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, 1998
OR
( ) Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______to_______
Commission File Number 0-368
OTTER TAIL POWER COMPANY
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0462685
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
215 S. CASCADE ST., BOX 496, FERGUS FALLS, MN 56538-0496
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (218) 739-8200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON SHARES, par value $5.00 per share
PREFERRED SHARE PURCHASE RIGHTS
CUMULATIVE PREFERRED SHARES, without par value
(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. (Yes X 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
State the aggregate market value of the voting stock held by nonaffiliates
of the registrant.
$438,363,131 as of February 26, 1999
Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock, as of the latest practicable date:
11,884,855 Common Shares ($5 par value) as of February 26, 1999
Documents Incorporated by Reference:
1998 Annual Report to Shareholders-Portions incorporated by reference into
Parts I and II
Proxy Statement dated March 12, 1999-Portions incorporated by reference into
Part III
PART I
Item 1. BUSINESS
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(a) General Development of Business
-------------------------------
Otter Tail Power Company (the Company) is an operating public utility
incorporated in 1907 under the laws of the State of Minnesota. The Company's
principal executive office is located at 215 South Cascade Street, Box 496,
Fergus Falls, Minnesota 56538-0496; its telephone number is (218)739-8200.
Historically, the Company's primary business has been the production,
transmission, distribution and sale of electric energy. During the last
decade the Company, through its subsidiaries, has made significant
investments in other businesses which are referred to as Manufacturing
Operations, Health Services Operations and Other Business Operations.
Manufacturing Operations includes businesses involved in the production of
agricultural equipment, automobile and truck frame-straightening equipment,
plastic pipe extrusion, and metal parts stamping and fabrication. Health
Services Operations consists of certain businesses which are involved in the
sale, service, rental, refurbishing, and operation of medical imaging
equipment and the sale of related supplies and accessories to various medical
institutions. Other Business Operations include businesses involved in such
areas as electrical and telephone construction contracting, energy services,
natural gas marketing, entertainment, waste incinerating, and telephone/cable
TV utility. Substantially all of these businesses are owned by the Company's
wholly-owned subsidiary Varistar Corporation (Varistar)(formerly Mid-States
Development, Inc.).
The Company continues to investigate acquisitions of additional non-
electric businesses and expects continued growth in this area. On May 1,
1998, the Company's energy services subsidiary, Otter Tail Energy Services,
acquired PAM Natural Gas, Inc. (PAM) a South Dakota-based marketer of natural
gas to commercial and institutional customers in Iowa, South Dakota, North
Dakota and Minnesota. Upon acquisition PAM's name was changed to Otter Tail
Energy Management Company.
In December 1998, Varistar entered into a definitive agreement to sell
certain assets of the radio stations and video production company owned by
KFGO, Inc. and the radio stations owned by Western Minnesota Broadcasting
Company. Disposition of the Quadrant Co. municipal waste burning facility is
also being considered following its shut down in July 1998 due to alleged
noncompliance with the Minnesota Pollution Control Agency (MPCA) particulate
emissions regulations. See "Other Business Operations" for additional
information regarding these subsidiaries.
For a discussion of the Company's results of operations, see
"Management's discussion and analysis of financial condition and results of
operations," which is incorporated by reference to pages 18 through 25 of the
Company's 1998 Annual Report to Shareholders, filed as an Exhibit hereto.
(b) Financial Information About Industry Segments
---------------------------------------------
The Company and its subsidiaries are engaged in businesses that have
been classified into four segments: Electric Operations, Manufacturing
Operations, Health Services Operations, and Other Business Operations.
Financial information about the Company's industry segments is incorporated
by reference to note 4 of "Notes to consolidated financial statements" on
pages 35 and 36 of the Company's 1998 Annual Report to Shareholders, filed
as an Exhibit hereto.
(c) Narrative Description of Business
---------------------------------
ELECTRIC OPERATIONS
-------------------
General
- -------
The Company derived 53% of its consolidated operating revenues from the
electric segment during 1998; 52% during 1997; and 54% during 1996. During
1998 the Company derived approximately 52.1% of its retail electric revenues
from Minnesota, 40.2% from North Dakota, and 7.7% from South Dakota.
The territory served by the Company is predominantly agricultural,
including a part of the Red River Valley. Although there are relatively few
large customers, sales to commercial and industrial customers are significant.
By customer category, 32.6% of 1998 electric revenue was derived from
commercial customers, 29.9% from residential customers, 20.1% from industrial
customers, and 17.4% from other sources, including municipalities, farms and
power pools.
No customer accounted for more than 10% of electric revenues in 1998.
Power pool sales to other utilities, which accounted for 25.5% of total 1998
kwh sales, increased from 14.5% in 1997. An increase in the Company's energy
available for sale combined with unusually high wholesale market demands led
to this increase in power pool sales to other utilities. Activity in short-
term energy sales is subject to change based on a number of factors and the
Company is unable to predict the 1999 level of activity.
The aggregate population of the Company's retail electric service area is
approximately 230,000. In this service area of 423 communities and adjacent
rural areas and farms, approximately 123,600 people live in communities having
a population of more than 1,000, according to the 1990 census. The only
communities served which have a population in excess of 10,000 are Jamestown,
North Dakota (15,571); Fergus Falls, Minnesota (12,362); and Bemidji,
Minnesota (11,245). Since 1990 when the customer count was at a low of
121,277, the Company has experienced an increase in customers. By year end
1998 total customers had increased to 125,712. During 1998, the Company
experienced a net increase of 521 customers, with the majority of growth in
residential customers.
Competition
- -----------
The Company's electric sales are subject to competition in some areas
from municipally owned systems, rural electric cooperatives and, in certain
respects, from on-site generators and cogenerators. The Company's electricity
also competes with other forms of energy. The degree of competition may vary
from time to time depending on relative costs and supplies of other forms of
energy. The Company may also face competition as the restructuring of the
electric industry evolves. Proposals that are being considered by various
states and at the federal level, along with the National Energy Policy Act of
1992 (NEPA), are expected to bring more competition into the electric
industry. NEPA reduces restrictions on operation and ownership of independent
power producers (IPPs). It also allows IPPs and other wholesale suppliers and
purchasers increased access to transmission lines. NEPA prohibits retail
wheeling ordered by the Federal Energy Regulatory Commission (FERC), but it
does not address the states' authority to order retail wheeling.
In 1996, FERC issued two closely related final rules. FERC Order No.
888 opened wholesale power sales to competition by requiring public utilities
who own, control, or operate transmission lines, to file nondiscriminatory
pro forma open access tariffs that offer others the same transmission service
they provide themselves. FERC Order No. 889 requires utilities to post or
make available information about their transmission system for their own
wholesale power transactions, such as capacity availability, by the same
means as their competitors would via an Open Access Same-time Information
System (OASIS), as well as separate their wholesale marketing and
transmission operation functions.
As the electric industry moves towards deregulation, the Company expects
the industry to become more competitive. The Company is taking a number of
steps to position itself for success in a competitive marketplace. It has
initiated the process of functionally unbundling its energy supply, energy
delivery, and energy services operations by setting up distinct separate
business units in each of these areas. The Company is developing the necessary
accounting systems to capture costs and determine the profitability of each of
these units and to identify areas for improvement and opportunities for
increased profitability. The Company has established an energy services
business unit to promote the energy-related products and services
traditionally offered to the Company's customers and to develop new products
and services to be offered to current and potential customers in order to
distinguish the Company from the competition. Furthermore, with the goal of
alleviating state tax inequities in the electric industry, the Company is
working with other utilities to develop tax reform proposals and testimony for
legislative committees developed in the states of Minnesota and North Dakota
to study competition.
In order to facilitate the move to competition and to control costs, the
Company announced a voluntary early retirement program in January 1998 for all
nonunion electric utility employees age 55 and over. The offer of early
retirement was accepted by 55 of the 67 eligible utility employees during the
enrollment period. The Company anticipates that most of the staff reduction
will be permanent, resulting in enhanced competitive positioning and earnings
potential.
As the electric industry evolves and become more competitive, the
Company believes it is well positioned to maintain its customer base and
may have opportunities to increase its market share. The Company's
generation capacity appears poised for competition due to unit heat rate
improvements and reductions in fuel and freight costs at most of its
generating plants. A comparison of the Company's electric retail rates to
the rates of other investor-owned utilities, cooperatives, and municipals
in the states the Company serves indicates that the Company's rates are
competitive. In addition, the Company plans to attempt more flexible pricing
strategies under an open, competitive environment.
For the status of other regulatory initiatives relating to competition,
see "General Regulation".
Capability and Demand
- ---------------------
At December 31, 1998, the Company had base load net plant capability
totaling 565,381 kw, consisting of 254,731 kw from the jointly-owned Big
Stone Plant (constituting the Company's 53.9% share of the plant's total
capability), 155,550 kw from the Hoot Lake Plant, 149,450 kw from the
jointly-owned Coyote Station (constituting the Company's 35% share of the
station's total capability), and, under contract, 5,650 kw from a co-
generation plant near Bemidji, Minnesota. In addition to its base load
capability, the Company has combustion turbine and small diesel units,
used chiefly for peaking and standby purposes, with a total capability of
90,634 kw, and hydroelectric capability of 4,109 kw. During 1998, the
Company generated about 66% of its total kwh sales and purchased the balance.
The Company has made arrangements to help meet its future base load
requirements, and continues to investigate other means for meeting such
requirements. The Company has an agreement with another utility for the
annual exchange of 75,000 kw of seasonal diversity capacity which runs
through October 2004. The Company also has agreements to purchase 75,000
kw of capacity for the summer of 1999 and 50,000 kw of year-round capacity
which extends through April 30, 2005. The Company has a direct control load
management system, which provides some flexibility to the Company to effect
reductions of peak load. The Company, in addition, offers rates to customers
which encourage off-peak usage.
The Company is a member of the Mid-Continent Area Power Pool (MAPP). The
objective of MAPP is to coordinate the planning and operation of generation
and interconnecting transmission facilities to provide reliable and economic
electric service to members' customers. Customers served by MAPP members
may, therefore, benefit from the regional high voltage interconnections,
which are capable of transferring large blocks of energy between systems.
Also, high voltage interconnections permit companies to engage in power
transactions with each other. The operating agreement for MAPP was restated
in 1996 to open membership to organizations outside the original Upper
Midwest boundaries, to establish a Regional Transmission Group and to add
energy market functions.
The Company traditionally experiences its peak system demand during the
winter season. For the calendar year 1998, the Company experienced a system
peak demand of 635,174 kw on January 13, 1998. The Company's highest sixty-
minute peak demand ever was 635,529 kw on January 7, 1997. Taking into
account additional capacity available to it in January 1998 under power
purchase contracts (including short-term arrangements), as well as its own
generating capacity, the Company's capability of then meeting system demand,
including reserve requirements computed in accordance with accepted industry
practice, amounted to 782,983 kw. The Company expects moderate load growth
in peak demand in 1999 as compared to 1998. The Company's additional capacity
available under power purchase contracts (as described above), combined with
the Company's generating capability and load management control capabilities,
is expected to meet 1999 system demand, including industry reserve
requirements.
Fuel Supply
- -----------
Coal is the principal fuel burned by the Company at its Big Stone,
Coyote, and Hoot Lake generating plants. Coyote, a mine-mouth facility,
burns North Dakota lignite coal. Hoot Lake and Big Stone plants burn
western subbituminous coal. The following table shows, for 1998, the
sources of energy used to generate the Company's net output of electricity:
Net Kilowatt % of Total
Hours Kilowatt
Generated Hours
Sources (Thousands) Generated
------- ----------- ---------
Subbituminous Coal. . . . . . . . . . . 2,184,413 68.2%
Lignite Coal. . . . . . . . . . . . . . 985,281 30.8
Hydro . . . . . . . . . . . . . . . . . 25,249 .8
Oil . . . . . . . . . . . . . . . . . . 7,200 .2
--------- -----
Total . . . . . . . . . . . . . . . . . 3,202,143 100.0%
========= =====
The Company has a coal supply agreement with Westmoreland Resources,
Inc. of Billings, Montana, for the supply of subbituminous coal to the Big
Stone Plant from mid-1995 through the end of 1999. The coal comes from the
Absaloka Mine near Hardin, Montana. Negotiations are underway for the
supply of subbituminous coal for 2000 and 2001. Based on current market
conditions, the Company expects to execute a new subbituminous coal contract
near current contract prices. The Company is in final negotiations for the
supply of subbituminous coal as needed for the Hoot Lake Plant. A lignite
coal contract with Knife River Coal Mining Company for the Coyote Station
expires in 2016, with a 15-year renewal option subject to certain
contingencies, and is expected to provide the plant's lignite coal
requirements during the term of the contract. Knife River Coal Mining Company
is an affiliate of Montana-Dakota Utilities Co., which is a co-owner of the
Big Stone Plant and Coyote Station.
In September 1996, three of the four co-owners of the Coyote Station
filed a Demand and Notice of Arbitration complaint against Knife River Coal
Mining Company and MDU Resources Group, Inc. The three co-owners contend that
the 15-year-old pricing mechanism outlined in the original coal supply
contract has been abandoned by all parties over the past 8 years and no longer
results in fair, equitable, and competitive prices for the lignite coal used
to generate electricity at the plant. The case was remanded to arbitration in
1997. The co-owners anticipate resolution of this case in 1999.
It is the Company's practice to maintain minimum 30-day inventory (at
full output) of coal at the Big Stone Plant, a 20-day inventory at the Coyote
Station, and a 10-day inventory at the Hoot Lake Plant.
The Company has a coal transportation agreement with Burlington Northern
and Santa Fe Railroad for transportation services to the Big Stone Plant.
This contract began in 1995 and runs through 1999. The Company has begun
negotiations on a new coal transportation agreement for the Big Stone Plant.
The average cost of coal consumed (including handling charges to the
plant sites) per million BTU for each of the three years 1998, 1997, and 1996,
was $.956, $.958, and $.944, respectively.
The Company is permitted by the State of South Dakota to burn some
alternative fuels, including tire and refuse derived fuel, at the Big Stone
Plant. The quantity of alternative fuel burned at the Big Stone Plant is
insignificant when compared to the total annual coal consumption at the Big
Stone Plant.
Rate Regulation
- ---------------
The Company is subject to electric rate regulation as follows:
Year Ended
December 31, 1998
-----------------
% of
Electric % of kwh
Rates Regulation Revenues Sales
----- ---------- -------- --------
MN retail sales MN Public Utilities
Commission 44.8% 40.4%
ND retail sales ND Public Service
Commission 34.5 28.7
SD retail sales SD Public Utilities
Commission 6.6 5.4
Transmission & sales FERC
for resale 14.1 25.5
----- -----
100.0% 100.0%
===== =====
The following table summarizes the electric rate proceedings with the
Minnesota Public Utilities Commission (MPUC), the South Dakota Public
Utilities Commissions (SDPUC), the North Dakota Public Service Commission
(NDPSC) and FERC since January 1, 1994:
Commission Date
- ---------- ----
Minnesota Last Proceeding was July 1, 1987
North Dakota Last Proceeding was September 22, 1993
South Dakota Last Proceeding was November 1, 1987
FERC On March 25, 1997, FERC issued an order approving a settlement
agreement in the Company's Open Access Transmission Tariff
filing of July 9, 1996. This settlement sets the rates the
Company can charge under its Open Access Transmission Tariff.
On May 29, 1997, FERC issued an order approving a request for
the waiver of the standards of conduct under Order 889.
Since 1995, the Company has recovered demand-side management related
costs, under Minnesota's Conservation Improvement Programs, through the use
of an annual recovery mechanism approved by the MPUC. In 1998, the MPUC
approved the Company's 1997 financial incentives filing along with a 2.75
percent surcharge on all Minnesota customers' bills starting on July 1, 1998,
for the recovery of conservation-related costs over and above those being
recovered in current rates. The approved surcharge in effect from July 1,
1997 through June 30, 1998 was 1.75 percent and the approved surcharge in
effect from July 1, 1996 through June 30, 1997 was 1.25 percent. The current
surcharge rate will be in place until June 30, 1999 when it will be revised
for subsequent years' program results.
During 1998, the Minnesota Department of Public Service (DPS)
recommended to the MPUC that demand-side management incentives for all
Minnesota electric utilities be terminated as of January 1, 1998. At a
hearing held November 19, 1998, the MPUC did not accept the DPS
recommendation, however, the MPUC put electric and gas utilities on notice
that the ability to earn demand-side management incentives could end as
early as January 1, 1999. Incentives accrued by the Company for 1998
totaled $1,750,000. A MPUC Chair's Round Table has been convened to examine
demand-side management programs and related incentives. A report from the
Round Table to the MPUC is due by May 1, 1999.
Under Minnesota law, the MPUC must allow implementation of an interim
rate increase, subject to refund with interest, sixty days after the initial
filing date of a rate increase request, except that the MPUC is not required
to allow implementation of the interim rate increase until four months after
the effective date of a previous rate order. The amount of the interim rate
increase will be calculated using the proposed test year cost of capital, the
rate of return on common equity most recently granted to the Company by the
MPUC, and rate base and expense items allowed by a currently effective MPUC
order. In addition, if the MPUC fails to make a final determination
regarding any rate request within ten months after the initial request is
filed, then the requested rate is deemed to be approved, except if (I) an
extension of the procedural schedule (in case of a contested rate increase
request) has been granted, in which case the schedule of rates will be deemed
to have been approved by the MPUC on the last day of the extended period of
suspension of the rate increase, or (II) a settlement has been submitted to
and rejected by the MPUC, and the MPUC does not make a final determination
concerning the schedule of rates, in which case the schedule of rates will be
deemed to have been approved sixty days after the initial or, if applicable,
the extended period of suspension of the rate increase.
Rate requests filed with the NDPSC become effective thirty days after
the date of filing unless suspended by the NDPSC. Within seven months after
the date of suspension, the NDPSC must act on the request, and during the
period of consideration by the NDPSC a suspended rate can be implemented only
with the approval of the NDPSC. The NDPSC periodically performs audits of gas
and electric utilities over which it has rate setting jurisdiction to
determine reasonability of overall rate levels. In the past, these audits
have occasionally resulted in settlement agreements adjusting rate levels.
While the Company has begun preliminary discussions with the NDPSC staff
regarding the current audit, it is too early to predict whether any rate
adjustment will be made.
South Dakota law provides that a requested rate increase can be
implemented thirty days after the date of filing, unless its effectiveness
is suspended by the SDPUC. The SDPUC may suspend the effectiveness of the
proposed rate change for a period not longer than ninety days beyond the time
when the rate change would otherwise go into effect, unless the SDPUC finds
that a longer time is required, in which case the SDPUC may extend the
suspension for a period not to exceed a total of twelve months. A public
utility may not put a proposed rate change into effect until at least forty-
five days after the SDPUC has made a determination concerning any previously
filed rate change. In the event that a requested rate change is suspended by
the SDPUC, such requested rate change may be implemented by the public
utility six months after the date of filing (unless previously authorized by
the SDPUC), subject to refund with interest.
The Company's wholesale power sales and transmission rates are subject
to the jurisdiction of the FERC under the Federal Power Act of 1935, as
amended (FPA). Filed rates are effective after a one-day suspension period,
subject to ultimate approval by the FERC. Power pool sales are conducted
continuously through MAPP on the basis of generating costs, in accordance
with schedules filed by MAPP with the FERC.
In rate cases, a forward test year procedure enables cost increases to
be recovered more promptly than use of an historic test year. The MPUC has
established by regulation a forward test year. North Dakota law allows a
forward test year. The SDPUC uses an historic test year with adjustments for
known and measurable changes occurring within twenty-four months of the last
month of the test year.
The Company has obtained approval from the regulatory commissions in
all three states which it serves for lower rates for residential demand
control and controlled service, in Minnesota and North Dakota for real-time
pricing, and in North Dakota and South Dakota for bulk interruptible rates.
Each of these special rates is designed to improve efficient use of Company
facilities, while encouraging use of electricity instead of other fuels and
giving customers more control over the size of their electric bill.
All of the Company's electric rate schedules now in effect, except
for wheeling, certain municipal and area lighting services and certain
interruptible rates, provide for adjustments in rates based upon the cost
of fuel delivered to the Company's generating plants, as well as for
adjustments based upon the cost of electric power energy purchased by the
Company. Such adjustments are presently based upon a two-month moving
average in Minnesota and under FERC regulation, a three-month moving
average in South Dakota, and a four-month moving average in North Dakota
and are applied to the next billing after becoming applicable.
General Regulation
- ------------------
Minnesota: Under the Minnesota Public Utilities Act, the Company is
subject to the jurisdiction of the MPUC with respect to rates, issuance of
securities, depreciation rates, public utility services, construction of
major utility facilities, establishment of exclusive assigned service areas,
contracts and arrangements with subsidiaries and other affiliated interests,
and other matters. The MPUC has the authority to assess the need for large
energy facilities and to issue or deny certificates of need, after public
hearings, within six months of an application to construct such a facility.
The DPS is responsible for investigating all matters subject to the
jurisdiction of the DPS or the MPUC, and for the enforcement of MPUC
orders. Among other things, the DPS is authorized to collect and analyze
data on energy and the consumption of energy, develop recommendations as
to energy policies for the governor and the legislature of Minnesota and
evaluate policies governing the establishment of rates and prices for
energy as related to energy conservation. The DPS acts as a state
advocate in matters heard before the MPUC. The DPS also has the power to
prepare and adopt regulations to conserve and allocate energy in the event
of energy shortages and on a long-term basis.
Under Minnesota law, every public utility that furnishes electric
service must make annual investments and expenditures in energy conservation
improvements, or make a contribution to the state's energy and conservation
account, in an amount equal to at least 1.5% of its gross operating revenues
from service provided in Minnesota. The DPS may require the Company to make
investments and expenditures in energy conservation improvements whenever it
finds that the improvement will result in energy savings at a total cost to
the utility less than the cost to the utility to produce or purchase an
equivalent amount of a new supply of energy. Such DPS orders are appealable
to the MPUC. Investments made pursuant to such orders generally are
recoverable costs in rate cases, even though ownership of the improvement may
belong to the property owner rather than the utility. In 1995, the MPUC
approved an automatic recovery mechanism which allows the Company to begin
collecting from customers any conservation-related expenditures not included
in base rates.
The MPUC requires the submission of a 15-year advance integrated
resource plan by utilities serving at least 10,000 customers, either
directly or indirectly, and having at least 100 megawatts of load. The
MPUC's findings and orders with respect to these submissions is binding
for jurisdictional utilities. The Company's most recent plan was submitted
to the MPUC in 1996, and was approved as submitted in its entirety. During
1998, the MPUC granted the Company a one year waiver in submitting its next
plan, which will be completed in 1999. The Minnesota legislature has enacted
a statute that favors conservation over the addition of new resources. In
addition, it has mandated the use of renewable resources where new supplies
are needed, unless the utility proves that a renewable energy facility is not
in the public interest. It has effectively prohibited the building of new
nuclear facilities. The environmental externality law requires the MPUC, to
the extent practicable, to quantify the environmental costs of each type of
generation, and to use such monetized values in evaluating resource plans.
The MPUC must disallow any nonrenewable rate base additions (whether within
or outside of the state) or any rate recovery therefrom, and may not approve
any nonrenewable energy facility in an integrated resource plan, unless the
utility proves that a renewable energy facility is not in the public
interest.The state has prioritized the acceptability of new generation with
wind and solar ranked first and coal and nuclear ranked fifth, the lowest
ranking.
Pursuant to the Minnesota Power Plant Siting Act, the Minnesota
Environmental Quality Board (EQB) has been granted the authority to
regulate the siting in Minnesota of large electric power generating
facilities in an orderly manner compatible with environmental preservation
nd the efficient use of resources. To that end, the EQB is empowered,
after study, evaluation, and hearings, to select or designate in Minnesota
sites for new electric power generating plants (50,000 kw or more) and
routes for transmission lines (200 kv or more) and to certify such sites
and routes as to environmental compatibility.
North Dakota: The Company is subject to the jurisdiction of the NDPSC
with respect to rates, services, certain issuances of securities and other
matters. The North Dakota Energy Conversion and Transmission Facility
Siting Act grants the NDPSC the authority to approve sites in North Dakota
for large electric generating facilities and high voltage transmission
lines. This Act is similar to the Minnesota Power Plant Siting Act
described above and affects new electric power generating plants of 50,000
kw or more and new transmission lines of more than 115 kv. The Company
is required to submit a ten-year plan to the NDPSC annually.
South Dakota: The South Dakota Public Utilities Act subjects the
Company to the jurisdiction of the SDPUC with respect to rates, public
utility services, establishment of assigned service areas, and other matters.
The Company is currently exempt from the jurisdiction of the SDPUC with
respect to the issuance of securities. Under the South Dakota Energy
Facility Permit Act, the SDPUC has the authority to approve sites in South
Dakota for large energy conversion facilities (100,000 kw or more) and
transmission lines of 115 kv or more.
FERC: The Company is also subject to regulation by the FERC,
successor to the Federal Power Commission, created pursuant to the FPA.
The FERC is an independent agency which has jurisdiction over rates for
sales for resale, transmission and sale of electric energy in interstate
commerce, interconnection of facilities, and accounting policies and
practices.
General: The United States Congress ended its 1998 legislative
session without taking action on proposed electric industry restructuring
legislation. Federal restructuring legislation in 1999 is not anticipated due
to the complexities of issues involved with federal intervention.
The MPUC issued its Wholesale Competition Report in 1996 and its Retail
Competition Report in 1997 and continues to work on specific topics in the
areas of potential stranded costs, unbundled rates and affiliated
transactions. The Minnesota legislature did not take any significant
legislative action on electric utility restructuring in 1998, and no
significant action is expected during 1999. In 1997, the North Dakota
legislature created a subcommittee to investigate the impact of electric
utility industry restructuring on North Dakota. The North Dakota
legislature plans to deal with tax issues surrounding restructuring first.
Currently, South Dakota is not undertaking any legislative activity regarding
electric utility restructuring.
The Company is subject to various federal and state laws, including the
Federal Public Utility Regulatory Policies Act and the Energy Policy Act of
1992, which are intended to promote the conservation of energy and the
development and use of alternative energy sources.
The Company is unable to predict the impact on its operations
resulting from future regulatory activities by any of the above agencies,
from any future legislation or from any future tax which may be imposed upon
the source or use of energy.
Environmental Regulation
- ------------------------
Impact of Environmental Laws: The Company's existing generating plants
are subject to stringent federal and state standards and regulations
regarding, among other things, air, water and solid waste pollution. The
Company estimates that it has expended in the five years ended December 31,
1998, approximately $2,238,000 for environmental control facilities.
Included in the 1999-2003 construction budget are approximately $2,757,000
for environmental equipment for existing and new facilities, including
$677,000 for 1999.
Air Quality: Pursuant to the Federal Clean Air Act of 1970 as amended
(the Act), the United States Environmental Protection Agency (EPA) has
promulgated national primary and secondary standards for certain air
pollutants.
All primary fuel burned by the Company at its steam generating plants
is North Dakota lignite or western subbituminous coal with sulfur content
averaging less than one percent. Electrostatic precipitators have been
installed at the principal units at the Hoot Lake Plant and at the Big
Stone Plant. A fabric filter to collect particulates from stack gases has
been installed on a smaller unit at Hoot Lake Plant. As a result, the
units at the Big Stone Plant and the Hoot Lake Plant currently meet all
presently applicable federal and state air quality and emission standards.
The Coyote Station is substantially the same design as the Big Stone
Plant, except for site-related items and the inclusion of sulfur dioxide
removal equipment. The removal equipment--referred to as a dry scrubber--
consists of a spray dryer, followed by a fabric filter, and is designed to
desulfurize hot gases from the stack without producing sludge, an unwanted
by-product of the conventional wet scrubber system. The Coyote Station is
currently operating within all presently applicable federal and state air
quality and emission standards.
The Act, in addressing acid deposition, will impose new requirements
on power plants in an effort to reduce national emissions of sulfur dioxide
(SO2) and nitrogen oxide (NOx).
The national SO2 emission reduction goals are to be achieved through
a new market-based system under which power plants are to be allocated
"emissions allowances" that will require plants to either reduce their
emissions or acquire allowances from others to achieve compliance. The
SO2 emission reduction requirements are being imposed in two phases. Phase
one was imposed in 1995 and phase two will be imposed in 2000.
The phase one requirements did not apply to any of the Company's
plants. The phase two requirements will apply to the Company's plants. The
Company believes that its current use of low sulfur coal at the Hoot Lake
Plant and the dry scrubbers installed at the Coyote Station will enable
the facilities to comply with anticipated phase two limitations on SO2
emissions. The subbituminous coal burned at the Big Stone Plant replaced
lignite, which had been used since inception of plant operation in 1975 as
the primary fuel. The Company intends that the Big Stone Plant will
maintain current levels of operation and meet phase two requirements by
burning low sulfur subbituminous coal.
The national NOx emission reduction goals are to be achieved by
imposing mandatory emissions standards on individual sources. The NOx
emissions regulations that were issued by the EPA in 1995 apply to phase
one boilers of the same design as those used at the Hoot Lake Plant units
2 and 3. The Act allowed the EPA to retain the standard as it currently
applies to phase one boilers or adopt more stringent standards for phase
two boilers by January 1, 1997. More stringent standards were adopted by
the EPA on December 19, 1996. The Company had the option of complying
with the phase one standards beginning on January 1, 1997, under EPA's
early opt-in provision, or complying with any revised standard for phase
two boilers. The Company elected the early opt-in provision for Hoot
Lake Plant unit 2. The unit is governed by the phase one standard until
January 1, 2008. The Company did not elect the early opt-in provision
for Hoot Lake Plant unit 3. Minor modifications have been completed on
Hoot Lake Plant unit 3 to meet the NOx emission requirements by 2000.
On December 19, 1996, the EPA also adopted NOx emissions regulations
that would be applicable to cyclone-fired boilers such as those used at the
Big Stone Plant and Coyote Station. The regulations require that the
emission standard be met by cyclone boilers beginning on January 1, 2000.
The Company has evaluated the Big Stone Plant and Coyote Station NOx
emissions with respect to the December 19, 1996 rules. Existing emissions
monitoring data indicate that the Coyote Station meets the emissions
requirements. During 1997, the Company conducted tests at the Big Stone
Plant to determine if emissions can be reduced through modifications to
existing equipment. The results of the tests were positive and modifications
have been completed. As a result of the modifications, the Company believes
the NOx emissions regulations have been met.
The Act contains a list of regulated toxic air pollutants, which
includes certain substances believed to be emitted by the Company's plants.
The Act calls for EPA studies of the effects of emissions of the listed
pollutants by electric utility steam generating plants. The EPA has
completed the studies and sent reports to Congress. Because promulgation of
rules by the EPA has not been completed, it is not possible to assess at
this time whether, or to what extent, this legislation will ultimately
impact the Company.
Water Quality: The Federal Water Pollution Control Act Amendments of
1972, and amendments thereto, provide for, among other things, the
imposition of effluent limitations to regulate discharges of pollutants,
including thermal discharges, into the waters of the United States, and
the EPA has established effluent guidelines for the steam electric power
generating industry. Discharges must also comply with state water quality
standards.
The Company has all federal and state water permits presently necessary
for the operation of the Big Stone Plant. Water discharge permits for the
Hoot Lake Plant and Coyote Station were renewed in 1997 and 1998,
respectively, each for a five-year term. The Company owns five small dams
on the Otter Tail River which are subject to FERC licensing requirements.
A license for all five dams was issued on December 5, 1991. Total nameplate
rating of the five dams is 3,450 kw (net unit capability of 3,539 kw at
December 31, 1998).
Solid Waste: Permits for disposal of ash and other solid wastes have
been issued for the Big Stone Plant and Coyote Station. A renewal permit
is pending for the Hoot Lake Plant, and the Company anticipates that it
will obtain this renewal in due course. The Company estimates that the
current ash disposal site at the Hoot Lake Plant will be filled to capacity
within three to four years. The Company is evaluating its options,
including increased marketing of the ash for construction purposes and
building a new ash disposal site adjacent to the current site within the
same permitted area. Although an estimate of the engineering costs required
to construct a new facility has not been completed, the Company believes
that the investment required will not have a significant impact on future
plant operating costs.
The EPA has promulgated various solid and hazardous waste regulations
and guidelines pursuant to, among other laws, the Resource Conservation and
Recovery Act of 1976, the Solid Waste Disposal Act Amendments of 1980, and
the Hazardous and Solid Waste Amendments of 1984, which provide for, among
other things, the comprehensive control of various solid and hazardous wastes
from generation to final disposal. The states of Minnesota, North Dakota and
South Dakota have also adopted rules and regulations pertaining to solid and
hazardous waste. The total impact on the Company of the various solid and
hazardous waste statutes and regulations enacted by the federal government or
the states of Minnesota, North Dakota and South Dakota is not certain at this
time. To date, the Company has incurred no significant costs as a result of
these laws.
In 1980, the United States enacted the Comprehensive Environmental
Response, Compensation and Liability Act, commonly known as the Federal
Superfund law, which was reauthorized and amended in 1986. In 1983,
Minnesota adopted the Minnesota Environmental Response and Liability Act,
commonly known as the Minnesota Superfund law. In 1988, South Dakota enacted
the Regulated Substance Discharges Act, commonly known as the South Dakota
Superfund law. In 1989, North Dakota enacted the Environmental Emergency
Cost Recovery Act. Among other requirements the federal and state acts
establish environmental response funds to pay for remedial actions associated
with the release or threatened release of certain regulated substances into
the environment. These federal and state Superfund laws also establish
liability for cleanup costs and damage to the environment resulting from such
release or threatened release of regulated substances. The Minnesota
Superfund law also creates liability for personal injury and economic loss
under certain circumstances. The Company is unable to determine the total
impact of the Superfund laws on its operations at this time but has not
incurred any significant costs to date related to these laws.
The Federal Toxic Substances Control Act of 1976 regulates, among other
things, polychlorinated byphenyls (PCBs). The EPA has enacted regulations
concerning the use, storage and disposal of PCBs. The Company completed a
program for the removal of all PCB-filled transformers and capacitors by the
end of 1987 and received Certificates of Disposal in 1989. The Company
completed removal of PCB-contaminated mineral oil dielectric fluid from all
substation transformers and voltage regulators and continues to remove such
oil from other electrical equipment.
The University of Minnesota (University) notified the Company during
1998 that it intended to seek contribution for expenditures made by the
University for the remediation of soil contaminated by PCBs at the Rosemount
Research Center Superfund site, which is owned by the University. The MPCA
and the University asserted that some of the Company's used electrical
equipment shipped to the site for disposal was a source of contamination at
the site. The Company and the University have agreed to a settlement of
$450,000, which is being finalized. The Company recognized a liability for
$450,000 related to this settlement during the third quarter of 1998.
Health Effects of Electric and Magnetic Fields (EMF): In 1996, the
National Research Council of the National Academy of Sciences, after
evaluating more than 500 studies on the effects of EMF, found insufficient
evidence to consider electric and magnetic fields a threat to human health.
Although research conducted to date has found no conclusive evidence that
electric and magnetic fields affect health, a few studies have suggested a
possible connection with cancer. The utility industry continues to fund
studies. The ultimate impact, if any, of this issue on the Company and the
utility industry is impossible to predict.
Capital Expenditures
- --------------------
The Company is continually expanding, replacing and improving its
electric utility facilities. During 1998, the Company invested approximately
$18,174,000 for additions to its electric utility properties. During the
five years ended December 31, 1998, the Company had gross electric property
additions, including construction work in progress, of approximately
$134,511,000 and gross retirements of approximately $42,329,000.
The Company estimates that during the five years 1999 through 2003 it
will invest approximately $105 million for electric utility construction.
The Company continuously reviews options for increasing its generating
capacity, but at this time has no firm plans for additional base load
generating plant construction. The majority of electric utility expenditures
for the five-year period 1999 through 2003 will be for work related to the
Company's transmission and distribution system.
Franchises
- ----------
At December 31, 1998, the Company had franchises in all but one of the
371 incorporated municipalities which it serves. All franchises are
nonexclusive and generally were obtained for 20-year terms, with varying
expiration dates. No franchises are required to serve unincorporated
communities in any of the three states which the Company serves.
MANUFACTURING OPERATIONS
------------------------
General
- -------
Manufacturing Operations consists of businesses involved in the
following manufacturing activities: PVC pipe, sugar beet processing
equipment, metal stamping, contract machining, and frame-straightening racks
and accessories used by the auto body industry. The Company derived 20% of
its consolidated operating revenues from this segment in 1998, 21% in 1997,
and 17% in 1996.
The following is a brief description of each of these businesses:
Precision Machine of North Dakota, Inc., located in West Fargo, ND, uses
computer controlled lathes and milling machines to produce precision
parts for industrial equipment manufacturers.
Dakota Machine, Inc., located in West Fargo, ND, is primarily engaged in
the metal fabrication of large equipment that handles or processes sugar
beets.
Glendale Machining, Inc., located in Pelican Rapids, MN, uses computer
controlled lathes and milling machines to produce parts for farm
implement and industrial manufacturers.
BTD Manufacturing, Inc. (BTD), located in Detroit Lakes, MN, is a metal
stamping and tool and die manufacturer. BTD stamps, machines, and
assembles metal parts according to manufacturers' specifications
primarily for the recreation vehicle industry and industrial
manufacturers.
Northern Pipe Products, Inc., located in Fargo, ND, manufactures poly-
vinyl-chloride (PVC) pipe for municipal, rural water, irrigation and
other uses in a sixteen-state area.
Chassis Liner Corporation, located in Alexandria and Lucan, MN,
manufactures and sells vehicle frame-straightening equipment and
accessories used by the auto body shop industry.
Competition
- -----------
The various markets in which the Company's manufacturing entities
compete are characterized by intense competition. These markets have many
established manufacturers with broader product lines, greater distribution
capabilities, greater capital resources and larger marketing, research and
development staffs and facilities than the Company's manufacturing entities.
The Company believes the principal competitive factors in its
manufacturing segment are product performance, quality, price, ease of use,
technical innovation, cost effectiveness, customer service and breadth of
product line. The Company's manufacturing entities intend to continue to
compete on the basis of their high performance products, innovative
technologies, cost effective manufacturing techniques, close customer
relations and support and their strategy of increasing product offerings.
Some of the products sold by the companies in the manufacturing segment
are purchased by companies in the recreational vehicle market, sugar beet
industry, auto body shop industry and PVC pipe market. The growth in these
markets has provided strong growth for the Company's manufacturing segment.
A downturn in these markets could have an adverse impact on the financial
results of the Company's manufacturing segment. In addition, Northern Pipe
Products' gross margin percentage is related to PVC resin prices. Due to the
commodity nature of PVC resin and the dynamic supply and demand factors
worldwide, it is difficult to predict gross margin percentages or assume that
historical trends will continue.
Capital Expenditures
- --------------------
During 1998, capital expenditures of approximately $5.5 million were
made in Manufacturing Operations. Total capital expenditures for
Manufacturing Operations during the five-year period 1999-2003 are estimated
to be approximately $19 million.
HEALTH SERVICES OPERATIONS
--------------------------
General
- -------
Health Services Operations consists of businesses involved in the sale,
service, rental, refurbishing and operation of medical imaging equipment and
the sale of related supplies and accessories to various medical institutions,
primarily in the midwestern United States. The Company derived 16% of its
consolidated operating revenues from this segment in 1998, and 17% in both
1997 and 1996.
Subsidiaries comprising Health Services Operations include the
following:
Diagnostic Medical Systems, Inc. (DMS), located in Fargo, ND, sells,
services and refurbishes diagnostic medical imaging equipment and
associated supplies and accessories. DMS sells radiology equipment
manufactured by several entities, including Philips Medical Systems
(Philips) a large multi-national company based in the Netherlands.
Philips manufacturers fluoroscopic, radiographic and mammography
equipment, along with ultrasound, computerized tomography (CT) scanners,
magnetic resonance imaging (MRI) scanners, cardiac cath labs, and
radiation therapy equipment for the treatment of cancer. In 1994, DMS
entered into a five-year dealer agreement with Philips. This agreement
expired at the end of 1998. A new dealer agreement is currently being
negotiated with Philips. DMS is also a supplier of medical film and
related accessories. DMS markets mainly to hospitals, clinics and
mobile service companies in North Dakota, South Dakota, Minnesota,
Montana and Wyoming. DMS subsidiaries are DMS Imaging, Inc. and DMS
Leasing, Inc.
DMS Imaging, Inc., a subsidiary of DMS located in Bemidji MN, provides
CT, MRI, nuclear medicine services and other similar radiology services
to health care providers in a twenty-one state area.
Combined, the Health Services subsidiaries cover the three basics of the
medical imaging industry: (1) operating technologists who do the imaging of
patients of hospitals and clinics; (2) the equipment function that sells,
owns, rents, refurbishes and maintains the imaging machines; and (3) central
office specialists who provide scheduling, billing and administrative
support.
Each of the subsidiaries described above under Health Services
Operations and Manufacturing Operations is owned by Varistar.
Competition
- -----------
The market for selling, servicing and operating diagnostic imaging
services and imaging systems is highly competitive. In addition to direct
competition from other contract providers, the companies within the health
services segment compete with free-standing imaging centers and health care
providers that have their own diagnostic imaging systems and with equipment
manufacturers that sell imaging equipment to health care providers for full-
time installation. Some of their direct competitors which provide contract
MRI services have access to greater financial resources than the health
services companies. In addition, some of the health services companies'
customers are capable of providing the same services to their patients
directly, subject only to their decision to acquire a high-cost diagnostic
imaging system, assume the financial and technology risk, and employ the
necessary technologies. The companies within this segment compete against
other contract providers on the basis of quality of services, quality and
magnetic field strength of imaging systems, price, availability and
reliability.
Capital Expenditures
- --------------------
During 1998 capital expenditures of approximately $3.1 million were made
in Health Services. Total capital expenditures during the five-year period
1999-2003 are estimated to be $42 million.
OTHER BUSINESS OPERATIONS
General
- -------
The Company's Other Business Operations consists of businesses that are
diversified in such areas as electrical and telephone construction
contracting, entertainment, energy services, natural gas marketing, waste
incinerating, and telephone/cable TV utility. The Company derived 11% of its
consolidated operating revenues from these diversified businesses during
1998, 10% in 1997, and 12% during 1996.
The following is a brief description of each of these businesses:
Moorhead Electric, Inc., located in Moorhead, MN, provides electrical
wiring in residential, commercial and industrial settings; installs data
cable for commercial and industrial computer networks; and installs
underground fiber-optic and copper cable for the telecommunications
industry.
Aerial Contractors, Inc., located in West Fargo, ND, builds and repairs
overhead and underground electric distribution and transmission lines
and substations; and installs underground fiber-optic, copper and
coaxial cable for the telecommunciations industry.
KFGO, Inc. (KFGO), located in Fargo, ND, operates two AM and four FM
commercial radio stations along with a video production facility.
Varistar has entered into an agreement to sell certain assets owned by
KFGO. See below for more information.
Western Minnesota Broadcasting Company (Western), located in Morris, MN,
operates an AM and FM commercial radio station. Varistar has entered
into an agreement to sell the radio stations owned by Western. See
below for more information.
Quadrant Co. (Quadrant) owns a municipal waste burning facility located
in Perham, MN. In March 1998, the Company recorded a noncash accounting
charge related to the impairment of the Quadrant plant. The impaired
assets included building, machinery and equipment used to burn waste.
For a further discussion on the impairment, see note 3, in "Notes to
consolidated financial statements" on page 35 of the Company's 1998
Annual Report to Shareholders, filed as an Exhibit hereto. In July 1998,
the plant ceased operations due to alleged noncompliance with MPCA
particulate emissions regulations. See "Environmental Regulation"
below for more information.
Midwest Information Systems, Inc. (MIS), headquartered in Parkers
Prairie, MN, owns three operating telephone companies serving over 6,300
customers and two cable television companies serving approximately 1,200
customers. MIS is also involved in long-distance telephone, fiber-optic
transmission facilities, and the sale of direct broadcast satellite
television equipment.
Otter Tail Energy Services Company (OTESCO), headquartered in Fergus
Falls, MN was established in 1997 to pursue opportunities in the natural
gas and electricity markets. It offers technical services, engineering
services, performance-based service contracting and financial services
related to these products. OTESCO has one subsidiary, Otter Tail Energy
Management Company (OTEMCO), which was formed as a result of the
acquisition of PAM Natural Gas, Inc. OTEMCO is a marketer of natural
gas to commercial and institutional customers in Iowa, South Dakota,
North Dakota and Minnesota.
With the exception of Quadrant and OTESCO, each of the subsidiaries
described above is owned by Varistar. Quadrant and OTESCO are wholly-owned
subsidiaries of Minnesota-Dakota Generating Company, which in turn is a
wholly-owned subsidiary of the Company.
In December 1998, Varistar entered into a definitive agreement to sell
certain assets of the radio stations and video production company owned by
KFGO and the radio stations owned by Western Minnesota Broadcasting Company.
The agreement provides for a sale price of $24 million in cash, which would
result in an after-tax gain of approximately $8 million. Net cash proceeds
from the sale may be used to fund future acquisitions, to expand existing
businesses, to reduce outstanding debt or for other corporate purposes.
The sale is subject to approval by the Federal Communications Commission (FCC)
and other governmental authorities and is expected to close in late 1999.
General Regulation
- ------------------
The Company's operating telephone subsidiaries are subject to the
regulatory authority of the MPUC regarding rates and charges for telephone
services, as well as other matters. The operating telephone subsidiaries
must keep on file with the MPUC schedules of such rates and charges, and any
requests for changes in such rates and charges must be filed for approval by
the MPUC. The telephone industry is also subject generally to rules and
regulations promulgated by the FCC. The Company's operating cable television
subsidiary is regulated by federal and local authorities. The Company's
radio broadcasting subsidiaries are regulated by the FCC.
Environmental Regulation
- ------------------------
In July 1998, Quadrant's waste incinerators were shut down for alleged
noncompliance with MPCA particulate emissions regulations. Quadrant and the
Company received from the MPCA a Notice of Violation dated October 15, 1998,
outlining claimed violations of emission limits, operating requirements, and
reporting requirements applicable to Quadrant under Minnesota law. Quadrant
and the MPCA are in the process of negotiating a penalty settlement and
intend to negotiate the terms and conditions of a stipulation agreement
involving a compliance schedule, a civil penalty for past alleged violations
and stipulated penalties for any future violations of the stipulation
agreement. The outcome of the negotiations is not known at this time;
however, it is not expected to have a material financial impact on the
Company. The Company does not expect any further costs related to the plant's
disposition to have a material effect upon future consolidated earnings.
Competition
- -----------
Each of the businesses in Other Business Operations is subject to
competition, as well as the effects of general economic conditions, in their
respective industries.
Capital Expenditures
- --------------------
During 1998, capital expenditures of approximately $2.7 million were
made in Other Business Operations. Capital expenditures during the five-year
period 1999-2003 are estimated to be approximately $9 million for Other
Business Operations.
FINANCING
---------
The Company estimates that funds internally generated net of forecasted
dividend payments, combined with funds on hand, will be sufficient to meet
all sinking fund payments for First Mortgage Bonds in the next five years and
to provide for its estimated 1999-2003 consolidated capital expenditures.
Additional short-term or long-term financing will be required in the period
1999-2003 for the maturity of First Mortgage Bonds and other long-term debt,
in the event the Company decides to refund or retire early any of its
presently outstanding debt or Cumulative Preferred Shares, or for other
corporate purposes.
The foregoing estimates of capital expenditures and funds internally
generated may be subject to substantial changes due to unforeseen factors,
such as changed economic conditions, interest rates, demand for energy,
competitive conditions, technological changes, new environmental and other
governmental regulations, tax law changes, and rate regulation.
As of December 31, 1998, the Company had unutilized net fundable
property available for the issuance of more than $38 million principal amount
of additional First Mortgage Bonds and also was entitled to issue in excess
of $131 million principal amount of additional First Mortgage Bonds on the
basis of First Mortgage Bonds theretofore retired.
The Company's operating subsidiaries have been responsible for obtaining
their own financing after the Company's initial equity investment and have
developed financing arrangements with various banks. Historically, the
Company has not made or guaranteed loans to its subsidiaries, or cosigned on
any subsidiary's borrowing.
The Company has access to short-term borrowing resources. As of December
31, 1998, the Company and its subsidiaries had unused credit lines totaling
$35,439,000. The Company had $824,000 in short-term borrowings as of
December 31, 1998.
EMPLOYEES
---------
The Company and its subsidiaries had approximately 1,783 full-time
employees at December 31, 1998. A total of 559 employees are represented by
local unions of the International Brotherhood of Electrical Workers, of which
409 are employees of the Electric Operations segment and are covered by a
three-year labor contract that was renewed in 1999 and expires November 1,
2002. The Company has never experienced any strike, work stoppage, or strike
vote, and considers its present relations with employees as very good.
Forward Looking Information - Safe Harbor Statement Under the Private
---------------------------------------------------------------------
Securities Litigation Reform Act of 1995
----------------------------------------
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 (the Act), the Company has filed
cautionary statements identifying important factors that could cause the
Company's actual results to differ materially from those discussed in
forward-looking statements made by or on behalf of the Company. When used in
this Form 10-K and in future filings by the Company with the Securities and
Exchange Commission, in the Company's press releases and in oral statements,
words such as "may", "will", "expect", "anticipate", "continue", "estimate",
"project", "believes" or similar expressions are intended to identify
forward-looking statements within the meaning of the Act. Factors that might
cause such differences include, but are not limited to, governmental and
regulatory action, the competitive environment, economic factors, weather
conditions, the Company's ability to identify and address all year 2000
issues and other factors discussed under "Factors affecting future earnings"
on pages 22 through 25 of the Company's 1998 Annual Report to Shareholders,
filed as an Exhibit hereto. These factors are in addition to any other
cautionary statements, written or oral, which may be made or referred to in
connection with any such forward-looking statement or contained in any
subsequent filings by the Company with the Securities and Exchange
Commission.
Item 2. PROPERTIES
----------
The Coyote Station, which commenced operation in 1981, is a 414,000 kw
(nameplate rating) mine-mouth plant located in the lignite coal fields near
Beulah, North Dakota and is jointly owned by the Company, Northern Municipal
Power Agency, Montana-Dakota Utilities Co. and Northwestern Public Service
Company. The Company has a 35% interest in the plant and was the project
manager in charge of construction. On July 1, 1998, the Company became the
operating agent of the Coyote Station.
The Company, jointly with Northwestern Public Service Company and
Montana-Dakota Utilities Co., owns the 414,000 kw (nameplate rating) Big
Stone Plant in northeastern South Dakota which commenced operation in 1975.
The Company, for the benefit of all three utilities, was in charge of
construction and is now in charge of operations. The Company owns 53.9% of
the plant.
Located near Fergus Falls, Minnesota, the Hoot Lake Plant is comprised
of three separate generating units with a combined rating of 127,000 kw. The
oldest Hoot Lake Plant generating unit was constructed in 1948 (7,500 kw
nameplate rating) and a subsequent unit was added in 1959 (53,500 kw
nameplate rating). A third unit was added in 1964 (66,000 kw nameplate
rating) and later modified during 1988 to provide cycling capability,
allowing this unit to be more efficiently brought on-line from a standby
mode.
At December 31, 1998, the Company's transmission facilities, which are
interconnected with lines of other public utilities, consisted of 48 miles of
345 kv lines; 363 miles of 230 kv lines; 636 miles of 115 kv lines; and 4,228
miles of lower voltage lines, principally 41.6 kv. The Company owns the
uprated portion of the 48 miles of the 345 kv line, with Minnkota Power
Cooperative retaining title to the original 230 kv construction.
All of the Company's electric utility properties, with minor exceptions,
are subject to the lien of the Company's Indenture of Mortgage dated July 1,
1936, as amended and supplemented, securing its First Mortgage Bonds. All of
the common shares of the companies owned by Varistar are pledged to secure
indebtedness of Varistar.
Item 3. LEGAL PROCEEDINGS
-----------------
Quadrant and the Company received from the MPCA a Notice of Violation
dated October 15, 1998 outlining claimed violations of emission limits,
operating requirements and reporting requirements applicable to Quadrant
under Minnesota law. Quadrant and the MPCA are in the process of negotiating
a penalty settlement and intend to negotiate the terms and conditions of a
stipulation agreement involving a compliance schedule, a civil penalty for
past alleged violations and stipulated penalties for any future violations of
the stipulation agreement. The Company does not expect this proceeding to
have a material impact on the Company's consolidated financial position or
consolidated results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the three
months ended December 31, 1998.
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT (AS OF MARCH 1, 1999)
----------------------------------------------------------
Set forth below is a summary of the principal occupations and business
experience during the past five years of executive officers of the Company:
DATES ELECTED
-------------
NAME AND AGE TO OFFICE PRESENT POSITION AND BUSINESS EXPERIENCE
- ------------ --------- -----------------------------
John C. MacFarlane (59) 4/8/91 Present: Chairman, President and Chief
Executive Officer
John D. Erickson (40) 10/26/98 Present: Vice President, Finance and
Chief Financial Officer
Prior to
10/26/98 Director, Market Strategies & Regulation
Marlowe E. Johnson (54) 4/12/93 Present: Vice President, Customer
Service, North Dakota
Douglas L. Kjellerup (57) 4/12/93 Present: Vice President, Marketing and
Development
LeRoy S. Larson (53) 4/12/93 Present: Vice President, Customer
Service, Minnesota and South
Dakota
Jay D. Myster (60) 10/1/98 Present: Corporate Secretary
Prior to
10/1/98 Senior Vice President, Governmental and
Legal, and Corporate Secretary
Rodney C.H. Scheel (49) 4/10/95 Present: Vice President, Electrical
Prior to
4/10/95 Director, Information Services
Ward L. Uggerud (49) 4/10/89 Present: Vice President, Operations
Jeffrey J. Legge (42) 4/10/95 Present: Controller
Prior to
4/10/95 Manager, Tax Department
The term of office of each of the officers is one year, and there are
no arrangements or understanding between individual officers or any other
persons pursuant to which he was selected as an officer.
No family relationships exist between any officers of the Company.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-----------------------------------------------------------------
MATTERS
-------
The information required by this Item is incorporated by reference to
the first sentence under "Otter Tail Power Company stock listing" on Page 48,
to "Selected consolidated financial data" on Page 17 and to "Quarterly
information" on Page 41 of the Company's 1998 Annual Report to Shareholders,
filed as an Exhibit hereto.
Item 6. SELECTED FINANCIAL DATA
-----------------------
The information required by this Item is incorporated by reference to
"Selected consolidated financial data" on Page 17 of the Company's 1998
Annual Report to Shareholders, filed as an Exhibit hereto.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The information required by this Item is incorporated by reference to
"Management's discussion and analysis of financial condition and results of
operations" on Pages 18 through 25 of the Company's 1998 Annual Report to
Shareholders, filed as an Exhibit hereto.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company does not have material market risk exposure related to
foreign currency exchange rate risk, commodity price risk or interest rate
risk.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The information required by this Item is incorporated by reference to
"Quarterly information" on Page 41 and the Company's audited financial
statements on Pages 26 through 41 of the Company's 1998 Annual Report to
Shareholders excluding "Report of Management" on Page 26, filed as an Exhibit
hereto.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by this Item regarding Directors is
incorporated by reference to the information under "Nominees for Election as
Directors" in the Company's definitive Proxy Statement dated March 12, 1999.
The information regarding executive officers is set forth in Item 4A hereto.
The information regarding Section 16 reporting is incorporated by reference
to the information under "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive Proxy Statement dated March 12, 1999.
Item 11. EXECUTIVE COMPENSATION
----------------------
The information required by this Item is incorporated by reference to
the information under "Summary Compensation Table," "Pension and Supplemental
Retirement Plans," "Severance Agreements," and "Directors' Compensation" in
the Company's definitive Proxy Statement dated March 12, 1999.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this Item is incorporated by reference to
the information under "Outstanding Voting Shares" and "Security Ownership of
Management" in the Company's definitive Proxy Statement dated March 12, 1999.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
None.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) List of documents filed:
(1) and (2) See Table of Contents on Page 22 hereof.
(3) See Exhibit Index on Pages 23 through 28 hereof.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of
certain instruments defining the rights of holders of certain
long-term debt of the Company are not filed, and in lieu
thereof, the Company agrees to furnish copies thereof to the
Securities and Exchange Commission upon request.
(b) Reports on Form 8-K:
None
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.
OTTER TAIL POWER COMPANY
By /s/John D. Erickson
-------------------
John D. Erickson
Vice President, Finance
and Chief Financial Officer
Dated: March 24, 1999
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:
Signature and Title
- -------------------
John C. MacFarlane )
Chairman, President and )
Chief Executive Officer )
(principal executive officer) )
and Director )
)
John D. Erickson )
Vice President, Finance and )
Chief Financial Officer )
(principal financial officer) )
)
Jeffrey J. Legge ) By /s/John D. Erickson
Controller ) -------------------
(principal accounting officer) ) John D. Erickson
) Pro Se and Attorney-in-Fact
) Dated March 24, 1999
Thomas M. Brown, Director )
)
Dayle Dietz, Director )
)
Dennis R. Emmen, Director )
)
Maynard D. Helgaas, Director )
)
Arvid R. Liebe, Director )
)
Kenneth L. Nelson, Director )
)
Nathan I. Partain, Director )
)
Robert N. Spolum, Director )
OTTER TAIL POWER COMPANY
TABLE OF CONTENTS
-----------------
FINANCIAL STATEMENTS, SUPPLEMENTARY FINANCIAL DATA, SUPPLEMENTAL FINANCIAL
SCHEDULES INCLUDED IN ANNUAL REPORT (FORM 10-K) FOR THE YEAR ENDED
DECEMBER 31, 1998
The following items are included in this annual report by reference to the
registrant's Annual Report to Shareholders for the year ended December 31,
1998:
Page in
Annual
Report to
Shareholders
------------
Financial Statements:
Independent Auditors' Report........................................26
Consolidated Balance Sheets, December 31, 1998 and 1997........28 & 29
Consolidated Statements of Income for the Three Years
Ended December 31, 1998.............................................27
Consolidated Statements of Changes in Equity for the
Three Years Ended December 31, 1998.................................30
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1998.............................................31
Consolidated Statements of Capitalization, December 31, 1998
and 1997............................................................32
Notes to Consolidated Financial Statements.......................33-41
Selected Consolidated Financial Data for the Five Years
Ended December 31, 1998.............................................17
Quarterly Data for the Two Years Ended
December 31, 1998...................................................41
Schedules 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.
Exhibit Index
to
Annual Report
on Form 10-K
For Year Ended December 31, 1998
Previously Filed
----------------
As
Exhibit
File No. No.
-------- --------
3-A 10-K for year 3-A --Restated Articles of
ended 12/31/96 Incorporation, as amended
(including resolutions
creating outstanding series
of Cumulative Preferred Shares).
3-C 33-46071 4-B --Bylaws as amended through
April 11, 1988.
4-D-1 2-14209 2-B-1 --Twenty-First Supplemental
Indenture from the Company to
First Trust Company of Saint
Paul and Russel M. Collins, as
Trustees, dated as of July 1,
1958.
4-D-2 2-14209 2-B-2 --Twenty-Second Supplemental
Indenture dated as of
July 15, 1958.
4-D-3 33-32499 4-D-7 --Thirty-Second Supplemental
Indenture dated as of
January 18, 1974.
4-D-4 33-46070 4-D-12 --Forty-Third Supplemental
Indenture dated as of
February 1, 1991.
4-D-5 33-46070 4-D-13 --Forty-Fourth Supplemental
Indenture dated as of
September 1, 1991.
4-D-6 8-K dated 4-D-15 --Forty-Fifth Supplemental
7/24/92 Indenture dated as of
July 1, 1992.
4-D-7 8-A dated 1 --Rights Agreement, dated as of
1/28/97 January 28, 1997 (the Rights
Agreement), between the
Company and Norwest Bank
Minnesota, National Association.
4-D-8 8-A/A dated 1 --Amendment No. 1, dated as of
9/29/98 August 24, 1998, to the Rights
Agreement.
10-A 2-39794 4-C --Integrated Transmission
Agreement dated August 25,
1967, between Cooperative
Power Association and the
Company.
Previously Filed
----------------
As
Exhibit
File No. No.
-------- --------
10-A-1 10-K for year 10-A-1 --Amendment No. 1, dated as
ended 12/31/92 of September 6, 1979, to
Integrated Transmission
Agreement, dated as of
August 25, 1967, between
Cooperative Power Association
and the Company.
10-A-2 10-K for year 10-A-2 --Amendment No. 2, dated as of
ended 12/31/92 November 19, 1986, to Integ-
rated Transmission Agreement
between Cooperative Power
Association and the Company.
10-C-1 2-55813 5-E --Contract dated July 1, 1958,
between Central Power Electric
Corporation, Inc., and the
Company.
10-C-2 2-55813 5-E-1 --Supplement Seven dated
November 21, 1973.
(Supplements Nos. One
through Six have been super-
seded and are no longer in
effect.)
10-C-3 2-55813 5-E-2 --Amendment No. 1 dated
December 19, 1973, to
Supplement Seven.
10-C-4 10-K for year 10-C-4 --Amendment No. 2 dated
ended 12/31/91 June 17, 1986, to Supplement
Seven.
10-C-5 10-K for year 10-C-5 --Amendment No. 3 dated
ended 12/31/92 June 18, 1992, to Supplement
Seven.
10-C-6 10-K for year 10-C-6 --Amendment No. 4 dated
ended 12/31/93 January 18, 1994, to Supple-
ment Seven.
10-D 2-55813 5-F --Contract dated April 12,
1973, between the Bureau of
Reclamation and the Company.
10-E-1 2-55813 5-G --Contract dated January 8,
1973, between East River
Electric Power Cooperative
and the Company.
10-E-2 2-62815 5-E-1 --Supplement One dated
February 20, 1978.
10-E-3 10-K for year 10-E-3 --Supplement Two dated
ended 12/31/89 June 10, 1983.
10-E-4 10-K for year 10-E-4 --Supplement Three dated
ended 12/31/90 June 6, 1985.
Previously Filed
----------------
As
Exhibit
File No. No.
-------- --------
10-E-5 10-K for year 10-E-5 --Supplement No. Four, dated
ended 12/31/92 as of September 10, 1986.
10-E-6 10-K for year 10-E-6 --Supplement No. Five, dated
ended 12/31/92 as of January 7, 1993.
10-E-7 10-K for year 10-E-7 --Supplement No. Six, dated
ended 12/31/93 as of December 2, 1993.
10-F 10-K for year 10-F --Agreement for Sharing
ended 12/31/89 Ownership of Generating
Plant by and between the
Company, Montana-Dakota
Utilities Co., and North-
western Public Service
Company (dated as of
January 7, 1970).
10-F-1 10-K for year 10-F-1 --Letter of Intent for pur-
ended 12/31/89 chase of share of Big Stone
Plant from Northwestern
Public Service Company
(dated as of May 8, 1984).
10-F-2 10-K for year 10-F-2 --Supplemental Agreement No. 1
ended 12/31/91 to Agreement for Sharing
Ownership of Big Stone Plant
(dated as of July 1, 1983).
10-F-3 10-K for year 10-F-3 --Supplemental Agreement No. 2
ended 12/31/91 to Agreement for Sharing
ownership of Big Stone Plant
(dated as of March 1, 1985).
10-F-4 10-K for year 10-F-4 --Supplemental Agreement No. 3
ended 12/31/91 to Agreement for Sharing
ownership of Big Stone Plant
(dated as of March 31, 1986).
10-F-5 10-K for year 10-F-5 --Amendment I to Letter of
ended 12/31/92 Intent dated May 8, 1984, for
purchase of share of Big Stone
Plant.
10-G 10-Q for quarter 10-A --Big Stone Plant Coal Agreement
ended 9/30/94 by and between the Company,
Montana-Dakota Utilities Co.,
Northwestern Public Service
Company, and Westmoreland
Resources, Inc. (dated as of
June 30, 1994).
10-G-1 10-Q for quarter 10-B --Big Stone Coal Transportation
ended 9/30/94 Agreement by and between the
Company, Montana-Dakota
Utilities, Northwestern Public
Service Co., and Burlington
Northern Railroad Company
(dated as of July 18, 1994).
Previously Filed
----------------
As
Exhibit
File No. No.
-------- --------
10-G-2 10-K for year 10-G-2 --Amendment No. 1, dated as of
ended 12/31/95 December 27, 1995, to Big
Stone Coal Transportation
Agreement (dated as of
July 18, 1994).
10-H 2-61043 5-H --Agreement for Sharing Owner-
ship of Coyote Station
Generating Unit No. 1 by and
between the Company, Minnkota
Power Cooperative, Inc.,
Montana-Dakota Utilities Co.,
Northwestern Public Service
Company, and Minnesota Power
& Light Company (dated as of
July 1, 1977).
10-H-1 10-K for year 10-H-1 --Supplemental Agreement No.
ended 12/31/89 One dated as of November 30,
1978, to Agreement for Sharing
Ownership of Coyote Generating
Unit No. 1.
10-H-2 10-K for year 10-H-2 --Supplemental Agreement No.
ended 12/31/89 Two dated as of March 1, 1981,
to Agreement for Sharing
Ownership of Coyote Generating
Unit No. 1 and Amendment No. 2
dated March 1, 1981, to Coyote
Plant Coal Agreement.
10-H-3 10-K for year 10-H-3 --Amendment dated as of
ended 12/31/89 July 29, 1983, to Agreement for
Sharing Ownership of Coyote
Generating Unit No. 1.
10-H-4 10-K for year 10-H-4 --Agreement dated as of Sept.
ended 12/31/92 5, 1985, containing Amendment
No. 3 to Agreement for Sharing
Ownership of Coyote Generating
Unit No.1, dated as of July 1,
1977, and Amendment No. 5 to
Coyote Plant Coal Agreement,
dated as of January 1, 1978.
10-I 2-63744 5-I --Coyote Plant Coal Agreement
by and between the Company,
Minnkota Power Cooperative,
Inc., Montana-Dakota
Utilities Co., Northwestern
Public Service Company,
Minnesota Power & Light
Company, and Knife River
Coal Mining Company (dated
as of January 1, 1978).
10-I-1 10-K for year 10-I-1 --Addendum, dated as of March
ended 12/31/92 10, 1980, to Coyote Plant
Coal Agreement.
Previously Filed
----------------
As
Exhibit
File No. No.
-------- --------
10-I-2 10-K for year 10-I-2 --Amendment (No. 3), dated as
ended 12/31/92 of May 28, 1980, to Coyote
Plant Coal Agreement.
10-I-3 10-K for year 10-I-3 --Fourth Amendment, dated as
ended 12/31/92 of August 19, 1985, to
Coyote Plant Coal Agreement.
10-I-4 10-Q for quarter 19-A --Sixth Amendment, dated as of
ended 6/30/93 February 17, 1993, to Coyote
Plant Coal Agreement.
10-K 10-K for year 10-K --Diversity Exchange Agreement
ended 12/31/91 by and between the Company
and Northern States Power
Company, (dated as of May 21,
1985) and amendment thereto
(dated as of August 12, 1985).
10-L 10-K for year 10-L --Integrated Transmission
ended 12/31/91 Agreement by and between the
Company, Missouri Basin
Municipal Power Agency and
Western Minnesota Municipal
Power Agency (dated as of
March 31, 1986).
10-L-1 10-K for Year 10-L-1 --Amendment No. 1, dated as
ended 12/31/88 of December 28, 1988, to
Integrated Transmission
Agreement (dated as of
March 31, 1986).
10-M-1 10-K for year 10-M-1 --Hoot Lake Plant Coal
ended 12/31/89 Agreement dated as of
October 1, 1980, by and
between the Company and
Knife River Coal Mining
Company.
10-M-2 10-K for year 10-M-2 --First Amendment dated as of
ended 12/31/89 August 14, 1985, to Hoot
Lake Plant Coal Agreement.
10-M-3 10-K for year 10-M-10 --Hoot Lake Coal Transportation
ended 12/31/92 Agreement dated January 15,
1993 by and between the
Company and Northern Coal
Transportation Co.
10-M-4 10-Q for quarter 19-C --First Amendment dated as of
ended 6/30/93 January 20, 1993 to Hoot Lake
Coal Transportation Agreement
dated January 15, 1993.
10-M-5 10-K for year 10-M-5 --Second Amendment dated as of
ended 12/31/96 May 21, 1996 to Hoot Lake
Coal Transportation Agreement
dated January 15, 1993.
Previously Filed
----------------
As
Exhibit
File No. No.
-------- --------
10-N-1 10-K for year 10-N --Deferred Compensation Plan
ended 12/31/91 for Directors, dated
April 9, 1984.*
10-N-2 10-K for year 10-N-2 --Executive Survivor and Sup-
ended 12/31/94 plemental Retirement Plan,
as amended.*
10-N-3 10-K for year 10-P --Form of Severance
ended 12/31/92 Agreement.*
10-N-4 10-K for year 10-N-5 --Nonqualified Profit Sharing
ended 12/31/93 Plan.*
10-N-5 10-K for year 10-N-6 --Nonqualified Retirement
ended 12/31/93 Savings Plan.*
10-N-6 --1999 Employee Stock
Purchase Plan.
10-N-7 --1999 Stock Incentive Plan.*
13-A --Portions of 1998 Annual
Report to Shareholders
incorporated by reference
in this Form 10-K.
18 --Report of Independent
Accountants - Accounting Change.
21-A --Subsidiaries of Registrant.
23 --Consent of Deloitte & Touche LLP.
24-A --Powers of Attorney.
27 --Financial Data Schedule.
- --------
* Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K.
Exhibit 10-N-6
OTTER TAIL POWER COMPANY
1999 EMPLOYEE STOCK PURCHASE PLAN
ARTICLE I. INTRODUCTION
Section 1.01 Purpose. The purpose of the plan is to provide
employees of the Company and certain related corporations with an
opportunity to share in the ownership of the Company by providing
them with a convenient means for regular and systematic purchases
of Common Stock and, thus, to develop a stronger incentive to work
for the continued success of the Company.
Section 1.02 Rules of Interpretation. It is intended that the
Plan be an "employee stock purchase plan" as defined in Section
423(b) of the Code and Treasury Regulations promulgated thereunder.
Accordingly, the Plan shall be interpreted and administered in a
manner consistent therewith if so approved. All Participants in
the Plan will have the same rights and privileges consistent with
the provisions of the Plan.
Section 1.03 Definitions. For purposes of the Plan, the following
terms will have the meanings set forth below:
(a) "Acceleration Date" means the earlier of the date of shareholder
approval or approval by the Company's Board of Directors of (i) any
consolidation or merger of the Company in which the Company is not
the continuing or surviving corporation or pursuant to which shares
of Company Common Stock would be converted into cash, securities or
other property, other than a merger of the Company in which
shareholders of the Company immediately prior to the merger have
substantially the same proportionate ownership of stock in the
surviving corporation immediately after the merger; (ii) any sale,
exchange or other transfer (in one transaction or a series of related
transactions) of all or substantially all of the assets of the
Company; or (iii) any plan of liquidation or dissolution of the
Company.
(b) "Affiliate" means any subsidiary corporation of the Company, as
defined in Section 424(f) of the Code, whether now or hereafter
acquired or established.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the committee described in Section 10.01 of
the Plan.
(e) "Common Stock" means the Company's Common Shares, $5 par value
per share, as such stock may be adjusted for changes in the stock
or the Company as contemplated by Article XI of the Plan.
(f) "Company" means Otter Tail Power Company, a Minnesota
corporation, and its successors by merger or consolidation as
contemplated by Section 11.02 of the Plan
(g) "Current Compensation" means all regular wage, salary and
commission payments paid by the Company to a Participant in
accordance with the terms of his or her employment, but excluding
annual bonus payments and all other forms of special compensation.
(h) "Fair Market Value" as of a given date means the fair market
value of the Common Stock determined by such methods or procedures
as shall be established from time to time by the Committee, but shall
not be less than, if the Common Stock is then quoted on the NASDAQ
National Market System, the average of the high and low sales price
as reported on the NASDAQ National Market System on such date or, if
the NASDAQ National Market System is not open for trading on such
date, on the most recent preceding date when it is open for trading.
If on a given date the Common Stock is not traded on an established
securities market, the Committee shall make a good faith attempt to
satisfy the requirements of this Section 1.03(h) and in connection
therewith shall take such action as it deems necessary or advisable.
(i) "Participant" means a Regular Employee who is eligible to
participate in the Plan under Section 2.01 of the Plan and who has
elected to participate in the Plan.
(j) "Participating Affiliate" means an Affiliate which has been
designated by the Committee in advance of the Purchase Period in
question as a corporation whose eligible Regular Employees may
participate in the Plan.
(k) "Plan" means the Otter Tail Power Company 1999 Employee Stock
Purchase Plan, as it may be amended, the provisions of which are set
forth herein.
(l) "Purchase Period" means the period beginning on May 1, 1999 and
ending on the last business day in December, 1999 and thereafter each
approximate six-month period beginning on January 1st and July 1st of
each year and ending on the last business day in June and December of
each year; provided, however, that the then current Purchase Period
will end upon the occurrence of an Acceleration Date.
(m) "Regular Employee" means an employee of the Company or a
Participating Affiliate as of the first day of a Purchase Period,
including an officer or director who is also an employee, but excluding
an employee whose customary employment is less than 20 hours per week.
(n) "Stock Purchase Account" means the account maintained on the
books and records of the Company recording the amount received from
each Participant through payroll deductions made under the Plan.
ARTICLE II. ELIGIBILITY AND PARTICIPATION
Section 2.01 Eligible Employees. All Regular Employees shall be
eligible to participate in the Plan beginning on the first day of the
first Purchase Period to commence after such person becomes a Regular
Employee. Subject to the provisions of Article VI of the Plan, each
such employee will continue to be eligible to participate in the Plan
so long as he or she remains a Regular Employee.
Section 2.02 Election to Participate. An eligible Regular Employee
may elect to participate in the Plan for a given Purchase Period by
filing with the Company, in advance of that Purchase Period and in
accordance with such terms and conditions as the Committee in its sole
discretion may impose, a form provided by the Company for such purpose
(which authorizes regular payroll deductions from Current Compensation
beginning with the first payday in that Purchase Period and continuing
until the employee withdraws from the Plan or ceases to be eligible to
participate in the Plan).
Section 2.03 Limits on Stock Purchase. No employee shall be granted
any right to purchase Common Stock hereunder if such employee,
immediately after such a right to purchase is granted, would own,
directly or indirectly, within the meaning of Section 423(b)(3) and
Section 424(d) of the Code, Common Stock possessing 5% or more of the
total combined voting power or value of all the classes of the capital
stock of the Company or of all Affiliates.
Section 2.04 Voluntary Participation. Participation in the Plan on
the part of a Participant is voluntary and such participation is not
a condition of employment nor does participation in the Plan entitle
a Participant to be retained as an employee.
ARTICLE III. PAYROLL DEDUCTIONS AND STOCK PURCHASE ACCOUNT
Section 3.01 Deduction from Pay. The form described in Section 2.02
of the Plan will permit a Participant to elect payroll deductions of
any multiple of $10 but not less than $10 or more than $2,000 of such
Participant's Current Compensation for each pay period during such
Purchase Period, subject to such other limitations as the Committee
in its sole discretion may impose. A Participant may cease making
payroll deductions at any time, subject to such limitations as the
Committee in its sole discretion may impose. In the event that during
a Purchase Period the entire credit balance in a Participant's Stock
Purchase Account exceeds the product of (a) 85% of the Fair Market
Value of the Common Stock on the first business day of that Purchase
Period and (b) 2,000, then payroll deductions for such Participant
shall automatically cease, and shall resume on the first pay period
of the next Purchase Period.
Section 3.02 Credit to Account. Payroll deductions will be credited
to the Participant's Stock Purchase Account on each payday.
Section 3.03 Interest. No interest will be paid on payroll
deductions or on any other amount credited to, or on deposit in, a
Participant's Stock Purchase Account.
Section 3.04 Nature of Account. The Stock Purchase Account is
established solely for accounting purposes, and all amounts credited
to the Stock Purchase Account will remain part of the general assets
of the Company or the Participating Affiliate (as the case may be).
Section 3.05 No Additional Contributions. A Participant may not
make any payment into the Stock Purchase Account other than the
payroll deductions made pursuant to the Plan.
ARTICLE IV. RIGHT TO PURCHASE SHARES
Section 4.01 Number of Shares. Each Participant will have the right
to purchase on the last business day of the Purchase Period all, but
not less than all, of the number of whole and fractional shares,
computed to four decimal places, of Common Stock that can be purchased
at the price specified in Section 4.02 of the Plan with the entire
credit balance in the Participant's Stock Purchase Account, subject to
the limitations that (a) no more than 2000 shares of Common Stock may
be purchased under the Plan by any one Participant for a given Purchase
Period, and (b) in accordance with Section 423(b)(8) of the Code, no
more than $25,000 in Fair Market Value (determined at the beginning of
each Purchase Period) of Common Stock and other stock may be purchased
under the Plan and all other employee stock purchase plans (if any) of
the Company and the Affiliates by any one Participant for any calendar
year. If the purchases for all Participants for any Purchase Period
would otherwise cause the aggregate number of shares of Common Stock
to be sold under the Plan to exceed the number specified in Section
10.04 of the Plan, each Participant shall be allocated a pro rata
portion of the Common Stock to be sold for such Purchase Period.
Section 4.02 Purchase Price. The purchase price for any Purchase
Period shall be that price as announced by the Committee prior to the
first business day of that Purchase Period, which price may, in the
discretion of the Committee, be a price which is not fixed or
determinable as of the first business day of that Purchase Period;
provided, however, that in no event shall the purchase price for
any Purchase Period be less than the lesser of (a) 85% of the Fair
Market Value of the Common Stock on the first business day of that
Purchase Period or (b) 85% of the Fair Market Value of the Common
Stock on the last business day of that Purchase Period, in each case
rounded up to the next higher full cent.
ARTICLE V. EXERCISE OF RIGHT
Section 5.01 Purchase of Stock. On the last business day of a
Purchase Period, the entire credit balance in each Participant's
Stock Purchase Account will be used to purchase the number of whole
shares and fractional shares, computed to four decimal places, of
Common Stock purchasable with such amount (subject to the limitations
of Section 4.01 of the Plan), unless the Participant has filed with
the Company, in advance of that date and subject to such terms and
conditions as the Committee in its sole discretion may impose, a form
provided by the Company which requests the distribution
of the entire credit balance in cash.
Section 5.02 Notice of Acceleration Date. The Company shall use its
best efforts to notify each Participant in writing at least ten days
prior to any Acceleration Date that the then current Purchase Period
will end on such Acceleration Date.
ARTICLE VI. WITHDRAWAL FROM PLAN; SALE OF STOCK
Section 6.01 Voluntary Withdrawal. A Participant may, in accordance
with such terms and conditions as the Committee in its sole discretion
may impose, withdraw from the Plan and cease making payroll deductions
by filing with the Company a form provided for this purpose. In such
event, the entire credit balance in the Participant's Stock Purchase
Account will be paid to the Participant in cash within 30 days. A
Participant who withdraws from the Plan will not be eligible to reenter
the Plan until the beginning of the next Purchase Period following the
date of such withdrawal.
Section 6.02 Death. Subject to such terms and conditions as the
Committee in its sole discretion may impose, upon the death of a
Participant, no further amounts shall be credited to the Participant's
Stock Purchase Account. Thereafter, on the last business day of the
Purchase Period during which such Participant's death occurred and in
accordance with Section 5.01 of the Plan, the entire credit balance in
such Participant's Stock Purchase Account will be used to purchase
Common Stock, unless such Participant's estate has filed with the
Company, in advance of that day and subject to such terms and conditions
as the Committee in its sole discretion may impose, a form provided by
the Company which elects to have the entire credit balance in such
Participant's Stock Account distributed in cash within 30 days after
the end of that Purchase Period or at such earlier time as the Committee
in its sole discretion may decide. Each Participant, however, may
designate one or more beneficiaries who, upon death, are to receive the
Common Stock or the amount that otherwise would have been distributed
or paid to the Participant's estate and may change or revoke any such
designation from time to time. No such designation, change or
revocation will be effective unless made by the Participant in writing
and filed with the Company during the Participant's lifetime. Unless
the Participant has otherwise specified the beneficiary designation,
the beneficiary or beneficiaries so designated will become fixed as of
the date of the death of the Participant so that, if a beneficiary
survives the Participant but dies before the receipt of the payment
due such beneficiary, the payment will be made to such beneficiary's
estate.
Section 6.03 Termination of Employment. Subject to such terms
and conditions as the Committee in its sole discretion may impose,
upon a Participant's normal or early retirement with the consent of
the Company under any pension or retirement plan of the Company or
Participating Affiliate, no further amounts shall be credited to the
Participant's Stock Purchase Account. Thereafter, on the last business
day of the Purchase Period during which such Participant's approved
retirement occurred and in accordance with Section 5.01 of the Plan,
the entire credit balance in such Participant's Stock Purchase Account
will be used to purchase Common Stock, unless such Participant has
filed with the Company, in advance of that day and subject to such terms
and conditions as the Committee in its sole discretion may impose, a
form provided by the Company which elects to receive the entire credit
balance in such Participant's Stock Purchase Account in cash within
30 days after the end of that Purchase Period, provided that such
Participant shall have no right to purchase Common Stock in the event
that the last day of such a Purchase Period occurs more than three
months following the termination of such Participant's employment with
the Company or Participating Affiliate by reason of such an approved
retirement. In the event of any other termination of employment (other
than death) with the Company or a Participating Affiliate, participation
in the Plan will cease on the date the Participant ceases to be a Regular
Employee for any reason. In such event, the entire credit balance in
such Participant's Stock Purchase Account will be paid to the Participant
in cash within 30 days. For purposes of this Section 6.03, a transfer
of employment to any Participating Affiliate or to the Company, or a leave
of absence which has been approved by the Committee, will not be deemed
a termination of employment as a Regular Employee.
ARTICLE VII. NONTRANSFERABILITY
Section 7.01 Nontransferable Right to Purchase. The right to purchase
Common Stock hereunder may not be assigned, transferred, pledged or
hypothecated (whether by operation of law or otherwise), except as
provided in Section 6.02 of the Plan, and will not be subject to
execution, attachment or similar process. Any attempted assignment,
transfer, pledge, hypothecation or other disposition or levy of
attachment or similar process upon the right to purchase will be null
and void and without effect.
Section 7.02 Nontransferable Account. Except as provided in Section
6.02 of the Plan, the amounts credited to a Stock Purchase Account may
not be assigned, transferred, pledged or hypothecated in any way, and
any attempted assignment, transfer, pledge, hypothecation or other
disposition of such amounts will be null and void and without effect.
Section 7.03 Nontransferable Shares. Except as the Committee shall
otherwise permit, prior to the second anniversary of the beginning of
any Purchase Period, the Common Stock purchased at the end of such
Purchase Period by a Participant pursuant to Section 5.01 of the Plan
together with any additional Common Stock acquired pursuant to Section
8.04 of the Plan upon the reinvestment of dividends may not be assigned,
transferred, pledged, hypothecated or otherwise disposed of in any way
other than by will or by the laws of descent and distribution, and
any other attempted assignment, transfer, pledge, hypothecation or
other disposition of such share or shares will be null and void and
without effect.
ARTICLE VIII. COMMON STOCK ISSUANCE AND DIVIDEND REINVESTMENT
Section 8.01 Issuance of Purchased Shares. Promptly after the last
day of each Purchase Period and subject to such terms and conditions
as the Committee in its sole discretion may impose, the Company will
cause the Common Stock then purchased pursuant to Section 5.01 of the
Plan to be issued for the benefit of the Participant and held in the
Plan pursuant to Section 8.03 of the Plan.
Section 8.02 Completion of Issuance. A Participant shall have no
interest in the Common Stock purchased pursuant to Section 5.01 of
the Plan until such Common Stock is issued for the benefit of the
Participant pursuant to Section 8.03 of the Plan.
Section 8.03 Form of Ownership. The Common Stock issued under
Section 8.01 of the Plan will be held in the Plan in the name of the
Participant or jointly in the name of the Participant and another
person, as the Participant may direct on a form provided by the Company,
until such time as certificates for such shares of Common Stock are
delivered to or for the benefit of the Participant pursuant to Section
8.05 of the Plan.
Section 8.04 Automatic Dividend Reinvestment. Prior to the delivery
of certificates to or for the benefit of the Participant under Section
8.05 of the Plan, any and all cash dividends paid on full and fractional
shares of Common Stock issued under either Section 8.01 of the Plan or
this Section 8.04 shall be reinvested to acquire either new issue Common
Stock or shares of Common Stock purchased on the open market, as
determined by the Committee in its sole discretion. Purchases of Common
Stock under this Section 8.04 will be (a) with respect to shares newly
issued by the Company, invested on the dividend payment date, or, if
that date is not a trading day, the immediately preceding trading day,
or (b) with respect to shares purchased on the open market, normally
purchased on the open market within ten business days of the dividend
payment date, depending upon market conditions. The price per share
of the Common Stock issued under this Section 8.04 shall be (x) with
respect to shares newly issued by the Company, the Fair Market Value
of the Common Stock on the applicable investment date, or (y) with
respect to shares purchased on the open market, the weighted average
price per share at which the Common Stock is actually purchased on the
open market for the relevant period on behalf of all participants in
the Plan. All shares of Common Stock acquired under this Section
8.04 will be held in the Plan in the same name as the Common Stock
upon which the cash dividends were paid.
Section 8.05 Delivery. At any time following the conclusion of the
nontransferability period set forth in Section 7.03 of the Plan and
subject to such terms and conditions as the Committee in its sole
discretion may impose, by filing with the Company a form provided by
the Company for such purpose, the Participant may elect to have the
Company cause to be delivered to or for the benefit of the Participant
a certificate for the number of whole shares and cash for the number
of fractional shares representing the Common Stock purchased pursuant
to Section 5.01 of the Plan together with any additional Common Stock
acquired pursuant to Section 8.04 of the Plan upon the reinvestment
of dividends. The election notice will be processed as soon as
practicable after receipt. A certificate for whole shares normally
will be mailed to the Participant within five business days after
receipt of the election notice; provided, however, that if the notice
is received between a dividend record date and a dividend payment date,
a certificate will generally not be sent out until the declared
dividends have been reinvested pursuant to Section 8.04 of the Plan.
Any fractional shares normally will be sold on the first trading day
of each month and a check for the fractional shares sent to the
Participant promptly thereafter.
ARTICLE IX. EFFECTIVE DATE, AMENDMENT AND TERMINATION OF PLAN
Section 9.01 Effective Date. The Plan was approved by the Board of
Directors on December 14, 1998, subject to approval by the shareholders
of the Company within twelve (12) months thereafter.
Section 9.02 Plan Commencement. The initial Purchase Period under
the Plan will commence May 1, 1999. Thereafter, each succeeding
Purchase Period will commence and terminate in accordance with Section
1.03(l) of the Plan.
Section 9.03 Powers of Board. The Board of Directors may amend or
discontinue the Plan at any time. No amendment or discontinuation of
the Plan, however, shall be made without shareholder approval that
requires shareholder approval under any rules or regulations of the
NASDAQ National Market System or any securities exchange that are
applicable to the Company.
Section 9.04 Automatic Termination. The Plan shall automatically
terminate when all of the shares of Common Stock provided for in
Section 10.04 of the Plan have been sold, provided that such
termination shall in no way affect the terms of the Plan pertaining
to any Common Stock then held under the Plan.
ARTICLE X. ADMINISTRATION
Section 10.01 The Committee. The Plan shall be administered by a
committee (the "Committee") established by the Board of Directors.
The members of the Committee need not be directors of the Company
and shall be appointed by and serve at the pleasure of the Board of
Directors.
Section 10.02 Powers of Committee. Subject to the provisions of
the Plan, the Committee shall have full authority to administer the
Plan, including authority to interpret and construe any provision of
the Plan, to establish deadlines by which the various administrative
forms must be received in order to be effective, and to adopt such
other rules and regulations for administering the Plan as it may deem
appropriate. The Committee shall have full and complete authority to
determine whether all or any part of the Common Stock acquired pursuant
to the Plan shall be subject to restrictions on the transferability
thereof or any other restrictions affecting in any manner a
Participant's rights with respect thereto but any such restrictions
shall be contained in the form by which a Participant elects to
participate in the Plan pursuant to Section 2.02 of the Plan. Decisions
of the Committee will be final and binding on all parties who have an
interest in the Plan.
Section 10.03 Power and Authority of the Board of Directors.
Notwithstanding anything to the contrary contained herein, the Board
of Directors may, at any time and from time to time, without any further
action of the Committee, exercise the powers and duties of the Committee
under the Plan.
Section 10.04 Stock to be Sold. The Common Stock to be issued and
sold under the Plan may be authorized but unissued shares or shares
acquired in the open market or otherwise. Except as provided in
Section 11.01 of the Plan, the aggregate number of shares of
Common Stock to be sold under the Plan will not exceed 200,000 shares.
Section 10.05 Notices. Notices to the Committee should be addressed
as follows:
Otter Tail Power Company
215 South Cascade Street, Box 496
Fergus Falls, MN 56538-0496
Attn: Corporate Secretary
ARTICLE XI. ADJUSTMENT FOR CHANGES IN STOCK OR COMPANY
Section 11.01 Stock Dividend or Reclassification. If the
outstanding shares of Common Stock are increased, decreased,
changed into or exchanged for a different number or kind of
securities of the Company, or shares of a different par value
or without par value, through reorganization, recapitalization,
reclassification, stock dividend, stock split, amendment to the
Company's Articles of Incorporation, reverse stock split or
otherwise, an appropriate adjustment shall be made in the maximum
numbers and kind of securities to be purchased under the Plan with
a corresponding adjustment in the purchase price to be paid therefor.
Section 11.02 Merger or Consolidation. If the Company is merged
into or consolidated with one or more corporations during the term
of the Plan, appropriate adjustments will be made to give effect
thereto on an equitable basis in terms of issuance of shares of the
corporation surviving the merger or of the consolidated corporation,
as the case may be.
ARTICLE XII. APPLICABLE LAW
Rights to purchase Common Stock granted under the Plan shall be
construed and shall take effect in accordance with the laws of the
State of Minnesota.
Exhibit 10-N-7
OTTER TAIL POWER COMPANY
1999 STOCK INCENTIVE PLAN
Section 1. Purpose.
The purpose of the Plan is to promote the interests of the Company
and its shareholders by aiding the Company in attracting and retaining
employees, officers, consultants, independent contractors and non-employee
directors capable of assuring the future success of the Company, to offer
such persons incentives to put forth maximum efforts for the success of
the Company's business and to afford such persons an opportunity to
acquire a proprietary interest in the Company.
Section 2. Definitions.
As used in the Plan, the following terms shall have the meanings set
forth below:
(a) "Affiliate" shall mean (i) any entity that, directly or
indirectly through one or more intermediaries, is controlled by the
Company and (ii) any entity in which the Company has a significant
equity interest, in each case as determined by the Committee.
(b) "Award" shall mean any Option, Stock Appreciation Right,
Restricted Stock, Restricted Stock Unit, Performance Award, Other
Stock Grant or Other Stock-Based Award granted under the Plan.
(c) "Award Agreement" shall mean any written agreement, contract or
other instrument or document evidencing any Award granted under the
Plan.
(d) "Board" shall mean the Board of Directors of the Company.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time, and any regulations promulgated thereunder.
(f) "Committee" shall mean a committee of Directors designated by
the Board to administer the Plan. The Committee shall be comprised of
not less than such number of Directors as shall be required to permit
Awards granted under the Plan to qualify under Rule 16b-3, and each
member of the Committee shall be a "Non-Employee Director" within the
meaning of Rule 16b-3 and an "outside director" within the meaning of
Section 162(m) of the Code. The Company expects to have the Plan
administered in accordance with the requirements for the award of
"qualified performance-based compensation" within the meaning of
Section 162(m) of the Code.
(g) "Company" shall mean Otter Tail Power Company, a Minnesota
corporation, and any successor corporation.
(h) "Director" shall mean a member of the Board.
(i) "Eligible Person" shall mean any employee, officer, consultant,
independent contractor or Director providing services to the Company
or any Affiliate whom the Committee determines to be an Eligible
Person.
(j) "Fair Market Value" shall mean, with respect to any property
(including, without limitation, any Shares or other securities), the
fair market value of such property determined by such methods or
procedures as shall be established from time to time by the Committee.
Notwithstanding the foregoing, unless otherwise determined by the
Committee, the Fair Market Value of Shares as of a given date shall be,
if the Shares are then quoted on the NASDAQ National Market System,
the average of the high and low sales price as reported on the NASDAQ
National Market System on such date or, if the NASDAQ National Market
System is not open for trading on such date, on the most recent
preceding date when it is open for trading.
(k) "Incentive Stock Option" shall mean an option granted under
Section 6(a) of the Plan that is intended to meet the requirements
of Section 422 of the Code or any successor provision.
(l) "Non-Qualified Stock Option" shall mean an option granted under
Section 6(a) of the Plan that is not intended to be an Incentive
Stock Option.
(m) "Option" shall mean an Incentive Stock Option or a Non-Qualified
Stock Option, and shall include Reload Options.
(n) "Other Stock Grant" shall mean any right granted under
Section 6(e) of the Plan.
(o) "Other Stock-Based Award" shall mean any right granted under
Section 6(f) of the Plan.
(p) "Participant" shall mean an Eligible Person designated to be
granted an Award under the Plan.
(q) "Performance Award" shall mean any right granted under
Section 6(d) of the Plan.
(r) "Person" shall mean any individual, corporation, partnership,
association or trust.
(s) "Plan" shall mean the Otter Tail Power Company 1999 Stock
Incentive Plan, as amended from time to time, the provisions of which
are set forth herein.
(t) "Reload Option" shall mean any Option granted under
Section 6(a)(iv) of the Plan.
(u) "Restricted Stock" shall mean any Shares granted under
Section 6(c) of the Plan.
(v) "Restricted Stock Unit" shall mean any unit granted under
Section 6(c) of the Plan evidencing the right to receive a Share
(or a cash payment equal to the Fair Market Value of a Share) at
some future date.
(w) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the
Securities and Exchange Commission under the Securities Exchange
Act of 1934, as amended, or any successor rule or regulation.
(x) "Shares" shall mean Common Shares, $5 par value per share,
of the Company or such other securities or property as may
become subject to Awards pursuant to an adjustment made under
Section 4(c) of the Plan.
(y) "Stock Appreciation Right" shall mean any right granted
under Section 6(b) of the Plan.
Section 3. Administration.
(a) Power and Authority of the Committee. The Plan shall be
administered by the Committee. Subject to the express provisions
of the Plan and to applicable law, the Committee shall have full
power and authority to: (i) designate Participants; (ii) determine
the type or types of Awards to be granted to each Participant under
the Plan; (iii) determine the number of Shares to be covered by (or
with respect to which payments, rights or other matters are to be
calculated in connection with) each Award; (iv) determine the terms
and conditions of any Award or Award Agreement; (v) amend the terms
and conditions of any Award or Award Agreement and accelerate the
exercisability of Options or the lapse of restrictions relating to
Restricted Stock, Restricted Stock Units or other Awards; (vi)
determine whether, to what extent and under what circumstances Awards
may be exercised in cash, Shares, other securities, other Awards or
other property, or canceled, forfeited or suspended; (vii) determine
whether, to what extent and under what circumstances cash, Shares,
promissory notes, other securities, other Awards, other property and
other amounts payable with respect to an Award under the Plan shall
be deferred either automatically or at the election of the holder
thereof or the Committee; (viii) interpret and administer the Plan
and any instrument or agreement, including an Award Agreement, relating
to the Plan; (ix) establish, amend, suspend or waive such rules and
regulations and appoint such agents as it shall deem appropriate for
the proper administration of the Plan; and (x) make any other
determination and take any other action that the Committee deems
necessary or desirable for the administration of the Plan. Unless
otherwise expressly provided in the Plan, all designations,
determinations, interpretations and other decisions under or with
respect to the Plan or any Award shall be within the sole discretion
of the Committee, may be made at any time and shall be final,
conclusive and binding upon any Participant, any holder or
beneficiary of any Award and any employee of the Company or
any Affiliate.
(b) Delegation. The Committee may delegate its powers and duties
under the Plan to one or more Directors or a committee of Directors,
subject to such terms, conditions and limitations as the Committee
may establish in its sole discretion.
(c) Power and Authority of the Board of Directors. Notwithstanding
anything to the contrary contained herein, the Board may, at any time
and from time to time, without any further action of the Committee,
exercise the powers and duties of the Committee under the Plan.
Section 4. Shares Available for Awards.
(a) Shares Available. Subject to adjustment as provided in
Section 4(c) of the Plan, the aggregate number of Shares that may be
issued under all Awards under the Plan shall be 1,300,000. Shares to
be issued under the Plan may be either authorized but unissued Shares
or Shares acquired in the open market or otherwise. Any Shares that
are used by a Participant as full or partial payment to the Company
of the purchase price relating to an Award, or in connection with the
satisfaction of tax obligations relating to an Award, shall again be
available for granting Awards (other than Incentive Stock Options)
under the Plan. In addition, if any Shares covered by an Award or
to which an Award relates are not purchased or are forfeited, or if
an Award otherwise terminates without delivery of any Shares, then
the number of Shares counted against the aggregate number of Shares
available under the Plan with respect to such Award, to the extent
of any such forfeiture or termination, shall again be available for
granting Awards under the Plan. Notwithstanding the foregoing, the
number of Shares available for granting Incentive Stock Options under
the Plan shall not exceed 1,300,000, subject to adjustment as provided
in the Plan and subject to the provisions of Section 422 or 424 of
the Code or any successor provision.
(b) Accounting for Awards. For purposes of this Section 4, if an
Award entitles the holder thereof to receive or purchase Shares, the
number of Shares covered by such Award or to which such Award relates
shall be counted on the date of grant of such Award against the
aggregate number of Shares available for granting Awards under the
Plan.
(c) Adjustments. In the event that the Committee shall determine
that any dividend or other distribution (whether in the form of cash,
Shares, other securities or other property), recapitalization, stock
split, reverse stock split, reorganization, merger, consolidation,
split-up, spin-off, combination, repurchase or exchange of Shares or
other securities of the Company, issuance of warrants or other rights
to purchase Shares or other securities of the Company or other similar
corporate transaction or event affects the Shares such that an
adjustment is determined by the Committee to be appropriate in order
to prevent dilution or enlargement of the benefits or potential benefits
intended to be made available under the Plan, then the Committee shall,
in such manner as it may deem equitable, adjust any or all of (i) the
number and type of Shares (or other securities or other property) that
thereafter may be made the subject of Awards, (ii) the number and type
of Shares (or other securities or other property) subject to outstanding
Awards and (iii) the purchase or exercise price with respect to any
Award; provided, however, that the number of Shares covered by any Award
or to which such Award relates shall always be a whole number.
(d) Award Limitations Under the Plan. No Eligible Person may be
granted any Award or Awards under the Plan, the value of which Award or
Awards is based solely on an increase in the value of the Shares after
the date of grant of such Award or Awards, for more than 50,000 Shares
(subject to adjustment as provided for in Section 4(c) of the Plan),
in the aggregate in any calendar year. The foregoing annual limitation
specifically includes the grant of any Award or Awards representing
"qualified performance-based compensation" within the meaning of Section
162(m) of the Code.
Section 5. Eligibility.
Any Eligible Person shall be eligible to be designated a Participant.
In determining which Eligible Persons shall receive an Award and the
terms of any Award, the Committee may take into account the nature of
the services rendered by the respective Eligible Persons, their present
and potential contributions to the success of the Company or such other
factors as the Committee, in its discretion, shall deem relevant.
Notwithstanding the foregoing, an Incentive Stock Option may only be
granted to full or part-time employees (which term as used herein
includes, without limitation, officers and Directors who are also
employees), and an Incentive Stock Option shall not be granted to an
employee of an Affiliate unless such Affiliate is also a "subsidiary
corporation" of the Company within the meaning of Section 424(f) of
the Code or any successor provision.
Section 6. Awards.
(a) Options. The Committee is hereby authorized to grant Options
to Participants with the following terms and conditions and with such
additional terms and conditions not inconsistent with the provisions
of the Plan as the Committee shall determine:
(i) Exercise Price. The purchase price per Share purchasable
under an Option shall be determined by the Committee; provided, however,
that such purchase price shall not be less than 100% of the Fair Market
Value of a Share on the date of grant of such Option.
(ii) Option Term. The term of each Option shall be fixed by the
Committee.
(iii) Time and Method of Exercise. The Committee shall determine
the time or times at which an Option may be exercised in whole or in part
and the method or methods by which, and the form or forms (including,
without limitation, cash, Shares, promissory notes, other securities,
other Awards or other property, or any combination thereof, having a
Fair Market Value on the exercise date equal to the relevant exercise
price) in which, payment of the exercise price with respect thereto
may be made or deemed to have been made.
(iv) Reload Options. The Committee may grant Reload Options,
separately or together with another Option, pursuant to which, subject
to the terms and conditions established by the Committee, the Participant
would be granted a new Option when the payment of the exercise price of
a previously granted option is made by the delivery of Shares owned by
the Participant pursuant to Section 6(a)(iii) of the Plan or the
relevant provisions of another plan of the Company, and/or when Shares
are tendered or withheld as payment of the amount to be withheld under
applicable income tax laws in connection with the exercise of an Option,
which new Option would be an Option to purchase the number of Shares not
exceeding the sum of (A) the number of Shares so provided as
consideration upon the exercise of the previously granted option to
which such Reload Option relates and (B) the number of Shares, if any,
tendered or withheld as payment of the amount to be withheld under
applicable tax laws in connection with the exercise of the option to
which such Reload Option relates pursuant to the relevant provisions
of the plan or agreement relating to such option. Reload Options
may be granted with respect to Options previously granted under the Plan
or any other stock option plan of the Company or may be granted in
connection with any Option granted under the Plan or any other stock
option plan of the Company at the time of such grant. Such Reload
Options shall have a per share exercise price equal to the Fair Market
Value of one Share as of the date of grant of the new Option. Any
Reload Option shall be subject to availability of sufficient Shares
for grant under the Plan.
(b) Stock Appreciation Rights. The Committee is hereby authorized to
grant Stock Appreciation Rights to Participants subject to the terms of
the Plan and any applicable Award Agreement. A Stock Appreciation Right
granted under the Plan shall confer on the holder thereof a right to
receive upon exercise thereof the excess of (i) the Fair Market Value
of one Share on the date of exercise (or, if the Committee shall
determine, at any time during a specified period before or after the
date of exercise) over (ii) the grant price of the Stock Appreciation
Right as specified by the Committee, which price shall not be less than
100% of the Fair Market Value of one Share on the date of grant of the
Stock Appreciation Right. Subject to the terms of the Plan and any
applicable Award Agreement, the grant price, term, methods of exercise,
dates of exercise, methods of settlement and any other terms and
conditions of any Stock Appreciation Right shall be as determined by
the Committee. The Committee may impose such conditions or
restrictions on the exercise of any Stock Appreciation Right as it may
deem appropriate.
(c) Restricted Stock and Restricted Stock Units. The Committee is
hereby authorized to grant Restricted Stock and Restricted Stock Units
to Participants with the following terms and conditions and with such
additional terms and conditions not inconsistent with the provisions of
the Plan as the Committee shall determine:
(i) Restrictions. Shares of Restricted Stock and Restricted
Stock Units shall be subject to such restrictions as the Committee may
impose (including, without limitation, a waiver by the Participant of
the right to vote or to receive any dividend or other right or property
with respect thereto), which restrictions may lapse separately or in
combination at such time or times, in such installments or otherwise
as the Committee may deem appropriate.
(ii) Stock Certificates. Any Restricted Stock granted under the
Plan shall be registered in the name of the Participant and shall bear
an appropriate legend referring to the terms, conditions and restrictions
applicable to such Restricted Stock. In the case of Restricted Stock
Units, no Shares shall be issued at the time such Awards are granted.
(iii) Forfeiture. Except as otherwise determined by the
Committee, upon termination of employment (as determined under criteria
established by the Committee) during the applicable restriction period,
all Shares of Restricted Stock and all Restricted Stock Units at such
time subject to restriction shall be forfeited and reacquired by the
Company; provided, however, that the Committee may, when it finds that a
waiver would be in the best interest of the Company, waive in whole or
in part any or all remaining restrictions with respect to Shares of
Restricted Stock or Restricted Stock Units. Upon the lapse or waiver
of restrictions and the restricted period relating to Restricted Stock
Units evidencing the right to receive Shares, such Shares shall be
issued and delivered to the holders of the Restricted Stock Units.
(d) Performance Awards. The Committee is hereby authorized to grant
Performance Awards to Participants subject to the terms of the Plan and
any applicable Award Agreement. A Performance Award granted under the
Plan (i) may be denominated or payable in cash, Shares (including,
without limitation, Restricted Stock and Restricted Stock Units), other
securities, other Awards or other property and (ii) shall confer on the
holder thereof the right to receive payments, in whole or in part, upon
the achievement of such performance goals during such performance
periods as the Committee shall establish. Subject to the terms of the
Plan and any applicable Award Agreement, the performance goals to be
achieved during any performance period, the length of any performance
period, the amount of any Performance Award granted, the amount of any
payment or transfer to be made pursuant to any Performance Award and
any other terms and conditions of any Performance Award shall be
determined by the Committee.
(e) Other Stock Grants. The Committee is hereby authorized, subject
to the terms of the Plan and any applicable Award Agreement, to grant
to Participants Shares without restrictions thereon as are deemed by
the Committee to be consistent with the purpose of the Plan.
(f) Other Stock-Based Awards. The Committee is hereby authorized to
grant to Participants subject to the terms of the Plan and any applicable
Award Agreement, such other Awards that are denominated or payable in,
valued in whole or in part by reference to, or otherwise based on or
related to, Shares (including, without limitation, securities convertible
into Shares), as are deemed by the Committee to be consistent with the
purpose of the Plan. Shares or other securities delivered pursuant to a
purchase right granted under this Section 6(f) shall be purchased for such
consideration, which may be paid by such method or methods and in
form or forms (including, without limitation, cash, Shares, promissory
notes, other securities, other Awards or other property or any
combination thereof), as the Committee shall determine, the value of
which consideration, as established by the Committee, shall not be less
than 100% of the Fair Market Value of such Shares or other securities as
of the date such purchase right is granted.
(g) General.
(i) No Cash Consideration for Awards. Awards shall be granted
for no cash consideration or for such minimal cash consideration as may
be required by applicable law.
(ii) Awards May Be Granted Separately or Together. Awards may,
in the discretion of the Committee, be granted either alone or in
addition to, in tandem with or in substitution for any other Award or
any award granted under any plan of the Company or any Affiliate other
than the Plan. Awards granted in addition to or in tandem with other
Awards or in addition to or in tandem with awards granted under any such
other plan of the Company or any Affiliate may be granted either at the
same time as or at a different time from the grant of such other Awards
or awards.
(iii) Forms of Payment under Awards. Subject to the terms of the
Plan and of any applicable Award Agreement, payments or transfers to be
made by the Company or an Affiliate upon the grant, exercise or payment
of an Award may be made in such form or forms as the Committee shall
determine (including, without limitation, cash, Shares, promissory notes,
other securities, other Awards or other property or any combination
thereof), and may be made in a single payment or transfer, in
installments or on a deferred basis, in each case in accordance with
rules and procedures established by the Committee. Such rules and
procedures may include, without limitation, provisions for the payment
or crediting of reasonable interest on installment or deferred payments
or the grant or crediting of dividend equivalents with respect to
installment or deferred payments.
(iv) Limits on Transfer of Awards. No Award (other than Other
Stock Grants) and no right under any such Award shall be transferable
by a Participant otherwise than by will or by the laws of descent and
distribution; provided, however, that, if so determined by the
Committee, a Participant may, in the manner established by the Committee,
transfer Options (other than Incentive Stock Options) or designate a
beneficiary or beneficiaries to exercise the rights of the Participant
and receive any property distributable with respect to any Award upon
the death of the Participant. Each Award or right under any Award shall
be exercisable during the Participant's lifetime only by the Participant
or, if permissible under applicable law, by the Participant's guardian
or legal representative. No Award or right under any such Award may be
pledged, alienated, attached or otherwise encumbered, and any purported
pledge, alienation, attachment or encumbrance thereof shall be void and
unenforceable against the Company or any Affiliate.
(v) Term of Awards. The term of each Award shall be for such
period as may be determined by the Committee.
(vi) Restrictions; Securities Exchange Listing. All Shares or
other securities delivered under the Plan pursuant to any Award or the
exercise thereof shall be subject to such restrictions as the Committee
may deem advisable under the Plan, applicable federal or state securities
laws and regulatory requirements, and the Committee may cause appropriate
entries to be made or legends to be affixed to reflect such restrictions.
If any securities of the Company are traded on a securities exchange, the
Company shall not be required to deliver any Shares or other securities
covered by an Award unless and until such Shares or other securities have
been admitted for trading on such securities exchange.
Section 7. Amendment and Termination; Adjustments.
(a) Amendments to the Plan. The Board may amend, alter, suspend,
discontinue or terminate the Plan at any time; provided, however, that,
notwithstanding any other provision of the Plan or any Award Agreement,
without the approval of the shareholders of the Company, no such
amendment, alteration, suspension, discontinuation or termination shall
be made that, absent such approval:
(i) would violate the rules or regulations of the NASDAQ
National Market System or any securities exchange that are
to the Company; or
(ii) would cause the Company to be unable, under the Code, to
grant Incentive Stock Options under the Plan.
(b) Amendments to Awards. The Committee may waive any conditions of
or rights of the Company under any outstanding Award, prospectively or
retroactively. Except as otherwise provided herein or in the Award
Agreement, the Committee may not amend, alter, suspend, discontinue or
terminate any outstanding Award, prospectively or retroactively, if such
action would adversely affect the rights of the holder of such Award,
without the consent of the Participant or holder or beneficiary thereof.
(c) Correction of Defects, Omissions and Inconsistencies. The
Committee may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Award in the manner and to the extent
it shall deem desirable to carry the Plan into effect.
Section 8. Income Tax Withholding; Tax Bonuses.
(a) Withholding. In order to comply with all applicable federal or
state income tax laws or regulations, the Company may take such action
as it deems appropriate to ensure that all applicable federal or state
payroll, withholding, income or other taxes, which are the sole and
absolute responsibility of a Participant, are withheld or collected
from such Participant. In order to assist a Participant in paying all
or a portion of the federal and state taxes to be withheld or collected
upon exercise or receipt of (or the lapse of restrictions relating to)
an Award, the Committee, in its discretion and subject to such additional
terms and conditions as it may adopt, may permit the Participant to satisfy
such tax obligation by (i) electing to have the Company withhold a portion
of the Shares otherwise to be delivered upon exercise or receipt of (or
the lapse of restrictions relating to) such Award with a Fair Market Value
equal to the amount of such taxes or (ii) delivering to the Company Shares
other than Shares issuable upon exercise or receipt of (or the lapse of
restrictions relating to) such Award with a Fair Market Value equal to
the amount of such taxes. The election, if any, must be made on or
before the date that the amount of tax to be withheld is determined.
(b) Tax Bonuses. The Committee, in its discretion, shall have the
authority, at the time of grant of any Award under this Plan or at any
time thereafter, to approve cash bonuses to designated Participants to
be paid upon their exercise or receipt of (or the lapse of restrictions
relating to) Awards in order to provide funds to pay all or a portion of
federal and state taxes due as a result of such exercise or receipt (or
the lapse of such restrictions). The Committee shall have full
authority in its discretion to determine the amount of any such tax bonus.
Section 9. General Provisions.
(a) No Rights to Awards. No Eligible Person, Participant or other
Person shall have any claim to be granted any Award under the Plan, and
there is no obligation for uniformity of treatment of Eligible Persons,
Participants or holders or beneficiaries of Awards under the Plan. The
terms and conditions of Awards need not be the same with respect to any
Participant or with respect to different Participants.
(b) Award Agreements. No Participant will have rights under an Award
granted to such Participant unless and until an Award Agreement shall have
been duly executed on behalf of the Company and, if requested by the
Company, signed by the Participant.
(c) No Limit on Other Compensation Arrangements. Nothing contained
in the Plan shall prevent the Company or any Affiliate from adopting or
continuing in effect other or additional compensation arrangements, and
such arrangements may be either generally applicable or applicable only
in specific cases.
(d) No Right to Employment. The grant of an Award shall not be
construed as giving a Participant the right to be retained in the employ
of the Company or any Affiliate, nor will it affect in any way the right
of the Company or an Affiliate to terminate such employment at any time,
with or without cause. In addition, the Company or an Affiliate may at
any time dismiss a Participant from employment free from any liability
or any claim under the Plan or any Award, unless otherwise expressly
provided in the Plan or in any Award Agreement.
(e) Governing Law. The validity, construction and effect of the Plan
or any Award, and any rules and regulations relating to the Plan or any
Award, shall be determined in accordance with the laws of the State of
Minnesota.
(f) Severability. If any provision of the Plan or any Award is or
becomes or is deemed to be invalid, illegal or unenforceable in any
jurisdiction or would disqualify the Plan or any Award under any law
deemed applicable by the Committee, such provision shall be construed
or deemed amended to conform to applicable laws, or if it cannot be so
construed or deemed amended without, in the determination of the
Committee, materially altering the purpose or intent of the Plan or the
Award, such provision shall be stricken as to such jurisdiction or Award,
and the remainder of the Plan or any such Award shall remain in full
force and effect.
(g) No Trust or Fund Created. Neither the Plan nor any Award shall
create or be construed to create a trust or separate fund of any kind
or a fiduciary relationship between the Company or any Affiliate and a
Participant or any other Person. To the extent that any Person acquires
a right to receive payments from the Company or any Affiliate pursuant
to an Award, such right shall be no greater than the right of any
unsecured general creditor of the Company or any Affiliate.
(h) No Fractional Shares. No fractional Shares shall be issued or
delivered pursuant to the Plan or any Award, and the Committee shall
determine whether cash shall be paid in lieu of any fractional Shares or
whether such fractional Shares or any rights thereto shall be canceled,
terminated or otherwise eliminated.
(i) Headings. Headings are given to the Sections and subsections
of the Plan solely as a convenience to facilitate reference. Such
headings shall not be deemed in any way material or relevant to the
construction or interpretation of the Plan or any provision thereof.
Section 10. Effective Date of the Plan.
The Plan was approved by the Board on December 14, 1998, subject to
approval by the shareholders of the Company within twelve (12) months
thereafter. Any Award granted under the Plan prior to shareholder
approval of the Plan shall be subject to shareholder approval of the
Plan.
Section 11. Term of the Plan.
No Award shall be granted under the Plan after December 13, 2008 or any
earlier date of discontinuation or termination established pursuant to
Section 7(a) of the Plan. However, unless otherwise expressly provided
in the Plan or in an applicable Award Agreement, any Award theretofore
granted may extend beyond such date.
<TABLE>
Exhibit 13-A
Selected consolidated financial data
- -----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1988
------ ------ ------ ------ ------ ------ ------
(thousands except per-share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Electric $227,477 $205,121 $199,345 $203,925 $198,812 $192,290 $178,221
Manufacturing 86,030 81,543 64,568 38,690 13,083 8,473 -
Health services 68,728 66,185 61,697 50,896 45,555 32,068 -
Other business operations 48,843 41,430 45,323 32,818 29,276 32,396 -
-------- -------- -------- -------- -------- -------- --------
Total operating revenues $431,078 $394,279 $370,933 $326,329 $286,726 $265,227 $178,221
Special charges $ 9,522 $ - $ - $ - $ - $ - $ -
Cumulative change in
accounting principle (1) $ 3,819 $ - $ - $ - $ - $ - $ -
Net income $ 34,520 $ 32,346 $ 30,624 $ 28,945 $ 28,475 $ 27,369 $ 25,317
Cash flow from operations $ 63,959 $ 69,398 $ 68,611 $ 58,077 $ 51,832 $ 53,255 $ 47,675
Total assets $655,612 $655,441 $669,704 $609,196 $578,972 $563,905 $476,363
Long-term debt $181,046 $189,973 $163,176 $168,261 $162,196 $166,563 $121,815
Redeemable preferred $ 18,000 $ 18,000 $ 18,000 $ 18,000 $ 18,000 $ 18,000 $ 15,925
Common shares outstanding
(2) (thousands) 11,880 11,731 11,536 11,180 11,180 11,180 11,968
Number of common
shareholders (3) 13,699 13,753 13,829 13,933 14,115 13,634 14,595
Basic and diluted earnings
per share (4) (5) $ 2.73 $ 2.58 $ 2.46 $ 2.38 $ 2.34 $ 2.23 $ 1.92
Dividends per common share $ 1.92 $ 1.86 $ 1.80 $ 1.76 $ 1.72 $ 1.68 $ 1.48
- -------------------------------------------------------------------------------------------------
Notes:
(1) In the first quarter of 1998 the Company changed its method of
electric revenue recognition in the states of Minnesota and South
Dakota from meter-reading dates to energy-delivery dates.
The amount presented is net of income tax of $2,545.
(2) Number of shares outstanding at year-end.
(3) Holders of record at year-end.
(4) Based on average number of shares outstanding.
(5) 1998 includes cumulative effect of change in accounting principle
of 32 cents per share
</TABLE>
Management's discussion and analysis of
financial condition and results of operations
Management's major financial objective is to increase shareholder
value by earning returns for shareholders that exceed returns
available from comparable risk investments. This objective can be
met by earning the returns allowed by regulators in electric
operations combined with successfully growing diversified operations.
Meeting this objective enables the Company to preserve and enhance
its financial capability by maintaining optimal capitalization ratios
and a strong interest coverage position, providing excellent returns
to the common shareholder in the form of capital appreciation and
dividends, and preserving strong credit ratings on outstanding
securities, which in the form of lower interest rates benefits both
the Company's customers and shareholders.
Liquidity:
Liquidity is the ability to generate adequate amounts of cash
to meet the Company's needs, both short-term and long-term.
Historically, the Company's liquidity has been a function of its
capital expenditures and debt service requirements, its net internal
funds generation, and its access to long-term securities markets and
credit facilities for external capital.
Over the years the Company has achieved a high degree of long-term
liquidity by maintaining desired capitalization ratios through timely
stock and debt issuances or repurchases, maintaining strong bond
ratings, implementing cost-containment programs, evaluating
operations and projects on a cost-benefit approach, investing in
projects that enhance shareholder value, and implementing sound tax
reduction strategies.
Cash provided by operating activities of $64 million, as shown on the
Consolidated Statement of Cash Flows for the year ended December 31,
1998, combined with cash provided by the issuance of $5.5 million in
common stock and funds on hand of $5.3 million at December 31, 1997,
allowed the Company to pay dividends, retire short- and long-term
debt, meet sinking fund payment requirements on its outstanding First
Mortgage Bonds, acquire an additional business, and finance its
consolidated capital expenditures in 1998.
In 1998 the Company issued 148,426 common shares under its Automatic
Dividend Reinvestment and Share Purchase Plan, generating proceeds of
$5.5 million. In 1999 the Company plans to purchase shares on the
open market to fulfill the requirements of the Plan.
The Company estimates that funds internally generated net of
forecasted dividend payments, combined with funds on hand, will be
sufficient to meet all sinking fund payments for First Mortgage Bonds
in the next five years and to provide for its estimated 1999 through
2003 consolidated capital expenditures. Additional short-term or
long-term financing will be required in the period 1999 through 2003
for the maturity of First Mortgage Bonds and other long-term debt and
in the event the Company decides to refund or retire early any of its
presently outstanding debt or cumulative preferred shares or for
other corporate purposes.
Capital requirements:
The Company's consolidated capital requirements include periodic
and timely replacement of technically obsolete or worn out equipment,
new equipment purchases, and plant upgrades to accommodate anticipated
growth. The electric segment has a construction and capital investment
program to provide facilities necessary to meet forecasted customer
demands and provide reliable service. The construction program is
subject to continuing review and is revised annually in light of changes
in demands for energy, environmental laws, regulatory changes, technology,
the costs of labor, materials and equipment, and the Company's financial
condition (including cash flow and earnings).
Consolidated capital expenditures for the years 1998, 1997, and 1996
were $29 million, $42 million, and $65 million, respectively. The
reduction in capital expenditures since 1996 reflects an initiative
started by the Company in 1997 to more closely evaluate capital
expenditures.
The estimated capital expenditures for 1999 are $33 million and the
total expenditures for the five-year period 1999 through 2003 are
expected to be approximately $175 million. The breakdown of 1998
actual and 1999 through 2003 estimated capital project expenditures
by segment is as follows:
1998 1999 1999-2003
------ ------ -----------
(in millions)
Electric utility $ 18 $ 20 $105
Manufacturing 5 7 19
Health services 3 4 42
Other business operations 3 2 9
---- ---- ----
Total $ 29 $ 33 $175
In addition to these capital requirements, funds totaling
approximately $49 million will be needed during the five-year period
1999 through 2003 to retire First Mortgage Bonds and other long-term
obligations, including subsidiary long-term obligations, at maturity
and through sinking fund payments.
Capital resources:
Financial flexibility is provided by unused lines of credit, financial
coverages in excess of the minimum levels required for issuance of
securities, strong credit ratings, the pledging of assets owned by
the Company, and alternative financing arrangements such as leasing.
As of December 31, 1998, the Company had $3.9 million in cash and
cash equivalents and $35.4 million in unused lines of credit
available. Bank lines of credit are a key source of operating
capital and can provide interim financing of working capital and
other capital requirements, if needed. The Company had $824,000 of
credit lines in use at December 31, 1998. Borrowing rates on the
Company's bank line of credit averaged 6.65 percent for 1998. The
notes and credit lines of the subsidiaries are secured by a pledge of
all of the common stock of the subsidiaries. (See note 11 to
consolidated financial statements for further information.)
The Company's coverage ratios improved in 1998 compared to 1997 as a
result of a decreased level of debt and lower interest rates. The
fixed charge coverage ratio after taxes was 4.0 for 1998 as compared
to 3.0 for 1997 and the long-term debt interest coverage ratio before
taxes was 4.3 for 1998, as compared to 4.0 for 1997. The Company
expects these coverages to remain stable during 1999.
The Company's credit ratings affect its access to the capital market.
The current credit ratings for the Company's First Mortgage Bonds at
December 31, 1998, which remain unchanged from 1997, are as follows:
Moody's Investors Service Aa3
Duff and Phelps AA
Standard and Poor's AA-
The Company's disclosure of these security ratings is not a
recommendation to buy, sell, or hold the Company's securities.
As of December 31, 1998, the Company had the capacity under its
Indenture of Mortgage to issue an additional $170 million principal
amount of First Mortgage Bonds. (See note 9 to consolidated
financial statements for further information.)
Results of operations:
Electric operations
- -------------------
(bar graph of information in following table)
Electric operating income
(millions)
-------------------------
1996 $45.3
1997 $45.0
1998 $42.2
(end of graph)
Otter Tail Power Company provides electrical service to over 125,000
customers in a service territory of over 50,000 square miles.
1998 1997 1996
------ ------ ------
(in thousands)
Operating revenues $227,477 $205,121 $199,345
Production fuel 34,234 31,362 27,913
Purchased power 40,609 24,420 28,378
Other operation and maintenance expenses 70,584 72,112 66,401
Special charges 7,022 -- --
Depreciation and amortization 22,128 21,442 19,880
Property taxes 10,684 10,819 11,494
-------- -------- --------
Operating income $ 42,216 $ 44,966 $ 45,279
The 10.9 percent increase in electric operating revenues in 1998, as
compared to 1997, is due to a $17.9 million increase in power pool
revenues, combined with increases of $2.7 million in other electric
revenue and $1.7 million in retail revenue. Power pool kilowatt-hour
(kwh) sales increased 96 percent and revenue per power pool kwh sold
increased 33 percent. An increase in energy available for sale
enabled the Company to respond to unusually high wholesale market
demands, resulting in the increase in power pool sales in 1998. The
evolution of a competitive wholesale electricity market is reflected
in market-based increases in revenue per power pool kwh sold and the
cost per kwh of purchased power. Other electric revenue increased as
a result of more electrical contract work done for other utilities
and an increase in payments from other utilities for the use of
shared transmission facilities. Retail revenue increased 0.9 percent
despite a 0.3 percent decline in retail kwh sales. Revenue per
retail kwh increased 1.2 percent in 1998, as compared to 1997, as a
result of increases in the Minnesota Conservation Improvement Program
(CIP) surcharge rate and an increase in cost-of-energy revenues.
Significantly milder weather during the first quarter of 1998 was the
main contributing factor to the decline in retail kwh sales as
heating degree days were down 18.7 percent for 1998 as compared to
1997. Heating degree days, which generally correlate to increases or
decreases in the use of electricity by residential customers, were
7,827 for 1998, 9,628 for 1997, and 10,349 for 1996.
The 2.9 percent increase in electric operating revenues in 1997, as
compared to 1996, reflects increases of 1.0 percent in revenue from
retail kwh sales, 56.5 percent in other electric revenue, and 8.6
percent in revenue from power pool sales. The increase in retail
revenue is mainly due to increases in kwh sales to industrial
customers and increases in cost-of-energy revenue related to power
purchased for sale to retail customers in the first half of 1997. The
increase in other electric revenue in 1997, as compared to 1996,
reflects Minnesota CIP lost margins recovery approved by the
Minnesota Public Utilities Commission (MPUC). Increases in
transmission service charge revenue and electric property rental
income also contributed to the increase in other electric revenue in
1997, as compared to 1996. Power pool sales increased as a result of
strong sales in the fourth quarter of 1997, which offset lower sales
earlier in the year.
Increases or decreases in fuel and purchased power costs arising from
changing prices results in adjustments to the Company's rate
schedules through the cost of energy adjustment clause. Over the
last five years this has resulted in savings of nearly $42 million to
the Company's customers.
Greater plant availability in 1998, which allowed the Company to sell
more wholesale power, resulted in a 9.1 percent increase in kwhs
generated and a 9.2 percent increase in production fuel expense in
1998 as compared to 1997. The 66.3 percent increase in purchased
power costs in 1998 as compared to 1997 is due to a 161 percent
increase in cost of power purchased for resale combined with a 6.8
percent increase in cost of power purchased for system use. The cost
of power purchased for system use increased despite a 5.1 percent
decrease in the volume of energy purchased for system use as a result
of generally higher market prices for purchased power during 1998.
Power purchased for resale increased due to a 96 percent increase in
power pool sales combined with a 40 percent increase in cost per kwh
purchased for resale.
Production fuel expense increased 12.4 percent in 1997, as compared
to 1996, while purchased power expense decreased 13.9 percent over
the comparable periods for a net decrease in production fuel and
purchased power expenses of 0.9 percent. The net reduction in
production fuel and purchased power expenses in 1997, as compared to
1996, was achieved despite a slight increase in total kwh sales of
0.4 percent mainly as a result of having Big Stone Plant, the
Company's lowest-cost generating unit, available for generation
during all of 1997, as compared to 1996, when it was shut down two
months for a major overhaul. In 1997 Big Stone Plant generated a
record net output of 3,166,398 mwh for a single year exceeding its
previous record output by 515,627 mwh. The increase in generation at
Big Stone Plant contributed to a decrease in purchased power in 1997
and helped alleviate a shortage in available generation caused by the
scheduled maintenance shutdown of Coyote Station in the Spring of
1997.
Other electric operation and maintenance expenses for 1998 as
compared to 1997, decreased 2.1 percent. This decrease, in part,
reflects the effect of the Company's early retirement program, which
resulted in a workforce reduction of 55 employees by June 1, 1998.
Maintenance expenses were higher in 1997 than in 1998 due to the 10-
week overhaul of Coyote Station in 1997.
The primary contributors to the 8.6 percent increase in other
electric operation and maintenance expense in 1997 were the overhaul
of the Coyote Station in the second quarter of 1997 and increased
expenditures for outside and contracted services in 1997.
Special charges incurred in 1998 of $7 million represent two items
related to electric operations: (1) a noncash charge of $6.3 million
associated with a voluntary early retirement program offered by the
Company, and (2) the write-off of $717,000 in accumulated costs
related to a rail spur project at Big Stone Plant. (See note 3 to
consolidated financial statements for further information including
the net-of-tax and earnings per share impact of these charges.) The
Company incurred insignificant additional costs related to the early
retirement offer after the first quarter.
Depreciation and amortization expense for 1998 as compared to 1997,
increased 3.2 percent due to a slight increase in electric plant in
service. The 7.9 percent increase in depreciation and amortization
expense in 1997 is the result of property additions including
upgrades made to Big Stone Plant in the latter part of 1996.
The decrease in property taxes of 5.9 percent in 1997 compared to
1996 reflects reductions in Minnesota property taxes as a result of
legislative action affecting Minnesota commercial and industrial
property class rates for 1997 and lower assessed values on Minnesota
utility property.
Manufacturing operations
- ------------------------
(bar graph of information in following table)
Manufacturing operating
income
(millions)
-----------------------
1996 $6.5
1997 $7.9
1998 $8.7
(end of graph)
Manufacturing operations is made up of businesses involved in the
production of agricultural equipment, automobile and truck frame-
straightening equipment and accessories, plastic pipe extrusion, and
metal parts stamping and fabrication.
1998 1997 1996
------ ------ ------
(in thousands)
Operating revenues $86,030 $81,543 $64,568
Cost of goods sold 64,390 61,361 48,269
Operating expenses 12,979 12,237 9,795
------- ------- -------
Operating income $ 8,661 $ 7,945 $ 6,504
Manufacturing operating revenue increased 5.5 percent in 1998 as a
result of increased sales volumes of 15 percent within the
manufacturing companies that produce agricultural equipment and metal
parts stamping. These increases were offset by a reduction in sales
of automobile and truck frame-straightening equipment and a decrease
in revenues from the sales of PVC pipe. The increase in manufacturing
operating revenue of 26.3 percent in 1997 reflects increased sales at
all six of the Company's manufacturing subsidiaries.
During 1998 manufacturing cost of goods sold increased 4.9 percent as
a result of the increased sales volumes, offset by a decrease in
prices for resins used in the manufacture of PVC pipe. The increase
in operating expenses for 1998 of 6.1 percent was primarily due to
increased labor costs and the use of outside professional services.
The increases of 27.1 percent in manufacturing cost of goods sold and
24.9 percent in manufacturing operating expenses in 1997, as compared
to 1996, correspond to the increase in sales over the same comparable
periods. The increase in cost of goods sold in 1997 also reflects
increases in prices for resins used in the manufacture of PVC pipe.
Health services operations
- --------------------------
(bar graph of information in following table)
Health services
operating income
(millions)
-----------------
1996 $5.1
1997 $4.3
1998 $6.5
(end of graph)
Health services operations include businesses involved in the sale,
service, rental, refurbishing, and operation of medical imaging
equipment and the sale of related supplies and accessories to various
medical institutions primarily in the Midwest.
1998 1997 1996
------ ------ ------
(in thousands)
Operating revenues $68,728 $66,185 $61,697
Cost of goods sold 35,913 38,922 34,032
Operating expenses 26,305 22,968 22,528
------- ------- -------
Operating income $ 6,510 $ 4,295 $ 5,137
The 3.8 percent increase in health services operating revenue in
1998, as compared to 1997, is due to an increase in sales volumes of
diagnostic medical equipment combined with an increase in the number
of medical imaging scans performed offset by a decrease in the
average fee per scan. Health services cost of goods sold decreased
7.7 percent in 1998, as compared to 1997 due to the recording of
equipment valuation adjustments in 1997. The 14.5 percent increase in
health services operating expense in 1998 as related to 1997 reflects
the increase in rental costs of diagnostic imaging equipment and
increased repairs and maintenance expense on mobile imaging
equipment. The increase in health services operating revenue of 7.3
percent in 1997 and the increase in health services operating
expenses of 2 percent in 1997 is related to the 1996 acquisitions of
two medical imaging services companies. The increase in health
services cost of goods sold in 1997, as compared to 1996, is due to
valuation adjustments related to equipment held for sale and
increased costs associated with customer service contracts.
Other business operations
- -------------------------
(bar graph of information in following table)
Other business operations
operating income
(millions)
--------------------------
1996 $2.5
1997 $1.8
1998 ($0.2)
The Company's other business operations include telephone utilities
and businesses involved in electrical and telephone construction
contracting, entertainment, and waste incinerating. On May 1, 1998,
the Company acquired PAM Natural Gas, Inc. (PAM), a marketer of
natural gas to commercial and institutional customers. Upon
acquisition, PAM's name was changed to Otter Tail Energy Management,
Inc. (See note 4 to consolidated financial statements for more
information.)
In December 1998 Varistar Corporation (formerly Mid-States
Development, Inc.) entered into a definitive agreement to sell
certain assets of the radio stations and video production company
owned by KFGO, Inc., and the radio stations owned by Western
Minnesota Broadcasting Company to an unrelated party. (See
additional discussion under "Factors affecting future earnings" on
page 25.)
1998 1997 1996
------ ------ ------
(in thousands)
Operating revenues $48,843 $41,430 $45,323
Cost of goods sold 29,133 23,393 28,297
Special charges 2,500 -- --
Operating expenses 17,367 16,210 14,574
------ ------- -------
Operating income $ (157) $ 1,827 $ 2,452
Other business operations operating revenues, cost of goods sold, and
operating expenses increased 17.9 percent, 24.5 percent and 7.1
percent, respectively, in 1998, as compared to 1997, primarily as a
result of the PAM acquisition. Special charges of $2.5 million
recorded during the first quarter of 1998 represent an impairment
loss associated with the Quadrant Co. (Quadrant) waste incineration
plant. Substantially all of the first quarter charge was used to
reduce the plant book value to zero. The plant ceased operations
during the third quarter of 1998. During the fourth quarter of 1998,
an additional provision of $250,000 was included in operating
expenses for plant disposition costs. Pro forma operating income for
other business operations without Quadrant would have been
$3,016,000, $2,426,000, and $2,237,000 in 1998, 1997, and 1996,
respectively. (See note 3 to consolidated financial statements and
discussion under "Factors affecting future earnings" on page 25 for
further information on the Quadrant waste incineration plant,
including the net-of-tax and earnings per share impact of this
special charge.)
The 8.6 percent decrease in other business operations operating
revenue in 1997, as compared to 1996, is due to a decline in revenue
and reductions in material cost pass-through billings at the
Company's construction subsidiaries, offset slightly by increases in
media and telecommunications revenue due to the acquisition of
several radio stations in 1996. The decrease in construction activity
and material cost pass-through billings are the main factors
contributing to the 17.3 percent decrease in cost of goods sold in
1997. The increase in operating expenses from other business
operations of 11.2 percent in 1997 reflects the acquisitions of four
radio stations during 1996.
Consolidated other income and deductions--net
- ---------------------------------------------
(bar graph of information in following table)
Other income and deductions
(millions)
---------------------------
1996 $2.1
1997 $6.1
1998 $4.2
(end of graph)
The 32 percent decrease in other income and deductions--net for
1998, as compared to 1997, reflects the 1997 sale of a Direct
Broadcast Satellite franchise for $1.8 million. Included in other
income and deductions for 1998 is $839,000 of dividend income and a
$500,000 increase in revenue recognition relating to Minnesota CIP
financial incentives. A gain on the sale of the Direct Broadcast
Satellite franchise, in which the Company's telecommunications
subsidiary, Midwest Information Systems, Inc., held a one-third
ownership interest, accounted for $1.8 million of the increase in
other income and deductions--net in 1997, as compared to 1996.
Realized gains on sales of investments of $751,000 and an increase of
$1,322,000 in miscellaneous nonoperating income, including
compensation for the abandonment of certain microwave frequencies
licensed to the Company, also contributed to the 1997 increase in
other income and deductions--net. The remainder of the increase in
other income and deductions--net for 1997 reflects an increase in
revenue recognition related to Minnesota CIP financial incentives of
$307,000.
Consolidated interest charges
- -----------------------------
(bar graph of information in following table)
Interest charges
(millions)
----------------
1996 $16.9
1997 $18.5
1998 $15.6
(end of graph)
The 15.9 percent decrease in interest charges in 1998 as compared to
1997 is a result of a lower average interest rate on line of credit
borrowings and refinancing of various subsidiary companies' fixed and
variable interest rate debt with lower fixed rate debt in November
1997. In addition, the decrease can be attributed to the
implementation of a consolidated cash management function within the
subsidiaries that allowed excess cash to be used to reduce
outstanding borrowings. Also the medical imaging subsidiary reduced
debt by entering into a $16 million sale/leaseback transaction in
November 1997. Interest charges increased 9.8 percent in 1997 as a
result of increased debt at the Company's subsidiaries due to
acquisitions and growth and increased use of short-term debt at the
parent-company level.
Consolidated income taxes
- -------------------------
(bar graph of information in following table)
Income taxes
(millions)
------------
1996 $14.0
1997 $14.3
1998 $15.1
(end of graph)
The 5.8 percent increase in income taxes in 1998 as compared to 1997
reflects the use of a capital loss carryforward in 1997 combined with
an increase in net income before tax for 1998. The increase of 2.1
percent in 1997 income taxes over 1996 income taxes mainly is due to
an increase in income before income taxes for the same comparable
periods. Part of the increase in taxes on increased operating income
was offset by an increase in affordable housing tax credits earned in
1997 over 1996. (See note 14 and "Investments" under note 1 to
consolidated financial statements for more information.)
Cumulative effect of change in accounting principle
- ---------------------------------------------------
In the first quarter of 1998 the Company changed its method of
revenue recognition in the states of Minnesota and South Dakota from
meter-reading dates to energy-delivery dates. This change results in
better matching of revenues and expense and is consistent with
predominant industry practice. The change is also consistent with the
way the Company has been recording electric revenue for its North
Dakota customers since 1993 under an order from the North Dakota
Public Service Commission. The cumulative effect of this change was
$3,819,000 (net of income taxes of $2,545,000) or $0.32 per share.
(See note 2 to consolidated financial statements for more
information.)
Impact of inflation
- -------------------
The Company operates under regulatory provisions that allow price
increases in the cost of fuel and purchased power to be passed to
customers through automatic adjustments to its rate schedules under
the cost of energy adjustment clause. Other increases in the cost of
electric service must be recovered through timely filings for rate
relief with the appropriate regulatory agency.
The Company's health services, manufacturing and other business
operations consist almost entirely of unregulated businesses.
Increased operating costs are reflected in product or services
pricing with any limitations on price increases determined by the
marketplace. The impact of inflation upon these segments has been
less significant during the past few years because of the relatively
low rates of inflation experienced in the United States. Raw
material costs, labor costs, and interest rates are important
components of costs for companies in these segments. Any or all of
these components could be impacted by inflation, with a possible
adverse effect on the Company's profitability.
Factors affecting future earnings
Growth of electric revenue
- --------------------------
The results of operations discussed above are not necessarily
indicative of future earnings. Anticipated higher operating costs
and carrying charges on increased investment in plant, if not offset
by proportionate increases in operating revenues and other income
(either by appropriate rate increases, increases in unit sales, or
increases in nonelectric operations), will affect future earnings.
Growth in electric sales will be subject to a number of factors,
including the volume of power pool sales to other utilities, the
effectiveness of demand-side management programs, weather,
competition, and the rate of economic growth or decline in the
Company's service area. The Company's electric business is primarily
dependent upon the use of electricity by customers in our service
area. Percentage changes in the Company's electric kwh sales to
retail customers over the prior year for the last three years showed
a decrease of 0.3 percent in 1998 and increases of 1.4 percent in
1997, and 4.0 percent in 1996.
Market factors beyond the Company's control such as mergers and
acquisitions, geographical location, transmission costs and the
effects of deregulation could have a negative impact on
noncontractual power pool sales.
Rates of return earned on utility operations are subject to review by
the various state commissions that have jurisdiction over the
electric rates charged by the Company. These reviews may result in
future revenue reductions when actual rates of return are deemed by
regulators to be in excess of allowed rates of return.
Demand-side management
- ----------------------
Demand-side management (DSM) efforts will continue in all
jurisdictions served by the Company. The goal of DSM is to encourage
the wise and efficient use of electricity by customers. Currently,
Minnesota is the only jurisdiction that mandates investments in DSM.
In 1998 the Minnesota Public Utility Commission (MPUC) approved the
Company's 1997 financial incentive filing along with a 2.75 percent
surcharge on all Minnesota customers' bills starting on July 1, 1998,
for the recovery of conservation-related costs over and above those
being recovered in current rates. The approved surcharge in effect
from July 1, 1997 through June 30, 1998 was 1.75 percent and the
approved surcharge from July 1, 1996, through June 30, 1997, was 1.25
percent. The current surcharge rate will be in place until June 30,
1999, when it will be revised for subsequent years' program results.
During 1998 the Minnesota Department of Public Service (MDPS)
recommended to the MPUC that demand-side management incentives for
all Minnesota electric utilities be terminated as of January 1, 1998.
At a hearing held November 19, 1998, the MPUC did not accept the MDPS
recommendation, however, the MPUC put electric and gas utilities on
notice that the ability to earn demand-side management incentives
could end as early as January 1, 1999. Incentives accrued for 1998
totaled $1,750,000. A MPUC Chair's Round Table has been convened to
examine demand-side management programs and related incentives. A
report from the Round Table is due to the MPUC by May 1, 1999. (See
note 5 to consolidated financial statements for more information.)
Fuel Costs
- ----------
The Company began purchasing subbituminous coal for Big Stone Plant
in August 1995 under a contract that runs through December 1999. The
Company expects to execute a new coal contract in 2000 near current
contract prices.
In November 1995 the Company and two other Coyote Station owners
initiated a lawsuit against Knife River Coal Mining Company and its
parent, MDU Resources Group Inc., in an attempt to resolve disputes
over pricing in the Coyote coal agreement. The case was remanded to
arbitration in 1997 and a resolution is still pending. Any fuel cost
savings that may result from resolution of this dispute will be
passed on to customers through the cost of energy adjustment clause.
Environmental
- -------------
Current regulations under the Federal Clean Air Act (the Act) are not
expected to have a significant impact on future capital requirements
or operating costs. However, proposed or future regulations under the
Act, changes in the future coal supply market, and/or other laws and
regulations could impact such requirements or costs. It is
anticipated that, under current regulatory principles, any such costs
could be recovered through rates.
The Company's plants are not subject to the Act's phase one
requirements. Phase two standards of the Act must be met by the year
2000. The Company intends that Big Stone Plant will maintain current
levels of operation and meet phase two requirements for sulfur
dioxide emissions by burning subbituminous coal. Based on current
market conditions, the Company expects to execute a new coal contract
in 2000 near current contract prices. Under EPA regulations,
modifications would be required at Big Stone Plant by 2000 to satisfy
nitrogen oxide emission standards. During 1997 the Company conducted
tests at Big Stone Plant to determine if nitrogen oxide emissions
could be reduced through modifications to existing equipment. The
results of the tests were positive and modifications have been
completed. The Company is a member of the Utility Air Regulatory
Group (UARG). In 1998, the Federal Court rejected a petition filed by
the UARG for reconsideration of the standards based on
inconsistencies in current laws.
The Company's Coyote Station is equipped with sulfur dioxide removal
equipment. Compliance with the phase two requirements is not expected
to significantly impact operations at that plant. Hoot Lake Plant
already uses low-sulfur subbituminous coal. Minor modifications have
been completed at Hoot Lake Plant to meet the phase two nitrogen
oxide emission requirements by 2000.
Regulation and legislation
- --------------------------
In 1995 the Federal Energy Regulatory Commission (FERC) issued a
Notice of Proposed Rulemaking (NOPR) to promote competition and
deregulation in wholesale electric markets by requiring owners of
transmission facilities to offer nondiscriminatory open-access
transmission and ancillary services to wholesale sellers and
purchasers of electric energy in interstate commerce. On April 24,
1996, the FERC issued two final rules, Order Nos. 888 and 889, which
may have a potentially significant impact on wholesale markets.
Order No. 888, effective July 9, 1996, requires electric utilities
and other transmission providers to abide by, and to offer to other
transmission users, terms, conditions and pricing comparable to those
they use for themselves in transmitting power. The Company filed its
initial transmission tariff on July 9, 1996, as required by Order No.
888. A revised rate schedule became effective in the first quarter
of 1997.
Order No. 889, which became effective January 3, 1997, requires
public utilities to implement Standards of Conduct and an Open Access
Same-Time Information System (OASIS). These rules require
transmission personnel to provide information about their
transmission systems to all customers, including their marketing
associates within their respective companies, through the OASIS. The
FERC issued orders after rehearing, 888A and B, further clarifying
its intent to prevent any discriminatory abuse of market power by
utilities controlling both transmission and generation assets.
The U.S. Congress ended its 1998 legislative session without taking
action on proposed electric industry restructuring legislation.
Federal restructuring legislation in 1999 is not anticipated due to
the complexity of issues involved with federal intervention. The
Minnesota Public Utilities Commission issued its Wholesale
Competition Report in 1996 and its Retail Competition Report in 1997
and continues to work on specific topics in the areas of potential
stranded costs, unbundled rates, and affiliated transactions. The
Minnesota Legislature did not take any significant legislative action
on electric utility restructuring in 1998, and no significant action
is expected during 1999. In 1997 the North Dakota Legislature
created a subcommittee to investigate the impact of electric utility
industry restructuring on North Dakota. The North Dakota Legislature
plans to deal with tax issues surrounding restructuring first. The
South Dakota Public Utility Commission has not taken any action with
regards to industry restructuring or retail competition.
Competition
- -----------
As the electric industry moves towards deregulation the Company
expects the industry to become more competitive. The Company is
taking a number of steps to position itself for success in a
competitive marketplace. It has initiated the process of
functionally unbundling its energy supply, energy delivery, and
energy services operations. The Company is developing the necessary
accounting systems to capture costs and determine the profitability
of each of these business units and to identify areas for improvement
and opportunities for increased profitability. The Company has
established an energy services business unit to promote the energy-
related products and services traditionally offered to the Company's
customers and to develop new products and services to be offered to
current and potential customers in order to distinguish the Company
from the competition.
In January 1998 the Company announced a voluntary early retirement
program for all nonunion electric utility employees age 55 and over.
The offer of early retirement was accepted by 55 of the 67 eligible
utility employees during the enrollment period. (See note 3 to
consolidated financial statements for further information regarding
this voluntary early retirement program.) The Company anticipates
that most of the staff reductions will be permanent, resulting in
enhanced future earnings through reduced payroll expenses.
As the electric industry evolves and becomes more competitive, the
Company believes it is well positioned to maintain its customer base
and may have opportunities to increase its market share. The
Company's generation capacity appears poised for competition due to
unit heat rate improvements and reductions in fuel and freight costs.
A comparison of the Company's electric retail rates to the rates of
other investor-owned utilities, cooperatives, and municipals in the
states the Company serves indicates that its rates are competitive.
In addition, the Company would attempt more flexible pricing
strategies under an open, competitive environment.
The markets in which the Company's manufacturing companies, health
services companies, and other businesses compete are characterized by
intense competition and are subject to the effects of general
economic conditions in each of their respective industries. The
various markets the companies compete in have many established
manufacturers with broader product lines, greater distribution
capabilities, greater capital resources, and larger marketing,
research and development staffs and facilities.
Year 2000 readiness disclosure
- ------------------------------
Many computer software systems, as well as certain hardware and
equipment containing date-sensitive data, were structured to utilize
a two-digit year field meaning that they may not be able to properly
recognize dates in the year 2000. The Company recognizes that the
year 2000 occurrence puts all of its electronic systems on all
platforms at risk. Application systems, information technology
systems, and technology that includes embedded systems are being
reviewed, in order, from highly critical to less critical. These
systems include the Company's financial software, customer-
information system, energy-management system, power plant control
systems, manufacturing processes, and diagnostic medical imaging
equipment. In order to address the year 2000 issue from a total
business perspective, the Company is working with its major vendors,
customers, banks, regulatory and government agencies, and utility
alliances.
In order to improve business information systems, the Company's
operating businesses began replacing major financial software
applications in 1996. The electric utility has replaced its major
in-house developed financial software applications with financial
applications from Oracle Corporation, while at the same time,
replacing the hardware (platforms) on which these applications
reside. Because of the recent implementation, these systems should
require minimal remediation efforts. The costs of replacing these
major financial computer systems are not included in the cost
estimates discussed below.
The Company's plan to resolve the year 2000 issues involves three
phases: inventory, assessment and remediation/testing. As of
December 31, 1998, the inventory phase is complete within the
electric utility and ranges from 88 percent to 100 percent complete
for the other companies. The assessment phase is 95 percent complete
for the electric utility as of December 31, 1998 and will be
completed by the end of February 1999. Within the other companies the
assessment phase completion ranges from 50 percent to 100 percent.
Remediation and testing for the electric utility is 55 percent
complete and ranges from 25 percent to 98 percent complete for
the other companies as of December 31, 1998. The Company is on
schedule to complete remediation and testing by June 1, 1999.
In addition, the Company's operating businesses are in the process of
communicating with critical external parties in order to determine
how vulnerable the Company may be to these parties' failure to
resolve their own year 2000 issues. There can be no guarantee that
the third parties of business importance to the Company will
successfully reprogram or replace and test all of their own computer
hardware, software, and process control systems in a timely manner.
While the failure of a single third party to achieve year 2000
readiness should not have a material adverse effect on the Company's
financial results or operations, the failure of several key third
parties could have such an effect. The Company expects to have third
party assessments completed by March 1999. The Company is developing
plans to alter business relationships in the event certain third
parties fail to become year 2000 compliant.
The electric utility industry is unique in its dependence upon a
complex network of interrelated systems of the power pool grid in
order to support and maintain reliable, efficient operations. The
Company's year 2000 readiness effort is linked to the readiness
efforts of other utilities, as well as those of major customers whose
loads support the integrity of the power pool grid. The Company is
contacting its large customers to assess their level of year 2000
readiness and to discuss their operating plans for January 1, 2000.
The Company is coordinating its year 2000 effort with that of the
Mid-Continent Area Power Pool and with plans established by the North
America Electric Reliability Council (NERC) under the direction of
the U.S. Department of Energy. In April and September of 1999 the
Company will participate in NERC defined readiness drills. These
drills will be carried out at the power pool level. While the
Company is supporting these cooperative efforts, it cannot guarantee
the successful implementation of solutions of third parties. A
failure of a system within the power pool grid could have a material
impact on the Company and its customers.
The costs of the Company's year 2000 readiness effort are being
funded with cash flows from operations. These costs are not expected
to vary substantially from normal ongoing costs incurred for systems
development, implementation, and maintenance due to the use of
internal resources and the deferral of other projects. Total
expenditures related to remediation, testing, conversion,
replacement, and upgrading of system applications are expected to
range from $975,000 to $1,350,000 for 1997 to 2000. Expenditures
incurred through December 31, 1998 were $350,000.
The Company's medical subsidiary owns diagnostic imaging equipment
that has computer software vulnerable to year 2000 issues. While the
medical subsidiary will negotiate to have its vendors pay the costs
to solve the year 2000 issues, there can be no assurances the vendors
will absorb the costs. In the event the vendors do not pay all or
some portion of the costs, the medical subsidiary may have to absorb
the majority of the costs. These costs are included in the estimates
shown above.
Contingency plans are also being developed for certain critical
business and electrical processes. The business critical processes
contingency plans will be approved during the first quarter of 1999.
The Company's electrical system contingency plan uses templates
provided by the NERC and are to be completed by June 30, 1999.
At this time the Company believes its worst-case scenario is that key
customers could experience significant reductions in their power
needs due to their own year 2000 issues. Although the Company does
not believe that this scenario is likely to occur, the Company
expects that such a scenario would not have a material adverse affect
on the Company's consolidated financial position. The Company
believes a more probable worst-case scenario is a temporary
disruption of service to its electric customers, including the effect
of cascading disruptions caused by other entities whose electrical
systems are connected to the Company's. The Company has assessed the
risk of this scenario, and believes that contingency plans would
mitigate the long-term effect of such a scenario. In the event that
a temporary disruption in service does occur, the Company does not
expect that it would have a material adverse effect on its
consolidated financial position.
While the Company believes it will be able to resolve its year 2000
issues in a timely manner, if it is unable to complete the required
changes to existing critical systems, or if those with whom the
Company conducts business are unsuccessful in implementing timely
solutions, the year 2000 issue could have a material adverse effect
upon the Company's consolidated results of operations.
The costs of the project and the completion dates are based on
management's best estimates, which were derived from assumptions of
future events including the availability of resources, third party
modification plans, and other factors. There can be no guarantee
that these estimates will be achieved and actual results could vary
due to uncertainties.
The forward-looking statements contained in this section under the
heading "Year 2000 readiness disclosure" should be read in
conjunction with the Company's disclosure below under the heading
"Cautionary Statements for Purposes of the Safe Harbor Provisions of
the Private Securities Litigation Reform Act of 1995."
Diversification
- ---------------
In March 1998 the Company recorded a $2.5 million noncash accounting
charge related to the impairment of its Quadrant Co. waste
incineration plant. (See note 3 to consolidated financial statements
for further information.) In July 1998, Quadrant's waste incinerators
were shut down for alleged noncompliance with Minnesota Pollution
Control Agency (MPCA) particulate emissions regulations. Quadrant and
the Company received from the MPCA a Notice of Violation dated
October 15, 1998, outlining claimed violations of emission limits,
operating requirements, and reporting requirements applicable to
Quadrant under Minnesota law. Quadrant and the MPCA are in the
process of negotiating a penalty settlement and intend to negotiate
the terms and conditions of a stipulation agreement involving a
compliance schedule, a civil penalty for past alleged violations, and
stipulated penalties for any future violations of the stipulation
agreement. The outcome of the negotiations is not known at this
time; however, it is not expected to have a material financial impact
on the Company. The Company does not expect any further costs
related to the plant's disposition to have a material effect upon
future consolidated earnings.
In December 1998 Varistar entered into a definitive agreement to sell
certain assets of the radio stations and video production company
owned by KFGO, Inc., and the radio stations owned by Western
Minnesota Broadcasting Company to an unrelated party. The sale is
subject to approval by the Federal Communications Commission and
other governmental authorities. Operating income related to these
radio stations did not have a significant effect on consolidated
operating income for 1998, 1997, and 1996. When regulatory approvals
are received, the Company will recognize a one-time gain on the sale
of the radio stations.
The Company continues to investigate acquisitions of additional
businesses (both utility and nonutility) and expects continued growth
in this area. The success of these businesses and any future
business purchases will affect future earnings. Increased revenues
from the Company's nonregulated businesses could result in greater
earnings and stock price volatility.
Accounting pronouncements
In June 1998 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) 133 - Accounting
for Derivative Instruments and Hedging Activities, effective for
financial statements issued for periods beginning after June 15,
1999. SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that
all derivatives be recognized as either assets or liabilities and
that those financial instruments be measured at fair value. The
accounting for changes in the fair value of a derivative depends on
the intended use of the derivative. The adoption of this statement
is not expected to have a material impact on the Company's financial
position as presently reported.
In 1998 the Company adopted SFAS 131 -- Disclosures about Segments of
an Enterprise and Related Information and SFAS 132 -- Employers'
Disclosures about Pensions and Other Postretirement Benefits. The
adoption of SFAS 131 and 132 did not affect the Company's 1998
operations or financial position. (See note 1 to consolidated
financial statements for further information.)
Cautionary Statements for Purposes of the Safe Harbor Provisions of
the Private Securities Litigation Reform Act of 1995
The information in this annual report includes forward-looking
statements. Important risks and uncertainties that could cause
actual results to differ materially from those discussed in such
forward-looking statements are set forth above under "Factors
affecting future earnings." Other risks and uncertainties may be
presented from time to time in the Company's future Securities and
Exchange Commission filings.
<TABLE>
Otter Tail Power Company
Consolidated Statements of Income
For the Years Ended December 31 1998 1997 1996
- -----------------------------------------------------------------------------
(in thousands, except per-share amounts)
<S> <C> <C> <C>
Operating revenues
Electric $227,477 $205,121 $199,345
Manufacturing 86,030 81,543 64,568
Health services 68,728 66,185 61,697
Other business operations 48,843 41,430 45,323
-------- ------- --------
Total operating revenues 431,078 394,279 370,933
Operating expenses
Production fuel 34,234 31,362 27,913
Purchased power 40,609 24,420 28,378
Electric operation and maintenance expenses 70,584 72,112 66,401
Special charges 9,522 - -
Cost of goods sold 129,436 123,676 110,598
Other nonelectric expenses 52,926 47,275 43,351
Depreciation and amortization 25,813 25,536 23,387
Property taxes 10,724 10,865 11,533
-------- -------- --------
Total operating expenses 373,848 335,246 311,561
Operating Income
Electric 42,216 44,966 45,279
Manufacturing 8,661 7,945 6,504
Health services 6,510 4,295 5,137
Other business operations (157) 1,827 2,452
-------- -------- --------
Total operating income 57,230 59,033 59,372
Other income and deductions -- net 4,177 6,140 2,125
Interest charges 15,566 18,519 16,863
-------- -------- --------
Income before income taxes 45,841 46,654 44,634
Income taxes 15,140 14,308 14,010
-------- -------- --------
Income before cumulative effect of change
in accounting principle 30,701 32,346 30,624
Cumulative effect of change in accounting
principle (net-of-tax of $2,545) 3,819 - -
-------- -------- --------
Net income 34,520 32,346 30,624
Preferred dividend requirements 2,358 2,358 2,358
-------- -------- --------
Earnings available for common shares $ 32,162 $ 29,988 $ 28,266
======== ======== ========
Average number of common shares outstanding 11,798 11,639 11,503
Basic and diluted earnings per share
Before cumulative effect of change in
accounting principle $2.41 $2.58 $2.46
Cumulative effect of change in accounting
principle 0.32 - -
-------- -------- --------
Basic and diluted earnings per share $2.73 $2.58 $2.46
Dividends per common share $1.92 $1.86 $1.80
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
Otter Tail Power Company
Consolidated Balance Sheets, December 31 1998 1997
- -----------------------------------------------------------------------------
(in thousands)
Assets
<S> <C> <C>
Plant
Electric plant in service $ 770,887 $ 758,551
Diversified operations 89,094 89,716
--------- ---------
Total 859,981 848,267
Less accumulated depreciation and amortization 370,290 350,647
--------- ---------
Plant-net of accumulated depreciation and amortization 489,691 497,620
Construction work in progress 10,495 12,146
--------- ---------
Net plant 500,186 509,766
--------- ---------
Investments 20,612 20,048
--------- ---------
Intangibles--net 21,176 20,911
--------- ---------
Other assets 3,968 5,932
--------- ---------
Current assets
Cash and cash equivalents 3,919 5,301
Accounts receivable:
Trade (less accumulated provision for uncollectible
accounts: 1998, $1,444,000; 1997, $1,026,000) 40,029 33,304
Other 8,065 6,796
Materials and supplies:
Fuel 3,418 3,425
Inventory, materials, and operating supplies 23,138 24,160
Deferred income taxes 2,730 4,738
Accrued utility revenues 11,179 4,271
Other 6,310 3,795
--------- ---------
Total current assets 98,788 85,790
--------- ---------
Deferred debits
Unamortized debt expense and reacquisition premiums 3,737 4,187
Regulatory assets 3,774 5,060
Other 3,371 3,747
--------- ---------
Total deferred debits 10,882 12,994
--------- ---------
Total $ 655,612 $ 655,441
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
Otter Tail Power Company
Consolidated Balance Sheets, December 31 1998 1997
- -----------------------------------------------------------------------------
(in thousands)
Liabilities and Equity
<S> <C> <C>
Capitalization (page 32)
Common shares, par value $5 per share -- authorized,
25,000,000 shares; outstanding, 1998 -- 11,879,504
shares; 1997 -- 11,731,078 shares $ 59,398 $ 58,655
Premium on common shares 39,919 35,196
Retained earnings 125,462 115,942
Accumulated other comprehensive income 297 363
--------- ---------
Total common equity 225,076 210,156
Cumulative preferred shares 38,831 38,831
Long-term debt:
Electric utility 153,389 154,279
Diversifed operations 27,657 35,694
--------- ---------
Total capitalization 444,953 438,960
--------- ---------
Current liabilities
Short-term debt 824 2,100
Sinking fund requirements and current maturities 5,794 12,324
Accounts payable 32,411 28,427
Accrued salaries and wages 3,946 3,835
Federal and state income taxes accrued 2,192 2,572
Other taxes accrued 11,119 11,122
Interest accrued 3,120 3,339
Other 3,826 2,980
--------- ---------
Total current liabilities 63,232 66,699
--------- ---------
Noncurrent liabilities 22,842 17,805
--------- ---------
Commitments (note 8) - -
--------- ---------
Deferred credits
Accumulated deferred income taxes 90,964 97,583
Accumulated deferred investment tax credit 17,481 18,666
Regulatory liabilities 11,692 12,121
Other 4,448 3,607
--------- ---------
Total deferred credits 124,585 131,977
--------- ---------
Total $ 655,612 $ 655,441
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
Independent Auditors' Report
To the Shareholders of Otter Tail Power Company:
We have audited the accompanying consolidated balance sheets and
statements of capitalization of Otter Tail Power Company and its
subsidiaries (the Company) as of December 31, 1998, and 1997, and the
related consolidated statements of income, changes in equity, and
cash flows for each of the three years in the period ended December
31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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
consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated 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, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company at December 31, 1998, and 1997, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
As disclosed in note 2 to the consolidated financial statements, the
Company changed its method of accounting for unbilled revenues in
1998.
DELOITTE & TOUCHE LLP
February 1, 1999
Minneapolis, Minnesota
<TABLE>
Otter Tail Power Company
Consolidated Statements of Changes in Equity
- ----------------------------------------------------------------------------------------------------------
Par Premium Accumulated
Common value, on other
shares common common Retained comprehensive Total
outstanding shares shares earnings income equity
----------- ----------------------------------------------------
(in thousands, except common shares outstanding)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 11,180,136 $55,901 $30,335 $ 98,006 $ - $184,242
Effects of pooling transactions,
January 1, 1996:
Peoples Telephone 163,758 819 (798) 2,058 216 2,295
Chassis Liner 157,646 788 (588) 381 581
Common stock issuances 34,516 172 936 1,108
Comprehensive income:
Net income 30,624 30,624
Unrealized gains on available-
for-sale securities 403 403
-------
Total comprehensive income 31,027
Cumulative preferred dividends at
required annual rates (2,358) (2,358)
Common dividends (20,124) (20,124)
Distributions by pooled entities (723) (723)
---------- -----------------------------------------------------
Balance, December 31, 1996 11,536,056 $57,680 $29,885 $107,864 $ 619 $196,048
Cash portion of Peoples pooling
transaction, January 1, 1997 (209) (209)
Common stock issuances 195,022 975 5,520 6,495
Comprehensive income:
Net income 32,346 32,346
Unrealized gains on available
-for-sale securities 103 103
Reversal of previously
recorded unrealized gains
on available-for-sale
securities sold in 1997 (359) (359)
-------
Total comprehensive income 32,090
Cumulative preferred dividends at
required annual rates (2,358) (2,358)
Common dividends (21,496) (21,496)
Distributions by pooled entities (414) (414)
---------- -----------------------------------------------------
Balance, December 31, 1997 11,731,078 $58,655 $35,196 $115,942 $ 363 $210,156
Common stock issuances 148,426 743 4,723 5,466
Comprehensive income:
Net income 34,520 34,520
Unrealized loss on available-
for-sale securities (66) (66)
-------
Total comprehensive income 34,454
Cumulative preferred dividends at (2,358) (2,358)
required annual rates
Common dividends (22,642) (22,642)
---------- -----------------------------------------------------
Balance, December 31, 1998 11,879,504 $59,398 $39,919 $125,462 $ 297 225,076
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
Otter Tail Power Company
Consolidated Statements of Cash Flows
For the Years Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 34,520 $ 32,346 $ 30,624
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 34,965 39,302 35,305
Deferred investment tax credit--net (1,186) (1,186) (1,186)
Deferred income taxes (6,253) (3,155) (5,277)
Change in deferred debits and other assets 99 1,204 3,679
Change in noncurrent liabilities and deferred credits 2,129 1,960 3,389
Allowance for equity (other) funds used during
construction (103) - (325)
Loss/(Gain) on investments in and disposal of
noncurrent assets 607 (1,722) 555
Voluntary early retirement program charges 6,305 - -
Cumulative effect of change in accounting principle (3,819) - -
Asset impairment losses 3,217 - -
Cash provided by (used for) current assets and current
liabilities:
Change in receivables, materials, and supplies (5,765) (2,270) 396
Change in other current assets (2,962) 1,752 (922)
Change in payables and other current liabilities 2,804 908 867
Change in interest and income taxes payable (599) 259 1,506
------- ------- -------
Net cash provided by operating activities 63,959 69,398 68,611
------- ------- -------
Cash flows from investing activities
Gross capital expenditures (29,289) (41,973) (64,823)
Proceeds from disposal of noncurrent assets 3,359 20,802 4,734
Proceeds from the sales of marketable securities - 785 -
Purchase of subsidiaries, net of cash acquired (1,372) - (10,006)
Change in temporary cash investments - - 2,208
Change in other investments (1,585) (470) (10,640)
------- ------- -------
Net cash used in investing activities (28,887) (20,856) (78,527)
------- ------- -------
Cash flows from financing activities
Change in short-term debt--net issuances (1,276) (23,500) 25,600
Proceeds from issuance of long-term debt 1,559 178,272 118,083
Proceeds from issuance of common stock 5,466 6,286 1,719
Payments for debt and common stock issuance expense (82) (244) (22)
Payments for retirement of long-term debt (17,121) (181,917) (111,957)
Dividends paid (25,000) (24,268) (23,244)
------- ------- -------
Net cash (used in)/provided by financing activities (36,454) (45,371) 10,179
------- ------- -------
Net change in cash and cash equivalents (1,382) 3,171 263
Cash and cash equivalents at beginning of year 5,301 2,130 1,867
------- ------- -------
Cash and cash equivalents at end of year $ 3,919 $ 5,301 $ 2,130
======== ======== ========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest (net of amount capitalized) $ 15,189 $ 18,203 $ 16,650
Income taxes $ 22,966 $ 18,057 $ 18,832
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
Otter Tail Power Company
Consolidated Statements of Capitalization, December 31 1998 1997
- ------------------------------------------------------------ ------------------------
(in thousands)
<S> <C> <C>
Total common shareholders' equity $ 225,076 $ 210,156
--------- ---------
Cumulative preferred shares -- without par value (stated and
liquidating value $100 a share) -- authorized 1,500,000 shares;
outstanding:
Series subject to mandatory redemption:
$6.35, 180,000 shares; 9,000 shares due 2002-06;
135,000 shares due 2007 18,000 18,000
--------- ---------
Other series:
$3.60, 60,000 shares 6,000 6,000
$4.40, 25,000 shares 2,500 2,500
$4.65, 30,000 shares 3,000 3,000
$6.75, 40,000 shares 4,000 4,000
$9.00, 53,311 shares 5,331 5,331
--------- ---------
Total other preferred 20,831 20,831
--------- ---------
Cumulative preference shares -- without par value, authorized
1,000,000 shares; outstanding: none
Long-term debt
First mortgage bond series:
7.25%, due August 1, 2002 18,800 19,000
8.75%, due September 15, 2021 18,600 18,800
8.25%, due August 1, 2022 28,200 28,500
Pollution control series:
6.30-6.80%, due February 1, 2006, Big Stone project 5,307 5,367
6.30-6.90%, due February 1, 2019, Coyote project 21,264 21,499
--------- ---------
Total first mortgage bond series 92,171 93,166
Senior debentures 6.375%, due December 1, 2007 50,000 50,000
Long-term lease obligation (5.625% pollution control revenue
bonds due July 1, 1998) - 2,200
Industrial development refunding revenue bonds
5.00% due December 1, 2002 3,010 3,010
Pollution control refunding revenue bonds
variable 3.85% at December 31, 1998, due December 1, 2012 10,400 10,400
Obligations of Varistar Corporation:
7.80% ten-year term note 18,169 22,500
Various at 1.9% to 9% at December 31, 1998 4,112 10,775
Obligations of Midwest Information Systems, Inc.
variable 6.7% to 7.27% at December 31, 1998 10,169 11,542
Other 6 6
--------- ---------
Total 188,037 203,599
Less:
Current maturity 4,799 11,329
Sinking fund requirement 995 995
Unamortized debt discount and premium -- net 1,197 1,302
--------- ---------
Total long-term debt 181,046 189,973
--------- ---------
Total capitalization $ 444,953 $ 438,960
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
Otter Tail Power Company
Notes to consolidated financial statements
For the three years ended December 31, 1998
1. Summary of accounting policies
System of accounts--In 1997 the Company implemented an activity based
costing system along with an entirely new account code structure that
will enable it to capture costs to facilitate decision-making in a
less regulated and more competitive electric industry. For regulatory
reporting purposes, all new account code combinations can be
translated into the accounts of the Uniform System of Accounts
prescribed by the Federal Energy Regulatory Commission (FERC), the
Public Service Commission of North Dakota, and the Public Utilities
Commissions of Minnesota and South Dakota.
Principles of consolidation--The consolidated financial statements
include the accounts of the Company and all wholly owned
subsidiaries. Profits on sales from the regulated electric utility
company to nonregulated affiliates are eliminated. However, profits
on sales to the regulated electric utility company from nonregulated
affiliates are not eliminated, in accordance with the requirements of
Statement of Financial Accounting Standards (SFAS) No. 71 -
Accounting for the Effects of Certain Types of Regulation.
Plant, retirements, and depreciation--Utility plant is stated at
original cost. The cost of additions includes contracted work, direct
labor and materials, allocable overheads, and allowance for funds
used during construction. The cost of depreciable units of property
retired plus removal costs less salvage is charged to the accumulated
provision for depreciation. Maintenance, repairs, and replacement of
minor items of property are charged to operating expenses. Repairs
to property made necessary by storm damage are charged to the reserve
therefor. The provisions for utility depreciation for financial
reporting purposes are made on the straight-line method based on the
estimated service lives of the properties. Such provisions as a
percent of the average balance of depreciable electric utility
property were 3.12 percent in 1998, 3.08 percent in 1997, and 3.00
percent in 1996.
Property and equipment of nonutility and subsidiary operations are
carried at historical cost, or at the current appraised value if
acquired in a business combination accounted for under the purchase
method of accounting, and are depreciated on a straight-line basis
over the useful lives (3 to 40 years) of the related assets. Upon
sale or retirement of property and equipment, the cost and related
accumulated depreciation are eliminated from the respective accounts
and the resulting gain or loss is included in the consolidated
financial statements.
Jointly owned plants--The consolidated financial statements include
the Company's 53.9 percent and 35 percent ownership interests in the
assets, liabilities and expenses of Big Stone Plant and Coyote
Station, respectively. Amounts at December 31, 1998 and 1997
included in electric plant in service for Big Stone were $111,754,000
and $108,273,000, respectively, and the accumulated provision for
depreciation and amortization was $63,635,000 and $61,650,000,
respectively. Amounts at December 31, 1998 and 1997 included in
electric plant in service for Coyote were $145,899,000 and
$145,720,000, respectively, and the accumulated provision for
depreciation and amortization was $63,463,000 and $61,820,000,
respectively. The Company's share of direct expenses of the jointly
owned plants in service is included in the corresponding operating
expenses in the statement of income.
Allowance for funds used during construction (AFC)--AFC, a noncash
item, is included in construction work in progress. In 1998 and 1996
AFC was based on a composite rate that assumes funds used for
construction were provided by borrowed funds and equity funds. In
1997 the average level of short-term borrowing exceeded the average
level of construction work in progress; consequently, 1997 AFC was
based entirely on the year's average short-term debt borrowing rate.
The AFC included in construction work in progress will ultimately be
included in the rate base used in establishing rates for utility
services. The rate for AFC was 10.25 percent for 1998, 5.67 percent
for 1997, and 8.50 percent for 1996.
Recoverability of long-lived assets--The Company reviews its long-
lived assets whenever events or changes in circumstances indicate the
carrying amount of the assets may not be recoverable. The Company
determines potential impairment by comparing the carrying value of
the assets with net cash flows expected to be provided by operating
activities of the business or related assets. Should the sum of the
expected future net cash flows be less than the carrying values, the
Company would determine whether an impairment loss should be
recognized. An impairment loss would be quantified by comparing the
amount by which the carrying value exceeds the fair value of the
asset where fair value is based on the discounted cash flows expected
to be generated by the asset.
Income taxes--Comprehensive interperiod income tax allocation is used
for substantially all book and tax temporary differences. Deferred
income taxes arise for all temporary differences between the book and
tax basis of assets and liabilities. Deferred taxes are recorded
using the tax rates scheduled by tax law to be in effect when the
temporary differences reverse. The Company amortizes the investment
tax credit over the estimated lives of the related property.
Operating revenues--Electric customers' meters are read and bills are
rendered on a cycle basis. In the first quarter of 1998, the Company
changed its method of revenue recognition in the states of Minnesota
and South Dakota from meter-reading dates to energy-delivery dates, resulting
in the accrual of estimated unbilled revenue from sales of electricity
through the end of the accounting period. This change is consistent
with the way the Company has been recording electric revenue from its
North Dakota customers since 1993 under an order from the North
Dakota Public Service Commission. See note 2 for the cumulative
effect of recording Minnesota and South Dakota unbilled revenue as of
January 1, 1998.
The Company's rate schedules applicable to substantially all
customers include a cost of energy adjustment clause under which the
rates are adjusted to reflect changes in average cost of fuels and
purchased power. Since July 1, 1995, rate schedules applicable to
Minnesota customers also include a surcharge for recovery of
conservation-related expenses: 2.75 percent as of July 1, 1998, 1.75
percent from July 1, 1997 through June 30, 1998, and 1.25 percent
from July 1, 1996, through June 30, 1997, and .503 percent from July 1,
1995, through June 30, 1996. (See further discussion under note 5.)
Health services' operating revenues on major equipment and
installation contracts are recorded using the percentage-of-
completion method. Amounts received in advance under customer service
contracts are deferred and recognized on a straight-line basis over
the contract period.
Manufacturing operating revenues are recorded when products are
shipped, when services are rendered, and on a percentage-of-
completion basis for large items that are assembled over several
months.
Other business operations' operating revenues are recorded when
services are rendered or products are shipped. In the case of
construction contracts, the percentage-of-completion method is used.
Storm damage provision--The Company is required under its Indenture
of Mortgage to make annual provisions for storm damage of not less
than 0.5 percent gross electric operating revenues. Provisions for
loss have been used in determining rates approved by the applicable
regulatory commissions. Provisions for 1998, 1997, and 1996 were
$1,354,000, $1,423,000, and $1,247,000, respectively.
Employee incentive plan--The Company has incentive plans covering
employees that are based upon certain performance measures. Total
amounts of accrued compensation for these incentive plans in 1998,
1997, and 1996 were $3,083,000, $3,826,000, and $2,810,000,
respectively.
Use of estimates--In recording transactions and balances resulting
from business operations, the Company uses estimates based on the
best information available. Estimates are used for such items as
plant depreciable lives, tax provisions, uncollectible accounts,
workers' compensation claims, injuries and damages reserve, unbilled
revenues, service contract maintenance costs and actuarially
determined benefit costs. As better information becomes available
(or actual amounts are determinable) the recorded estimates are
revised. Consequently, operating results can be affected by
revisions to prior accounting estimates.
Reclassifications--Certain prior year amounts have been reclassified
to conform to 1998 presentation. Such reclassification had no impact
on net income and shareholders' equity.
Cash equivalents--The Company considers all highly liquid debt
instruments purchased with a maturity of 90 days or less to be cash
equivalents.
Debt reacquisition premiums--In accordance with regulatory treatment,
the Company defers utility debt redemption premiums and amortizes
such costs over the original life of the reacquired bonds. The
unamortized balance was $2,490,000 on December 31, 1998.
Investments--At December 31, 1998 and 1997, the Company had
noncurrent investments of $7,540,000 and $6,761,000, respectively, in
limited partnerships that invest in tax-credit qualifying affordable
housing projects. These investments, accounted for under the equity
method, provided the Company with tax credits of $1,330,000 and
$1,057,000, in 1998 and 1997, respectively. At December 31, 1998 and
1997, the Company had $590,000 and $703,000 respectively, invested in
marketable equity securities classified as available-for-sale and
recorded at market value. The balance of investments at December 31,
1998 consists of $1,911,000 in additional investments accounted for
under the equity method, and $10,571,000 in financial instruments,
with $1,515,000 related to participation in economic development loan
pools. The balance of investments at December 31, 1997 consists of
$2,071,000 in additional investments accounted for under the equity
method, and $10,513,000 in financial instruments, with $2,070,000
related to participation in economic development loan pools. (See
further discussion under note 12.)
Inventories--The electric operation inventories are reported at
average cost. The health service, manufacturing, and other business
operation inventories are stated at the lower of cost (first-in,
first-out) or market.
Short-term debt--The composite interest rate on short-term debt
outstanding as of December 31, 1998 and 1997, was 8.75 percent and
6.15 percent, respectively. The average interest rate paid on short-
term debt during 1998 and 1997 was 6.65 percent and 5.67 percent,
respectively.
Intangible assets--The majority of the Company's intangible assets
consist of goodwill associated with the acquisition of subsidiaries.
Intangible assets are amortized on a straight-line basis over periods
of 40 years for the telephone company and 15 years or less for all
other intangibles. The Company periodically evaluates the recovery
of intangible assets based on an analysis of undiscounted future cash
flows. Total intangibles as of December 31 are as follows:
1998 1997
--------- ---------
(in thousands)
Goodwill on telephone company $ 7,749 $ 7,749
Other intangible assets 21,808 20,594
--------- ---------
Total 29,557 28,343
Less accumulated amortization 8,381 7,432
--------- ---------
Intangibles-net $21,176 $20,911
Adoption of new accounting pronouncements--In 1998 the Company adopted
Statement of Financial Accounting Standards (SFAS) 131 - Disclosures
about Segments of an Enterprise and Related Information. SFAS 131
supersedes SFAS 14, Financial Reporting for Segments of a Business
Enterprise, replacing the "industry segment" approach with the
"management" approach. The management approach designates the
internal organization that is used by management for making operating
decisions and assessing performance as the source of the Company's
reportable segments. SFAS 131 also requires disclosures about
products and services, geographic areas, and major customers. The
adoption of SFAS 131 did not change the Company's reportable segments
or affect results of operations or financial position.
In February 1998 the Financial Accounting Standards Board (FASB)
issued SFAS 132 -- Employers' Disclosures about Pensions and Other
Postretirement Benefits, which was effective for the Company on
January 1, 1998. SFAS 132 revises employers' disclosures about
pension and other postretirement benefit plans. The adoption of SFAS
132 did not affect the Company's 1998 results of operations or
financial position. Note 10 reflects the adoption of SFAS 132.
In 1997 the Company adopted SFAS 128 - Earnings Per Share. SFAS 128
requires certain public companies to present both basic and diluted
earnings per share (EPS) on the face of their income statements.
Diluted EPS reflects the dilution that could occur if securities or
other contracts to issue common stock (options, warrants, convertible
debt or preferred stock, contingent share arrangements, etc.) were
exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity.
Other than the Company's outstanding $9.00 exchangeable cumulative
preferred shares, which are not redeemable or exchangeable until
after August 9, 1999, the Company has no financial instruments
outstanding similar to those mentioned above. Additionally, if the
outstanding $9.00 preferred shares were exchanged for shares of the
Company's common stock, the effect on the Company's 1998 EPS would be
antidilutive. Therefore, the Company's basic and diluted EPS are the
same and are effectively disclosed on the face of the Company's 1998,
1997, and 1996 consolidated statements of income included in this
report.
In June 1997 the FASB issued SFAS 130 - Reporting Comprehensive
Income, which was adopted by the Company in 1997. SFAS 130
establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in
a full set of general purpose financial statements and requires that
all items required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements. The Consolidated Statements of Changes in
Equity reflects the adoption of SFAS 130.
New accounting pronouncement--In June 1998 the FASB issued Statement
of Financial Accounting Standards (SFAS) 133 -- Accounting for
Derivative Instruments and Hedging Activities, effective for
financial statements issued for periods beginning after June 15,
1999. SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that
all derivatives be recognized as either assets or liabilities and
that those financial instruments be measured at fair value. The
accounting for changes in the fair value of a derivative depends on
the intended use of the derivative. The adoption of this statement is
not expected to have a material impact on the Company's financial
position as presently reported.
2. Change in accounting principle
Effective January 1, 1998 the Company changed its method of revenue
recognition in the states of Minnesota and South Dakota from meter-
reading dates to energy-delivery dates, resulting in the accrual of
estimated unbilled revenue from sales of electricity through the end
of the accounting period. This change is consistent with the way the
Company has been recording electric revenue from its North Dakota
customers since 1993 under an order from the North Dakota Public Service
Commission. The cumulative effect of recording Minnesota and South Dakota
unbilled revenue as of January 1, 1998, increased 1998 net income by
$3,819,000 (net of income taxes of $2,545,000) or $0.32 per share.
The effect on 1998 income of this accounting change, not including
the cumulative effect, was an increase in net income of approximately
$193,000 or $0.02 per share.
If the Company had been recording Minnesota and South Dakota unbilled
revenue in previous accounting periods, its reported electric revenue
for 1997 and 1996 would have been $203,778,000 and $200,640,000,
respectively, and its reported net income would have been $31,540,000
or $2.51 per share and $31,401,000 or $2.52 per share, for 1997 and
1996, respectively.
3. Special charges
In January 1998 the Company announced a voluntary early retirement
program for all nonunion electric utility employees age 55 and over.
The offer of early retirement was accepted by 55 of 67 eligible
utility employees during the enrollment period that ended March 23,
1998. Most of the cash costs of the program will be funded through
the Company's pension plan. The Company recorded a noncash charge to
operating expenses of $6,305,000 ($3,783,000 net-of-tax or $0.32 per
share) in 1998 for special termination benefits and the recognition
of previously unrecognized prior service costs related to pension and
postretirement benefits. The electric utility will experience a
reduction in payroll costs as a result of the voluntary early
retirement program.
In March 1998 the Company recorded a noncash accounting charge
related to the impairment of its Quadrant Co. (Quadrant) waste
incineration plant. Quadrant operates a municipal waste burning
facility located in Perham, Minnesota. The facility processed solid
waste for three Minnesota counties. Quadrant is included in the other
business operations segment. Due to developments which may have
required additional capital investment in the plant to be in
compliance with current air-pollution rules, reductions in waste
flows and related revenue, and increased costs associated with
repairs and maintenance due to the age of the facility, it was
determined that future cash flows from this facility were less than
the carrying value of the assets requiring the recognition of an
impairment loss. The impaired assets include buildings, machinery,
and equipment used to burn waste. The revised carrying value of this
group of assets was determined to be zero, which was calculated on
the basis of discounted estimated future cash flows. The pre-tax
noncash charge of $2,500,000 ($1,500,000 net-of-tax or $0.13 per
share) pertaining to the write down includes $248,000 for selling or
disposal costs.
The recognition of this impairment is in accordance with the
provisions of Statement of Financial Accounting Standards No. 121 --
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The $2,500,000 impairment loss is included
in operating expenses under the caption of special charges and in
operating income from other business operations on the Company's
Statement of Income for the year ended December 31, 1998. In the
fourth quarter of 1998 an additional provision of $250,000 was
recorded under other nonelectric expenses for plant disposition
costs.
In the first quarter of 1998, as a result of an unfavorable court
decision related to the construction of a rail spur intended to serve
Big Stone Plant, the Company wrote off $717,000 ($430,000 net-of-tax
or $0.04 per share) in capitalized project related costs.
4. Business combinations and segment information
Effective November 1998 Mid-States Development, Inc., a subsidiary of
the Company since 1989, changed its name to Varistar Corporation
(Varistar). On January 1, 1999 the Company's telecommunications
subsidiary, North Central Utilities, Inc. (NCU) merged with Varistar.
Subsidiaries previously owned by NCU became wholly owned subsidiaries
of Varistar.
On May 1, 1998 the Company acquired PAM Natural Gas, Inc. (PAM) for
approximately $1.8 million in stock purchased on the open market and
an earn out amount to be paid over seven years contingent upon the
achievement of certain financial results. PAM is a Sioux Falls,
South Dakota-based marketer of natural gas to commercial and
institutional customers in Iowa, South Dakota, North Dakota and
Minnesota. Upon acquisition PAM's name was changed to Otter Tail
Energy Management, Inc. The PAM acquisition was accounted for as a
purchase. The pro forma effect of the PAM acquisition on 1998 and
1997 revenue, net income, or earnings per share was not significant.
On January 2, 1997, the Company acquired all of the outstanding
common stock of The Peoples Telephone Co. of Bigfork (Peoples), a
telephone company with 1,903 access lines serving five communities in
Northern Minnesota, in exchange for 163,758 newly issued shares of
the Company's common stock and $209,000 in cash. On June 30, 1997,
the Company's subsidiary, Varistar acquired all of the outstanding
common stock of Chassis Liner Corporation (Chassis Liner), a
manufacturer of auto and truck frame-straightening equipment with
facilities in Alexandria and Lucan, Minnesota, in exchange for
157,646 newly issued shares of the Company's common stock. These
acquisitions have been accounted for under the pooling of interests
method of accounting. There were no transactions between the
Company, Peoples, and Chassis Liner prior to the acquisitions. Costs
incurred to effect these mergers were not significant. The Company's
1996 consolidated financial statements were restated to include both
Peoples and Chassis Liner.
In 1996 Varistar purchased a Montana-based supplier of X-ray supplies
and accessories in February, a mobile medical diagnostic services
company located in Minnesota in April, and four radio stations
located in the Fargo, North Dakota/ Moorhead, Minnesota, market area:
two in June, one in October, and one in December. NCU acquired two
small cable TV systems in 1996.
In the 1996 acquisitions, the purchase method of accounting was used
and the acquisitions would have had no significant pro forma effect
on the Company's operating revenues, net income, or earnings per
share for 1996. The total price for the businesses acquired was
$11,060,000 in 1996.
Segment information--The accounting policies of the segments are the
same as those described in the note 1 -- Summary of accounting
policies. The Company's business operations, which are based mainly
in Minnesota, North Dakota, and South Dakota are broken down into
four segments based upon products and services. Electric operations
includes the electric utility only. Health services operations
consists of businesses involved in the sale, service, rental,
refurbishing and operations of medical imaging equipment and the sale
of related supplies and accessories to various medical institutions
located primarily in the Midwestern United States. Manufacturing
operations includes production of agricultural equipment, plastic
pipe, automobile and truck frame-straightening equipment and
accessories, and fabricated metal parts. Other business operations
consists of businesses diversified in such areas as electrical and
telephone construction contracting, entertainment, waste
incinerating, and telecommunications. The Company evaluates the
performance of its business segments and allocates resources to them
based on earnings contribution and return on investment. Information
for the business segments for 1998, 1997 and 1996 is presented in the
table below.
1998 1997 1996
-------- -------- --------
(in thousands)
Operating revenue
Electric $227,477 $205,121 $199,345
Manufacturing 86,030 81,543 64,568
Health services 68,728 66,185 61,697
Other business operations 48,843 41,430 45,323
-------- -------- --------
Total $431,078 $394,279 $370,933
Operating income
Electric $ 42,216 $ 44,966 $ 45,279
Manufacturing 8,661 7,945 6,504
Health services 6,510 4,295 5,137
Other business operations (157) 1,827 2,452
-------- -------- --------
Total $ 57,230 $ 59,033 $ 59,372
Depreciation and amortization
Electric $ 22,128 $ 21,442 $ 19,880
Manufacturing 510 542 594
Health services 541 638 585
Other business operations 2,634 2,914 2,328
-------- -------- --------
Total $ 25,813 $ 25,536 $ 23,387
Capital expenditures
Electric $ 17,939 $ 26,603 $ 38,224
Manufacturing 5,536 6,264 4,787
Health services 3,101 3,800 16,230
Other business operations 2,713 5,306 5,582
-------- -------- --------
Total $ 29,289 $ 41,973 $ 64,823
Identifiable assets
Electric $525,226 $526,679 $523,509
Manufacturing 41,579 40,814 34,354
Health services 36,241 35,738 65,140
Other business operations 52,566 52,210 46,701
-------- -------- --------
Total $655,612 $655,441 $669,704
No single external customer accounts for 10 percent or more of the
Company's revenues. Substantially all sales and long-lived assets of
the Company are within the United States.
5. Rate matters
On July 1, 1995, the Company began charging all Minnesota customers a
.5030 percent surcharge on their electric service statements for
recovery of conservation-related costs exceeding the amount already
included in base rates. On July 1, 1996, the rate was increased to
1.25 percent, on July 1, 1997, the rate was increased to 1.75 percent
and on July 1, 1998 the rate was increased to 2.75 percent. The
conservation-related costs being recovered through the surcharge and
in base rates include Conservation Improvement Program (CIP)
expenditures, carrying charges on costs incurred in excess of costs
currently being recovered, lost margins on avoided kilowatt-hour
sales, and bonus incentives related to energy savings. The MPUC
approved recovery of 1997, 1996, and 1995 lost margins and bonus
incentives in 1998, 1997, and 1996, respectively. The Company
recorded revenues related to 1998, 1997, and 1996 lost margins and
bonus incentives of $1,750,000, $1,931,000, and $1,266,000,
respectively. As these costs are recovered through the monthly
billing process, the amounts billed are offset by the amortization of
deferred CIP charges.
During 1998 the Minnesota Department of Public Service (MDPS)
recommended to the Minnesota Public Utilities Commission (MPUC) that
demand-side management incentives for all Minnesota electric
utilities be terminated as of January 1, 1998. At a hearing held
November 19, 1998, the MPUC did not accept the MDPS recommendation,
however, the MPUC put electric and gas utilities on notice that the
ability to earn demand-side management incentives could end as early
as January 1, 1999. A MPUC Chair's Round Table has been convened to
examine demand-side management programs and related incentives. A
report from the Round Table is due to the MPUC by May 1, 1999.
6. Common shares
New issuances--On August 30, 1996, the Company filed a shelf
registration statement with the Securities and Exchange Commission
for the issuance of up to 1,000,000 common shares pursuant to the
Company's Automatic Dividend Reinvestment and Share Purchase Plan
(the Plan), which will permit shares purchased by shareholders,
employees, or customers who participate in the Plan to be either new
issue common shares or common shares purchased on the open market.
In December 1996 the Company began issuing newly issued common shares
under the Plan: 148,426 shares were issued in 1998, 161,831 shares
were issued in 1997 and 34,516 shares were issued in 1996. In 1999
the Company plans to purchase shares on the open market for the Plan.
Additional common stock issuances in 1997 included 321,404
unregistered shares to effect the pooling acquisitions, 30,561 shares
to the Company's leveraged employee stock ownership plan and 2,630
shares issued as a bonus to a consultant.
Shareholder rights plan--On January 27, 1997, the Company's Board of
Directors declared a dividend of one preferred share purchase right
(Right) for each outstanding common share held of record as of
February 10, 1997. One Right was also issued with respect to each
common share issued after February 10, 1997. Each Right entitles the
holder to purchase from the Company one one-hundredth of a share of
newly created Series A Junior Participating Preferred Stock at a
price of $70, subject to certain adjustment. The Rights are
exercisable when, and are not transferable apart from the Company's
common shares until, a person or group has acquired 15 percent or
more, or commenced a tender or exchange offer for 15 percent or more,
of the Company's common shares. If the specified percentage of the
Company's common shares is acquired, each Right will entitle the
holder (other than the acquiring person or group) to receive, upon
exercise, common shares of either the Company or the acquiring
company having value equal to two times the exercise price of the
Right. The Rights are redeemable by the Company's Board of Directors
in certain circumstances and expire on January 27, 2007.
7. Retained earnings restriction
The Company's Indenture of Mortgage and Articles of Incorporation, as
amended, contain provisions that limit the amount of dividends that
may be paid to common shareholders. Under the most restrictive of
these provisions, retained earnings at December 31, 1998, were
restricted by $10,008,000.
8. Commitments
At December 31, 1998, the Company had commitments under contracts in
connection with construction programs aggregating approximately
$2,973,000. For capacity requirements the Company has agreements
extending through April 2005, at annual costs of approximately
$5,340,000 in 1999, $2,300,000 in each year of 2000 through 2004, and
$760,000 in 2005.
The Company also has several long-term coal contracts in which it is
responsible for making payment only upon the delivery of the coal.
The risk of loss from nonperformance of the contracts is considered
nominal because of the availability of other suppliers and the
expected continued reliability of the current fuel suppliers.
Furthermore, the cost of energy adjustment provision in the rate-
making process lessens the risk of loss (in the form of increased
costs) from market price changes because it assures recovery of
almost all fuel costs.
In 1996 the Big Stone Plant joint owners entered into operating
leases for 250 new aluminum coal cars for transporting coal to Big
Stone Plant. The terms of the leases are 15 years. The new cars
began transporting coal in October 1996. In November 1997 Varistar's
medical imaging services subsidiary entered into a sale/leaseback
transaction whereby $16,000,000 of diagnostic medical equipment was
sold and leased back under two operating leases with terms of three
and four years. The amounts of future operating lease payments are
as follows:
Electric Subsidiary
utility companies Total
-------- ---------- --------
(in thousands)
1999 $939 $10,315 $11,254
2000 939 9,771 10,710
2001 939 8,008 8,947
2002 939 4,079 5,018
2003 939 919 1,858
Later years 3,912 557 4,469
Rent expense was $13,016,000, $6,714,000, and $6,288,000 for 1998,
1997, and 1996, respectively.
9. Long-term obligations
Preferred shares--The $6.35 cumulative preferred shares are
redeemable in whole or in part at the option of the Company after
December 1, 1998, at $102.540, declining linearly to $100.00 at
December 31, 2002.
The $9.00 exchangeable cumulative preferred shares are redeemable in
whole or in part at the option of the Company after August 9, 1999,
for $100.00 per share payable in cash or, at the holder's election,
common shares. Subject to certain conditions, such shares are
exchangeable at the option of the holder after August 9, 1999, for
$100.00 per share in cash or common shares.
Long-term debt--All utility property, with certain minor exceptions,
is subject to the lien of the Indenture of Mortgage of the Company
securing its First Mortgage Bonds. The Company is required by the
Indenture to make annual payments (exclusive of redemption premiums)
for sinking fund purposes, except that the requirement with respect
to certain series may be satisfied by the delivery of bonds of such
series of equal principal amount. The Company issued First Mortgage
Bonds of its pollution control series to secure payment of a like
principal amount of revenue bonds that were issued by local
governmental units to finance facilities leased or purchased and that
the Company has capitalized. Varistar's ten-year term note and credit
line borrowings are secured by a pledge of all of the common stock of
the companies owned by Varistar. The aggregate amounts of maturities
and sinking fund requirements on bonds outstanding and other long-
term obligations at December 31, 1998, for each of the next five
years are $5,794,000 for 1999, $5,618,000 for 2000, $5,189,000 for
2001, $26,026,000 for 2002, and $4,304,000 for 2003.
10. Pension plan and other postretirement benefits
The utility company's noncontributory funded pension plan covers
substantially all electric utility employees. The plan provides 100
percent vesting after 5 vesting years of service and for retirement
compensation at age 65, with reduced compensation in cases of
retirement prior to age 62. The utility company reserves the right
to discontinue the plan, but no change or discontinuance may affect
the pensions theretofore vested. The utility company's policy is to
fund pension costs accrued. All past service costs have been provided
for. The total pension cost was $3,670,000 for 1998, $1,104,000 for
1997, and $1,292,000 for 1996.
The pension plan has a trustee who is responsible for pension
payments to retirees. Five investment managers are responsible for
managing the plan's assets. In addition, an independent actuary
performs the necessary actuarial valuations for the plan.
Net periodic pension cost for 1998, 1997, and 1996 includes the
following components:
1998 1997 1996
------- ------- -------
(in thousands)
Service cost--benefit earned during the period $ 2,319 $ 2,385 $ 2,273
Interest cost on projected benefit obligation 7,823 7,131 6,754
Expected return on assets (10,988) (9,036) (8,443)
Amortization of transition asset (235) (235) (235)
Amortization of prior-service cost 1,069 980 943
Amortization of net gain (344) (121) --
------- ------- -------
Net periodic pension cost $ (356) $ 1,104 $ 1,292
1998 early retirement and curtailment 4,026 -- --
------- ------- -------
Total expense $ 3,670 $ 1,104 $ 1,292
======= ======= =======
The plan assets consist of common stock and bonds of public
companies, U.S. Government Securities, cash, and cash equivalents.
The following tables provide a reconciliation of the changes in the
plan's benefit obligations and fair value of assets over the two-year
period ending December 31, 1998 and a statement of the funded status
as of December 31 of both years:
1998 1997
-------- --------
(in thousands)
Reconciliation of benefit obligation:
Obligation at January 1 $107,357 $100,664
Service cost 2,319 2,385
Interest cost 7,823 7,131
Plan amendments -- 1,658
Actuarial loss 13,924 807
Benefit payments (6,813) (5,288)
1998 early retirement and curtailment 3,895 --
-------- --------
Obligation at December 31 $128,505 $107,357
======== ========
Reconciliation of fair value of plan assets:
Fair value of plan assets at January 1 $137,560 $121,506
Actual return on plan assets 19,054 21,119
Pension purchase options rollovers 225 223
Benefit payments (6,813) (5,288)
-------- --------
Fair value of plan assets at December 31 $150,026 $137,560
======== ========
Funded status:
Funded status at December 31 $ 21,521 $ 30,203
Unrecognized transition asset (780) (1,015)
Unrecognized prior-service cost 9,393 10,594
Unrecognized net actuarial gain (31,174) (37,152)
-------- --------
Net amount recognized $ (1,040) $ 2,630
======== ========
The following table provides the amounts recognized in the statement
of financial position as of December 31 of both years:
1998 1997
-------- --------
(in thousands)
Prepaid benefit cost $ -- $ 2,630
Accrued benefit liability 1,040 --
-------- --------
Net amount recognized $ (1,040) $ 2,630
======== ========
The assumptions used for actuarial valuations were:
1998 1997
-------- --------
Discount rate 6.50% 7.25%
Rate of increase in future compensation level 4.25% 4.25%
Long-term rate of return on assets 9.50% 8.50%
In addition to providing pension benefits to all electric utility
employees, the Company has an unfunded, nonqualified benefit plan for
executive officers and certain key management employees. This plan
provides defined benefit payments to these employees upon their
retirements or to their beneficiaries upon their deaths for a 15-year
period. Life insurance carried on the plan participants is payable
to the Company upon the employee's death. There are no plan assets in
this nonqualified benefit plan due to the nature of the plan. The net
periodic pension cost of this program in 1998, 1997, and 1996 was
$562,000, $482,000, and $485,000, respectively.
Net periodic pension cost for 1998, 1997, and 1996 includes the
following components:
1998 1997 1996
-------- ------- -------
(in thousands)
Service cost--benefit earned during the period $ (88) $ (140) $ (132)
Interest cost on projected benefit obligation 521 475 467
Amortization of transition obligation 18 20 20
Amortization of prior service cost 111 127 130
------- ------ -----
Net periodic pension cost $ 562 $ 482 $ 485
1998 early retirement and curtailment 1,413 -- --
------- ------ -----
Total expense $ 1,975 $ 482 $ 485
======= ====== =====
The following tables provide a reconciliation of the changes in the
plan's benefit obligations over the two-year period ending December
31, 1998 and a statement of the funded status as of December 31 of
both years:
1998 1997
-------- --------
(in thousands)
Reconciliation of benefit obligation:
Obligation at January 1 $ 6,964 $ 6,636
Service cost (88) (140)
Interest cost 521 475
Actuarial loss 807 128
Benefit payments (273) (135)
1998 early retirement and curtailment 1,140 --
------- -------
Obligation at December 31 $ 9,071 $ 6,964
======= =======
Funded status:
Funded status at December 31 $ (9,071) $ (6,964)
Unrecognized transition obligation 34 62
Unrecognized prior-service cost 1,273 1,647
Unrecognized net actuarial loss 1,422 615
------- -------
Net amount recognized $ (6,342) $ (4,640)
========= =========
The following table provides the amounts recognized in the statement
of financial position as of December 31 of both years:
1998 1997
-------- --------
(in thousands)
Accrued benefit liability $ (7,649) $ (5,355)
Intangible asset 1,307 715
------- -------
Net amount recognized $ (6,342) $ (4,640)
========= =========
The assumptions used for actuarial valuations were:
1998 1997
------ ------
Discount rate 6.50% 7.25%
Rate of increase in future compensation level 5.00% 5.00%
In addition to providing pension benefits, the electric utility
provides a portion of health insurance benefits for retired electric
utility employees. Substantially all of the Company's electric
utility employees may become eligible for health insurance benefits
if they reach age 55 and have 10 years of service. Upon adoption of
SFAS 106 - Employers' Accounting for Postretirement Benefits Other
Than Pensions - in January 1993, the Company elected to recognize its
transition obligation related to postretirement benefits earned of
approximately $14,964,000 over a period of 20 years. There are no
plan assets.
The net postretirement benefit cost for 1998, 1997, and 1996 includes
the following components:
1998 1997 1996
-------- -------- --------
(in thousands)
Service cost - benefit earned during the period $ 563 $ 578 $ 484
Interest cost on accumulated postretirement
benefit obligation 1,281 1,159 1,132
Amortization of transition obligation 748 748 748
Amortization of net gain (209) (251) (210)
Life insurance curtailment gain -- -- (749)
------ ------ ------
Net periodic postretirement benefit cost $2,383 $2,234 $1,405
1998 early retirement and curtailment 954 -- --
------ ------ ------
Total expense $3,337 $2,234 $1,405
====== ====== ======
The following tables provide a reconciliation of the changes in the
plan's benefit obligations over the two-year period ending December
31, 1998 and a statement of the funded status as of December 31 of
both years:
1998 1997
-------- --------
(in thousands)
Reconciliation of benefit obligation:
Obligation at January 1 $ 17,707 $ 16,323
Service cost 563 578
Interest cost 1,281 1,159
Actuarial loss 4,726 337
Benefit payments (1,412) (1,057)
Participant premium payments 492 367
1998 early retirement and curtailment 271 --
-------- --------
Obligation at December 31 $ 23,628 $ 17,707
======== ========
Funded status:
Funded status at December 31 $ (23,628) $ (17,707)
Unrecognized transition obligation 10,474 11,223
Unrecognized loss (gain) 802 (3,449)
--------- ---------
Net amount recognized $ (12,352) $ (9,933)
========= =========
The following table provides the amounts recognized in the
statement of financial position as of December 31 of both
years:
1998 1997
-------- --------
(in thousands)
Accrued benefit liability $(12,352) $ (9,933)
The assumed health-care cost-trend rate used in measuring the
accumulated postretirement benefit obligation as of December 31,
1998, was 7.5 percent for 1999, decreasing linearly each successive
year until it reaches 5.0 percent in 2003, after which it remains
constant. The assumed health care cost trend rate used in measuring
the accumulated postretirement benefit obligation as of December 31,
1997, was 8.0 percent for 1998, decreasing linearly each successive
year until it reaches 5.0 percent in 2003, after which it remains
constant. The assumed discount rate used in determining the
accumulated postretirement benefit obligation as of December 31, 1998
and 1997, was 6.50 percent and 7.25 percent, respectively.
Assumed health-care cost-trend rates have a significant effect on the
amounts reported for health care plans. A one-percentage-point
change in assumed health-care cost-trend rates for 1998 would have
the following effects:
1 percent 1 percent
increase decrease
--------- ---------
Effect on total of service and interest (in thousands)
cost components $ 304 $ (261)
Effect on the postretirement benefit obligation $ 2,525 $ (2,281)
The Company has a leveraged employee stock ownership plan (ESOP) for
the benefit of all its electric utility employees. Contributions
made by the Company were $1,078,000 for 1998, $1,055,000 for 1997,
and $1,010,000 for 1996.
11. Compensating balances and short-term borrowings
The Company maintains formal bank lines of credit for its electric
utility operations separate from lines and letters of credit
maintained by the subsidiary companies. They make available to the
Company bank loans for short-term financing and provide backup
financing for commercial paper notes. At December 31, 1998, the
Company maintained no compensating balances to support formal bank
lines of credit. The Company's bank lines of credit for electric
utility operations totaled $18,000,000, none of which was used at
December 31, 1998. The subsidiary companies' bank lines and letters
of credit, which require no compensating balances, totaled
$18,263,000 of which $824,000 was used at December 31, 1998.
12. Fair value of financial instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and short-term investments--The carrying amount approximates
fair value because of the short-term maturity of those instruments.
Other investments--The carrying amount approximates fair value. A
portion of other investments is in financial instruments that have
variable interest rates that reflect fair value. The remainder of
other investments is accounted for by the equity method which, in the
case of operating losses, results in a reduction of the carrying
amount.
Redeemable preferred stock--The fair value is estimated based on the
current rates available to the Company for the issuance of redeemable
preferred stock.
Long-term debt--The fair value of the Company's long-term debt is
estimated based on the current rates available to the Company for the
issuance of debt. About $20 million of the Company's long-term debt,
which is subject to variable interest rates, approximates fair value.
1998 1997
--------------------- ---------------------
(in thousands)
Carrying Fair Carrying Fair
amount value amount value
--------- --------- --------- ---------
Cash and short-term investments $ 3,919 $ 3,919 $ 5,301 $ 5,301
Other investments 20,612 20,612 20,048 20,048
Redeemable preferred stock (18,000) (19,252) (18,000) (19,619)
Long-term debt (181,046) (203,789) (189,973) (207,063)
The Company's marketable securities are included in investments on
the balance sheet and are classified as available for sale. These
securities are recorded at fair value with any unrealized gain or
loss included in accumulated other comprehensive income in the equity
section of the balance sheet net of deferred income taxes of $210,000
at year-end 1998 and $257,000 at year-end 1997. Realized gains and
losses are computed on each specific investment sold. The amounts
recognized on the balance sheet as of December 31, 1998 and 1997, and
amounts sold for each year are as follows:
1998 1997
-------- --------
Available for sale - securities (in thousands)
Cost $ 83 $ 83
Gross unrealized gain 507 620
------- -------
Fair value $ 590 $ 703
======= =======
Proceeds from sale $ -- $ 785
Gross realized gains -- 707
13. Property, plant, and equipment
1998 1997
-------- --------
(December 31, in thousands)
Electric plant:
Production 309,109 $305,147
Transmission 143,822 141,956
Distribution 234,671 227,463
General 83,285 83,985
-------- --------
Electric plant 770,887 758,551
Less accumulated depreciation and amortization 332,315 315,011
------- --------
Electric plant net of accumulated depreciation 438,572 443,540
Construction work in progress 10,495 12,146
-------- --------
Net electric plant $449,067 $455,686
-------- --------
Diversified operations plant $ 89,094 $ 89,716
Less accumulated depreciation and amortization 37,975 35,636
-------- --------
Net diversified operations plant $ 51,119 $ 54,080
-------- --------
Net plant $500,186 $509,766
======== ========
14. Income taxes
The total income tax expense differs from the amount computed by
applying the federal income tax rate (35 percent in 1998, 1997 and
1996) to net income before total income tax expense for the following
reasons:
1998 1997 1996
-------- -------- --------
(in thousands)
Tax computed at federal statutory rate $18,272 $16,329 $15,378
Increases (decreases) in tax from:
State income taxes net of federal income tax
benefit 2,665 2,224 1,835
Investment tax credit amortization (1,186) (1,186) (1,186)
Depreciation differences--flow-through
method reversal 1,133 408 (138)
Differences reversing in excess of federal rates (1,639) (994) (1,030)
Dividend received/paid deduction (643) (620) (604)
Affordable housing tax credits (1,330) (1,057) (593)
Permanent and other differences 413 (796) 348
------- ------- -------
Total income tax expense $17,685 $14,308 $14,010
======= ======= =======
Overall effective federal and state income tax rate 33.9% 30.7% 31.4%
Income tax expense includes the following:
Charges (credits) related to operations:
Current federal income taxes $20,198 $17,123 $18,014
Current state income taxes 4,182 3,300 3,608
Deferred federal income taxes (4,085) (3,410) (4,657)
Deferred state income taxes (206) (205) (480)
Investment tax credit amortization (1,186) (1,186) (1,186)
------- ------- -------
Total $18,903 $15,622 $15,299
------- ------- -------
Charges (credits) related to other income
and deductions:
Current federal income taxes (280) (645) (430)
Affordable housing tax credits (1,330) (1,057) (593)
Current state income taxes (9) 19 (103)
Deferred federal and state income taxes 401 369 (163)
------- ------- -------
Total income tax expense $17,685 $14,308 $14,010
======= ======= =======
The Company's deferred tax assets and liabilities were composed of
the following on December 31, 1998 and 1997:
1998 1997
------- -------
(in thousands)
Deferred tax assets
Amortization of tax credits $ 11,497 $ 12,258
Vacation accrual 1,202 1,121
Unearned revenue 1,844 4,105
Operating reserves 10,026 7,890
Differences related to property 2,209 936
Transfer to regulatory asset 124 (61)
Other 991 811
--------- ---------
Total deferred tax assets $ 27,893 $ 27,060
Deferred tax liabilities
Differences related to property (108,968) (111,300)
Excess tax over book - pensions -- (1,043)
Transfer to regulatory asset (3,744) (4,999)
Transfer to regulatory liability -- (188)
Other (3,415) (2,375)
--------- ---------
Total deferred tax liabilities $(116,127) $(119,905)
--------- ---------
Deferred income taxes $ (88,234) $ (92,845)
========= =========
15. Quarterly information (unaudited)
The quarterly data shown below reflects seasonal and timing
variations that are common in the utility industry.
<TABLE>
Three Months Ended
March 31 June 30 September 30 December 31
-------------- --------------- --------------- ---------------
1998 1997 1998 1997 1998 1997 1998 1997
------ ------ ------ ------ ------ ------ ------ ------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues $96,909 $94,289 $106,946 $91,096 $112,171 $101,858 $115,052 $107,036
Operating income $ 5,558 $19,741 $ 14,685 $ 9,798 $ 17,856 $ 13,753 $ 19,131 $ 15,742
Income before cumulative effect
of change in accounting principle $ 1,939 -- -- -- -- -- -- --
Cumulative effect of change in
accounting principle -- net-of-tax $ 3,819 -- -- -- -- -- -- --
-------
Net income $ 5,758 $10,690 $ 8,015 $ 5,393 $ 9,877 $ 7,785 $ 10,870 $ 8,478
Earnings available for common shares $ 5,168 $10,101 $ 7,426 $ 4,803 $ 9,287 $ 7,195 $ 10,281 $ 7,889
Basic and diluted earnings per share
Before cumulative effect of change
in accounting principle $ .12 -- -- -- -- -- -- --
Cumulative effect of change in
accounting principle $ .32 -- -- -- -- -- -- --
------
Basic and diluted earnings per share $ .44 $ .87 $ .63 $ .41 $ .79 $ .62 $ .87 $ .67
Dividends paid per common share $ .48 $ .465 $ .48 $ .465 $ .48 $ .465 $ .48 $ .465
Price range:
High $38 3/4 $34 3/4 $37 3/4 $34 1/4 $40 3/4 $34 1/2 $42 3/4 $38 3/8
Low $36 $31 1/2 $30 1/8 $30 $35 $31 1/2 $37 $32 1/8
Average number of common shares
outstanding 11,740 11,569 11,777 11,621 11,818 11,661 11,855 11,704
</TABLE>
In the first quarter of 1998 the Company changed its method of
electric revenue recognition in the states of Minnesota
and South Dakota from meter-reading dates to energy-delivery dates
resulting in the recognition of $6,364,000 ($3,819,000 net-of-tax) in
unbilled revenue. The first quarter of 1998 also reflects the recording of
special charges related to the voluntary early retirement program, Quadrant
Co. asset impairment and the write-off of the Big Stone plant rail spur
project.
- -----------------------------------------------------------------------------
Stock listing
- -------------
Otter Tail common stock is traded on The Nasdaq Stock Market.
(Nasdaq: National Association of Securities Dealers Automated
Quotation.)
Exhibit 18
REPORT OF INDEPENDENT ACCOUNTANTS - ACCOUNTING CHANGE
Otter Tail Power Company
We have audited the consolidated balance sheets of Otter Tail Power
Company and its subsidiaries (the Company) as of December 31, 1998 and
1997, and the related consolidated statements of income, retained earnings,
and cash flows for each of the three years in the period ended December 31,
1998, included in your Annual Report on Form 10-K to the Securities and
Exchange Commission and have issued our report thereon dated February 1,
1999. Note 2 to such consolidated financial statements contains a
description of the Company's change in its method of accounting for
unbilled revenues in the States of Minnesota and South Dakota during 1998.
In our judgement, such change is to an alternative accounting principle
that is preferable under the circumstances.
Deloitte & Touche LLP
Minneapolis, Minnesota
February 1, 1999
Exhibit 21-A
OTTER TAIL POWER COMPANY
Subsidiaries of the Registrant
March 1, 1999
Company State of Organization
Minnesota-Dakota Generating Company Minnesota
Otter Tail Realty Company Minnesota
Otter Tail Management Corporation* Minnesota
ORD Corporation* Minnesota
Quadrant Co. Minnesota
Midwest Information Systems, Inc. Minnesota
Midwest Telephone Co. Minnesota
Osakis Telephone Company Minnesota
Peoples Telephone Company of Bigfork Minnesota
Data Video Systems, Inc. Minnesota
Otter Tail Communications SD, Inc. South Dakota
MIS Investments, Inc. Minnesota
Varistar Corporation Minnesota
Glendale Machining, Inc. Minnesota
Precision Machine of North Dakota, Inc. North Dakota
Dakota Machine, Inc. North Dakota
Dakota Engineering, Inc. North Dakota
Aerial Contractors, Inc. North Dakota
Moorhead Electric, Inc. Minnesota
KFGO, Inc. North Dakota
Western Minnesota Broadcasting Company Minnesota
Diagnostic Medical Systems, Inc. North Dakota
DMS Imaging, Inc. North Dakota
DMS Leasing Corporation North Dakota
BTD Manufacturing, Inc. Minnesota
Northern Pipe Products, Inc. North Dakota
Northern Micro, Inc. North Dakota
Fargo Baseball, LLC Minnesota
Fargo Sports Concession LLC Minnesota
Chassis Liner Corporation Minnesota
Otter Tail Energy Services Company, Inc. Minnesota
Mid-States Testing Company Minnesota
Otter Tail Energy Management Company Minnesota
*Inactive
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
Nos. 333-11145 on Form S-3 and 333-25261, 333-73041, 333-73075 on Form
S-8 of Otter Tail Power Company of our report dated February 1, 1999,
incorporated by reference in this Annual Report on Form 10-K of Otter
Tail Power Company for the year ended December 31, 1998.
Deloitte & Touche LLP
Minneapolis, Minnesota
March 24, 1999
Exhibit 24-A
POWER OF ATTORNEY
__________
I, JEFFREY J. LEGGE, do hereby constitute and appoint JOHN C.
MAC FARLANE, JOHN D. ERICKSON, and C. E. BRUNKO, and or any one of them,
my Attorney-in-Fact for the purpose of signing, in my name and on my
behalf as Controller and Principal Accounting Officer of Otter Tail Power
Company, the Annual Report of Otter Tail Power Company on Form 10-K for
its fiscal year ended December 31, 1998, and any and all amendments to said
Annual Report, and to deliver on my behalf said Annual Report and any and
all amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission pursuant to the Securities Exchange Act
of 1934, as amended.
Date: February 12, 1999.
___________Jeffrey J. Legge_______
Jeffrey J. Legge
In Presence of:
Anita Anderson
______________
Becky Luhning
______________
POWER OF ATTORNEY
__________
I, JOHN C. MAC FARLANE, do hereby constitute and appoint JOHN D.
ERICKSON, and C. E. BRUNKO, or any one of them, my Attorney-in-Fact for
the purpose of signing, in my name and on my behalf as President and
Chief Executive Officer, Principal Executive Officer and Director of
Otter Tail Power Company, the Annual Report of Otter Tail Power Company
on Form 10-K for its fiscal year ended December 31, 1998, and any and
all amendments to said Annual Report, and to deliver on my behalf said
Annual Report and any and all amendments thereto, as each thereof is
so signed, for filing with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934, as amended.
Date: February 11, 1999.
________John C. MacFarlane_______
John C. MacFarlane
In Presence of:
Deborah A. Kleven
___________________
Penny Mosher
___________________
POWER OF ATTORNEY
__________
I, ROBERT N. SPOLUM, do hereby constitute and appoint JOHN C.
MAC FARLANE, JOHN D. ERICKSON, and C. E. BRUNKO, or any one of them,
my Attorney-in-Fact for the purpose of signing, in my name and on my
behalf as Director of Otter Tail Power Company, the Annual Report of
Otter Tail Power Company on Form 10-K for its fiscal year ended
December 31, 1998, and any and all amendments to said Annual Report,
and to deliver on my behalf said Annual Report and any and all
amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission pursuant to the Securities Exchange
Act of 1934, as amended.
Date: February 17, 1999
___________Robert N. Spolum_____
Robert N. Spolum
In Presence of:
Dwight Fredricson
___________________
Francine C. Johnson
___________________
POWER OF ATTORNEY
__________
I, NATHAN I. PARTAIN, do hereby constitute and appoint JOHN C.
MAC FARLANE, JOHN D. ERICKSON, and C. E. BRUNKO, or any one of them,
my Attorney-in-Fact for the purpose of signing, in my name and on my
behalf as Director of Otter Tail Power Company, the Annual Report of
Otter Tail Power Company on Form 10-K for its fiscal year ended
December 31, 1998, and any and all amendments to said Annual Report,
and to deliver on my behalf said Annual Report and any and all
amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission pursuant to the Securities Exchange
Act of 1934, as amended.
Date: February 19, 1999.
_________Nathan I. Partain________
Nathan I. Partain
In Presence of:
Eric Elveberg
_____________
Ellen Rembert
_____________
POWER OF ATTORNEY
__________
I, DAYLE DIETZ, do hereby constitute and appoint JOHN C. MAC FARLANE,
JOHN D. ERICKSON, and C. E. BRUNKO, or any one of them, my Attorney-in-Fact
for the purpose of signing, in my name and on my behalf as Director of
Otter Tail Power Company, the Annual Report of Otter Tail Power Company on
Form 10-K for its fiscal year ended December 31, 1998, and any and all
amendments to said Annual Report, and to deliver on my behalf said Annual
Report and any and all amendments thereto, as each thereof is so signed,
for filing with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, as amended.
Date: March 1, 1999.
___________Dayle Dietz___________
Dayle Dietz
In Presence of:
Eleanor Zakala
________________
Steve Stroh
________________
POWER OF ATTORNEY
__________
I, ARVID R. LIEBE, do hereby constitute and appoint JOHN C.
MAC FARLANE, JOHN D. ERICKSON, and C. E. BRUNKO, or any one of them,
my Attorney-in-Fact for the purpose of signing, in my name and on my
behalf as Director of Otter Tail Power Company, the Annual Report of
Otter Tail Power Company on Form 10-K for its fiscal year ended
December 31, 1998, and any and all amendments to said Annual Report,
and to deliver on my behalf said Annual Report and any and all
amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission pursuant to the Securities Exchange
Act of 1934, as amended.
Date: February 16, 1999.
___________Arvid R. Liebe ______
Arvid R. Liebe
In Presence of:
Renee Thomas
_________________
Susan J. DeJong
_________________
POWER OF ATTORNEY
__________
I, THOMAS M. BROWN, do hereby constitute and appoint JOHN C.
MAC FARLANE, JOHN D. ERICKSON, and C. E. BRUNKO, or any one of them,
my Attorney-in-Fact for the purpose of signing, in my name and on my
behalf as Director of Otter Tail Power Company, the Annual Report of
Otter Tail Power Company on Form 10-K for its fiscal year ended
December 31, 1998, and any and all amendments to said Annual Report,
and to deliver on my behalf said Annual Report and any and all
amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission pursuant to the Securities Exchange
Act of 1934, as amended.
Date: February 22, 1999.
___________Thomas M. Brown _____
Thomas M. Brown
In Presence of:
Donna M. Hull
_________________
Diane Rundlbade
_________________
POWER OF ATTORNEY
__________
I, C. E. BRUNKO, do hereby constitute and appoint JOHN C. MAC FARLANE,
and JOHN D. ERICKSON, or any one of them, my Attorney-in-Fact for the
purpose of signing, in my name and on my behalf as Assistant Treasurer
and Assistant Secretary of Otter Tail Power Company, the Annual Report of
Otter Tail Power Company on Form 10-K for its fiscal year ended December
31, 1998, and any and all amendments to said Annual Report, and to deliver
on my behalf said Annual Report and any and all amendments thereto, as each
thereof is so signed, for filing with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934, as amended.
Date: February 12, 1999.
__________C. E. Brunko____________
C. E. Brunko
In Presence of:
LeAnn Dornburg
____________________
Desdemona B. Norgren
____________________
POWER OF ATTORNEY
__________
I, MAYNARD D. HELGAAS, do hereby constitute and appoint JOHN C.
MAC FARLANE, JOHN D. ERICKSON, and C. E. BRUNKO, or any one of them,
my Attorney-in-Fact for the purpose of signing, in my name and on my
behalf as Director of Otter Tail Power Company, the Annual Report of
Otter Tail Power Company on Form 10-K for its fiscal year ended December
31, 1998, and any and all amendments to said Annual Report, and to
deliver on my behalf said Annual Report and any and all amendments
thereto, as each thereof is so signed, for filing with the Securities
and Exchange Commission pursuant to the Securities Exchange Act of 1934,
as amended.
Date: February 14, 1999.
_________Maynard D. Helgaas_______
Maynard D. Helgaas
In Presence of:
Julie Dunwoodie
___________________
Ronald Hurour
___________________
POWER OF ATTORNEY
__________
I, KENNETH L. NELSON, do hereby constitute and appoint JOHN C.
MAC FARLANE, JOHN D. ERICKSON, and C. E. BRUNKO, or any one of them,
my Attorney-in-Fact for the purpose of signing, in my name and on my
behalf as Director of Otter Tail Power Company, the Annual Report of
Otter Tail Power Company on Form 10-K for its fiscal year ended
December 31, 1998, and any and all amendments to said Annual Report,
and to deliver on my behalf said Annual Report and any and all
amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission pursuant to the Securities Exchange
Act of 1934, as amended.
Date: February 15, 1999
__________Kenneth L. Nelson____
Kenneth L. Nelson
In Presence of:
Kim M. Nelson
_________________
Penny Mosher
_________________
POWER OF ATTORNEY
__________
I, DENNIS R. EMMEN, do hereby constitute and appoint JOHN C.
MAC FARLANE, JOHN D. ERICKSON, and C. E. BRUNKO, or any one of them,
my Attorney-in-Fact for the purpose of signing, in my name and on my
behalf as Director of Otter Tail Power Company, the Annual Report of
Otter Tail Power Company on Form 10-K for its fiscal year ended
December 31, 1998, and any and all amendments to said Annual Report,
and to deliver on my behalf said Annual Report and any and all
amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission pursuant to the Securities Exchange
Act of 1934, as amended.
Date: February 16, 1999
_________Dennis R. Emmen_______
Dennis R. Emmen
In Presence of:
Becky Luhning
________________
Penny Mosher
________________
POWER OF ATTORNEY
__________
I, JOHN D. ERICKSON, do hereby constitute and appoint JOHN C.
MAC FARLANE, and C. E. BRUNKO, or any one of them, my Attorney-in-Fact
for the purpose of signing, in my name and on my behalf as Vice
President, Finance of Otter Tail Power Company, the Annual Report of
Otter Tail Power Company on Form 10-K for its fiscal year ended December
31, 1998, and any and all amendments to said Annual Report, and to
deliver on my behalf said Annual Report and any and all amendments
thereto, as each thereof is so signed, for filing with the Securities
and Exchange Commission pursuant to the Securities Exchange Act of
1934, as amended.
Date: February 24, 1999.
_________John D. Erickson______
John D. Erickson
In Presence of:
Penny Mosher
_________________
Lori D. Dawkins
_________________
<TABLE> <S> <C>
<ARTICLE> UT
Exhibit 27
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of December 31, 1998, and the Consolidated
Statement of Income for the twelve months ended December 31, 1998, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 449,067
<OTHER-PROPERTY-AND-INVEST> 96,875
<TOTAL-CURRENT-ASSETS> 98,788
<TOTAL-DEFERRED-CHARGES> 10,882
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 655,612
<COMMON> 59,398
<CAPITAL-SURPLUS-PAID-IN> 39,919
<RETAINED-EARNINGS> 125,759
<TOTAL-COMMON-STOCKHOLDERS-EQ> 225,076
18,000
20,831
<LONG-TERM-DEBT-NET> 181,046
<SHORT-TERM-NOTES> 824
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 5,794
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 204,041
<TOT-CAPITALIZATION-AND-LIAB> 655,612
<GROSS-OPERATING-REVENUE> 431,078
<INCOME-TAX-EXPENSE> 15,140
<OTHER-OPERATING-EXPENSES> 373,848
<TOTAL-OPERATING-EXPENSES> 388,988
<OPERATING-INCOME-LOSS> 42,090
<OTHER-INCOME-NET> 4,177
<INCOME-BEFORE-INTEREST-EXPEN> 46,267
<TOTAL-INTEREST-EXPENSE> 15,566
<NET-INCOME> 34,520
2,358
<EARNINGS-AVAILABLE-FOR-COMM> 32,162
<COMMON-STOCK-DIVIDENDS> 22,642
<TOTAL-INTEREST-ON-BONDS> 14,823
<CASH-FLOW-OPERATIONS> 63,959
<EPS-PRIMARY> 2.73
<EPS-DILUTED> 2.73
</TABLE>
