Management's Discussion and Analysis
Northwestern Public Service is an energy distribution company with core
operations engaged in the electric, natural gas, and propane businesses.
The Company generates and distributes electric energy to 55,000 customers
in eastern South Dakota. It also purchases and distributes natural gas to
76,000 customers in eastern South Dakota and four communities in Nebraska.
In August 1995, the Company acquired Synergy Group, Inc., a retail propane
distributor in the eastern and south-central regions of the United States.
Late in 1995, two smaller propane companies were acquired: Myers Propane
Gas Company and Western Gas. Propane complements the Company's electric and
natural gas distribution businesses and adds geographical diversity to its
operations with more than 180,000 customers and operations in 17 states.
Unlike the Company's electric and natural gas businesses, propane
distribution rates and service areas are unregulated.
Weather
Weather patterns have a material impact on the Company's operating
performance. Because natural gas and propane are heavily used for
residential and commercial heating, the demand for these products depends
upon weather patterns throughout the Company's service area. With a larger
proportion of its operations related to seasonal natural gas and propane
sales in 1996, the distribution of the Company's quarterly operating
performance will be different than in historical periods. A significantly
greater portion of the Company's future operating income is expected to be
recognized in the first and fourth quarters related to higher revenues from
the heating season. Operating income for the second and third quarters is
expected to be less than historical periods.
Earnings Growth
Earnings for 1995 were $18.0 million or $2.21 per share, compared to $15.3
million or $2.00 per share for 1994. The 10.5% earnings per share increase
in 1995 was primarily due to an increase in retail electric sales, modest
gas rate relief, and increased contributions from nonregulated operations,
principally propane. The Company issued 1.2 million additional shares of
common stock in 1995 related to the propane acquisitions. Earnings per
share for 1995 reflect 6% more average shares outstanding.
Earnings in 1994 were $2.00 compared to $1.96 in 1993. The increase was
primarily due to greater electric retail sales and increased contributions
from nonregulated businesses.
Dividend Enhancement
In November 1994, the Company's Board of Directors elected to increase
dividends four cents a share to $1.70. Subsequently, in November 1995, the
Board approved an increase in annual dividends per share from $1.70 to
$1.76. The Company's Certificate of Incorporation provides for the payment
of dividends on Common Stock out of retained earnings provided common
equity remains at least 25% of capitalization after payment of dividends.
The Company's financial strength, the success of its growth strategies, and
competitive changes in the industry will be factors to be considered when
evaluating future dividend payments.
Business Segment Summary
Increase Increase
Year Ended December 31 1995 1994 (Decrease) 1993 (Decrease)
------- ------- ------------ ------ ------------
REVENUES
Electric $74,857 $73,077 $ 1,780 2.4% $70,105 $2,972 4.2%
Gas 64,483 62,141 2,342 3.8% 65,018 (2,877) (4.4%)
Propane 38,883 - 38,883 - - - -
Manufacturing 26,747 22,047 4,700 21.3% 18,134 3,913 21.6%
OPERATING INCOME
Electric $26,003 $25,662$ 341 1.3% $21,752 $3,910 18.0%
Gas 3,862 2,540 1,322 52.0% 3,903 (1,363)(34.9%)
Propane 5,604 - 5,604 - - - -
Manufacturing 2,628 2,334 294 12.6% 1,618 716 44.3%
OPERATING DATA
Electric sales-
retail (mwh) 1,071 1,019 52 5.1% 964 55 5.7%
Gas throughput
(000 mmbtu) 15,204 14,750 454 3.1% 14,811 (61) (0.4%)
Propane sales
(000 gallons) 37,805 - 37,805 - - - -
- --------------------
Result of Operations
- --------------------
Electric
(graph of information in following table)
Electric Retail Sales
(000'S)
-----------------------
1991 936,368
1992 894,077
1993 964,477
1994 1,018,509
1995 1,071,328
(end of graph)
Increases in electric revenues reflect the effects of a warmer summer. The
Company set a new record for peak electric demand during the summer of 1995
exceeding the previous peak record set in 1991 by 8%. Retail electric kwh
sales increased by 5.1% in 1995, and residential customers' average annual
kwh use increased 5.2% from 8,859 kwh in 1994 to 9,316 kwh in 1995. Fuel-
related costs were comparable in 1995 with the increase in electric
revenue. Customers began to realize benefits from a new lower-cost sub-
bituminous coal contract for the Company's jointly owned Big Stone Plant
which became effective in August 1995. Combined with plant efficiency
improvements, the annual fuel cost savings are expected to be in excess of
$2.2 million. These savings are passed back to customers through the
operation of the fuel adjustment clause.
The increase in electric operating income reflects the higher retail sales,
offset by slightly higher operating expenses. Other operating expenses
increased primarily due to growth-related costs in expanded energy services
and marketing functions. The operating expense increase also includes the
initiation of incentive compensation programs for all employees which links
pay to performance. Maintenance expense declined slightly while
depreciation and property taxes reflect the increase in depreciable plant.
1994 vs. 1993. In 1994, revenue increases were related to a 5.7% increase
in retail kwh sales over 1993. The increase in electric operating income
was related to increased sales and lower operating costs. Maintenance
decreased due primarily to lower electric transmission and distribution
expenditures. Depreciation increases were attributed to an increase in
construction activity.
Natural Gas
(graph of information in following table)
Gas Throughput
000mmbtu
---------------------
1991 13,236
1992 12,340
1993 14,811
1994 14,750
1995 15,204
(end of graph)
One of the predominant factors affecting the Company's gas operations is
weather patterns during the winter heating season. Because natural gas is
heavily used for residential and commercial heating, the demand for this
product depends upon weather conditions. In 1995, the increase in natural
gas revenues over 1994 reflects the effects of rate increases, growth in
the number of customers and slightly cooler weather. Gas revenues include
a 6.2% overall rate increase in South Dakota implemented on November 15,
1994, and an 8.3% overall increase in Nebraska effective April 1, 1995.
Customers increased 2% over 1994.
The increase in gas operating income reflects a 3.1% increase in
throughput, effects of rate increases, offset by slightly higher operating
expenses. As discussed above, the increase in other operating expenses was
primarily due to growth-related costs in the expanded energy services and
marketing functions and incentive compensation programs. Maintenance
expense declined slightly while depreciation and property taxes reflect the
increase in depreciable plant.
1994 vs. 1993. Warmer weather patterns during the heating season resulted
in a 4.4% decrease in gas revenues offset slightly by a rate increase
implemented in South Dakota late in 1994. The decrease in operating income
was related to higher gas production and distribution expenses.
Depreciation increases were attributed to an increase in construction
activity.
Propane
(graph of information in following table)
Revenue Growth (000's)
Electric Natural Gas Manufacturing Propane
-------- ----------- ------------- -------
1991 67,958 54,942 - -
1992 65,628 52,216 1,353 -
1993 70,105 65,018 18,134 -
1994 73,077 62,141 22,047 -
1995 74,858 64,483 26,747 38,883
(end of graph)
Propane revenues include Synergy Group, Inc. acquired August 15, 1995,
Myers Propane Gas Company acquired on December 7, 1995, and Western Gas
acquired November 20, 1995. Since August, weather throughout the Company's
propane service area was 3% cooler than normal and 19% cooler than the same
period in 1994. Because of the heavy use of propane for heating, propane
sales are extremely weather sensitive. Synergy was acquired in the summer
which traditionally is a net loss period in the industry; the majority of
propane revenues occur in the first and fourth quarters when propane is
heavily sold for residential and commercial heating.
Operating revenue from propane sales was $38.9 million on sales of 37.8
million gallons. Propane revenues and earnings are consolidated with
Northwestern's utility and other diversified businesses.
The acquisition of the propane properties was made in association with
Empire Gas Corporation, a large propane distribution company headquartered
in Lebanon, Missouri, which has a management team experienced in the retail
propane distribution business. With Northwestern, Empire Gas provides
joint oversight and management of the properties acquired. Empire Gas
provides administrative and operating management services to all propane
properties including accounting, human resources, marketing, management
information systems, and propane supply and transportation functions. In
accordance with the Company's plans upon the acquisition of Synergy,
substantial changes were made in the management and operation of the
acquired business in order to achieve improvement in the results of
operations. Among the cost efficiency measures put into place to reduce
Synergy's operating, selling, and administrative expenses were the
elimination of employee positions, and corporate overhead and field
location operating expenses. The Synergy headquarters office operations in
Farmingdale, New York were closed in late November with corporate functions
consolidated with the Empire Gas corporate offices. Another significant
expense reduction was the elimination of compensation and lease expenses
previously paid to Synergy stockholders.
Manufacturing
Manufacturing revenues and operating income are related to the Company's
ownership interest in Lucht Inc., a company that manufactures photographic
processing and imaging equipment used by high-volume photo processing
laboratories. Operating income in 1995 increased by 12.6% over 1994
primarily due to acquisitions and an increase in sales of existing product
lines. Operating income in 1994 increased by 44.3% over 1993 when the
Company acquired the remaining 40% ownership interest not included in the
original acquisition.
Other Income Statement Items
Other income increased in 1995 over 1994 primarily due to greater
investment income related to the gain recognized from the sale of common
shares held by one of the Company's subsidiaries. The increase in interest
expense is primarily related to the issuance of $60 million general
mortgage bonds issued in August 1995 as a part of the Synergy acquisition
financing. Income taxes increased as the result of higher taxable income.
The increase in preferred dividends and the addition of minority interest
on preferred securities is related to the issuance of preferred securities
to finance the propane transactions.
- -------------------------------
Liquidity and Capital Resources
- -------------------------------
During 1995, cash flow from operations, net of dividends paid, together
with proceeds from external financing activities provided the funds for
construction expenditures, acquisitions, and other requirements.
Operating Activities
(graph of information in following table)
Cash Flows From
Operating Activities
------------------------
1991 24,874,754
1992 23,056,432
1993 24,262,799
1994 26,268,921
1995 35,366,960
(end of graph)
Cash flow from operating activities in 1995 increased 35% from 1994
primarily due to growth in the Company's earnings and propane acquisitions.
Liquidity is also increased through the availability of substantial cash
and investment balances. Cash equivalents and marketable securities
totaled $44.7 million, $39.2 million, and $39.1 million at December 31,
1995, 1994, and 1993.
Investment Activities - Financing Activities
The Company's principal investments and capital requirements in 1995 were
related to the acquisition of propane properties. During the third quarter
of 1995, the Company issued $60 million of 7.10% series general mortgage
bonds, maturing in 2005, 1.3 million shares of preferred securities of
subsidiary trust and 1.2 million shares of common stock.
The proceeds were used primarily for the acquisition of Synergy. In
December, the Company issued 42,890 shares of common stock and 11,500
shares of redeemable cumulative preferred stock related to the acquisition
of Myers Propane.
In August 1995, the holders of all series of the Company's First Mortgage
Bonds under the 1940 Mortgage Indenture (the 8.824% series due 1998, the
8.90% series due 1999, and the 6.99% series due 2002) agreed to exchange
those bonds for equivalent bonds under the 1993 General Mortgage Indenture.
The provisions of that indenture result in an increase in the amount of
bonds that can be issued on the basis of bonded property and increased
financing flexibility.
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.
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,
1995, unused short-term lines of credit totaled $24 million. In addition,
the Company's nonregulated businesses maintain credit agreements with
various banks for revolving and term loans.
The consolidated capital structure at December 31, 1995 was 53% debt,
1% preferred stock, 8% preferred securities of subsidiary trust, and 38%
common equity as compared to 52% debt, 1% preferred stock, and 47% common
equity at year-end 1994. The Company's capital structure at December 31,
1995 includes the consolidation of $29 million of non-recourse debt of its
subsidiaries.
- --------------------
Capital Requirements
- --------------------
The Company's primary capital requirements include the funding of its
energy business construction and expansion programs, the funding of debt
and preferred stock retirements 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. 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 1995, 1994, and 1993 were
$29.6 million, $22.7 million, and $20.0 million. Construction expenditures
during the last three years included expenditures related to an operations
center expected to provide cost savings and operating efficiencies through
consolidation of activities, the installation of an additional 43 mw of
internal peaking capacity, and the expansion of the Company's natural gas
system into additional communities in eastern South Dakota. In addition,
1995 included $4.7 million of capital expenditures related to propane.
Construction expenditures for 1996, excluding propane, are estimated to be
$16.0 million. The majority of the projected expenditures will be spent on
enhancements of the electric and gas distribution systems. Estimated
electric and natural gas related construction expenditures for the years
1996 through 2000 are expected to be $70.4 million. Nonregulated capital
expenditures for 1996 are estimated to be $6.5 million. Estimated
nonregulated capital expenditures for the years 1996 through 2000 are
expected to be $20.5 million.
Capital requirements for the mandatory retirement of long-term debt and
mandatory preferred stock sinking fund redemption totaled $600,000,
$600,000, and $180,000, for the years ended 1995, 1994, and 1993,
respectively. It is expected that such mandatory retirements will be
$580,000 in 1996, $570,000 in 1997, $20.6 million in 1998, $12.8 million in
1999, and $5.0 million in 2000.
The Company anticipates that future capital requirements will be met by
both internally generated cash flows and available external financing.
- -----------------------------
Competition and Business Risk
- -----------------------------
The electric and natural gas utility businesses continue to undergo
numerous transformations and the Company is operating in a rapidly
developing competitive marketplace. The passage of the National Energy
Policy Act of 1992 has accelerated competition in the electric business by
promoting competition in the industry at the wholesale level. Competition
in the Company's gas business was accelerated with the passage of the
Federal Energy Regulatory Commission's (FERC) Order 636 which resulted in
an unbundling of gas supply and services to customers, or separately-
priced, sale and transportation services.
The changes in the electric business are expected to be similar to those
experienced in the natural gas business over the last few years. The FERC,
which regulates interstate and wholesale electric transactions, has opened
up transmission grids and mandated that utilities must allow others equal
access to utility transmission systems. Various state regulatory bodies
are also supporting initiatives to redefine the electric energy market and
are experimenting with retail wheeling which gives some retail customers
the ability to choose their supplier of electricity. Traditionally,
utilities have been vertically integrated, providing bundled energy
services to customers. The potential for continued unbundling of energy
services exists, allowing customers to buy their own electricity and
natural gas on the open market and having it delivered by the local
utility.
The growing pace of competition in the energy industry has been a primary
focus of management over the last few years. The Company's future financial
performance will be dependent on the effective execution of operating
strategies to address a more competitive and changing energy marketplace.
Business strategies focus on enhancing the Company's competitive position,
on expanding energy sales and markets with new products and services for
customers, and increasing shareholder value. The Company has realigned all
areas of the business to support energy services and marketing functions.
A new marketing plan, an expanded line of energy products and services,
additional staff and new technologies are part of the Company's strategy
for providing responsive and superior customer service.
To strengthen the Company's competitive position, new technology was added
that enables employees to better serve customers, costs are being reduced
by centralizing activities to improve efficiency and customer
responsiveness, and business processes are being reengineered to apply best-
practices methodology. Long-term supply contracts have been renegotiated
to lower customers' energy costs and new alliances help reduce expenses and
add innovative work approaches.
Energy distribution growth will be increasingly important to the Company in
the future. In addition to maintaining a strong competitive position in
electric, natural gas, and propane distribution businesses, the Company
intends to seek new investments and acquisitions that have long-term
growth potential. While such investments and acquisitions can involve
increased risk in comparison to the Company's energy distribution
businesses, they offer the potential for enhanced investment returns.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: The statements included in this Annual Report to Shareholders which
are not historical facts and which are forward looking statements involve
risks and uncertainties detailed in the Company's Securities and Exchange
Commission filings.
Report of Management
The management of Northwestern Public Service Company is responsible for
the integrity and objectivity of the financial information contained in
this annual report. The consolidated financial statements, which
necessarily include some amounts which are based on informed judgments and
estimates of management, have been prepared in conformity with generally
accepted accounting principles.
In meeting this responsibility, management maintains a system of internal
accounting controls which is designed to provide reasonable assurance that
the assets of the Company are safeguarded and that transactions are
executed in accordance with management's authorization and are recorded
properly for the preparation of financial statements. This system is
supported by written policies, selection and training of qualified
personnel, an appropriate segregation of responsibilities within the
organization, and a program of internal auditing.
The Board of Directors, through its Audit Committee which is comprised
entirely of outside directors, oversees management's responsibilities for
financial reporting. The Audit committee meets regularly with management,
the internal auditors, and the independent public accountants to make
inquiries as to the manner in which each is performing its
responsibilities. The independent public accountants and the internal audit
staff have unrestricted access to the Audit committee, without management's
presence, to discuss auditing, internal accounting control, and financial
reporting matters.
Arthur Andersen LLP, an independent public accounting firm, has been
engaged annually to perform an audit of the Company's financial statements.
Their audit is conducted in accordance with generally accepted auditing
standards and includes examining, on a test basis, supporting evidence,
assessing the Company's accounting principles and significant estimates
made by management, and evaluating the overall financial statement
presentation to the extent necessary to allow them to report on the
fairness, in all material respects, of the operating results and financial
condition of the Company.
Merle D. Lewis
President and Chief Executive Officer
Richard R. Hylland
Executive Vice President-Strategic Development
Report of Independent Public Accountants
To the Stockholders and Board of Directors of Northwestern Public Service
Company:
We have audited the accompanying consolidated balance sheets and statement
of capitalization of NORTHWESTERN PUBLIC SERVICE COMPANY (a Delaware
corporation) AND SUBSIDIARIES as of December 31, 1995 and 1994, 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,
1995. 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, 1995 and 1994, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
Minneapolis, Minnesota
February 2, 1996
CONSOLIDATED STATEMENT OF CAPITALIZATION
December 31
1995 1994
----------------- -----------------
Common Stock Equity:
Common stock, $3.50 par value,
20,000,000 shares authorized;
8,920,122 and 7,677,232 shares
outstanding, respectively $ 31,220,427 $ 26,870,312
Additional paid-in capital 56,594,914 29,922,847
Retained earnings 59,159,042 55,373,112
Unrealized gain on investments, net 5,703,808 2,538,669
----------------- -----------------
152,678,191 38% 114,704,940 47%
----------------- -----------------
Cumulative Preferred Stock:
$100 par value, 300,000 shares
authorized; 37,600 shares outstanding:
Nonredeemable - 4 1/2% Series 2,600,000 2,600,000
Redeemable -
5 1/4% Series 10,000 40,000
6 1/2% Series 1,150,000 -
Preferred Stock of Subsidiary:
No par value, 2,500 shares outstanding:
Redeemable - 2,500,000 -
----------------- -----------------
6,260,000 1% 2,640,000 1%
----------------- -----------------
Company obligated mandatorily redeemable
security of trust holding solely parent debentures:
8 1/8% Series due 2023 32,500,000 8% -
Long-Term Debt:
Series Due
- ---------------------------------
General 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
7.10% 2005 60,000,000 -
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
----------------- -----------------
183,850,000 46% 123,850,000 51%
Nonrecourse debt of subsidiaries 29,560,224 7% 3,772,500 1%
Less-Due within one year (570,000) - (570,000) -
----------------- -----------------
212,840,224 53% 127,052,500 52%
----------------- -----------------
Total Capitalization $ 404,278,415 100% $ 244,397,440 100%
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31
1995 1994 1993
------------- ------------
Operating Activities:
Net income $ 19,305,569 $ 15,440,208 $ 15,191,073
Items not affecting cash:
Depreciation and amortization 14,633,154 12,438,501 11,805,763
Deferred income taxes 2,540,385 1,509,619 (1,398,578)
Investment tax credit (563,311) (564,801) (566,498)
Changes in current assets and
liabilities net of
effects from acquisitions:
Trade accounts receivable (3,897,932) (1,057,563) (2,145,693)
Inventories (327,160) (1,447,191) (111,703)
Other current assets (2,641,018) (259,826) (1,056,726)
Accounts payable (1,718,666) 2,699,294 (1,565,245)
Accrued taxes 937,553 (1,487,575) 2,393,850
Accrued interest 1,741,160 (30,991) 193,772
Other current liabilities 3,328,632 421,690 898,638
Other, net 2,028,594 (1,392,444) 624,146
------------- ------------ ------------
Cash flows from operating
activities 35,366,960 26,268,921 24,262,799
------------- ------------ ------------
Investment Activities:
Property additions (29,636,745) (22,680,856) (19,974,072)
Purchase of noncurrent
investments, net (5,669,229) (1,386,178) (6,923,488)
Purchase of net assets, net
of cash acquired (109,528,168) - (2,850,000)
Purchase of working capital, net (10,607,114) - -
Acquisition related costs (5,405,328) - -
------------- ------------ ------------
Cash flows for investment
activities (160,846,584) (24,067,034) (29,747,560)
------------- ------------ ------------
Financing Activities:
Dividends on common and
preferred stock (14,463,389) (12,940,868) (12,635,351)
Minority interest on preferred
securities of subsidiary trust (1,056,250) - -
Issuance of long-term and
nonrecourse subsidiary debt 86,599,820 1,100,000 76,453,842
Repayment of long-term debt (3,156,699) (677,500) (58,900,200)
Issuance of preferred securities
of subsidiary trust 31,213,261 - -
Issuance of preferred stock 3,650,000 - -
Retirement of preferred stock (30,000) (30,000) (30,000)
Issuance of common stock 31,022,182 - -
Commercial paper borrowings
(repayments) (6,300,000) 9,800,000 -
------------- ------------ ------------
Cash flows from (for)
financing activities 127,478,925 (2,748,368) 4,888,291
------------- ------------ ------------
Increase (Decrease) in Cash and
Cash Equivalents 1,999,301 (546,481) (596,470)
Cash and Cash Equivalents,
beginning of year 2,552,612 3,099,093 3,695,563
------------- ------------ ------------
Cash and Cash equivalents,
end of year $ 4,551,913 $ 2,552,612 $ 3,099,093
============= ============ ============
Supplemental Cash Flow Information:
Cash paid during the year for:
Income taxes $ 5,972,200 $ 7,382,119 $ 6,338,293
Interest 8,381,217 8,887,901 8,771,595
Noncash transactions during the year for:
Assumption of debt as part of
acquisition $ 2,344,603 $ - $ -
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
Years Ended December 31
1995 1994 1993
------------- ------------- -------------
Operating Revenues:
Electric $ 74,857,501 $ 73,077,431 $ 70,104,822
Gas 64,482,943 62,141,382 65,017,964
Propane 38,883,031 - -
Manufacturing 26,746,847 22,047,241 18,134,456
------------- ------------- -------------
204,970,322 157,266,054 153,257,242
------------- ------------- -------------
Operating Expenses:
Fuel and purchased power 14,304,791 14,552,637 13,961,306
Purchased gas sold 46,430,023 46,351,422 48,153,861
Other operating expenses 23,428,509 21,728,387 23,285,277
Propane costs 31,716,415 - -
Manufacturing costs 23,735,000 19,385,349 16,269,766
Maintenance 6,019,601 6,169,895 6,368,346
Depreciation and amortization 14,633,154 12,438,501 11,805,763
Property and other taxes 6,605,660 6,103,903 6,139,613
------------- ------------- -------------
166,873,153 126,730,094 125,983,932
------------- ------------- -------------
Operating Income:
Electric 26,003,006 25,661,632 21,752,231
Gas 3,861,608 2,540,091 3,903,313
Propane 5,604,307 - -
Manufacturing 2,628,248 2,334,237 1,617,766
------------- ------------- -------------
38,097,169 30,535,960 27,273,310
Investment Income and Other 3,029,376 2,443,420 4,430,466
Interest Expense, net (11,694,483) (9,669,829) (8,944,584)
------------- ------------- -------------
Income Before Income Taxes 29,432,062 23,309,551 22,759,192
Income Taxes (10,126,493) (7,869,343) (7,568,119)
------------- ------------- -------------
Net Income 19,305,569 15,440,208 15,191,073
Minority Interest on Preferred
Securities of Subsidiary Trust (1,056,250) - -
Dividends on Cumulative Preferred
Stock (258,939) (119,888) (121,463)
------------- ------------- -------------
Earnings on Common Stock 17,990,380 15,320,320 15,069,610
Retained Earnings, beginning of year 55,373,112 52,873,772 50,318,050
Dividends on Common Stock (14,204,450) (12,820,980) (12,513,888)
------------- ------------- -------------
Retained Earnings, end of year $ 59,159,042 $ 55,373,112 $ 52,873,772
============= ============= =============
Average Shares Outstanding 8,130,581 7,677,232 7,677,232
Earnings Per Average Common Share $ 2.21 $ 2.00 $ 1.96
============= ============= =============
Dividends Declared Per Average
Common Share $ 1.746 $ 1.670 $ 1.630
============= ============= =============
See Notes to Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS
December 31
1995 1994
--------------- ----------------
ASSETS
Property:
Electric $ 336,961,117 $ 321,153,724
Gas 73,546,150 67,213,487
Propane 74,815,533 -
Manufacturing 2,048,725 1,558,484
--------------- ----------------
487,371,525 389,925,695
Less-Accumulated depreciation (150,469,310) (139,381,075)
--------------- ----------------
336,902,215 250,544,620
Current Assets:
Cash and cash equivalents 4,551,913 2,552,612
Trade accounts receivable, net 28,190,389 12,255,483
Receivables related to acquisition 23,357,538 -
Inventories
Coal and fuel oil 3,600,474 4,886,572
Materials and supplies 4,097,484 4,686,771
Manufacturing 5,660,357 5,064,859
Propane 8,287,443 -
Deferred gas costs 2,925,865 3,029,688
Other 9,948,238 3,694,912
--------------- ----------------
90,619,701 36,170,897
--------------- ----------------
Other Assets:
Investments 51,907,141 46,237,912
Deferred charges and other 30,240,083 22,881,641
Goodwill and other intangibles, net 49,052,343 3,230,570
--------------- ----------------
131,199,567 72,350,123
--------------- ----------------
$ 558,721,483 $ 359,065,640
=============== ================
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity $ 152,678,191 $ 114,704,940
Nonredeemable cumulative preferred stock 2,600,000 2,600,000
Redeemable cumulative preferred stock 3,660,000 40,000
Company obligated mandatorily redeemable
security of trust holding solely
parent debentures 32,500,000 -
Long-term debt 212,840,224 127,052,500
--------------- ----------------
404,278,415 244,397,440
--------------- ----------------
Commitments and Contingencies
(Notes 7, 8, 9)
Current Liabilities:
Commercial Paper 3,500,000 9,800,000
Long-term debt due within one year 570,000 570,000
Accounts payable 15,564,985 13,139,557
Accrued taxes 7,689,592 6,740,035
Accrued interest 4,738,243 2,915,084
Accrued Liabilities related to acquisition 12,750,424 -
Other 13,947,990 6,039,430
--------------- ----------------
58,761,234 39,204,106
--------------- ----------------
Deferred Credits:
Accumulated deferred income taxes 43,666,229 37,328,539
Unamortized investment tax credits 10,021,519 10,584,830
Other 41,994,086 27,550,725
--------------- ----------------
95,681,834 75,464,094
--------------- ----------------
$ 558,721,483 $ 359,065,640
See Notes to Consolidated Financial =============== ================
Statements
Notes to Consolidated Financial Statement
- ---------------------------
1. Significant Accounting
Policies -
- ---------------------------
Nature of Operations:
Northwestern Public Service Company is an investor-owned combination
electric and natural gas utility with nonregulated propane and
manufacturing operations. The Company is engaged in the production,
purchase, transmission, distribution and sale of electricity and the
delivery of natural gas. The Company serves 55,310 electric customers in
eastern South Dakota and 76,464 natural gas customers in eastern South
Dakota and central Nebraska. To provide baseload electric power, the
Company jointly owns three coal-fired generating plants with other
utilities. The Company has various long-term supply agreements with its
natural gas suppliers for the purchase of natural gas in the normal course
of its gas operations. Through the acquisitions of Synergy Group, Inc.,
Western Gas, and Myers Propane Gas Company, the Company provides propane
delivery service to 184,500 customers located principally in the eastern
and south-central regions of the United States. The Company's
manufacturing operations are comprised of Lucht Inc., a wholly owned
subsidiary that develops, manufactures, and markets multi-image
photographic printers and other related equipment.
Basis of Consolidation:
The accompanying consolidated financial statements include the accounts of
Northwestern Public Service Company and all wholly and majority owned
subsidiaries. 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. Propane revenues and costs reflect the operations
of Synergy Group, Inc. which was acquired effective August 15, 1995,
Western Gas, which was acquired effective November 20, 1995, and Myers
Propane Gas Company, which was acquired effective December 7, 1995.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition and Gas Costs:
Electric and natural gas revenues are based on billings rendered to
customers rather than on meters read or energy delivered. Customers are
billed monthly on a cycle basis. Revenues from sales of propane are
recognized principally as fuel products are shipped or delivered to
customers. Manufacturing revenue is recognized as equipment is shipped or
delivered to customers.
The commodity cost portion of natural gas purchased from wholesale
suppliers but not yet billed to customers is charged to deferred gas costs.
This account is subsequently credited in future periods as customers are
billed for natural gas used in prior periods. This method has the
approximate effect of matching costs with revenues in any financial
reporting period. The demand cost portion of natural gas costs, which is
comprised of numerous components, is expensed as incurred.
The Company has various long-term gas supply agreements with its natural
gas suppliers for the purchase of natural gas in the normal course of its
gas operations. An agreement with Cibola Energy Services Corporation
provides supply, storage and transportation services of natural gas in
South Dakota, while an agreement with KN Gas Marketing, Inc. provides
similar services 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 1995,
1994, and 1993, allowance for equity funds was $134,000, $17,000, and
$32,000. Allowance for borrowed funds for 1995, 1994, and 1993 was
$362,000, $39,000, and $50,000.
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 3.61% in 1995, 3.39% in 1994, and 3.37% in 1993. The percentage for
1995 includes a propane-related depreciation provision and depreciable
property whose estimated useful lives range from 5 to 33 years.
Depreciation rates include a provision for the Company's share of the
estimated costs to decommission three coal-fired generating plants at the
end of the useful life of each plant. The annual provision for such costs
is included in depreciation expense, while the accumulated provisions are
included in other deferred credits.
The costs of maintenance, repairs, and replacements of minor property items
are charged to maintenance expense accounts. Costs of renewals and
betterments of electric and natural gas property units are charged to
property accounts. The costs of units of electric and natural gas property
removed from service, net of removal costs and salvage, are charged to
accumulated depreciation. No profit or loss is recognized in connection
with ordinary retirements of depreciable electric and natural gas property.
Goodwill and Other Intangibles:
The excess of the cost of businesses acquired over the fair market value of
all tangible and intangible assets acquired, net of liabilities assumed has
been recorded as goodwill which is being amortized on a straight-line basis
over 40 years. Other intangibles, consisting principally of costs of
covenants not to compete, are being amortized over the estimated periods
benefited which do not exceed 10 years. Goodwill and other intangibles are
reflected net of accumulated amortization recorded at December 31, 1995 and
1994, of $1,188,000 and $567,000, respectively.
It is the Company's policy to review goodwill and other intangible assets
for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable.
If such review indicates that the carrying amount is not recoverable, it is
the Company's policy to reduce the carrying amount of these assets to fair
value.
Investments and Fair Value of Financial Instruments:
The Company's investments consist primarily of corporate preferred and
common stocks. In addition, the Company has investments in privately held
entities and ventures, safe harbor leases, and various money market and tax
exempt investment programs. These investments are accounted for in
accordance with Statement of Financial Accounting Standards No. 115 (SFAS
115), "Accounting for Certain Investments in Debt and Equity Securities".
SFAS 115 requires that certain investments in debt and equity securities be
reported at fair value.
The Company's securities are classified under the provisions of SFAS 115.
As of December 31, 1995, the fair value, cost, and the gross unrealized
gain of the Company's preferred stock investments, classified as available
for sale, were $37,746,000, $37,592,000, and $154,000, respectively. The
fair value, cost, and the gross unrealized gains on the Company's
marketable equity securities, classified as available for sale, were
$9,892,000, $1,271,000, and $8,621,000, respectively. 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
securities, classified as available for sale, were $8,480,000, $1,368,000,
and $7,112,000, respectively. The unrealized gain, net of tax, at December
31, 1995 and 1994 was $5,704,000 and $2,539,000, respectively. Held to
maturity securities are reported at cost, which approximated fair value and
at December 31, 1995 and 1994 was $4,269,000 and $6,016,000, respectively.
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 1995 and 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 natural gas costs which are deferred for book purposes
but expensed currently for tax purposes.
For book purposes, investment tax credits were deferred and are being
amortized as a reduction of income tax expense over the useful lives of the
property which generated the credits.
Statement of Financial Accounting Standards No. 121:
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which
establishes new accounting standards for the impairment of long-lived
assets. The statement is effective for fiscal years beginning after
December 15, 1995. While the Company has not performed a detailed analysis
of the impact of the statement, management does not expect that the
adoption, which will occur in 1996, will have a material effect on
financial position or results of operations.
Statement of Financial Accounting Standards No. 123:
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation", was issued in October 1995 and effective for fiscal
years beginning after December 15, 1995. This statement will have no impact
on the Company's results of operations or financial position.
Reclassifications:
Certain 1994 and 1993 amounts have been reclassified to conform to the 1995
presentation. Such reclassifications had no impact on net income and common
stock equity as previously reported.
- ---------------------------
2. Business Acquisitions -
- ---------------------------
On August 15, 1995, the Company completed its acquisition of Synergy Group
Incorporated (Synergy), a retail distributor of propane. Synergy maintained
152 retail branches serving approximately 200,000 customers in 23 states,
primarily in suburban and rural areas of the eastern and south-central
regions of the United States. In conjunction with the acquisition, the
Company sold certain retail property outlets to an unrelated third party.
The transaction represented an initial cash investment by the Company of
approximately $137.5 million, but after the sale of certain retail property
outlets, the total net cash acquisition investment by the Company was
$104.9 million. The Company made debt and preferred stock investments in
SYN Inc., the entity created to acquire Synergy, and Northwestern Growth
Corporation, one of the Company's wholly owned subsidiaries, owns control
of SYN Inc. common stock. The acquisition was accounted for under the
purchase method of accounting. The total net purchase price was comprised
of consideration paid of $104.9 million cash, certain securities issued,
certain liabilities assumed including long-term debt of $2.3 million, and
transaction related costs of $5.4 million. The cost in excess of the fair
value of the net tangible and intangible assets acquired of $50.6 million
has been classified as goodwill and is being amortized on a straight-line
method over 40 years. The allocation of the purchase price to the acquired
assets and liabilities of Synergy was based on preliminary estimated fair
value of the related assets and liabilities and is subject to adjustment as
further information becomes available. The Company has asserted claims
under the acquisition agreement for post-closing adjustments to reduce the
total consideration paid for the acquisition of Synergy. If these claims
are successful, an adjustment in the consideration paid for the acquisition
could result.
The Company's investments in SYN Inc. were funded primarily by financings
undertaken in 1995. During the third quarter of 1995, the Company issued
$60 million of 7.10% general mortgage bonds due August 1, 2005, 1.3 million
shares of
8 1/8% preferred securities of subsidiary trust, and 1.2 million shares of
common stock.
Effective November 20, 1995, SYN Inc. acquired control of Western Gas
(Western) for $2 million plus the value of certain current assets. Western
is a retail distributor of propane serving approximately 3,500 customers in
and around Edenton, North Carolina. The purchase price was comprised of
cash and a certain amount of seller financing. Effective December 7, 1995,
the Company acquired majority control of Myers Propane Gas Company (Myers)
through the issuance of 42,890 shares of common stock and 11,500 shares of
6 1/2% redeemable cumulative preferred stock. Myers is a retail distributor
of propane serving approximately 4,500 customers in and around Sandusky,
Ohio. The total purchase price of $4.8 million was comprised of the
securities issued by the Company and a certain amount of seller financing.
The acquisitions were accounted for under the purchase method of
accounting.The cost in excess of fair value of the net assets acquired of
$1.9 million has been classified as goodwill and is being amortized on a
straight-line method over 40 years.
The acquisitions of Synergy, Western, and Myers were made in association
with Empire Gas Corporation (Empire Gas), a large propane distribution
company headquartered in Lebanon, Missouri, which has a management team
experienced in the retail propane distribution business. Empire Gas has a
30% common stock ownership interest in SYN Inc. (after debt and preferred
stock obligations to the Company) and a management agreement between SYN
Inc. and Empire Gas has been executed whereby Empire Gas performs the
planning and management of the assets and business operations.
Had the acquisition of Synergy occurred on January 1, 1994 (the effect of
the Myers and Western acquisitions are immaterial), combined unaudited pro
forma results for the years ended December 31, 1995 and 1994 as prescribed
under Accounting Principles Board Opinion No. 16 (APB 16), "Business
Combinations", would have been: Revenues $262,239,000 and $256,645,000, net
income $19,993,000 and $9,674,000 and earnings per share $2.25 and $1.09.
The pro forma disclosures required under APB 16 are not indicative of past
or future operating results. Since the acquisition, the Company has
implemented significant cost reduction measures principally related to
elimination of certain employee positions, corporate administrative
expenses and other specifically identified operating expenses that have not
been reflected in the pro forma information under the provisions of APB 16.
- ---------------------------
3. Short-Term Borrowings -
- ---------------------------
The Company may issue short-term debt in the form of bank loans and
commercial paper as interim financing for general corporate purposes. The
bank loans may be obtained under short-term lines of credit which totaled
$24 million at December 31, 1995. The Company pays an annual fee
equivalent to 1/4% of the unused lines. There were no borrowings
outstanding at December 31, 1995 and 1994. At December 31, 1995, the
Company had outstanding $3.5 million of commercial paper.
- --------------------
4. Long-Term Debt -
- --------------------
Substantially all of the Company's utility plant is subject to the lien of
the indentures securing its general mortgage bonds and pollution control
obligations. General mortgage bonds of the Company may be issued in
amounts limited by property, earnings, and other provisions of the mortgage
indenture.
Lucht Inc. has a credit agreement with a bank whereby it may borrow up to
$8 million in revolving and term loans. A balance of $4,802,500 was
outstanding under the revolving and term loan as of December 31, 1995 at a
weighted average interest rate of 8.5%. Borrowings under the agreement are
collateralized by all receivables, inventories, property, and other assets
of Lucht, and are nonrecourse to the Company.
SYN Inc. has a credit agreement with a bank whereby it may borrow up to $25
million in revolving loans. A balance of $21,342,320 was outstanding under
the facility as of December 31, 1995, at a variable interest rate tied to a
certain Eurodollar index plus 2%. Borrowings under the agreement are
collateralized by SYN Inc. receivables and inventories and are nonrecourse
to the Company. The term of the facility ends December 31, 1997.
The balance of nonrecourse debt to subsidiaries is comprised of the
remaining debt assumed from the Synergy acquisition of $615,404 and
securities issued of $2 million as part of the Myers acquisition. In
addition, there was $800,000 of other subsidiary debt outstanding.
Annual scheduled retirements of the Company's long-term bond debt during
the next five years are $20,000,000 in 1998, $12,500,000 in 1999, and
$5,000,000 in 2000. Scheduled retirements of the Lucht long-term debt are
$570,000 in 1996, $570,000 in 1997, $570,000 in 1998, and $292,500 in 1999.
- -------------------------------
5. Capital Stock Transactions
and Retained Earnings
Availability -
- -------------------------------
As part of financing the Synergy acquisition, the Company issued 1.2
million shares of common stock and 1.3 million shares of 8 1/8% preferred
securities of subsidiary trust. In financing the Myers acquisition, the
Company issued 42,890 shares of common stock and 11,500 shares of
redeemable cumulative preferred stock. Preferred stock transactions for
the three years ended December 31, 1995, have also included redemptions to
satisfy mandatory sinking fund requirements.
With the release of the 1940 Mortgage Indenture in 1995, the only
restriction on the Company's ability to pay dividends on common stock is
limited by the Company's Restated Certificate of Incorporation whereby no
dividend declared shall cause common stock equity to be less than 25% of
total capitalization.
Under its credit agreement, SYN Inc. is limited in the payment of dividends
and interest related to the preferred stock and debt investments held by
the Company. Such payments may be made to the Company provided they do not
render SYN Inc. in default, as defined, of the credit agreement executed
with the bank and are subordinate to any indebtedness outstanding under the
credit agreement.
The following table summarizes the capital stock transactions that occurred
during the year (in thousands):
Paid-in
Preferred Common Capital
----------- -------- --------
Balance, 12/31/94 $2,640 $26,870 $29,923
Private placement* 1,150 150 1,000
Public offering* - 4,200 25,672
Mandatory sinking
fund redemption (30) - -
Subsidiary issuance 2,500 - -
----------- -------- --------
Balance, 12/31/95 $6,260 $31,220 $56,595
----------- -------- --------
*See Footnote 2.
- ------------------
6. Income Taxes -
- ------------------
Income tax expense is comprised of the following (in thousands):
1995 1994 1993
------- ------ ------
Federal income -
Current tax expense $ 7,849 $6,522 $9,038
Deferred tax (benefit)
expense 2,540 1,509 (1,399)
Investment tax credit (563) (565) (566)
State income 300 403 495
------- ------ ------
$10,126 $7,869 $7,568
------- ------ ------
The following table reconciles the Company's effective income tax rate to
the federal statutory rate:
1995 1994 1993
------- ------ ------
Federal statutory rate 35% 35% 35%
Amortization of
investment tax credit (2) (2) (2)
Dividends received
deduction (5) (3) (2)
Other, net 6 4 2
------- ------ ------
34% 34% 33%
------- ------ ------
The components of the net deferred federal income tax liability recognized
in the Company's Consolidated Balance Sheet are related to the following
temporary differences at December 31 (in thousands):
1995 1994
--------- ----------
Excess tax depreciation $(26,252) $(24,592)
Safe harbor leases (7,060) (8,233)
Property basis and
life differences (7,526) (7,526)
Asset sales (4,366) (4,766)
Regulatory asset (4,052) (4,052)
Regulatory liability 4,189 4,189
Unbilled revenue 3,857 3,882
Unamortized investment
tax credit 3,491 3,491
Unrealized gain
on investments (3,071) (1,367)
Other, net (2,876) 1,645
--------- ----------
$(43,666) $(37,329)
--------- ----------
- --------------------------
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 each finance their own investment.
The Company has long-term coal contracts for delivery of lignite coal to
Coyote I and sub-bituminous coal to Neal #4. The lignite coal contract for
Big Stone expired 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, 1995, is
as follows (dollars in thousands):
Big Stone Neal #4 Coyote I
---------- -------- ---------
Utility plant in service $47,150 $35,011 $45,502
Accumulated
depreciation $26,076 $15,945 $17,968
Construction work
in progress $1,583 $272 $232
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
- ------------------------
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 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, 1995, 1994, and 1993 were as follows (in thousands):
1995 1994 1993
--------- --------- ---------
Service cost $ 755 $ 948 $ 985
Interest cost on projected
benefit obligation 3,144 3,176 3,048
Actual return
on assets (10,082) 586 (2,970)
Net amortization
and deferral 6,475 (4,391) (886)
--------- --------- ---------
Net periodic
pension cost $ 292 $ 319 $ 177
--------- --------- ---------
The following table reflects the funded status of the Company's pension
plan as of December 31, 1995, 1994, and 1993 (in thousands):
1995 1994 1993
--------- --------- ---------
Actuarial present value of
Accumulated benefit obligation
Vested $ 39,946 $ 34,436 $ 34,052
Nonvested 1,417 1,197 1,528
--------- --------- ---------
41,363 35,633 35,580
--------- --------- ---------
Provision for future
pay increases 5,488 3,993 5,515
--------- --------- ---------
Projected benefit
obligation 46,851 39,626 41,095
Plan assets at
fair value 52,762 44,501 46,912
--------- --------- ---------
Projected benefit oblication
less than plan assets (5,911) (4,875) (5,817)
Unrecognized
transition obligation (1,547) (1,702) (1,856)
Unrecognized net gain 5,381 5,365 6,941
--------- --------- ---------
Prepaid pension cost $ (2,077) $ (1,212) $ ( 732)
--------- --------- ---------
The assumptions used in calculating the projected benefit obligation for
1995, 1994, and 1993 were as follows:
1995 1994 1993
--------- --------- ---------
Discount rate 7 3/4% 8 1/2% 8%
Expected rate of return
on assets 8 1/2% 8 1/2% 8 1/2%
Long-term rate of increase
in compensation levels 3% 4% 5%
The Company provides an employee savings plan which permits all employees
to defer receipt of compensation as provided in Section 401(k) of the
Internal Revenue Code. Under the plan, any employee may elect to direct up
to twelve percent of their gross compensation be contributed to the plan.
The Company contributes 50 cents for every one dollar contributed by the
employee, up to a maximum Company contribution of three percent of the
employee's gross compensation. Costs incurred under the plan were
$479,000, $468,000, and $442,000 in 1995, 1994, and 1993.The Company also
provides an Employee Stock Ownership Plan (ESOP) for full-time employees.
The ESOP is funded primarily with federal income tax savings which arise
from tax laws applicable to such employee benefit plans. Certain Company
contributions and shares of stock acquired by the ESOP are allocated to
participants' accounts in proportion to the compensation of employees
during the particular year for which allocation is made. Costs incurred
under the plan were $810,000, $705,000, and $757,000 in 1995, 1994, and
1993.
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 $648,000,
$552,000, and $544,000 in 1995, 1994, and 1993, respectively.
SYN Inc. 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
fifteen percent of their gross compensation be contributed to the plan.
SYN Inc. contributes 25 cents for every one dollar contributed by the
employee, up to a maximum SYN Inc. contribution of four percent of the
employee's gross compensation. Costs incurred under the plan for the
partial year 1995 were $31,000.
- ---------------------------
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 such sulfur dioxide emission
requirements at its generating plants by the required compliance dates and
that it is in compliance with all presently applicable environmental
protection requirements and regulations. The Company is also subject to
other environmental regulations including matters related to former
manufactured gas plant sites. During 1995, the Company remediated a site
located at Huron, South Dakota through thermal desorption of residues in
the soil. Adjustments of the Company's natural gas rates to reflect the
costs associated with the remediation were approved through the regulatory
process. The Company is pursuing recovery from insurance carriers. No
administrative or judicial proceedings involving the Company are now
pending or known by the Company to be contemplated under present
environmental protection requirements.
- --------------------------------
10. 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
through 1996. The provisions of the 6 1/2% Series stock contain a 5 year
put option exercisable by the holders of the securities and a 10 year
redemption option exercisable by the Company. In any event, redemption
will occur at par value. The preferred stock of subsidiary is redeemable
beginning July 1, 1999 at a redemption price of $1,075.00 per share. The
cumulative preferred stock, 4 1/2% Series, may be redeemed in whole or in
part at the option of the Board of Directors at any time upon at least 30
days notice at $110.00 per share, plus accrued dividends.
In the event of involuntary dissolution, all Company preferred stock
outstanding would have a preferential interest of $100 per share, plus
accumulated dividends, before any distribution to common stockholders.
The Company is also authorized to issue a maximum of 200,000 shares of
preference stock at a par value of $50 per share. No preference shares
have ever been issued.
- ---------------------------
11. Segments of Business -
- ---------------------------
The four primary segments of the Company's business are its electric,
natural gas, propane, and manufacturing operations. The following table
summarizes certain information specifically identifiable with each segment
as of or for the years ended December 31 (in thousands):
1995 1994 1993
---------- --------- ---------
Depreciation and
Amortization:
Electric $ 10,503 $ 10,115 $ 9,841
Gas 2,185 1,996 1,718
Propane 1,562 - -
Manufacturing 383 328 247
---------- --------- ---------
$ 14,633 $ 12,439 $ 11,806
---------- --------- ---------
Capital
Expenditures:
Electric $ 17,868 $ 16,023 $ 11,225
Gas 6,521 6,425 8,483
Propane 4,726 - -
Manufacturing 522 233 266
--------- --------- ---------
$ 29,637 $ 22,681 $ 19,974
--------- --------- ---------
Assets:
Identifiable -
Electric $218,006 $210,872 $206,962
Gas 59,384 52,008 45,296
Propane 173,665 - -
Manufacturing 16,409 13,843 11,352
Corporate assets 91,257 82,343 79,964
--------- --------- ---------
$558,721 $359,066 $343,574
--------- --------- ---------
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.
- ------------------------------
12. Quarterly Financial Data
(unaudited) -
- ------------------------------
First Second Third Fourth
(thousands except per share amounts)
1995:
Operating revenues $50,754 $40,107 $45,548 $68,561
Operating income 12,929 6,679 6,908 11,581
Net income 7,103 3,049 3,140 6,014
Average shares 7,677 7,677 8,277 8,889
Earnings per average
common share $ .92 $ .39 $ .32 $ .59
-------------------------------------
1994:
Operating revenues $55,464 $33,757 $30,195 $37,850
Operating income 14,163 4,783 3,793 7,797
Net income 8,017 2,244 1,330 3,849
Average shares 7,677 7,677 7,677 7,677
Earnings per average
common share $ 1.04 $ .29 $ .17 $ .50
-------------------------------------
The 1995 quarterly earnings per average common share do not total to 1995
annual earnings per average common share due to the effect of common stock
issuances during the year.