million in long-term debt and the assumption of certain
liabilities and other long-term debt. The cost in excess of the fair value
of the net tangible and intangible assets acquired and the costs related to
arranging the debt financing for the acquisition of $31.7 million have been
recorded as intangible assets and are being amortized on a straight-line
method over 40 years. The allocation of the purchase price to the acquired
assets and liabilities of Synergy was based on fair value of the related
assets and liabilities. The Company has asserted claims under the
acquisition agreement for post-closing adjustments related to the
acquisition of Synergy. If these claims are successful, an adjustment in
the consideration paid for the acquisition could result.
The Company's investments in SYN Inc. were funded primarily by
financings undertaken in 1995. During the third quarter of 1995, the
Company issued $60 million of 7.10% general mortgage bonds due August 1,
2005, 1.3 million shares of 8 1/8% preferred securities of subsidiary trust
and 1.2 million shares of common stock.
On December 7, 1995, the Company acquired majority control of Myers
through the issuance of 42,890 shares of common stock and 11,500 shares of
6 1/2% redeemable cumulative preferred stock. Myers is a retail
distributor of propane serving approximately 4,500 customers in and around
Sandusky, Ohio. The total purchase price of $4.8 million was comprised of
the securities issued by the Company seller financing. The acquisition was
accounted for under the purchase method of accounting. The cost in excess
of fair value of the net assets acquired of $1.9 million has been
classified as goodwill and is being amortized on a straight-line method
over 40 years.
On October 7, 1996, the Company completed the acquisition of Energy, a
retail distributor of propane. Energy maintained 168 retail branches
serving approximately 130,000 customers in 10 states, primarily in
southeast and midwest regions of the United States. The total purchase
price of $120 million was comprised of cash, assumption of certain
liabilities including long-term debt of $94 million, and transaction
related costs. The cost in excess of the fair value of the net tangible
assets acquired has been classified as goodwill and is being amortized on a
straight-line method over 40 years. The allocation of the purchase price
to the acquired assets and liabilities of Energy was based on fair value of
the related assets and liabilities.
Had the acquisitions of Coast, Energy, Myers, and Synergy and the
Partnership Formation occurred on January 1, 1995, combined unaudited pro
forma results for the years ended December 31, 1996 and 1995, as prescribed
under Accounting Principles Board Opinion No. 16 (APB 16), "Business
Combinations", would have been: Revenues $770,031,000 and $620,887,000,
net income $18,771,000 and $16,437,000 and earnings per share $2.10 and
$1.84. The pro forma disclosures required under APB 16 are not indicative
of past or future operating results. Since the acquisitions and
Partnership Formation, the Company has implemented significant cost
reduction measures principally related to elimination of certain employee
positions, corporate administrative expenses and other specifically
identified operating expenses that have not been reflected in the pro forma
information under the provisions of APB 16.
(3) 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. The Company's
aggregate lines of credit available are $24 million at December 31, 1996.
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, 1996
and 1995. At December 31, 1996, the Company had no outstanding commercial
paper borrowings. At December 31, 1995, the Company had outstanding $3.5
million of commercial paper.
(4) Long-Term Debt -
Substantially all of the Company's electric and gas utility plant is
subject to the lien of the indentures securing its 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. The following table summarizes the Company's
general mortgage bonds and pollution control obligations at December 31 (in
thousands):
Series Due 1996 1995
----------------------- -------- -------- --------
General mortgage bonds -
8.824% 1998 $ 15,000 $ 15,000
8.9% 1999 7,500 7,500
6.99% 2002 25,000 25,000
7.10% 2005 60,000 60,000
7% 2023 55,000 55,000
Pollution control obligations -
5.85%, Mercer Co., ND 2023 7,550 7,550
5.90%, Salix, IA 2023 4,000 4,000
5.90%, Grant Co., SD 2023 9,800 9,800
-------- --------
$183,850 $183,850
======== ========
In conjunction with the Partnership Formation in December 1996, the
Partnership issued $220 million in First Mortgage Notes (Notes). These
Notes are collateralized by substantially all of the assets of the
Partnership and ranks pari passu with the Bank Credit Facility. The Notes
bear interest at a fixed rate of 7.53% payable semi-annually and mature in
the year 2010 with eight equal annual installments beginning in the year
2003. The Partnership may, at its options and under certain circumstances
following the disposition of assets be required to offer to prepay the
Notes, in whole or in part. The Note agreement contains restrictive
covenants applicable to the Partnership, including (a) restrictions on the
incurrence of additional indebtedness, (b) restrictions on the ratio of
consolidated cash flow to consolidated interest expense of the Partnership,
as defined, and (c) restrictions on certain liens, loans and investments,
payments, mergers, consolidations, sales of assets and other transactions.
Generally, as long as no default exists or would result, the Partnership is
permitted to make cash distributions not more frequently than quarterly in
an amount not to exceed available cash, as defined, for the immediately
preceding calendar quarter.
The Partnership also entered into a Bank Credit Facility in December
1996 with a group of commercial banks. The Bank Credit Facility consists
of a $50 million Working Capital Credit Facility and a $75 million
Acquisition Facility to finance propane business acquisitions. There were
$10,445,000 of borrowings outstanding under Working Capital Facility at
December 31, 1996. There were no outstanding borrowings on the Acquisition
Facility at December 31, 1996. The Bank Credit Facility bears interest at
a variable rate tied to a certain Eurodollar index or prime rate, plus a
variable margin for either rate which depends upon the Partnership's ratio
of consolidated debt to consolidated cash flow. The Bank Credit Facility
matures in December 1999. The Bank Credit Facility is collateralized by
substantially all the assets of the Partnership and ranks pari passu with
the First Mortgage Notes. The Bank Credit Facility contains restrictive
covenants applicable to the Partnership, including (a) restrictions on the
incurrence of additional indebtedness, (b) restrictions on the ratio of
consolidated cash flow to consolidated interest expense of the Partnership,
as defined, and (c) restrictions on certain liens, loans and investments,
payments, mergers, consolidations, sales of assets and other transactions.
They also require that the Partnership maintain a ratio of total funded
indebtedness to consolidated cash flow, as defined. Generally, as long as
no default exists or would result, the Partnership is permitted to make
cash quarterly distributions in an amount not to exceed Available Cash, as
defined.
Lucht Inc. has a credit agreement with a bank whereby it may borrow up
to $8 million in revolving and term loans. Balances of $3,290,000 and
$4,802,500 were outstanding under the revolving and term loan as of
December 31, 1996 and 1995, at a weighted average interest rate of 8%.
Borrowings under the agreement are collateralized by all receivables,
inventories, property and other assets of Lucht, and are nonrecourse to the
Company.
SYN Inc. had a credit agreement with a bank whereby it could borrow up
to $30 million in revolving loans. The facility was repaid in conjunction
with the Partnership Formation. A balance of $21,342,320 was outstanding
under the facility as of December 31, 1995.
The balance of other nonrecourse debt is comprised of the remaining
debt assumed and issued from Coast, Energy, Myers and Synergy acquisitions
of $8,072,000 and $3,415,000 at December 31, 1996 and 1995.
Annual scheduled consolidated retirements of long-term debt during the
next five years are $1,244,000 in 1997, $21,500,000 in 1998, $14,000,000 in
1999, $6,500,000 in 2000 and $6,500,000 in 2001.
(5) Capital Stock Transactions and Retained Earnings Availability -
As part of financing the Synergy acquisition, the Company issued 1.2
million shares of common stock. The Company also issued 1.3 million shares
of 8 1/8% preferred securities of subsidiary trust which mature in
September 2025. In financing the Myers acquisition, the Company issued
42,890 shares of common stock and 11,500 shares of redeemable cumulative
preferred stock. Preferred stock transactions for the three years ended
December 31, 1996, have also included redemptions to satisfy mandatory
sinking fund requirements. The following table summarizes the capital
stock transactions that occurred during the year: (in thousands)
Preferred Common Additional
Stock Stock Paid in Capital
--------- --------- ---------------
Balance 12-31-95 $ 6,260 $31,220 $56,595
Mandatory sinking fund
redemption (10) - -
--------- --------- ---------------
Balance 12-31-96 $ 6,250 $31,220 $56,595
========= ========= ===============
The preferred stock of subsidiary is redeemable at the option of the
Company. There were 2,500 shares of preferred stock outstanding at
December 31, 1996 and 1995. The preferred stock was redeemed in January
1997.
In December 1996, the Company's Board of Directors declared, pursuant to a
stockholders' rights plan, a dividend distribution of one Right on each
outstanding share of the Company's common stock. Each Right becomes
exercisable, upon the occurrence of certain events, at an exercise price of
$100 per share, subject to adjustment. The Rights are currently not
exercisable and will be exercisable only if a person or group of affiliated
or associated persons (Acquiring Person) either acquires ownership of 15%
or more of the Company's common stock or commences a tender or exchange
offer than would result in ownership of 15% or more. In the event the
Company is acquired in a merger or other business combination transaction
or 50% or more of its consolidated assets or earnings power are sold, each
Right entitles the holder to receive such number of shares of common stock
of the Acquiring Person having a market value of two times the then current
exercise price of the Right. The Rights, which expire in December 2006,
are redeemable in whole, but not in part, at a price of $.01 per Right, at
the Company's option at any time until any Acquiring Person has acquired
15% or more of the Company's common stock.
(6) Common and Preferred Stock Equity -
The following table summarizes the Company's common and preferred stock
equity at December 31 (dollars in thousands, except par value):
1996 1995
---------- ---------
Common Stock Equity:
Common stock, $3.50 par value,
20,000,000 share authorized;
8,920,122 shares outstanding $ 31,220 $ 31,220
Additional paid-in capital 56,595 56,595
Retained earnings 66,144 59,159
Unrealized gain on
investments, net 9,846 5,704
-------- --------
$163,805 $152,678
======== ========
Cumulative Preferred Stock:
$100 par value, 1,000,000 shares
authorized; 37,600 shares outstanding
Nonredeemable-4 1/2% Series $2,600 $2,600
Redeemable-
5 1/4% Series - 10
6 1/2% Series 1,150 1,150
-------- --------
$3,750 $3,760
======== ========
(7) Income Taxes -
Income tax expense is comprised of the following (in thousands):
1996 1995 1994
-------- -------- --------
Federal income -
Current tax expense $ 9,174 $7,849 $6,522
Deferred tax
expense 5,830 2,540 1,509
Investment tax credit (561) (563) (565)
State income 972 300 403
-------- -------- --------
$15,415 $10,126 $7,869
======== ======== ========
The following table reconciles the Company's effective income tax
rate to the federal statutory rate:
1996 1995 1994
-------- -------- --------
Federal statutory rate 35% 35% 35%
State income, net of
federal benefit 2 - -
Amortization of
investment tax credit (1) (2) (2)
Dividends received
deduction (1) (5) (3)
Other, net 2 6 4
-------- -------- --------
37% 34% 34%
======== ======== ========
The components of the net deferred federal income tax liability
recognized in the Company's Consolidated Balance Sheet are related to the
following temporary differences at December 31 (in thousands):
1996 1995
---------- ---------
Excess tax depreciation $(77,032) $(26,252)
Safe harbor leases (5,630) (7,060)
Property basis and life differences(6,480) (7,526)
Asset sales (3,967) (4,366)
Regulatory assets (3,489) (4,052)
Regulatory liabilities 4,189 4,189
Unbilled revenue 3,596 3,857
Unamortized investment tax credit 3,491 3,491
Unrealized gain on investments (5,302) (3,071)
Other, net 19,730 (2,876)
----------- ----------
$(70,894) $(43,666)
=========== ==========
(8) 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 each 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 expired inmid-1995, and the plant owners have negotiated and
secured a contract for minimum annual purchases of 1.2 million tons of
Montana sub-bituminous coal for the period of mid-1995 through 1999. 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, 1996, is as follows (dollars in thousands):
Big Stone Neal #4 Coyote I
--------- ------- --------
Utility plant in service $44,658 $34,986 $45,687
Accumulated depreciation $25,243 $16,970 $19,295
Construction work in
progress $ 4,171 $ 461 $ 327
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
(9) 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, 1996, 1995 and 1994 were as follows (in thousands):
1996 1995 1994
-------- -------- --------
Service cost $ 958 $ 755 $ 948
Interest cost on projected
benefit obligation 3,506 3,144 3,176
Actual return on assets (5,745) (10,082) 586
Net amortization
and deferral 1,608 6,475 (4,391)
-------- -------- --------
Net periodic pension cost $ 327 $ 292 $ 319
======== ======== ========
The following table reflects the funded status of the Company's
pension plan as of December 31, 1996, 1995 and 1994 (in thousands):
1996 1995 1994
-------- -------- --------
Actuarial present value of:
Accumulated benefit obligation -
Vested $43,950 $39,946 $34,436
Nonvested 1,577 1,417 1,197
-------- -------- --------
45,527 41,363 35,633
Provision for future
pay increases 4,531 5,488 3,993
-------- -------- --------
Projected benefit
obligation 50,058 46,851 39,626
Plan assets at fair value 56,507 52,762 44,501
-------- -------- --------
Projected benefit obligation
less than plan assets (6,449) (5,911) (4,875)
Unrecognized transition
obligation (1,392) (1,547) (1,702)
Unrecognized net gain 4,821 5,381 5,365
-------- -------- --------
Prepaid pension cost $(3,020) $(2,077) $(1,212)
======== ======== ========
The assumptions used in calculating the projected benefit obligation
for 1996, 1995 and 1994 were as follows:
1996 1995 1994
-------- -------- --------
Discount rate 7.25% 7.75% 8.50%
Expected rate of return
on assets 8.50% 8.50% 8.50%
Long-term rate of increase
in compensation levels 3% 3% 4%
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 every 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 $594,000, $479,000, and $468,000 in 1996, 1995 and 1994. The
Company also provides an Employee Stock Ownership Plan (ESOP) for 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 $849,000, $810,000 and $705,000 in 1996, 1995
and 1994.
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 $1,291,000,
$648,000 and $552,000 in 1996, 1995 and 1994.
Cornerstone provides employee savings plans which permits all
employees to defer receipt of compensation as provided in Section 401(k) of
the Internal Revenue Code. Under the plans, any employee may elect to
direct a percentage of their gross compensation be contributed to the
plans. Cornerstone at its discretion may match a portion of the employee
contribution and may also make a profit sharing contribution.
(10) Environmental Matters -
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. The Company is also
subject to other environmental regulations including matters related to
former manufactured gas plant sites. During 1995, the Company remediated a
site located at Huron, South Dakota through thermal desorption of residues
in the soil. Adjustments of the Company's natural gas rates to reflect the
costs associated with the remediation were approved through the regulatory
process. The Company is pursuing recovery from insurance carriers. No
administrative or judicial proceedings involving the Company are now
pending or known by the Company to be contemplated under present
environmental protection requirements.
(11) Cumulative Preferred Stock and Preference Stock -
The provisions of the 6 1/2% Series stock contain a five-year put
option exercisable by the holders of the securities and a 10 year
redemption option exercisable by the Company. In any event, redemption
will occur at par value. The cumulative preferred stock, 4 1/2% Series,
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 $110.00 per share, plus accrued
dividends.
In the event of involuntary dissolution, all Company 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 1,000,000 shares
of preference stock at a par value of $50 per share. No preference shares
have ever been issued.
(12) Segments of Business -
The four primary segments of the Company's business are its electric,
natural gas distribution, propane 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):
1996 1995 1994
-------- -------- --------
Depreciation and
Amortization Expense:
Electric $ 10,620 $ 10,503 $ 10,115
Natural Gas 2,492 2,185 1,996
Propane 5,730 1,562 -
Manufacturing 572 383 328
-------- -------- --------
$ 19,414 $ 14,633 $ 12,439
-------- -------- --------
Capital Expenditures:
Electric $ 19,598 $ 17,868 $ 16,023
Natural Gas 8,172 6,521 6,425
Propane 7,349 4,726 -
Manufacturing 51 522 233
-------- -------- --------
$ 35,170 $ 29,637 $ 22,681
-------- -------- --------
Assets:
Identifiable -
Electric $223,262 $218,006 $210,872
Natural Gas 66,213 59,384 52,008
Propane 611,707 173,665 -
Manufacturing 14,946 16,409 13,843
Corporate assets 197,588 91,257 82,343
-------- -------- --------
$1,113,716 $558,721 $359,066
----------- -------- --------
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.
(13) Quarterly Financial Data (unaudited) -
First Second Third Fourth
------- ------- ------- --------
(thousands except per share amounts)
1996: Operating revenues $97,219 $56,681 $49,705 $140,404
Operating income 23,813 6,436 4,652 15,517
Net income 13,309 3,353 1,301 8,091
Average shares 8,920 8,920 8,920 8,920
Earnings per average
common share $ 1.40 $ .29 $ .06 $ .81
------- ------- ------- --------
1995: Operating revenues $50,754 $40,107 $45,548 $ 68,561
Operating income 12,929 6,679 6,908 11,581
Net income 7,103 3,049 3,140 6,014
Average shares 7,677 7,677 8,277 8,889
Earnings per average
common share $ .92 $ .39 $ .32 $ .59
======= ======= ======= ========
The 1995 quarterly earnings per average common share do not total to
1995 annual earnings per average common share due to the effect of
common stock issuances during the year.
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