EXHIBIT 13.A
ANNUAL REPORT TO STOCKHOLDERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
Pages 12-14
(graph of information in following table)
ELECTRIC CAPABILITY AND PEAK DEMAND
MW
Forecast
--------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Capability at Peak* 290 307 309 309 309
Peak Demand 192 237 230 257 260
*Includes Net Capacity Purchased.
(end of graph)
LIQUIDITY AND CAPITAL RESOURCES
The Company has a high degree of long-term liquidity through the generation
of operating cash flows, the availability of substantial cash reserves, and
a sound capital structure. The Company has adequate capacity for
additional financing and has maintained its liquidity position through
favorable bond and commercial paper ratings.
During the three years ended 1994, the Company has generated operating cash
flows while continuing to maintain substantial cash reserves in the form of
marketable securities. In 1994, 1993, and 1992, cash flows from operating
activities were $26.3 million, $24.3 million, and $23.1 million. Cash
equivalents and marketable securities totaled $39.2 million, $39.1 million,
and $25.6 million at December 31, 1994, 1993, and 1992.
Working capital and other financial resources are also provided by lines of
credit, which are generally used to support commercial paper borrowings, a
primary source of short-term financing. At December 31, 1994, unused short-
term lines of credit totaled $12 million.
The Company currently has outstanding bonds issued under two indentures;
the 1940 Mortgage Indenture and the 1993 General Mortgage Indenture. The
1940 indenture provides a first lien on substantially all electric and gas
property as security for outstanding bonds. The 1993 indenture provides a
junior lien on all of the Company's electric and gas properties that are
covered under the previously existing indenture as security for outstanding
bonds. The 1993 indenture junior lien will become a first lien when all
bonds issued under the 1940 indenture are retired. The provisions of the
1993 indenture provide increased financial flexibility and an increase in
the amount of bonds that can be issued on the basis of bonded property.
The Company will continue to review the economics of retiring or refunding
long-term debt and preferred stock to minimize long-term financing costs.
The Company's financial coverages are at levels in excess of those required
for the issuance of debt and preferred stock.
CAPITAL REQUIREMENTS
The Company's primary capital requirements include the funding of its
utility construction and expansion programs, the funding of debt and
preferred stock retirements and sinking fund requirements, and the funding
of its corporate development and investment activities.
The emphasis of the Company's construction activities is to undertake those
projects that most efficiently serve the expanding needs of its customer
base, enhance energy delivery capabilities, expand its current customer
base, and provide for the reliability of energy supply. Capital expenditure
plans are subject to continual review and may be revised as a result of
changing economic conditions, variations in sales, environmental
requirements, investment opportunities, and other ongoing considerations.
Expenditures for construction activities for 1994, 1993, and 1992 were
$22.7 million, $20.0 million, and $18.5 million. Construction expenditures
during the last three years included expenditures related to the
installation of an additional 43 mw of internal peaking capacity, the
expansion of the Company's natural gas system into 29 additional
communities in eastern South Dakota, and to an operations center which will
provide future cost savings and operating efficiencies through
consolidation of activities. Construction expenditures for 1995 are
estimated to be $19.3 million. The majority of the projected expenditures
will be spent on enhancements of the electric and gas distribution systems
and completion of the operations center. Estimated construction
expenditures for the years 1995 through 1999 are expected to be $69
million.
Capital requirements for the mandatory retirement of long-term debt and the
mandatory preferred stock sinking fund redemption totaled $600,000,
$180,000, and $513,000 for the years ended 1994, 1993, and 1992. It is
expected that such mandatory retirements will be $600,000 in 1995,
$1,080,000 in 1996, $570,000 in 1997, $20.6 million in 1998, and $13.5
million in 1999.
The Company anticipates that future capital requirements will be met by
both internally generated cash flows and available external financing.
The Company will continue to evaluate and pursue opportunities to enhance
shareholder return through nonregulated business investments. Nonregulated
projects are expected to be financed from the existing investment portfolio
and from other available financing options.
RESULTS OF OPERATIONS
Earnings Comparisons
Earnings per share of common stock were $2.00 in 1994 compared to $1.96 in
1993 and $1.77 in 1992. The increase in 1994 was primarily due to a 5.6%
increase in retail electric sales and improved profitability from
nonregulated operations. Also favorably impacting 1994 earnings was a
decrease in other operating expenses. Offsetting earnings in 1994 was a
4.9% decrease in gas sales largely due to warmer than normal weather in the
last quarter of 1994 and increased interest expense related to the issuance
of general mortgage bonds in August 1993. The Company also recorded less
investment income in 1994 due to payments received in 1993 for accumulated
dividends and interest after LodgeNet Entertainment Corporation, an
investment held by one of the Company's subsidiaries, sold shares of common
stock through an initial public offering. The increase in earnings per
share in 1993 from 1992 was primarily due to more normal weather patterns
and to interest and dividends received after the initial public offering of
LodgeNet Entertainment Corporation.
Operating Revenues
Weather fluctuations in the Company's service area have the greatest
influence on the comparison of revenues from year to year. In 1994, more
favorable weather contributed to increased electric use per customer.
Residential customers averaged an increase of 2.5%, while commercial and
industrial customers' use increased 5.6%. Retail electric kwh sales
increased 5.6% in 1994, while sales to wholesale customers, representing
primarily kwh sales to other utilities in the power pool, decreased 4.8%.
In 1993, retail kwh sales increased 7.9%, while sales to wholesale
customers increased 19.6%. In 1994, warmer weather was largely responsible
for the 4.9% decrease in sales of gas, while in 1993, colder weather
patterns during the heating season resulted in a 20% increase in sales of
gas. The 6.2% overall rate increase implemented in South Dakota on
November 15, 1994 had a modest upward impact on gas revenues for the year.
The following tables summarize the factors affecting the variations in
electric and gas revenues between years (in thousands):
Variation from
Prior Year
---------------------
1994 1993
------- -------
ELECTRIC REVENUE:
Variation in kwh sales $ 3,571 $ 4,987
Changes in rates, fuel
cost recovery, and other (553) (876)
Sales for resale (45) 366
------- -------
$ 2,973 $ 4,477
======= =======
GAS REVENUE:
Variation in mmbtu sales $(3,129) $10,349
Changes in rates, gas cost
recovery, and other 252 2,453
------- -------
$(2,877) $12,802
======= =======
Operating Expenses
Fuel for electric generation and purchased power increased comparably in
1994 with the increase in electric revenue. Purchased gas sold decreased in
1994 as weather-related sales of gas declined. Other operating expenses,
excluding 1993 nonrecurring items, increased slightly over 1993 primarily
due to higher gas production and distribution expenses, partially offset by
lower employee benefit expense and lower administrative salaries related to
fewer employees during 1994. Maintenance decreased due primarily to lower
electric transmission and distribution expenditures. Depreciation
increases can be attributed to an increase in construction activity, and
income taxes increased as a result of higher taxable income. The increase
in interest charges is due to the increase in long-term debt issued through
refinancing activities in August 1993.
In 1993, the weather-related increases in electric and gas revenues
resulted in comparable increases in electric fuel-related costs and
purchased gas sold. Other operating expenses increased over 1992 due to
higher gas distribution and customer accounts expenses. Maintenance
increased due primarily to expenditures at the Company's baseload plants.
Property and other taxes increased primarily because South Dakota property
taxes were unusually low in 1992 related to reduced property tax
assessments. The increase in interest charges is due to the issuance of
long-term debt in August 1993.
FUTURE EARNINGS AND CASH FLOW VARIABLES
The Company's future earnings and cash flow performance are dependent on
numerous factors including, among others, the unpredictable midwestern
weather patterns, the effects of regulation on the Company's utility
operations, the Company's ability to maintain and expand its electric and
gas revenue base, the prudent containment of operating expenses, and the
performance of its corporate development and investment programs.
Although the Company will continue to pursue opportunities to expand its
gas and electric revenue base, it is not expected that high levels of
growth in electric and gas customer demand will occur in the Company's
service territory during the next several years. The anticipation
that growth in customer demand will not be at high levels in 1995, or the
near future, increases the importance of the Company's expansion programs,
customer retention, and cost containment activities to maintain and enhance
operating income from utility operations. Future utility operating income
will also be impacted by regulatory decisions affecting the Company's
electric and gas operations.
The energy industry in general has become increasingly competitive. The
National Energy Policy Act of 1992 was designed to promote energy
efficiency and increased competition in the electric wholesale markets. In
1992, the Federal Energy Regulatory Commission (FERC) also issued Order
636. Order 636 requires, among other provisions, that all companies with
natural gas pipelines separate natural gas supply or production services
from transportation service and storage businesses. This allows gas
distribution companies, such as the Company, and individual customers to
purchase gas directly from producers, third parties, and various gas
marketing entities and transport it through the suppliers' pipelines.
While Order 636 had positive aspects by providing for more diversified
supply and storage options, it also required the Company to assume
responsibility for the procurement, transportation, and storage of natural
gas. The alternatives now available under Order 636 create additional
pressure on all distribution companies to keep gas supply and
transportation pricing competitive, particularly for large customers.
The Company is subject to environmental regulations from numerous entities.
The Clean Air Act Amendments of 1990 (the Act) stipulate limitations on
sulfur dioxide and nitrogen oxide emissions from coal-fired power plants.
The Company believes it can economically meet such sulfur dioxide emission
requirements at its generating plants by the required compliance dates and
that it is in compliance with all presently applicable environmental
protection requirements and regulations. In addition to the Act, the
Company is also subject to other environmental regulations including
matters related to utility processing sites. The Company conducted an
investigation of a former gas manufacturing site in 1994 and is taking
remedial action to dispose of waste material found at such site. Recovery
of remediation costs for such sites will be sought from insurance carriers
and through the regulatory process although there is no assurance that such
costs will be recovered. No administrative or judicial proceedings
involving the Company are now pending or known by the Company to be
contemplated under present environmental protection requirements.
In addition to factors affecting electric and gas energy operations, the
Company's future earnings are also dependent on income generated from
corporate development and investment activities. A substantial portion of
such investment activities in 1994 included participation in preferred
stock investment programs that provide a flow of current income, much of
which is tax advantaged. During the next several years, the Company will
seek energy or energy-related investment opportunities that meet the goal
of expanding the Company's current energy operations. Additionally, the
Company may also pursue nonenergy investments in privately held entities
and ventures that provide the potential of increased long-term investment
returns. Such privately held investments can involve increased principal
and liquidity risk when compared to the Company's preferred stock
investments or its energy operations.
(graph of information in following table)
INVESTMENTS
Recorded Basis
Millions of Dollars
1990 1991 1992 1993 1994*
---- ---- ---- ---- ----
Other Investments 19.1 18.3 16.5 10.4 6.0
Marketable Equity
Securities 2.3 1.4 1.4 1.4 8.5
Preferred Stock 19.8 22.1 20.0 33.1 31.7
---- ---- ---- ---- ----
41.2 41.8 37.9 44.9 46.2
==== ==== ==== ==== ====
*Includes adoption of SFAS 115.
In addition to the investments reflected above, one of the Company's
subsidiaries, Northwestern Systems, Inc., owns Lucht, Inc. The Company's
Consolidated Statement of Income includes the results of Lucht, Inc.
(end of graph)
(graph of information in following table)
CASH FLOWS FROM OPERATIONS
Millions of Dollars
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
Cash Flows from
Ongoing Activities 25.1 24.9 23.1 24.3 26.3
Cash Flows from
Capital Gains 3.6 - - - -
---- ---- ---- ---- ----
28.7 24.9 23.1 24.3 26.3
==== ==== ==== ==== ====
As the utility industry becomes more competitive, the amount of cash flow
generated from operations becomes an important benchmark. The Company has
a high degree of long-term liquidity through the generation of operating
cash flows while continuing to maintain a substantial investment portfolio.
(end of graph information)
NONENERGY OPERATIONS
In addition to the Company's investment portfolio of preferred stock
investments, the Company holds interests in two nonenergy businesses. At
December 31, 1994, Northwestern Networks, Inc. (NNI), one of the Company's
wholly owned subsidiaries, held investments in LodgeNet Entertainment
Corporation (LEC), consisting of 1,121,000 shares of LEC common stock.
During 1994, subordinated debt of $6 million which had been invested in LEC
by NNI was redeemed.
Another of the Company's subsidiaries, Northwestern Systems, Inc., owns
Lucht, Inc., a firm that develops, manufactures, and markets multi-image
photographic printers and other related equipment. This investment
contributed revenues of $22.0 million and operating income of $2.2 million
in 1994 compared to revenues of $18.1 million and operating income of $1.6
million in 1993.
REPORT OF MANAGEMENT
Page 15
The management of Northwestern Public Service Company is responsible for
the integrity and objectivity of the financial information contained in
this annual report. The consolidated financial statements, which
necessarily include some amounts which are based on informed judgments and
estimates of management, have been prepared in conformity with generally
accepted accounting principles.
In meeting this responsibility, management maintains a system of internal
accounting controls which is designed to provide reasonable assurance that
the assets of the Company are safeguarded and that transactions are
executed in accordance with management's authorization and are recorded
properly for the preparation of financial statements. This system is
supported by written policies, selection and training of qualified
personnel, an appropriate segregation of responsibilities within the
organization, and a program of internal auditing.
The Board of Directors, through its Audit Committee which is comprised
entirely of outside directors, oversees management's responsibilities for
financial reporting. The Audit Committee meets regularly with management,
the internal auditors, and the independent public accountants to make
inquiries as to the manner in which each is performing its
responsibilities. The independent public accountants and the internal
audit staff have unrestricted access to the Audit Committee, without
management's presence, to discuss auditing, internal accounting control,
and financial reporting matters.
Arthur Andersen LLP, an independent public accounting firm, has been
engaged annually to perform an audit of the Company's financial statements.
Their audit is conducted in accordance with generally accepted auditing
standards and includes examining, on a test basis, supporting evidence,
assessing the Company's accounting principles and significant estimates
made by management, and evaluating the overall financial statement
presentation to the extent necessary to allow them to report on the
fairness, in all material respects, of the operating results and financial
condition of the Company.
Merle Lewis
President and Chief Executive Officer
Richard Hylland
Vice President-Finance and Corporate Development
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Page 15
To the Stockholders and Board of Directors of
Northwestern Public Service Company:
We have audited the accompanying consolidated balance sheet and statement
of capitalization of NORTHWESTERN PUBLIC SERVICE COMPANY (a Delaware
corporation) AND SUBSIDIARIES as of December 31, 1994 and 1993, and the
related consolidated statements of operations and retained earnings and
cash flows for each of the three years in the period ended December 31,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Northwestern Public
Service Company and Subsidiaries as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in Note 1, effective January 1, 1994, the Company changed its
method of accounting for certain investments in debt and equity securities.
Arthur Andersen LLP
Minneapolis, Minnesota,
January 27, 1995.
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
Page 16
Years ended December 31
1994 1993 1992
------------ ------------ ------------
Operating Revenues:
Electric $ 73,077,431 $ 70,104,822 $ 65,627,621
Gas 62,141,382 65,017,964 52,216,333
Manufacturing 22,047,241 18,134,456 1,352,600
------------ ------------ ------------
157,266,054 153,257,242 119,196,554
------------ ------------ ------------
Operating Expenses:
Fuel for electric generation 13,399,170 12,731,558 12,072,833
Purchased power 1,153,467 1,229,748 841,356
Purchased gas sold 46,351,422 48,153,861 38,186,237
Other operating expenses 21,728,387 23,285,277 19,871,923
Manufacturing costs 19,552,720 16,296,738 1,345,966
Maintenance 6,169,895 6,368,346 5,889,310
Depreciation 12,438,501 11,805,763 11,061,520
Property and other taxes 6,103,903 6,139,613 5,118,469
------------ ------------ ------------
126,897,465 126,010,904 94,387,614
------------ ------------ ------------
Operating Income:
Electric 25,661,632 21,752,231 21,909,402
Gas 2,540,091 3,903,313 2,892,904
Manufacturing 2,166,866 1,590,794 6,634
------------ ------------ ------------
30,368,589 27,246,338 24,808,940
Investment Income and Other 2,610,791 4,457,438 2,690,294
Interest Expense, net (9,669,829) (8,944,584) (8,105,109)
------------ ------------ ------------
Income Before Income Taxes 23,309,551 22,759,192 19,394,125
Income Taxes (7,869,343) (7,568,119) (5,672,719)
------------ ------------ ------------
Net Income 15,440,208 15,191,073 13,721,406
Dividends on Cumulative
Preferred Stock (119,888) (121,463) (143,267)
------------ ------------ ------------
Earnings on Common Stock 15,320,320 15,069,610 13,578,139
Retained Earnings,
beginning of year 52,873,772 50,318,050 48,986,426
Dividends on Common Stock (12,820,980) (12,513,888) (12,206,799)
Premium on Preferred
Stock Retirement 0 0 (39,716)
------------ ------------ ------------
Retained Earnings, end of year $ 55,373,112 $ 52,873,772 $ 50,318,050
============ ============ ============
Earnings Per Average Common Share
based on 7,677,232 shares $ 2.00 $ 1.96 $ 1.77
============ ============ ============
Dividends Declared Per Common Share $ 1.67 $ 1.63 $ 1.59
============ ============ ============
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF CASH FLOWS
Page 17
Years ended December 31
1994 1993 1992
------------ ------------ ------------
Operating Activities:
Net income $ 15,440,208 $ 15,191,073 $ 13,721,406
Items not requiring cash:
Depreciation 12,438,501 11,805,763 11,061,520
Deferred income taxes 1,509,619 (1,398,578) (47,328)
Investment tax credit (564,801) (566,498) (568,655)
Changes in current assets
and liabilities:
Accounts receivable (1,057,563) (2,145,693) (1,049,603)
Inventories (1,447,191) (111,703) 352,866
Other current assets (259,826) (1,056,726) (1,246,370)
Accounts payable 2,699,294 (1,565,245) 2,499,414
Accrued taxes (1,487,575) 2,393,850 (579,660)
Accrued interest (30,991) 193,772 143,992
Other current liabilities 421,690 898,638 424,523
Other, net (1,392,444) 624,146 (1,655,673)
Cash flows from ------------ ------------ ------------
operating activities 26,268,921 24,262,799 23,056,432
------------ ------------ ------------
Investment Activities:
Property additions (22,680,856) (19,974,072) (18,510,018)
Sale (purchase) of noncurrent
investments, net (1,386,178) (9,773,488) 3,872,766
Acquisition of net assets 0 0 (4,122,180)
------------ ------------ ------------
Cash flows for
investment activities (24,067,034) (29,747,560) (18,759,432)
------------ ------------ ------------
Financing Activities:
Common and preferred stock
dividends paid (12,940,868) (12,635,351) (12,350,066)
Issuance of long-term debt 1,100,000 76,453,842 26,072,200
Repayment of long-term debt (677,500) (58,900,200) (12,736,000)
Retirement of preferred stock (30,000) (30,000) (3,085,000)
Commercial paper borrowings
(repayments) 9,800,000 0 (2,000,000)
------------ ------------ ------------
Cash flows from (for)
financing activities (2,748,368) 4,888,291 (4,098,866)
------------ ------------ ------------
Increase (Decrease) in Cash and
Cash Equivalents (546,481) (596,470) 198,134
Cash and Cash Equivalents,
beginning of year 3,099,093 3,695,563 3,497,429
------------ ------------ ------------
Cash and Cash equivalents,
end of year $ 2,552,612 $ 3,099,093 $ 3,695,563
============ ============ ============
Supplemental Cash Flow Information:
Cash paid during the year for:
Income taxes $ 7,382,119 $ 6,338,293 $ 6,129,541
Interest 8,887,901 8,771,595 7,442,176
See Notes to Consolidated Financial Statements
CONSOLIDATED BALANCE SHEET
Page 18
December 31
1994 1993
------------- -------------
ASSETS
Property:
Electric $ 321,153,724 $ 308,225,360
Gas 67,213,487 60,880,235
Manufacturing 1,558,484 1,864,751
------------- -------------
389,925,695 370,970,346
Less-Accumulated depreciation (139,381,075) (131,287,329)
------------- -------------
250,544,620 239,683,017
------------- -------------
Current Assets:
Cash and cash equivalents 2,552,612 3,099,093
Accounts receivable, net 12,255,483 11,197,920
Fuel, at average cost 4,886,572 4,040,170
Inventories, materials and supplies 4,686,771 5,109,966
Manufacturing inventories 5,064,859 4,040,875
Deferred gas costs 3,029,688 4,121,591
Other 3,694,912 2,343,183
------------- -------------
36,170,897 33,952,798
------------- -------------
Other Assets:
Investments 46,237,912 44,851,734
Deferred charges and other 26,112,211 25,086,544
------------- -------------
72,350,123 69,938,278
------------- -------------
$ 359,065,640 $ 343,574,093
============= =============
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity $ 114,704,940 $ 109,666,931
Nonredeemable cumulative preferred stock 2,600,000 2,600,000
Redeemable cumulative preferred stock 40,000 70,000
Long-term debt 127,052,500 126,600,000
------------- -------------
244,397,440 238,936,931
------------- -------------
Commitments and Contingencies (Notes 1,6,7,8)
Current Liabilities:
Commercial Paper 9,800,000 0
Long-term debt due within one year 570,000 600,000
Accounts payable 13,139,557 10,440,263
Accrued taxes 6,740,035 8,227,610
Accrued interest 2,915,084 2,946,075
Other 6,039,430 5,617,740
------------- -------------
39,204,106 27,831,688
------------- -------------
Deferred Credits:
Accumulated deferred income taxes 37,328,539 35,683,509
Unamortized investment tax credits 10,584,830 11,149,631
Other 27,550,725 29,972,334
------------- -------------
75,464,094 76,805,474
------------- -------------
$ 359,065,640 $ 343,574,093
============= =============
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF CAPITALIZATION
Page 19
December 31
1994 1993
------------------- -------------------
Common Stock Equity:
Common stock, $3.50 par value,
20,000,000 shares authorized;
7,677,232 shares outstanding $ 26,870,312 $ 26,870,312
Additional paid-in capital 29,922,847 29,922,847
Retained earnings 55,373,112 52,873,772
Unrealized gain on investments, net 2,538,669 0
------------------- -------------------
114,704,940 47% 109,666,931 46%
------------------- -------------------
Cumulative Preferred Stock:
$100 par value, 300,000 shares
authorized; outstanding:
Nonredeemable, 4 1/2% Series 2,600,000 2,600,000
Redeemable, 5 1/4% Series 40,000 70,000
------------------- -------------------
2,640,000 1% 2,670,000 1%
------------------- -------------------
Long-Term Debt:
Series Due
------------------------------- -----
First mortgage bonds-
8.824% 1998 15,000,000 15,000,000
8.9% 1999 7,500,000 7,500,000
6.99% 2002 25,000,000 25,000,000
General mortgage bonds-
7% 2023 55,000,000 55,000,000
Pollution control obligations-
5.85%, Mercer Co., ND 2023 7,550,000 7,550,000
5.90%, Salix, IA 2023 4,000,000 4,000,000
5.90%, Grant Co., SD 2023 9,800,000 9,800,000
------------------- -------------------
123,850,000 123,850,000
Other long-term debt 3,772,500 3,350,000
Less-Due within one year (570,000) (600,000)
------------------- -------------------
127,052,500 52% 126,600,000 53%
------------------- -------------------
Total Capitalization $244,397,440 100% $238,936,931 100%
================== ==================
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pages 20-24
(1) SIGNIFICANT ACCOUNTING POLICIES -
Basis of Consolidation:
The accompanying consolidated financial statements include the accounts of
Northwestern Public Service Company and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated
from the consolidated financial statements. The Company's regulated
businesses are subject to various state and federal agency regulation. The
accounting policies followed by these businesses are generally subject to
the Uniform System of Accounts of the Federal Energy Regulatory Commission
(FERC) which differ in some respects from those used by nonregulated
businesses. Manufacturing revenues and costs reflect the operations of
Lucht, Inc. which was acquired effective December 1, 1992.
Revenue Recognition and Gas Costs:
Electric and gas revenue is based on billings rendered to customers rather
than on meters read or energy delivered. Customers are billed monthly on a
cycle basis.
The commodity cost portion of gas purchased from wholesale suppliers but
not yet billed to customers is charged to deferred gas costs. This account
is subsequently credited in future periods as customers are billed for gas
used in prior periods. This method has the approximate effect of matching
gas costs with gas revenues in any financial reporting period. The demand
cost portion of gas costs, which is comprised of numerous components, is
expensed as incurred.
The Company has various long-term gas supply agreements with its pipeline
suppliers for the purchase of natural gas in the normal course of its gas
operations. Service agreements with Northern Natural Gas Company provide
for firm transportation of natural gas in South Dakota, while a service
agreement with KN Gas Supply Co. provides much of the Company's natural gas
supply in Nebraska.
Allowance for Funds Used During Construction:
The allowance for funds used during construction includes the costs of
equity and borrowed funds used to finance construction which are
capitalized in accordance with rules prescribed by the FERC. In 1994,
1993, and 1992, allowance for equity funds was $17,000, $32,000, and
$105,000. Allowance for borrowed funds for 1994, 1993, and 1992 was
$39,000, $50,000, and $158,000.
Cash Equivalents:
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Depreciation and Maintenance:
Depreciation is computed using the straight-line method based on the
estimated useful lives of the various classes of property. Depreciation
provisions, as a percentage of the average balance of depreciable property,
were 3.39% in 1994, 3.37% in 1993, and 3.32% in 1992.
Depreciation rates include a provision for the Company's share of the
estimated costs to decommission three coal-fired generating plants at the
end of the useful life of each plant. The annual provision for such costs
is included in depreciation expense, while the accumulated provisions are
included in other deferred credits.
The costs of maintenance, repairs, and replacements of minor property items
are charged to maintenance expense accounts. Costs of renewals and
betterments of electric and gas property units are charged to property
accounts. The costs of units of electric and gas property removed from
service, net of removal costs and salvage, are charged to accumulated
depreciation. No profit or loss is recognized in connection with ordinary
retirements of depreciable electric and gas property.
Investments and Fair Value of Financial Instruments:
The Company's investments consist primarily of corporate preferred and
common stocks. In addition, the Company has investments in privately held
entities and ventures, safe harbor leases, and various money market and tax
exempt investment programs. Effective January 1, 1994, the Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115). SFAS 115
requires that certain investments in debt and equity securities be reported
at fair value. The cumulative effect of adopting SFAS 115 was a $9,302,000
gain, net of tax, and the net unrealized gain was $2,539,000 at December
31, 1994.
The Company's securities are classified under the provisions of SFAS 115.
As of December 31, 1994, the fair value, cost, and the gross unrealized
holding loss of the Company's preferred stock, classified as available for
sale, were $31,742,000, $34,948,000, and $3,206,000, respectively. The
fair value, cost, and the gross unrealized gains on the Company's
marketable equity securities, classified as available for sale, were
$8,480,000, $1,368,000, and $7,112,000, respectively. Other held to
maturity securities are reported on the cost basis of $6,016,000.
The Company uses the specific identification method for determining the
cost basis of its investments in available for sale securities. Gross
proceeds and realized gains and losses on sales of its available for sale
securities were not material in 1994.
Based on current market rates for debt of similar credit quality and
remaining maturities or quoted market prices for certain issues, the face
value of the Company's long-term debt approximates its market value.
Income Taxes:
Deferred income taxes relate primarily to the difference between book and
tax methods of depreciating property, taxable income derived from safe
harbor leases, the difference in the recognition of revenues for book and
tax purposes, and gas costs which are deferred for book purposes but
expensed currently for tax purposes.
For book purposes, investment tax credits were deferred and are being
amortized as a reduction of income tax expense over the useful lives of the
property which generated the credits.
Reclassifications:
Certain 1993 and 1992 amounts have been reclassified to conform to the 1994
presentation. Such reclassifications had no impact on net income and
common stock equity as previously reported.
(2) CAPITAL STOCK TRANSACTIONS AND
RETAINED EARNINGS AVAILABILITY -
There were no common stock transactions during the three years ended
December 31, 1994. Preferred stock transactions for the three years ended
December 31, 1994, have been limited to redemptions to satisfy mandatory
sinking fund requirements.
At December 31, 1994, $42,461,000 of retained earnings was available for
payment of dividends on common stock under the most restrictive of various
provisions which limit the payment of dividends on common stock.
(3) INCOME TAXES -
Income tax expense is comprised of the following (in thousands):
1994 1993 1992
------ ------ ------
Federal income -
Current tax expense $6,522 $9,038 $6,002
Deferred tax (benefit)
expense 1,509 (1,399) (47)
Investment tax credit (565) (566) (568)
State income 403 495 286
------ ------ ------
$7,869 $7,568 $5,673
====== ====== ======
The following table reconciles the Company's effective income tax rate to
the federal statutory rate:
1994 1993 1992
---- ---- ----
Federal statutory rate 35% 35% 34%
Amortization of investment
tax credit (2) (2) (3)
Dividends received deduction (3) (2) (2)
Other, net 4 2 -
---- ---- ----
34% 33% 29%
==== ==== ====
The components of the net deferred federal income tax liability recognized
in the Company's Consolidated Balance Sheet is related to the following
temporary differences at December 31 (in thousands):
1994 1993
-------- --------
Excess tax depreciation $(24,592) $(22,671)
Safe harbor leases (8,233) (9,171)
Property basis and life differences (7,526) (8,312)
Asset sales (4,766) (5,171)
Regulatory asset (4,052) (4,477)
Regulatory liability 4,189 4,189
Unbilled revenue 3,882 3,901
Unamortized investment tax credit 3,491 3,491
Other, net 278 2,537
-------- --------
$(37,329) $(35,684)
======== ========
(4) SHORT-TERM BORROWINGS -
The Company may issue short-term debt in the form of bank loans and
commercial paper as interim financing for general corporate purposes. The
bank loans may be obtained under short-term lines of credit which totaled
$12 million at December 31, 1994. The Company pays an annual fee
equivalent to 1/4% of the unused lines. There were no line of credit
borrowings outstanding at December 31, 1994 and 1993. At December 31,
1994, the Company had outstanding $9.8 million of commercial paper.
(5) LONG-TERM DEBT -
Substantially all of the Company's utility plant is subject to the lien of
the indentures securing its first mortgage bonds, general mortgage bonds
and pollution control obligations. General mortgage bonds of the Company
may be issued in amounts limited by property, earnings, and other
provisions of the mortgage indenture.
Lucht has a credit agreement with a bank whereby it may borrow up to $7
million in revolving and term loans. A balance of $3,772,500 was
outstanding under the revolving and term loan as of December 31, 1994 at a
weighted average interest rate of 8.90%. Borrowings under the agreement
are collateralized by all receivables, inventories, property, and other
assets of Lucht.
Annual scheduled retirements of the Company's long-term bond debt during
the next five years are $20,000,000 in 1998 and $12,500,000 in 1999.
Scheduled retirements of the Lucht long-term debt are $570,000 in 1995,
$1,070,000 in 1996, $570,000 in 1997, $570,000 in 1998, and $992,500 in
1999.
(6) JOINTLY OWNED PLANTS -
The Company has an ownership interest in three major electric generating
plants, all of which are operated by other utility companies. The Company
has an undivided interest in these facilities and is responsible for its
proportionate share of the capital and operating costs while being entitled
to its proportionate share of the power generated. The Company's interest
in each plant is reflected in the Consolidated Balance Sheet on a pro rata
basis, and its share of operating expenses is reflected in the Consolidated
Statement of Income and Retained Earnings. The participants finance their
own investment.
The Company has long-term coal contracts for delivery of lignite coal to
Coyote I and sub-bituminous coal to Neal #4. The lignite coal contract for
Big Stone expires in mid-1995, and the plant owners have negotiated and
secured a contract for Montana sub-bituminous coal for the period of mid-
1995 through 1999. The new sub-bituminous coal contract for Big Stone
requires minimum annual purchases of 1.2 million tons. The lignite contract
for Coyote I is a total requirements contract with a minimum obligation of
30,000 tons per week except during scheduled or forced outages. Neal #4
has a contract for delivery of sub-bituminous coal with an annual minimum
purchase requirement of 1.8 million tons. Information relating to the
Company's ownership interest in these facilities at December 31, 1994, is
as follows (dollars in thousands):
Big Stone Neal #4 Coyote I
--------- ------- --------
Utility plant in service $46,982 $35,002 $45,477
Accumulated depreciation $24,688 $15,097 $16,735
Construction work
in progress $788 $269 $270
Total plant capacity - mw 449 624 427
Company's share 23.4% 8.7% 10.0%
In-service date 1975 1979 1981
Coal contract
expiration date 1999 1998 2016
(7) EMPLOYEE RETIREMENT BENEFITS -
The Company maintains a noncontributory defined benefit pension plan
covering substantially all employees. The benefits to which an employee is
entitled under the plan are derived using a formula based on the number of
years of service and compensation levels as defined. The Company
determines the annual funding for its plan using the frozen initial
liability cost method. The Company's annual contribution is funded in
accordance with the requirements of ERISA. Assets of the plan consist
primarily of debt and equity securities.
The components of net periodic pension cost for the years ended December
31, 1994, 1993, and 1992 were as follows (in thousands):
1994 1993 1992
------ ------ ------
Service cost $ 948 $ 985 $ 966
Interest cost on projected
benefit obligation 3,176 3,048 2,951
Actual return on assets 586 (2,970) (5,779)
Net amortization and deferral (4,391) (886) 2,283
------ ------ ------
Net periodic pension cost $ 319 $ 177 $ 421
====== ====== ======
The following table reflects the funded status of the Company's pension
plan as of December 31, 1994, 1993, and 1992 (in thousands):
1994 1993 1992
------- ------- -------
Actuarial present value of:
Accumulated benefit obligation-
Vested $34,436 $34,052 $33,058
Nonvested 1,197 1,528 1,131
------- ------- -------
35,633 35,580 34,189
Provision for future pay
increases 3,993 5,515 5,234
------- ------- -------
Projected benefit obligation 39,626 41,095 39,423
Plan assets at fair value 44,501 46,912 45,366
------- ------- -------
Projected benefit obligation
less than plan assets (4,875) (5,817) (5,943)
Unrecognized transition
obligation (1,702) (1,856) (2,011)
Unrecognized net gain 5,365 6,941 7,910
------- ------- -------
Prepaid pension cost $(1,212) $ (732) $ (44)
======= ======= =======
The assumptions used in calculating the projected benefit obligation for
1994, 1993, and 1992 were as follows:
1994 1993 1992
------ ------ ------
Discount rate 8 1/2% 8% 8%
Expected rate of return on assets 8 1/2% 8 1/2% 8 1/2%
Long-term rate of increase
in compensation levels 4% 5% 5%
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 112 (SFAS 112), "Employers' Accounting for Postemployment
Benefits." As the Company provides only certain limited disability-related
postemployment benefits to its employees, adoption of SFAS 112 had no
material impact on operating results.
The Company provides an employee savings plan which permits all employees
to defer receipt of compensation as provided in Section 401(k) of the
Internal Revenue Code. Under the plan, any employee may elect to direct up
to twelve percent of their gross compensation be contributed to the plan.
The Company contributes 50 cents for each one dollar contributed by the
employee, up to a maximum Company contribution of three percent of the
employee's gross compensation. Costs incurred under the plan were
$468,000, $442,000, and $411,000 in 1994, 1993, and 1992.
The Company also provides an Employee Stock Ownership Plan (ESOP) for most
full-time employees. The ESOP is funded primarily with federal income tax
savings which arise from tax laws applicable to such employee benefit
plans. Certain Company contributions and shares of stock acquired by the
ESOP are allocated to participants' accounts in proportion to the
compensation of employees during the particular year for which allocation
is made. Costs incurred under the plan were $705,000, $757,000, and
$794,000 in 1994, 1993, and 1992.
The Company also has various supplemental retirement plans for outside
directors and selected management employees. The plans are nonqualified
defined benefit plans that provide for certain amounts of salary
continuation in the event of death before or after retirement, or certain
supplemental retirement benefits in lieu of any death benefits. In
addition, the Company provides life insurance benefits to beneficiaries of
all eligible employees who represent a reasonable insurable risk. To
minimize the overall cost of plans providing life insurance benefits, the
Company has obtained life insurance coverage that is sufficient to fund
benefit obligations. Costs incurred under the plans were $552,000,
$544,000, and $508,000 in 1994, 1993, and 1992.
(8) ENVIRONMENTAL MATTERS -
The Company is subject to environmental regulations from numerous entities.
The Clean Air Act Amendments of 1990 (the Act) stipulate limitations on
sulfur dioxide and nitrogen oxide emissions from coal-fired power plants.
The Company believes it can economically meet such sulfur dioxide emission
requirements at its generating plants by the required compliance dates and
that it is in compliance with all presently applicable environmental
protection requirements and regulations. In addition to the Act, the
Company is also subject to other environmental regulations including
matters related to utility processing sites. The Company conducted an
investigation of a former gas manufacturing site in 1994 and is taking
remedial action to dispose of waste material found at such site. Recovery
of remediation costs for such sites will be sought from insurance carriers
and through the regulatory process although there is no assurance that such
costs will be recovered. No administrative or judicial proceedings
involving the Company are now pending or known by the Company to be
contemplated under present environmental protection requirements.
(9) CUMULATIVE PREFERRED STOCK AND PREFERENCE STOCK -
The Company's cumulative preferred stock, 5 1/4% Series, is subject to
mandatory redemption at par through an annual sinking fund requirement, as
defined.
All cumulative preferred stock may be redeemed in whole or in part at the
option of the Board of Directors at any time upon at least 30 days notice
at the per share prices noted below, plus accrued dividends:
Redemption Prices
----------------------------------------------
Series Present Through Subsequent
------ ------- ------------ ---------------
4 1/2% $110.00 - -
5 1/4% 100.35 May 31, 1995 $100.18-$100.00
In the event of involuntary dissolution, all preferred stock outstanding
would have a preferential interest of $100 per share, plus accumulated
dividends, before any distribution to common stockholders.
The Company is also authorized to issue a maximum of 200,000 shares of
preference stock at a par value of $50 per share. No preference shares
have ever been issued.
(10) SEGMENTS OF BUSINESS -
The three primary segments of the Company's business are its electric,
natural gas distribution, and manufacturing operations. The following table
summarizes certain information specifically identifiable with each segment
as of or for the years ended December 31 (in thousands):
1994 1993 1992
-------- -------- --------
Depreciation Expense:
Electric $ 10,115 $ 9,841 $ 9,504
Gas 1,996 1,718 1,558
Manufacturing 328 247 -
------- -------- --------
12,439 $ 11,806 $ 11,062
------- -------- --------
Capital Expenditures:
Electric $ 16,023 $ 11,225 $ 12,605
Gas 6,425 8,483 5,905
Manufacturing 233 266 -
------- -------- --------
22,681 $ 19,974 $ 18,510
------- -------- --------
Assets:
Identifiable -
Electric $210,872 $206,962 $204,206
Gas 52,008 45,296 37,814
Manufacturing 13,843 11,352 9,161
Corporate assets 82,343 79,964 57,013
-------- -------- --------
$359,066 $343,574 $308,194
-------- -------- --------
Identifiable assets include all assets that are used directly in each
business segment. Corporate assets consist of assets not directly
assignable to a business segment, i.e., cash, investments, certain accounts
receivable, prepayments, and other miscellaneous current and deferred
assets.
(11) QUARTERLY FINANCIAL DATA (UNAUDITED) -
First Second Third Fourth
------- ------- ------- -------
(thousands except per share amounts)
1994:
Operating revenues $55,464 $33,757 $30,195 $37,850
Operating income 14,104 4,784 3,752 7,729
Net income 8,017 2,244 1,330 3,849
Earnings per
average common
share $ 1.04 $ .29 $ .17 $ .50
======= ======= ======= =======
1993:
Operating revenues $51,137 $33,783 $29,775 $38,562
Operating income 11,495 5,416 5,727 4,608
Net income 6,574 2,344 2,468 3,805
Earnings per
average common
share $ .85 $ .30 $ .32 $ .49
======= ======= ======= =======