EXHIBIT 13(a)
ANNUAL REPORT TO STOCKHOLDERS
PAGE 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
The Company has a strong liquidity position through the generation of
significant cash flows, the availability of substantial cash reserves, and
a sound capital structure. The Company also has adequate capacity for
additional financing and has maintained favorable bond and commercial paper
ratings.
During the three years ended 1993, the Company has generated
significant operating cash flows while continuing to maintain substantial
cash reserves in the form of marketable securities. In the years ended
1993, 1992, and 1991, cash flows from operating activities were $24.0
million, $23.1 million, and $24.9 million, respectively. Cash equivalents
and marketable securities totaled $39.1 million, $25.6 million, and $29.9
million at December 31, 1993, 1992, and 199l, respectively.
Working capital and other financial resources are also provided by
unused lines of credit, which are generally used to support commercial
paper borrowings, a primary source of short-term financing. At
December 31, 1993, unused short-term lines of credit totaled
$12 million.
The Company currently has outstanding bonds issued under two
indentures; the 1940 Mortgage Indenture and the 1993 General Mortgage
Indenture. The 1940 indenture provides a first lien on substantially all
utility property as security for outstanding bonds. The 1993 indenture
provides a junior lien on all of the Company's utility properties that are
covered under the previously existing indenture as security for outstanding
bonds. The 1993 indenture junior lien will become a first lien when all
bonds issued under the 1940 indenture are retired. The provisions of the
1993 indenture result in an increase in the amount of bonds that can be
issued on the basis of bonded property as well as increased financing
flexibility.
In June 1993, the Company issued $7,550,000 of 5.85% and $13,800,000
of 5.90% Pollution Control Refunding Revenue Bonds, due 2023. The proceeds
were used to redeem $21,350,000 of 6 3/8%, 6 7/8% and 7.2% Pollution
Control Revenue Bonds which would have matured between 1994 and 2009. In
August 1993, the Company sold $55,000,000 of General Mortgage Bonds, 7%
Series, due 2023. The net proceeds were used for the redemption of the
Company's First Mortgage Bonds Series 6 1/4%, 8%, 8 1/4% and 8.8% which
totaled $36,500,000. The proceeds were also used to reduce short-term
commercial paper borrowings and for general corporate purposes.
The Company will continue to review the economics of retiring or
refunding long-term debt and preferred stock to minimize long-term
financing costs. The Company's financial coverages are at levels in excess
of those required for the issuance of debt and preferred stock.
CAPITAL REQUIREMENTS
The Company's primary capital requirements include the funding of its
utility construction and expansion programs, the funding of debt and
preferred stock retirements and sinking fund requirements, and the funding
of its corporate development and investment activities.
The emphasis of the Company's construction activities is to undertake
those projects that most efficiently serve the expanding needs of its
customer base, enhance energy delivery and reliability capabilities through
system replacement, expand its current customer base, and provide for the
reliability of energy supply. Expenditures for construction activities for
the years 1993, 1992, and 1991 were $19.7 million, $18.5 million, and $23.0
million, respectively. Construction expenditures during the last three
years included the installation of an additional 43 mw of internal peaking
capacity, and the expansion of the Company's natural gas system into 26
additional communities in eastern South Dakota. Construction expenditures
for 1994 are estimated to be $17.9 million. Over half of these projected
expenditures will be spent on enhancements of the electric distribution
system. The Company also projects spending modest amounts on the Company's
continuing gas expansion program. Estimated construction expenditures for
the years 1994 through 1998 are expected to be $72 million.
ANNUAL REPORT TO STOCKHOLDERS
PAGE 17
Capital requirements for the mandatory retirement of long-term debt
and mandatory preferred stock sinking fund redemption totaled $180,000,
$513,000, and $1.4 million, for the years ended 1993, 1992, and 1991,
respectively. It is expected that such mandatory retirements will be
$630,000 in 1994 and 1995, $610,000 in 1996, $600,000 in 1997, and $20.6
million in 1998.
The Company anticipates that future capital requirements will be met
by both internally generated cash flows and available external financing.
RESULTS OF OPERATIONS
EARNINGS COMPARISONS
Earnings per share of common stock were $1.96 in 1993 compared to
$1.77 in 1992 and $1.88 in 1991. The increase in 1993 was due to more
normal weather patterns and to proceeds received by one of the Company's
subsidiaries, Northwestern Networks, Inc. (NNI), for payment of accumulated
dividends and interest related to its investment in LodgeNet Entertainment
Corporation (LEC) after LEC sold shares of common stock through an initial
public offering. NNI recorded after-tax gains of $1,727,000 in 1993
related to the transaction. The Company's more normal weather patterns in
1993 occurred during the first quarter and third quarter, contributing to
higher operating revenues. Offsetting earnings in 1993 was a $1,750,000
restructuring charge to operating expenses related to implementation of
certain cost containment and efficiency programs. The decrease in earnings
per share in 1992 from 1991 was primarily due to warmer weather patterns
during the first quarter of 1992 and cooler weather during the summer of
1992 which resulted in a significant decrease in operating revenues.
OPERATING REVENUES
As indicated by degree day information, weather has the greatest
influence on the comparison of revenues from year to year. In 1993, retail
electric kwh sales increased by 7.9%, while sales to wholesale customers,
representing primarily kwh sales to other utilities in the power pool,
increased by 19.6%. In 1992, retail kwh sales decreased by 4.5%, but were
somewhat offset by an 18.3% increase in sales to wholesale customers.
Colder weather patterns during the 1993 heating season resulted in a 20.1%
increase in mcf sales of gas. In 1992, warmer weather was responsible for
the 7.0% decrease in total mcf sales of gas over 1991.
The following table summarizes the factors affecting the variations in
revenues between years:
Variation from prior year
-------------------------
1993 1992
---- ----
(in thousands)
Electric Revenue:
Variation in kwh sales $ 5,441 $(2,817)
Changes in rates, fuel
cost recovery, and other (964) 487
------- -------
$ 4,477 $(2,330)
======= =======
Gas Revenue:
Variation in mcf sales $10,349 $(3,925)
Changes in rates, gas
cost recovery, and other 2,453 1,199
------- -------
$12,802 $(2,726)
======= =======
OPERATING EXPENSES
More favorable weather patterns in 1993 resulted in comparable
increases in electric fuel-related costs and purchased gas sold. Other
operating expenses, excluding the $1.7 million related to a restructuring
charge referred to above, increased over 1992 primarily due to higher gas
distribution and customer accounts expenses. Additionally, operating
expenses in 1992 were benefited due to the receipt of insurance proceeds
related to employee benefits. Maintenance increased due primarily to
expenditures at the Company's baseload plants. Depreciation increases can
be attributed to an increase in construction activity. Property and other
taxes increased primarily because South Dakota property taxes were
unusually low in 1992 related to reduced property tax assessments. Income
taxes increased as a result of higher taxable income. The increase in
interest charges is due to the issuance of $55 million of General Mortgage
Bonds in August 1993, offset by the redemption of the 6 1/4%, 8%, 8 1/4%
and 8.8% Series of First Mortgage Bonds which totaled $36.5 million.
ANNUAL REPORT TO STOCKHOLDERS
PAGE 18
In 1992, the significant weather-related decrease in revenues resulted
in comparable decreases in electric fuel-related costs and purchased gas
sold. Property and other taxes were unusually low in 1992 due to reduced
property tax assessments, and income taxes decreased related to lower
taxable income. Interest expense increased in 1992 due to the issuance of
$25 million of First Mortgage Bonds in September 1992, offset by the
redemption of 9.85% and 9 5/8% Series First Mortgage Bonds.
FUTURE EARNINGS AND CASH FLOW VARIABLES
The Company's future earnings and cash flow performance are dependent
on numerous factors including, among others, the unpredictable midwestern
weather patterns, the effects of regulation on the Company's utility
operations, the Company's ability to maintain and expand its electric and
gas revenue base, the prudent containment of operating expenses, and the
performance of its corporate development and investment programs.
Although the Company will continue to aggressively pursue
opportunities to expand its gas and electric revenue base, it is not
expected that high levels of growth in electric and gas customer demand
will occur in the Company's service territory during the next several
years. The anticipation that growth in customer demand will not be at high
levels in 1994, or the near future, increases the importance of the
Company's expansion programs and cost containment activities to maintain
and enhance operating income from utility operations. Future utility
operating income will also be impacted by regulatory decisions affecting
the Company's electric and gas operations.
In addition to factors affecting electric and gas utility operations,
the Company's future earnings are also dependent on income generated from
corporate development and investment activities. A large portion of such
investment activities in 1993 included participation in preferred stock
investment programs that involve substantial liquidity and provide a flow
of current income, much of which is tax advantaged. During the next
several years, the Company will seek utility or utility-related investment
opportunities that meet the goal of expanding the Company's current utility
operations. Additionally, the Company may also pursue, where appropriate,
nonutility investments in privately held entities and ventures that provide
the potential of increased long-term investment returns. Such privately
held investments can involve increased principal and liquidity risk when
compared to the Company's preferred stock investments or its utility
operations.
NONUTILITY OPERATIONS
In addition to the Company's investment portfolio of preferred stock
investments, the Company holds interests in two nonutility businesses. At
December 31, 1992, Northwestern Networks, Inc. (NNI), one of the Company's
wholly owned subsidiaries, held investments in LodgeNet Entertainment
Corporation (LEC), consisting of LEC common stock and $12.9 million of LEC
15% cumulative preferred stock. During 1993, NNI converted all of its LEC
common stock to $3.8 million of convertible preferred stock and provided
additional funding to LEC in the form of $6 million of 12% subordinated
debt. On October 21, 1993, LEC sold 5,175,000 shares of common stock
through an initial public offering at a price of $13.50 per share.
Proceeds from the initial public offering were used to retire loans under
LEC's credit facility and to redeem the 15% cumulative preferred stock held
by NNI at face value plus accumulated dividends. In addition, NNI received
payment of accrued interest on the subordinated note. The balance of the
proceeds will be used by LEC in its future business operations. In
connection with the public offering, the convertible preferred stock held
by NNI was converted to 1,121,000 shares of LEC common stock, and NNI
exchanged the 12% subordinated note for a new $6,000,000 subordinated note
with a coupon rate of 2% over the LEC credit facility rate. LEC's common
stock is now traded on NASDAQ under the symbol LNET. NNI recorded after-
tax income of $1,727,000 in 1993 related to dividends and interest received
following the initial public offering.
In December 1992, one of the Company's subsidiaries, Northwestern
Systems, Inc. (NSI), acquired a 60% ownership interest in Lucht
Engineering, Inc. (Lucht), a firm that develops, manufactures, and markets
multi-image photographic printers and other related equipment. On
October 1, 1993, NSI acquired the remaining 40% common stock interest in
Lucht. This investment contributed $.10 per share to the Company's
earnings in 1993.
ANNUAL REPORT TO STOCKHOLDERS
PAGE 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
OF NORTHWESTERN PUBLIC SERVICE COMPANY:
We have audited the accompanying consolidated balance sheet and
consolidated statement of capitalization of NORTHWESTERN PUBLIC SERVICE
COMPANY (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1993
and 1992, and the related consolidated statement of income and retained
earnings and cash flows for each of the three years in the period ended
December 31, 1993. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Northwestern
Public Service Company and Subsidiaries as of December 31, 1993 and 1992,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen & Co.
Minneapolis, Minnesota
February 1, 1994.
ANNUAL REPORT TO STOCKHOLDERS
PAGE 20
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
Years ended December 31
1993 1992 1991
------------ ------------ ------------
Operating Revenues:
Electric $ 70,104,822 $ 65,627,621 $ 67,957,685
Gas 65,017,964 52,216,333 54,942,474
Other 18,134,456 1,352,600 0
------------ ------------ ------------
153,257,242 119,196,554 122,900,159
------------ ------------ ------------
Operating Expenses:
Fuel for electric generation 12,731,558 12,072,833 12,247,112
Purchased power 1,229,748 841,356 1,293,204
Purchased gas sold 48,153,861 38,186,237 39,850,574
Other operating expenses 23,285,277 19,871,923 19,450,481
Manufacturing costs 16,543,662 1,345,966 0
Maintenance 6,368,346 5,889,310 5,835,969
Depreciation 11,558,839 11,061,520 10,506,102
Property and other taxes 6,139,613 5,118,469 6,269,088
Income taxes 6,940,374 5,234,602 7,101,524
------------ ------------ ------------
132,951,278 99,622,216 102,554,054
------------ ------------ ------------
Operating Income 20,305,964 19,574,338 20,346,105
Investment Income and Other,
net of taxes (Note 1) 3,829,693 2,252,177 1,712,096
Interest Expense, net (8,944,584) (8,105,109) (7,243,605)
------------ ------------ ------------
Net Income 15,191,073 13,721,406 14,814,596
Dividends on Cumulative
Preferred Stock (121,463) (143,267) (370,081)
------------ ------------ ------------
Net Income Available for
Common Stock 15,069,610 13,578,139 14,444,515
Retained Earnings,
beginning of year 50,318,050 48,986,426 46,326,463
Dividends on Common Stock (12,513,888) (12,206,799) (11,784,552)
Premium on Preferred
Stock Retirement 0 (39,716) -
------------ ------------ ------------
Retained Earnings, end of year $ 52,873,772 $ 50,318,050 $ 48,986,426
============ ============ ============
Earnings Per Average Common Share
based on 7,677,232 shares $ 1.96 $ 1.77 $ 1.88
============ ============ ============
Dividends Declared Per
Common Share $ 1.63 $ 1.59 $ 1.535
============ ============ ============
See Notes to Consolidated Financial Statements
ANNUAL REPORT TO STOCKHOLDERS
PAGE 21
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31
1993 1992 1991
------------ ------------ ------------
Operating Activities:
Net income $ 15,191,073 $ 13,721,406 $ 14,814,596
Items not requiring cash:
Depreciation 11,558,839 11,061,520 10,506,102
Deferred income taxes, net (1,398,578) (47,328) (946,920)
Investment tax credit (566,498) (568,655) (597,347)
Changes in current assets
and liabilities:
Accounts receivable (2,145,693) (1,049,603) (613,278)
Inventories (111,703) 352,866 (756,876)
Other current assets (1,056,726) (1,246,370) 1,857,160
Accounts payable (1,565,245) 2,499,414 (1,943,154)
Accrued taxes 2,393,850 (579,660) 2,491,591
Accrued interest 193,772 143,992 548,811
Other current liabilities 898,638 424,523 473,264
Other, net 604,591 (1,655,673) (959,195)
------------ ------------ ------------
Cash flows from operating
activities 23,996,320 23,056,432 24,874,754
------------ ------------ ------------
Investment Activities:
Additions to utility plant (19,707,593) (18,510,018) (22,996,064)
Sale (purchase) of noncurrent
investments, net (6,923,488) 3,872,766 (648,713)
Acquisition of net assets (2,850,000) (4,122,180) -
------------ ------------ ------------
Cash flows for investment
activities (29,481,081) (18,759,432) (23,644,777)
------------ ------------ ------------
Financing Activities:
Common and preferred stock
dividends paid (12,635,351) (12,350,066) (12,154,633)
Issuance of long-term debt 76,453,842 26,072,200 15,000,000
Repayment of long-term debt (58,900,200) (12,736,000) (1,233,000)
Retirement of preferred stock (30,000) (3,085,000) (195,000)
Commercial paper repayments 0 (2,000,000) (2,500,000)
------------ ------------ ------------
Cash flows from (for)
financing activities 4,888,291 (4,098,866) (1,082,633)
------------ ------------ ------------
Increase (Decrease) in Cash and
Cash Equivalents (596,470) 198,134 147,344
Cash and Cash Equivalents, 3,695,563 3,497,429 3,350,085
beginning of year ------------ ------------ ------------
Cash and Cash equivalents,
end of year $ 3,099,093 $ 3,695,563 $ 3,497,429
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ 6,338,293 $ 6,129,541 $ 6,620,863
Interest 8,771,595 7,442,176 6,098,910
See Notes to Consolidated Financial Statements
ANNUAL REPORT TO STOCKHOLDERS
PAGE 22
CONSOLIDATED BALANCE SHEET
December 31
1993 1992
ASSETS ------------ ------------
Utility Plant, at original cost:
Electric $292,508,996 $284,656,157
Gas 53,414,571 46,739,238
Common 15,788,899 14,798,045
------------ ------------
Utility plant in service 361,712,466 346,193,440
Less-Accumulated depreciation 130,610,474 122,085,437
------------ ------------
231,101,992 224,108,003
Construction work in progress 7,393,129 5,624,869
------------ ------------
238,495,121 229,732,872
------------ ------------
Current Assets:
Cash and cash equivalents 3,099,093 3,695,563
Accounts receivable, net 11,197,920 9,052,227
Fuel, at average cost 4,040,170 3,337,294
Inventories, materials and supplies 9,150,841 9,742,014
Deferred gas costs 4,121,591 4,035,067
Other 2,343,183 1,372,981
------------ ------------
33,952,798 31,235,146
------------ ------------
Other Assets:
Investments 44,851,734 37,928,246
Deferred charges and other 26,274,440 9,298,109
------------ ------------
71,126,174 47,226,355
------------ ------------
$343,574,093 $308,194,373
============ ============
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity $109,666,931 $107,111,209
Nonredeemable cumulative preferred stock 2,600,000 2,600,000
Redeemable cumulative preferred stock 70,000 100,000
Long-term debt 126,600,000 106,422,200
------------ ------------
238,936,931 216,233,409
------------ ------------
Commitments and Contingencies (Notes 1,7,8,9) 0 0
------------ ------------
Current Liabilities:
Long-term debt due within one year 600,000 150,000
Accounts payable 10,440,263 12,005,508
Accrued taxes 8,227,610 5,833,760
Accrued interest 2,946,075 2,752,303
Other 5,617,740 4,719,102
------------ ------------
27,831,688 25,460,673
------------ ------------
Deferred Credits:
Accumulated deferred income taxes 35,683,509 37,055,175
Unamortized investment tax credits 11,149,631 11,716,129
Other 29,972,334 17,728,987
------------ ------------
76,805,474 66,500,291
------------ ------------
$343,574,093 $308,194,373
============ ============
See Notes to Consolidated Financial Statements
ANNUAL REPORT TO STOCKHOLDERS
PAGE 23
CONSOLIDATED STATEMENT OF CAPITALIZATION
December 31
1993 1992
------------------- -------------------
Common Stock Equity:
Common stock, $3.50 par value,
20,000,000 shares authorized;
7,677,232 shares outstanding $ 26,870,312 $ 26,870,312
Additional paid-in capital 29,922,847 29,922,847
Retained earnings 52,873,772 50,318,050
------------------- -------------------
109,666,931 46% 107,111,209 50%
------------------- -------------------
Cumulative Preferred Stock:
$100 par value, 300,000 shares
authorized; outstanding:
Nonredeemable-
4 1/2% Series 2,600,000 2,600,000
Redeemable-
5 1/4% Series 70,000 100,000
------------------- -------------------
2,670,000 1% 2,700,000 1%
------------------- -------------------
Long-Term Debt:
Series Due
-------- -----
First mortgage bonds-
6 1/4% 1996 0 3,500,000
8.824% 1998 15,000,000 15,000,000
8.9% 1999 7,500,000 7,500,000
8% 2002 0 6,000,000
6.99% 2002 25,000,000 25,000,000
8 1/4% 2003 0 15,000,000
8.8% 2007 0 12,000,000
General mortgage bonds-
7% 2023 55,000,000 -
------------------- -------------------
102,500,000 84,000,000
------------------- -------------------
Pollution control obligations
(Note 4) -
5.85%, Mercer Co., ND 2023 7,550,000 7,550,000
5.90%, Salix, IA 2023 4,000,000 4,000,000
5.90%, Grant Co., SD 2023 9,800,000 9,950,000
------------------- -------------------
21,350,000 21,500,000
------------------- -------------------
123,850,000 105,500,000
Other long-term debt 3,350,000 1,072,200
Less-Due within one year 600,000 150,000
------------------- -------------------
126,600,000 53% 106,422,200 49%
------------------- -------------------
Total Capitalization $238,936,931 100% $216,233,409 100%
=================== ===================
See Notes to Consolidated Financial Statements
ANNUAL REPORT TO STOCKHOLDERS
PAGE 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES -
BASIS OF CONSOLIDATION:
The accompanying consolidated financial statements include the
accounts of Northwestern Public Service Company and its wholly owned
subsidiaries. The Company's regulated businesses are subject to various
state and federal agency regulation. The accounting policies followed by
these businesses are generally subject to the Uniform System of Accounts of
the Federal Energy Regulatory Commission (FERC). These accounting policies
differ in some respects from those used by its nonregulated businesses.
All significant intercompany balances and transactions have been eliminated
from the consolidated financial statements. The accompanying Consolidated
Statement of Income and Retained Earnings includes the operating results of
Lucht Engineering, Inc. effective December 1, 1992, the date of
acquisition.
REVENUE RECOGNITION:
Electric and gas revenue is based on billings rendered to customers
rather than on meters read or energy delivered. Customers are billed
monthly on a cycle basis.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION:
The allowance for funds used during construction includes the costs of
equity and borrowed funds used to finance construction which are
capitalized in accordance with rules prescribed by the FERC. In the years
ended 1993, 1992, and 1991, allowance for equity funds was $32,000,
$105,000, and $228,000. Allowance for borrowed funds for the years ended
1993, 1992, and 1991 was $50,000, $158,000, and $184,000.
CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
GAS COSTS:
The commodity cost portion of gas purchased from wholesale suppliers
but not yet billed to customers is charged to deferred gas costs. This
account is subsequently credited in future periods as customers are billed
for gas used in prior periods. This method has the approximate effect of
matching gas costs with gas revenues in any financial reporting period.
The demand cost portion of gas costs, which is comprised of numerous
components, is expensed as incurred.
The Company has various long-term gas supply agreements with its
pipeline suppliers for the purchase of natural gas in the normal course of
its gas operations.
DEPRECIATION AND MAINTENANCE:
Depreciation is computed using the straight-line method based on the
estimated useful lives of the various classes of property. Depreciation
provisions, as a percentage of the average balance of depreciable plant in
service, were 3.31% in 1993, 3.32% in 1992, and 3.34% in 1991.
Depreciation rates include a provision for the Company's share of the
estimated costs to decommission three coal-fired generating plants at the
end of the useful life of each plant. The annual provision for such costs
is included in depreciation expense, while the accumulated provisions are
included in other deferred credits.
The costs of maintenance, repairs, and replacements of minor property
items are charged to maintenance expense accounts. Costs of renewals and
betterments of property units are charged to utility plant accounts. The
costs of units of property removed from service, net of removal costs and
salvage, are charged to accumulated depreciation. No profit or loss is
recognized in connection with ordinary retirements of depreciable utility
property.
INVESTMENTS:
The Company's investments consist primarily of corporate preferred and
common stocks. In addition, the Company has investments in privately held
entities and ventures, safe harbor leases, and various money market and tax
exempt investment programs. Preferred stocks were recorded at a cost basis
of $34.1 million on December 31, 1993.
At December 31, 1992, Northwestern Networks, Inc. (NNI), one of the
Company's wholly owned subsidiaries, held investments in LodgeNet
Entertainment Corporation (LEC), consisting of LEC common stock and $12.9
million of LEC 15% cumulative preferred stock. During 1993, NNI converted
all of its LEC common stock to $3.8 million of convertible preferred stock
and provided additional funding to LEC in the form of $6 million of 12%
subordinated debt. On October 21, 1993, LEC sold 5,175,000 shares of
common stock through an initial public offering at a price of $13.50 per
share. Proceeds from the initial public offering were used to retire loans
under LEC's credit facility and to redeem the 15% cumulative preferred
stock held by NNI at face value plus accumulated dividends. In addition,
NNI received payment of accrued interest on the subordinated note. NNI
recorded after-tax income of $1,727,000 in 1993 related to dividends and
interest received upon the closing of the initial public offering. In
connection with the initial public offering, the convertible preferred
stock held by NNI was converted to 1,121,000 shares of LEC common stock,
and NNI exchanged the 12% subordinated note for a new $6,000,000
subordinated note with a coupon rate of 2% over the LEC credit facility
rate.
Effective December 1, 1992, Northwestern Systems, Inc. (NSI), one of
the Company's wholly owned subsidiaries, acquired a 60 percent common stock
ownership interest in Lucht Engineering, Inc. (Lucht). The acquisition was
accounted for under the purchase method of accounting. On October 1, 1993,
NSI acquired the remaining 40 percent common stock interest in Lucht.
ANNUAL REPORT TO STOCKHOLDERS
PAGE 25
In May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for
Certain Investments in Debt and Equity Securities." The Company will adopt
SFAS 115 in 1994. It is anticipated that adoption will primarily affect
balance sheet disclosures and will not have a material effect on operating
results.
INCOME TAXES:
Deferred income taxes relate primarily to the difference between book
and tax methods of depreciating property, taxable income derived from safe
harbor leases, the difference in the recognition of revenues for book and
tax purposes, and to gas costs which are deferred for book purposes but
expensed currently for tax purposes. The cumulative net amount of tax
provisions related to deferred gas costs are recorded as a current
liability in the balance sheet since the related deferred gas costs are
classified as a current asset.
For book purposes, investment tax credits are deferred and amortized
as a reduction of income tax expense over the useful lives of the property
which generated the credits.
RECLASSIFICATIONS:
Certain 1992 and 1991 amounts have been reclassified to conform to the
1993 presentation. Such reclassifications had no impact on net income and
common stock equity as previously reported.
(2) SHORT-TERM BORROWINGS -
The Company may issue short-term debt in the form of bank loans and
commercial paper as interim financing for general corporate purposes. The
bank loans may be obtained under short-term lines of credit which totaled
$12 million at December 31, 1993. The Company pays an annual fee
equivalent to 1/4% of the unused lines. There were no borrowings
outstanding at December 31, 1993 and 1992.
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS -
The carrying amount of the Company's cash equivalents and certain
money market fund investments approximate fair value due to the short-term
maturity of those instruments.
In addition to cash equivalents, the Company's preferred stock
portfolio, recorded at a cost basis of $34.1 million, had an estimated fair
value of $34.7 million at December 31, 1993. The fair value of preferred
stocks is estimated based on quoted market prices for these and similar
investment securities. The carrying value of the Company's investment in
LodgeNet Entertainment Corporation common stock is $1.4 million. The
investment had a market value of approximately $16.4 million at
December 31, 1993, based on the year-end market price for LEC common stock.
Based on current market rates for debt of similar credit quality and
remaining maturities or quoted market prices for certain issues, the face
value of the Company's long-term debt approximates its market value.
(4) LONG-TERM DEBT -
Substantially all of the Company's utility plant is subject to the
lien of the indentures securing its first mortgage bonds, general mortgage
bonds, and pollution control obligations. General mortgage bonds of the
Company may be issued in amounts limited by property, earnings, and other
provisions of the mortgage indenture.
In June 1993, the Company issued $7,550,000 of 5.85% and $13,800,000
of 5.90% Pollution Control Refunding Revenue Bonds, due 2023. The net
proceeds were used to redeem $21,350,000 of 6 3/8%, 6 7/8% and 7.2%
Pollution Control Revenue Bonds which would have matured between 1994 and
2009. In August 1993, the Company sold $55,000,000 of General Mortgage
Bonds, 7% Series due 2023 which were issued under the Company's General
Mortgage Indenture and Deed of Trust dated as of August 1, 1993. The net
proceeds were used to redeem the outstanding 6 1/4%, 8%, 8 1/4% and 8.8%
Series First Mortgage Bonds in the amount of $36,500,000, to reduce short-
term commercial paper borrowings, and for general corporate purposes. The
only scheduled retirements of the Company's long-term bond debt during the
next five years are $20,000,000 in 1998.
Lucht Engineering, Inc. has a credit agreement with a bank whereby it
may borrow up to $7 million in revolving and term loans. A balance of
$3,350,000 was outstanding under the revolving and term loan as of
December 31, 1993 at an interest rate of 6.75%. Borrowings under the
agreement are collateralized by all receivables, inventories, property, and
other assets of Lucht. Scheduled retirements of the Lucht long-term debt
are $600,000 during each of the years 1994 through 1998.
(5) CAPITAL STOCK TRANSACTIONS AND RETAINED EARNINGS AVAILABILITY -
There were no common stock transactions during the three years ended
December 31, 1993. In 1992, the Company retired all of the 7 5/8% and 8%
cumulative preferred stock with a total par value of $3,055,000. Other
preferred stock transactions for the three years ended December 31, 1993,
have been limited to redemptions to satisfy mandatory sinking fund
requirements.
At December 31, 1993, $39,962,000 of retained earnings was available
for payment of dividends on common stock under the most restrictive of
various provisions which limit the payment of dividends on common stock.
ANNUAL REPORT TO STOCKHOLDERS
PAGE 26
(6) INCOME TAXES -
Income tax expense is comprised of the following (in thousands):
1993 1992 1991
---- ---- ----
Federal income -
Current tax expense $7,541 $4,915 $8,209
Deferred tax benefit (530) 602 (993)
Investment tax credit (566) (568) (597)
State income 495 286 483
------ ------ ------
Total charged to operations 6,940 5,235 7,102
Federal income - nonoperating 628 438 122
------ ------ ------
$7,568 $5,673 $7,224
====== ====== ======
The following table reconciles the Company's effective federal income
tax rate to the federal statutory rate:
1993 1992 1991
---- ---- ----
Federal statutory rate 35% 34% 34%
Amortization of investment tax credit (2) (3) (3)
Dividends received deduction (2) (2) (2)
Other, net - (1) 1
--- --- ---
Effective federal income tax rate 31% 28% 30%
=== === ===
The components of the net deferred federal income tax liability
recognized in the Company's Consolidated Balance Sheet is comprised of the
following at December 31 (in thousands):
Deferred Tax Asset (Liability)
------------------------------
1993 1992
---- ----
Excess tax depreciation $(22,671) $(20,402)
Safe harbor leases (9,171) (9,778)
Property basis and life differences (8,312) (9,022)
Asset sales (5,171) (6,173)
Regulatory asset (4,477) (4,648)
Regulatory liability 4,189 4,393
Unbilled revenue 3,901 3,257
Unamortized investment tax credit 3,491 3,575
Other, net 2,537 1,743
-------- --------
Total $(35,684) $(37,055)
======== ========
On January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." The
cumulative and current period effect on net income of adopting SFAS 109 was
not material as the significant items were regulatory related. As a result
of adopting SFAS 109, the Company recognized regulatory assets and
associated deferred tax liabilities of $13.7 million related primarily to
book and tax property basis differences. In addition, the Company
recognized regulatory liabilities and associated deferred tax assets of
$12.9 million related primarily to unamortized investment tax credits and
previously recorded deferred income taxes in excess of the existing
statutory tax rate of 34 percent, which are anticipated to be returned to
customers over the estimated remaining useful lives of the utility
property.
(7) JOINTLY OWNED PLANTS -
The Company has an ownership interest in three major electric
generating plants, all of which are operated by other utility companies.
The Company has an undivided interest in these facilities and is
responsible for its proportionate share of the capital and operating costs
while being entitled to its proportionate share of the power generated.
The Company's interest in each plant is reflected in the Consolidated
Balance Sheet on a pro rata basis, and its share of operating expenses is
reflected in the Consolidated Statement of Income and Retained Earnings.
The participants finance their own investment. The Company has long-term
coal contracts for delivery of lignite coal to Coyote I and sub-bituminous
coal to Neal #4. The lignite coal contract for Big Stone expires in 1995,
and the plant owners are negotiating with coal suppliers for a contract
from that year forward. Contracts for Big Stone and Coyote I are total
requirements contracts with a minimum obligation of 30,000 tons per week
except during scheduled or forced outages. Neal #4 has a contract for
delivery of sub-bituminous coal with an annual minimum purchase requirement
of 1.8 million tons. Information relating to the Company's ownership
interest in these facilities at December 31, 1993, is as follows:
Big Stone Neal #4 Coyote I
--------- ------- --------
(dollars in thousands)
Utility plant in service $46,640 $34,972 $45,320
Accumulated depreciation $23,436 $14,134 $15,551
Construction work in progress $ 303 $ 155 $ 234
Total plant capacity - mw 452 624 426
Company's share 23.4% 8.7% 10.0%
In-service date 1975 1979 1981
Coal contract expiration date 1995 1998 2016
ANNUAL REPORT TO STOCKHOLDERS
PAGE 27
(8) EMPLOYEE RETIREMENT BENEFITS -
The Company maintains a noncontributory defined benefit pension plan
covering substantially all employees. The benefits to which an employee is
entitled under the plan are derived using a formula based on the number of
years of service and compensation levels during the last few years of
service before retirement.
The Company determines the annual funding for its plan using the
frozen initial liability cost method. The Company's annual contribution is
funded in accordance with the requirements of ERISA. The assets of the
plan are comprised primarily of debt and equity securities.
The components of net periodic pension cost for the years ended
December 31, 1993, 1992, and 1991 were as follows (in thousands):
1993 1992 1991
---- ---- ----
Service cost $ 985 $ 966 $ 910
Interest cost on projected
benefit obligation 3,048 2,951 2,834
Actual return on assets (2,970) (5,779) (6,435)
Net amortization and deferral (886) 2,283 3,539
----- ------- -------
Net periodic pension cost $ 177 $ 421 $ 848
===== ======= =======
The following table reflects the funded status of the Company's
pension plan as of December 31, 1993, 1992, and 1991 (in thousands):
1993 1992 1991
---- ---- ----
Actuarial present value of:
Accumulated benefit obligation -
Vested $34,052 $33,058 $28,343
Nonvested 1,528 1,131 1,183
------- ------- -------
35,580 34,189 29,526
Provision for future pay increases 5,515 5,234 6,406
------- ------- -------
Projected benefit obligation 41,095 39,423 35,932
Plan assets at fair value 46,912 45,366 41,084
------- ------- -------
Projected benefit obligation
less than plan assets (5,817) (5,943) (5,152)
Unrecognized transition obligation (1,856) (2,011) (2,165)
Unrecognized net gain 6,941 7,910 7,545
------- ------- -------
(Prepaid) accrued pension cost $ (732) $ (44) $ 228
======= ======= =======
The assumptions used in calculating the projected benefit obligation
for 1993, 1992, and 1991 were as follows:
1993 1992 1991
---- ---- ----
Discount rate 8% 8% 8 1/2%
Expected rate of return on assets 8 1/2% 8 1/2% 8 1/2%
Long-term rate of increase
in compensation levels 5% 5% 6%
(9) ENVIRONMENTAL MATTERS -
The Company is subject to environmental regulations from numerous
entities. The Clean Air Act Amendments of 1990 (the Act) stipulate
limitations on sulfur dioxide and nitrogen oxide emissions from coal-fired
power plants. The Company believes it can economically meet the Act's
sulfur dioxide emission requirements at its generating plants by the
required compliance dates. The Act also requires the EPA to study cyclone
boiler nitrogen oxide and air toxic emissions. In addition to the Clean
Air Act, the Company is also subject to other environmental regulations
including matters related to utility processing sites. Due to the
uncertain nature of the results of such studies and regulations, the
Company cannot now determine the additional costs, if any, or the
regulatory treatment which may occur related to specific environmental
provisions.
(10) CUMULATIVE PREFERRED STOCK AND PREFERENCE STOCK -
All series of the Company's cumulative preferred stock, except the
41/2% Series, are subject to mandatory redemption at par through an annual
sinking fund requirement, as defined for each series. On January 2, 1992,
the Company's 7 5/8% and 8% cumulative preferred stock was retired with a
total par value of $3,055,000.
All cumulative preferred stock may be redeemed in whole or in part at
the option of the Board of Directors at any time upon at least 30 days
notice at the per share prices noted below, plus accrued dividends:
Redemption Prices
-----------------------------------------
Series Present Through Subsequent
- ------ ------- ------- ----------
4 1/2% $110.00 - -
5 1/4% 100.53 May 31, 1994 $100.35-$100.00
In the event of involuntary dissolution, all preferred stock
outstanding would have a preferential interest of $100 per share, plus
accumulated dividends, before any distribution to common stockholders.
The Company is also authorized to issue a maximum of 200,000 shares of
preference stock at a par value of $50 per share. No preference shares
have ever been issued.
ANNUAL REPORT TO STOCKHOLDERS
PAGE 28
(11) SEGMENTS OF BUSINESS -
The Company's principal business segments consist of the following (in
thousands):
1993 1992 1991
---- ---- ----
Operating Revenues:
Electric $ 70,105 $ 65,628 $ 67,958
Gas 65,018 52,216 54,942
Other 18,134 1,353 -
Operating Income:
Electric 16,999 17,712 17,708
Gas 2,480 1,856 2,638
Other 827 6 -
Depreciation Expense:
Electric 9,841 9,504 9,079
Gas 1,718 1,558 1,427
Construction Expenditures:
Electric 11,225 12,605 18,162
Gas 8,483 5,905 4,834
Assets:
Identifiable -
Electric 206,962 204,206 200,492
Gas 45,296 37,814 32,776
Other assets 91,316 66,174 64,493
-------- -------- --------
$343,574 $308,194 $297,761
======== ======== ========
Identifiable assets include all assets that are used directly in each
business segment. Other assets consist principally of cash, accounts
receivable, prepayments, and investments.
(12) QUARTERLY FINANCIAL DATA (UNAUDITED) -
First Second Third Fourth
----- ------ ----- ------
(thousands except per share amounts)
1993:
Operating revenues $51,137 $33,783 $29,775 $38,562
Operating income 8,211 4,216 4,720 3,159
Net income 6,574 2,344 2,468 3,805
Earnings per average common share .85 .30 .32 .49
======= ======= ======= =======
1992:
Operating revenues $37,041 $25,664 $22,012 $34,480
Operating income 5,981 3,870 3,954 5,769
Net income 4,677 2,478 2,349 4,217
Earnings per average common share .61 .32 .30 .54
======= ======= ======= =======